Norwegian giant in it for the long haul with Texas shale venture

Sep 13

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Helge Lund (left), CEO of Norwegian energy company Statoil, speaks with Statoil Joint Venture Manager Cesar Alvarez (facing away) and Talisman Energy Frac Specialist Nabila Larsen (right) at a Talisman Energy fracking site near Cotulla, Texas. Statoil is working with Talisman energy to develop oil and gas ventures in the Eagle Ford shale formation in south central Texas. (Photo: JOHN DAVENPORT/SAN ANTONIO EXPRESS-NEWS)

LA SALLE COUNTY – Helge Lund, CEO of Norway’s Statoil, likes to say his company is more than just a financial investor in shale gas fields in the U.S., and he made that abundantly clear one morning last week.

Up before dawn, the tall, soft-spoken Norwegian ate breakfast tacos and endured a long drive on bumpy dirt roads before arriving at a remote well site, about 100 miles south of San Antonio, where mesquite and prickly pear blanket the dusty landscape and deer, jackrabbits and rattlesnakes are the primary residents.

His mission was to get an up-close look at an operation in the Eagle Ford shale formation, where the company launched a joint venture last year, and he spent several hours in the sweltering South Texas sun doing just that.

“The key point for us is we do not look at this as a short-term investment,” said Lund, 48, wearing thick red coveralls, steel-toe boots and a hard hat. Rather, he said, it is an important part of the company’s future.

Last fall, Statoil announced it would pay $1.3 billion for properties in the Eagle Ford shale formation and team up with Canada’s Talisman Energy to develop them. Two years earlier, the Norwegian oil giant paid roughly the same amount for a stake in Marcellus shale properties in the Northeast U.S. operated by Chesapeake Energy.

Statoil is among a number of foreign oil companies including France’s Total, China’s Cnooc and Australia’s BHP Billiton that are paying huge sums to enter U.S. shale rock formations, where recent breakthroughs in drilling and extraction technology – pioneered by small U.S. producers – have put massive quantities of natural gas within reach.

A push to diversify

But Statoil, two-thirds owned by the Norwegian government, faces special pressure to diversify its production beyond Norway, where mature offshore fields in the North Sea are in decline and taxes are high.

As such, it has focused on North America, where it also is a major leaseholder in the Gulf of Mexico, has exploration acreage in Alaska, operates an oil sands project in Canada and is drilling off the Canadian eastern coast.

“The next 10 years, we will probably have steeper growth in North America than in any other region of the world,” said Lund, who expects a fivefold increase by the end of the decade in Statoil’s North American production, now roughly 100,000 barrels of oil equivalent per day.

Sharp increase is goal

The company has a broader goal over the same period to boost global output to 2.5 million barrels per day from about 1.9 million barrels today, as fields also come online in Brazil and elsewhere.

Statoil also might consider partnerships to explore in the Arctic, like one announced late last month by Exxon Mobil Corp. and Russia’s Rosneft.

“I cannot rule that out,” said Lund, noting that the Arctic will be another focus area for the company moving forward.

But he is the first to acknowledge that while Statoil is a skilled offshore operator, particularly in harsh climates, it still has much to learn in the onshore unconventional gas business. That’s why Talisman is taking the lead in operating wells in the Eagle Ford, while Statoil serves as understudy.

Statoil will begin operating wells under the joint venture by as early as the end of next year, though details of how the two companies will divide things up remain in discussion, Lund said.

The Eagle Ford shale, which is 450 miles long and 50 miles wide and runs in a crescent-shaped band below San Antonio, has been attractive to oil companies because, in addition to gas, it contains more valuable supplies of oil, condensate and natural gas liquids.

Houston’s Marathon Oil Corp., for instance, inked a $3.5 billion deal in June to acquire 285,000 acres in the formation, while Shell, ConocoPhillips and others also have positions.

But it can be challenging to develop the Eagle Ford’s deep high-pressure wells, and the mix of gas or liquids can vary widely from zone to zone.

Scales and fangs

Then there’s the matter of the neighbors.

“Rattlesnakes are really bad out here,” said David Peterson, a safety consultant to Talisman at the well site.

Sven del Pozzo, an industry analyst with IHS-Herold in Stamford, Conn., said such challenges will be difficult to navigate for companies like Statoil with little experience in shale plays.

“This is new for them,” he said. “It’s going to take some time to get it right.”

Since December, Talisman has drilled 22 wells under the joint venture, said Chris Jeske, manager of Talisman’s Eagle Ford unit. It’s run from The Woodlands, where half a dozen Statoil employees are working and more are coming.

The joint venture now has eight rigs in the formation, will increase that to 14 by the end of next year and then has plans to drill up to 200 wells a year, Jeske said.

The partnership controls roughly 170,000 acres across La Salle, McMullen, Live Oak, Bee, Karnes and DeWitt counties.

While Statoil is focused first on becoming an operator in the Eagle Ford and sees more opportunity for shale acquisitions in the U.S., “we are looking at opportunities outside North America as we mature our approach,” Lund said.

Possible areas for expansion could include Asia, South America and Europe.

He said Statoil also has had talks with China National Petroleum Co. on a possible joint venture to develop shale acreage in China, though he declined to discuss specifics.

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