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Executives

Hilde Nafstad - SVP, IR

Helge Lund - President and CEO

Eldar Sætre - CFO

Analysts

Trond Omdal - Arctic Securities

Hootan Yazhari - Bank of America

James Hubbard - Morgan Stanley

John Olaisen - Carnegie

Oswald Clint - Sanford Bernstein

Dominique Patry - Cheuvreux

Kim Fustier - Credit Suisse

Statoil ASA (STO) Q3 2010 Earnings Call November 3, 2010 8:30 AM ET

Hilde Nafstad

Good afternoon ladies and gentlemen and welcome to Statoil's Third Quarter Earnings Presentation and Conference Call. My name is Hilde Nafstad, and I am the Head of Investor Relations in Statoil.

Before we start, let me say that there are no fire drills plan today so, in case the fire alarm goes off you will need to exit through the emergency exits on each of the room and continue on towards the same side.

This morning at 7.30 AM Central European Time we announced our results for the third quarter of 2010. A press release regarding the results were sent through wires and through the Oslo Stock Exchange. The quarterly report and today's presentation can, as usual, be downloaded from our website statoil.com. There is a link directly to presentation on the front page of statoil.com.

I will ask you to kindly take a special note of the information regarding forward-looking statements, which can be found on the last page of the presentation set. Please note that the question can be posed by means of telephone. Questions cannot be posed directly from the web. The dial-in numbers for posing questions can be found on the website. The operator of the conference call will explain the procedure for posing questions over the phone immediately before the Q&A session starts.

We have our CEO and President, Helge Lund with us here today and he will give a brief introduction before Statoil's, Chief Financial Officer, Mr. Eldar Sætre, will take us through the second quarter earnings presentation. Welcome Helge.

Helge Lund

Thank you, Hilde. Good afternoon, ladies and gentlemen, and thank you for participating at this conference. Let me make a few remarks before I leave the floor to Eldar to take you through the results in more detail.

In Statoil, we have behind us an extraordinary quarter characterized by extensive but also planned maintenance activities, which have led to low oil and gas production as you see throughout the quarter. At the same time, we have strong cash generation. We have financial flexibility and the cost is under firm control in all business areas and you have also seen that the HSE results are moving on a positive trend.

Based on our financial flexibility and operational flexibility, we have also had a very active quarter in terms of strengthening and high-grading our portfolio. Our field development projects show good progress across the board. New field development decisions have been taken and we have been quite active in terms of high-grading the portfolio and there the listing of the SFR and the acquisition of joint venture at Eagle Ford are the most important step forward this quarter.

New field developments will along with the ramp up of fields generate an additional 350,000 to 400,000 barrels per day in 2012, compared to what you see in 2010. However, this will lead to very limited expected production growth in 2011 due to the phasing of the start up and ramp up of these fields.

Earlier in the year, two well known factors have taken our production downwards in the guided range, namely the reduction of the production permit of Ormen Lange and well incident and drilling challenges at Gullfaks.

As you have seen from our announcement this morning, we have now decided to take our 2010 production guiding to 1.9 million barrels per day and I can understand that some questions are raised regarding why we changed our guiding so late in the year. However, very recently two additional factors triggered the adjustment on the production guiding for 2010. After very, very careful considerations, the license groups for two of our big fields, Gullfaks South and Kvitebjørn, very recently decided to perform [IOR] activities that will increase the short-term production but increase the longer term production and value creation.

In addition, it has become clear that the operational problems that have been known for the while related to a faulty compressor at Kollsnes would have a longer duration and higher impact than previously known. These factors combined with the usual certainty regarding gas off take led us to conclude that the 2010 production forecast should be reduced to around 1.9 million barrels per day.

With those words, please Eldar, I leave it to you to take the audience to a more detailed explanation of the numbers. Thank you.

Eldar Sætre

Thank you, Helge. Good afternoon, Ladies and gentlemen. As Helge said, this quarter has been characterized by an extensive and very well planned maintenance activities, which have led to a significant reduction in the quarterly volumes both on the oil and gas side, compared to the same quarter last year.

Our cash generation and the financial robustness remained solid throughout the quarter. I’ll come back to that. All business areas also demonstrate very good cost control and the HSE results are strong and improving.

