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Is Statoil Ready To Move Away From Fossil Fuels?

Statoil Rig

Norway’s parliament recently passed legislation vowing to make the country carbon-neutral by 2030. The bill passed with bi-partisan support and is a powerful indicator of the political desire among Northern Europeans to achieve a more sustainable energy future.

The bill is somewhat vague on details, stipulating only that Norway will work on reducing its carbon footprint through trading on the common European carbon trading market and emission reduction through international agreements. Norway has also planned to initiate widespread re-forestation in order to achieve a better carbon balance. The country had previously vowed to achieve carbon neutrality in 2008, pushing the target to 2050, before again re-scheduling it this week to 2030.

There is considerable skepticism among Norwegians that the promise to reach carbon neutrality can be kept, with critics noting an emphasis on carbon-positive actions (like re-forestation) in lieu of practical measure for reducing emissions. Norway, much like its southern neighbor Germany, has been vocal in its support of a positive climate change policy; but like the Teutonic giant, which has maintained its use of coal albeit with promises to cease using coal by 2018, Norway’s stance has been somewhat contradictory, with greenhouse gas emissions rising by 1.5 percent in 2015.

The question is: how does the new carbon-neutral policy impact Statoil, Norway’s huge (and hugely-profitable) state-owned oil company and Europe’s largest natural gas producer?

Last year, Statoil joined several other major energy companies in supporting “significant cuts” in greenhouse gas emissions. Since the Paris agreement on climate change reached last year, Statoil has been a vocal proponent for “new thinking” in the energy industry, to reflect the changing economic, environmental and political conditions.

Norway wants to ban gas-powered cars by 2025. Statoil, for its part, has publicly recognized that at least 90 percent of cars sold by 2040 will be hybrid or electric and that renewable energy could account for 40 percent of world energy output by that time. It currently accounts for about 5 percent. Statoil, a major natural gas producer and the provider for 15 percent of the total European market, supports a shadow price of $50 per metric ton on the European carbon exchange. The price on Friday June 17 was $6.44.

The weak market conditions and low prices have eaten into Norway’s energy investments. Rystad Energy recently reported that Norway’s oil and natural gas fields declined in value to the tune of $50 billion in two years. This represents a fall of nearly one-third. The news comes amidst expectations of stagnant demand for natural gas in Europe lasting until 2020.

Norway, unlike any other European country with the exception of Russia, draws a significant chunk of its state revenue from the energy industry. Norway owns a 67 percent stake in Statoil ASA. Last year, Norway’s derived half of its oil and gas revenue from production taxes, 43 percent from the government’s direct ownership in oil and gas assets, and 7 percent from dividends paid by Statoil ASA, in which the government has a 67 percent stake. Related: Saudi Aramco IPO, Not for BP

The bulk of its oil wealth has ended up in the sovereign wealth fund. Norway’s model of state-managed energy companies feeding into a public wealth account is being openly copied by Saudi Arabia, which hopes to achieve the same success in public investment that Norway has achieved: the sovereign wealth fund contains around $850 billion and is the largest such fund on earth.

As estimates of future prospects in energy grow increasingly bullish, Statoil remains pessimistic, with the company’s chief economist predicting several years of a tight market and global production to fall drastically by 2040. The company has dropped an expensive off-shore contract in Brazil, a move that reflects the worldwide hesitancy toward further off-shore exploration. Yet at the same time, Statoil has vigorously pursued new production in the North Sea, bringing on a new field that promises 80 million barrels in oil equivalent. It recently concluded a 19-month exploration off the Newfoundland coast, an area known as Flemish Pass, which promises 300 million to 600 million barrels. This estimation allows for some cautious optimism, though Statoil’s CEO noted that the company was largely “disappointed” that estimates of the field’s capacity did not come in higher.

There are other signs that Statoil is not ready to abandon off-shore contracts. After losing out with other bidders on Mexican contracts last year, Statoil has recently announced interest in new contacts with PEMEX for fields in the Gulf of Mexico. Despite low prices, Statoil is interested due to the region’s relatively un-explored status. A spokesperson for PEMEX noted that Trion field contains roughly 485 million barrels and will cost $11 billion to fully develop. Winning the contract will allow Statoil to claim a significantly higher reserve replacement ratio for the year. In 2015 Statoil’s RRR fell to 55 percent from 62 percent in 2014.

So despite appearances to the contrary, Norway’s energy giant does not yet appear willing to give up on fossil fuels completely. Even expensive projects are being pursued if they promise high returns in the long run. And as Norway plans for a new energy future, it is likely that it will remain inextricably linked to its state-run energy industry, even as private competitors emerge to challenge Statoil’s dominance.

By Gregory Brew for Oilprice.com

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