Statoil Reminds Us Just How Risky the Oil and Gas Exploration Business Is

Despite radical advances in technology and improvements in safety, the oil and gas exploration and production (E&P) industry remains a highly risky one. Even though E&P companies now have a fantastic array of tools at their disposal, including more advanced drilling rigs and seismic acquisition techniques, exploration success is far from guaranteed.

Just ask Statoil (NYSE: STO  ) . Despite being of the most capable oil and gas exploration companies in the world, the Norwegian oil giant's most recently drilled Arctic well turned out to be a failure.

Photo credit: Wikimedia Commons

Statoil's dry well
Statoil's Apollo well, located in one of the northernmost reaches of the Barents Sea, failed to yield commercial quantities of hydrocarbons and turned out to be a "dry" well, according to a statement by the Norwegian Petroleum Directorate.

While a disappointment for Statoil, the well's poor results were cheered by Greenpeace activists who had been working diligently to delay Statoil from drilling it. Greenpeace and other environmental groups believe that drilling in an area so close to the Bear Island nature reserve and the edge of the polar ice cap is extremely risky since an oil spill could seriously endanger vital ecosystems.

Still, environmental opposition and disappointing results from Apollo won't do much to slow down Statoil's ambitious exploration program in the Barents Sea and the Norwegian continental shelf (NCS). In fact, the Spitsbergen rig that drilled Apollo is now venturing even farther north to drill the Atlantis well.

The rig is owned by Transocean (NYSE: RIG  ) , a company that provides offshore contract drilling services for upstream companies, and is on contract to Statoil. Seeking to raise cash to upgrade its fleet of rigs, whose average age is much older than competitor Seadrill's (NYSE: SDRL  ) fleet, Transocean recently announced that it plans to raise as much as $350 million through the initial public offering of a company that owns three of its drillships.

Statoil's active exploration program
This year, Statoil plans to test the potential of the Hoop area in the Barents Sea and continue exploratory drilling near the Johan Castberg discoveries. While the Johan Castberg exploration program has failed to meet Statoil's expectations, the company still believes in the field and is evaluating several nearby prospects for drilling in 2014.

Statoil also plans to drill 20-25 exploration wells in the NCS this year, of which around two-thirds will be Statoil-operated. The company's track record in the region is one of the best in the industry. Over the past five years, its exploration success rate in the NCS has averaged more than 70%, significantly higher than the industry average of 49%.

Overall, Statoil says it will maintain a high level of exploration activity, with plans to spend $3.5 billion on exploration activity to complete roughly 50 wells in six high-impact basins this year. One of the company's biggest opportunities lies in the Gulf of Mexico, where it is currently drilling in a potentially game-changing prospect called Martin.

What's next for Statoil?
Despite the recent miss at Apollo, Statoil was the world's leading oil and gas explorer last year, as measured by the total volume of conventional oil and gas discovered, and lay claim to the year's largest oil discovery: the Bay du Nord find offshore Canada. Over the period 2011-2013, it made 11 high-impact discoveries with a cumulative resource potential of 3.9 billion barrels of oil equivalent.

In addition to its active exploration program, Statoil also has a number of offshore projects in the NCS and Gulf of Mexico, as well as onshore programs mainly in U.S. tight oil plays, which should help drive 3% annual production growth through 2016. The company is also focused on improving its capital efficiency and boosting shareholder returns through a $5 billion reduction in spending over the next three years and the proposed implementation of a quarterly dividend.

The combination of these measures should help Statoil improve its financial performance and generate stronger returns for its shareholders in the years ahead, assuming commodity prices remain high and assuming that key projects can be brought online on time and on budget.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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