This illustration compares our third quarter key earnings figures compared with the same quarter last year which we can see at the bottom. Our net income is more than doubled from NOK6.6 billion in 2009 to NOK13.8 billion which has grown this quarter. While the net operating income of NOK32.2 billion is approximately at the same level as we saw last year.

The NOK1.6 billion of net adjustments is composed of various elements and the most significant one is reversals according to the IFRS accounting standards of previous impairments and also cost provisions. Also, sale of assets and some net positive impacts from derivatives. Now these effects were partly, to some extent, countered by an impairment of the well known Corrib gas field in Ireland. Now this brings the adjusted earnings down to NOK26.7 billion which is compared to NOK31.1 billion in the same quarter last year.

The reported tax rate was 60.9%. After these adjustments that I talked about for the effects of tax on infrequent items and also net financial items, our effective tax rate on the adjusted earnings amounts to 68%, which is slightly below our guidance of around 70%. This reduction in the tax rate is mainly driven by a relatively higher income outside of the Norwegian continental shelf compared to income on the Norwegian continental shelf. Adjusted earnings after tax were NOK8.5 billion versus NOK9.2 billion in the third quarter last year.

Let me now take a look at the cash flows. The cash generation from underlying operations excluding variations in working capital remains strong and amounts to NOK132 billion so far this year. Taxes paid adds up to NOK57 billion. Recorded gross investments was at NOK58.7 billion and net investments at NOK54.1 billion.

We paid dividends in the second quarter of NOK19 billion which was related to 2009 and was in accordance with our dividend policy.

Net debt to capital employed was 26% reported and 28% when we adjust for the tax payment which is not synchronized to our earnings. This is in line with our expectations.

Let me now turn to the production figures. Here you can see a broad categorization of the changes in this quarter’s production volumes compared with the same quarter last year, to the left. Reduction is around 17% and we’re talking about equity production and this is inline with the management’s expectations. Firstly, we have performed extensive planned turnaround activities on our liquids fields this quarter with a total impact of more than 100,000 barrels per day and an increased impact of almost 60,000 barrels per day compared to last year.

Typically normally these turnaround activities during the summer season is much more evenly spread between the second and the third quarter than we have seen in this quarter with a massive portion of the seasonal maintenance.

In addition, this quarter we have also performed extensive maintenance activities at our gas processing facilities. That includes both Costa, Kollsnes and West projects.

There are major maintenance activities shut down turnarounds of course with typically every sixth year and the last one was in 2003.

This year, this maintenance activity which too lasted for three weeks was also combined with more comprehensive maintenance of the other processing facilities for instance two weeks shutdown at Kollsnes.

This has resulted in several award main gas fields holding back production or performing plant maintenance in line with scheduled downtime of the processing facilities. The combined effect of this maintenance from this gas related maintenance is more than 90,000 barrels per day compared to the third quarter last year.

For commercial reasons, we do not guide in detail on the planned maintenance effects on our NCS gas fields; although we recognize that this might lead to some challenges when estimating the gas production from the outside. However, this effect is as planned and is included in our annual production guidance.

Secondly, as we have previously guided, we have a natural decline rate on the overall mature part of our portfolio of around 5% combining oil and gas fields. In this period, I could highlight the significant decline in the tail-end of some of Gulf of Mexico gas assets like Q Gas, Spiderman and San Jacinto of around combined 15,000 barrels per day. In fact we do not expect any further production from the Q and San Jacinto fields.

The overall decline this quarter compared to last year is estimated to around 100,000 barrels per day. This was only to a limited extent offset by startup of new capacity, the Morvin field and ramp up also on (inaudible) and Marcellus compared to last year.

On top of the natural decline we have had some negative impacts related to drilling of wells on Gullfaks. This was partly caused by the incident that you know about at the Gullfaks C 6 well in May which let to shut-in of the whole platform for two months, and that extended in to July.

Gullfaks also experienced problems with the new built rig, the Deepsea Atlantic, resulting in a delayed drilling program and they have just recently secured additional rig capacity for 2011.

In addition, we have made a reallocation of MCS gas volumes of 20,000 barrels per day between the second and the third quarter leading to a decrease in the third quarter reported volumes.

