Statoil's Huge Opportunity

As production growth from its traditional stomping grounds in the Norwegian Continental Shelf (NCS) has slowed after decades of development, Statoil (NYSE: STO  ) has turned toward international deepwater projects to fuel growth. But a massive recent discovery in the NCS suggests the region should continue to be a major driver of growth for the company for a long time.

Source: Wikimedia Commons.

Statoil's massive opportunity at Johan Sverdrup
In 2010, Statoil and one of its joint venture partners, Lundin Petroleum, announced two separate discoveries in a mature part of the Norwegian shelf. After communication between the two discoveries was confirmed, the two companies realized they were looking at a truly massive continuous oil discovery -- the Johan Sverdrup field.

With estimated resources of 1.8 billion-2.9 billion barrels of oil equivalent, Johan Sverdrup was one of the largest discoveries in the world in 2010 and 2011 and is one of the biggest discoveries in the Norwegian shelf since the mid-1980s. Appraisal of the field is currently under way, with Statoil and its partners having recently announced how they plan to develop the field over the next several years.

The field will be developed in multiple phases using a field center consisting of four installations and power from shore. Production from the field is expected to commence in late 2019 with an estimated plateau production of 550,000-650,000 barrels of oil equivalent per day (boe/d), of which 220,000-260,000 boe/d would be net to Statoil.

At its peak, Johan Sverdrup is expected to account for about 25% of total production from the Norwegian shelf and will have an estimated productive life of about 50 years. Production from the first phase, which is estimated to cost $16.4 billion-$19.6 billion, is expected to total between 315,000 and 380,000 boe/d.

How Statoil is countering NCS production decline
Clearly, Statoil and its partners have high hopes for Johan Sverdrup, whose appraisal has renewed optimism about the potential of the NCS. But the field won't begin producing for at least another five years, which means Statoil needs to find new sources of production to offset NCS production declines. One of the ways it has accomplished this is by focusing on higher-growth international opportunities.

Over the past couple of years, the company has brought online several high-impact projects, including Peregrino in Brazil, Pazflor and PSVM in Angola, and Skarv in Norway, while also accelerating development of its North American onshore resources in the Marcellus, Bakken, and Eagle Ford. As a result, its international volumes have grown at a CAGR of 13% since 2008, helping offset 15% annual decline from its NCS operations over the period.

How Statoil plans to grow production
Going forward, Statoil is targeting 3% annual production growth through 2016, while also reducing its capital spending by about $5 billion over the period. In my view, this production growth target looks quite achievable, given Statoil's robust portfolio of upcoming growth projects.

Some of the major needle-moving projects for the company will be CLOV in Angola, Jack/St. Malo and Big Foot in the Gulf of Mexico, and Goliat in the Barents Sea. CLOV, which is operated by Total (NYSE: TOT  ) , should boost Statoil's production by nearly 40,000 barrels per day when it comes online this year, while Jack/St. Malo and Big Foot, both operated by Chevron (NYSE: CVX  ) , should add another 60,000 barrels per day of net production.

Both projects are slated to come online this year, though Chevron recently said Big Foot's start-up may be postponed until early next year because of construction delays. Lastly, Goliat is slated to commence production in the third quarter of this year and will have a production capacity of nearly 40,000 barrels of oil per day net to Statoil. Combined, these four projects will boost Statoil's net production by about 140,000 boe/d, which should be enough to offset NCS declines and deliver 3% production growth through 2016.

The bottom line
If Statoil can avoid project delays and cost overruns at these projects, they should generate enough organic free cash flow to cover Statoil's dividend from 2016 onwards, assuming the price of Brent crude oil stays at around $100. And after 2020, once Johan Sverdrup begins pumping oil, the company has an even bigger potential runway to boost growth.

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