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Energy Giant Must Change To Prosper, Statoil CEO Says.

In surprisingly candid comments for a chief executive, the head of European energy giant Statoil admitted that his Norwegian-based company must radically change its business practices if it wants to survive and prosper for another 30 years, and that natural gas will play the leading role.

Speaking on Energy Strategies for the New Economy to a wide range of energy executives attending the 19th annual Cambridge Energy Research Associates conference, Olav Fjell took the spotlight away from fellow panelists Kenneth Lay, chairman and CEO of Enron Corp., and Luis Tellez, Mexico's Secretary of Energy, as he discussed Statoil's intensive restructuring effort, both externally and internally.

"I see a need for massive investments, both in exploration/production and infrastructure, not to speak of marketing and trading, making energy just as convenient and affordable in the future as it is today," said Fjell, adding, "In fact, it has to become even more convenient, just as it has to become even more environmentally friendly."

Fjell is a banker who was hired last summer to oversee Statoil's overhaul in order to meet growing global competition for its gas and oil products while facing increased demands from often frustrated shareholders and customers.

During his often-impassioned talk, Fjell expressed disappointment with those who believe petroleum has become a "sunset" industry. "I find this surprising, as I see very few facts supporting such a view. Few industries actually are having longer time horizons than ours."

Statoil was founded in 1972 to develop offshore projects as a result of enormous oil discoveries off the Norwegian North Sea. Later, its focus was to establish a presence in global oil markets and the European gas markets; today, it is one of the leading exporters of natural gas into Europe. Now, however, Statoil must cope with a far different form of technological challenge, one in which the energy business is driven by the markets rather than access to resources. In the past 10 years especially, Statoil has changed its traditional role from being an instrument for the state to a company where value creation for the shareholder is its main objective. The "era of privileges is long gone," he asserted.

"What matters is how efficiently you manage your resources, what you do with them, how you create value by gaining positions in the marketplace and satisfying customer needs. Energy markets are becoming increasingly competitive, both between fuels and within fuels. This combination is much more complex than it used to be. We see supermarkets sell gasoline, service stations sell food, water companies sell electricity and gas companies provide communication services," Fjell said.

Noting that Statoil seriously lags companies such as Enron in terms of e-commerce, Fjell said it is undertaking a comprehensive program starting with downstream customers before moving on to suppliers and finally the entire business chain. Statoil, with its rapidly increasing production of natural gas now moving into Continental Europe, is investing in a new company that offers domestic energy management services based on the Internet. The goal is to have more than half of all Nordic homes "intelligent" within 10 years, allowing energy consumption to be more efficiently managed, Fjell said.

"Our customers demand more efficient distribution, higher quality and cleaner fuels. They are increasingly asking for more flexibility and a greater freedom of choice. They expect us to help solve problems," he said. In addition, Norway's market share in key markets including Germany and France will surpass 20 percent, and that too is being driven by natural gas.

Although many question why the company must change after 30 years of success, Fjell said there is no choice. After 70 years of remaining static, the major oil companies worldwide during the past two years have witnessed a stunning number of mergers and acquisitions that have challenged and changed Statoil's competitive setting, he said.

The European gas markets, meanwhile, have also been deregulated at an increasing pace. One consequence may be lower margins throughout the value chain, but it also means a change in the distribution of the margins within that chain, he said.

"Being placed mainly in the upstream constitutes a strategic challenge for Statoil, and for Norway as a natural gas producer and exporter," he said. Another serious dilemma is the maturing of the Norwegian Continental Shelf. Unless new major commercial discoveries are found in the near future, production will soon peak, Fjell warned.

"Statoil has to be able to compete on equal terms with its major competitors, in Norway and in the international markets, by being more flexible and reacting faster. Therefore, we must expose Statoil fully to market challenges."

Fjell wants to change the basic structure of Statoil's ownership structure from being essentially a business manager by bringing in private owners and a stock exchange listing. The government is the biggest Norwegian resource owner and producer but is actually a silent partner in that its energy-related income and expenses move into the central government budget. Combining Statoil with the state-owned interests before privatization will increase the value of the petroleum assets and strengthen its ability to build an even strong position as a player in the European gas markets, he said.

Fjell admitted that Statoil's ambitious growth and investment program of recent years has not met with competitive returns. As a result, Statoil needs to curb investments to retain a sound financial picture and must divest its non-core assets. "We have no ambition of engaging in every investment opportunity."

The company, meanwhile, has cut administrative costs by streamlining its entire organization. By the end of 2001, Fjell predicted its cost base will be 20 percent below the one entering 1999. Some 1,500 jobs, or 10 percent of the workforce, were cut last year.

The first building block in Statoil's strategy will be to focus and restructure its upstream businesses, both in Norway and internationally. Next, it will further exploit its European gas position, using its imposing strength in the upstream and in the delivery systems connecting the Norwegian Continental Shelf to the United Kingdom and the Continental.

"Our position on the Norwegian Shelf and in the gas chain is unique. Our Nordic marketing position is attractive and will help build a broader energy platform," Fjell said. It will also have a leading role as an energy supplier in the Nordic and Baltic areas.

His vision for Statoil is to within five years rank among the top-level global upstream players, with a much stronger international presence than it has today. It will not be easy job, he acknowledged.

"We have to take the long route, simply because shortcuts are not available," Fjell concluded.
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Comment:Energy Giant Must Change To Prosper, Statoil CEO Says.
Author:Share, Jeff
Publication:Pipeline & Gas Journal
Geographic Code:4EXNO
Date:Aug 1, 2000
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