Lastly, the expected higher level of Ormen Lange production permit was not granted by the authorities and, therefore, the bringing in the third quarter down by approximately 30,000 barrels per day partly also in order to repay the higher off take that we have taken in the previous quarter of the gas year. The lower than expected production permit will also run through the 2010 gas year which started October this year and will thereby also impact next year's production.

I will briefly comment on the adjusted earnings per each of our business areas. We still show robust financial performance despite the lower production volumes this quarter. Our continued strict cost control, as I talked about, also shows good results within all business areas as you can see from both our operating costs and our SG&A cost developments.

E&P Norway's adjusted earnings were NOK21.7 billion which is down 14% from third quarter last year. The main reason was the significant reduction in produced volumes. This effect was partially offset by 14% higher prices on both oil and gas. Exploration expenses and operating expenses were roughly at the same level as we saw in the same quarter last year.

International E&P's adjusted earnings decreased by NOK0.3 billion compared to last year and the entitlement production was around 36,000 barrels per day lower, while equity production was down around 5% or approximately 25,000 barrels per day. The main reason was decline in particular a sharp reduction in production from the (inaudible) that I just mentioned due to water breakthrough. In addition, we had slightly higher maintenance on the international assets and very limited contribution from ramp up of new fields basically from the Marcellus gas production.

Adjusted exploration expenses increased by NOK1.4 billion to a total of NOK2.7 billion outside of the Norwegian continental shelf. This increase is mainly due to lower capitalization and more being expensed which have been capitalized in previous periods.

Operating expenses are approximately at the same level while SG&A and depreciation are significantly down compared to last year.

Natural gas adjusted results were NOK2.1 billion compared to NOK3.3 billion last year and the reduction was mainly caused by lower equity volumes from the Norwegian Continental Shelf which directly affected both the results from our processing and transportation business by NOK0.3 billion and our marketing and trading contribution by almost NOK1 billion deriving both from lower scale due to the volumes and lower flexibility in the trading activities also from the lower volumes.

Finally, manufacturing and marketing. Adjusted third quarter earnings were NOK0.9 billion which is up from almost zero last year and the improved results were reflected in actually all sub-segments mainly related to improved results from our trading strategies and higher fuel margins and volumes in our fuel and retail business.

Our manufacturing business, mainly the refineries, had slightly negative results also this quarter due to continued low refinery margins and turnaround at the Mongstad refinery.

In the third quarter, we have also demonstrated very good progress, mentioned by Helge, in terms of maturing and developing our portfolio for future production and value creation. As mentioned initially, (inaudible) is starting production any day now. Vega and Vega South are on track to start production during the fourth quarter. Our fast track projects on the Norwegian Continental Shelf are also progressing as planned.

We are very pleased that steam injection now has started at the Leismer demonstration plant in Canada started in early September and actually one month ahead of schedule. Peregrino in Brazil is also on track with first oil expected towards the end of the first quarter next year.

Several fields are being sanctioned this quarter. In Norway, the development plant has been submitted for Valemon and Marulk PDO has been approved by the parliament. Internationally both Jack and St. Malo in the deepwater Gulf of Mexico and the CLOV development of Block 17 in Angola have also been sanctioned for development.

Continuous business development activities are also important to shape our portfolio as outlined in strategy and this quarter we have strengthened and diversified our position in North America through the Eagle Ford acquisition of 67,000 net acres to Statoil. This transaction adds at least 550 million barrels to our already substantial North American resource base and the strengthening our US gas value chain and adding also liquids to the onshore portfolio in the US.

Our offshore heavy oil growth effort is further enhanced by acquisition of additional interest in the Statoil operated Mariner field in the UK.

Lastly, we are very pleased with the capital markets reception of the new Statoil Fuel and Retail Company following the listening on the Oslo Stock Exchange on the 2nd of October and we are convinced that the listing will provide the company with the necessary framework for future growth and value creation going forward.

Finally some comments to our guidance. My first message in this context is, as mentioned by Helge, that we have now concluded on a revised 2010 production guiding of 1.9 million barrels per day of equity production. This is down from the previous range of 1.925 to 1.975 as we have guided. There are several contributing factors to this adjustment and I will go through them. The adjustment represents 2.5% adjustment compared to the mid point of the previous range.

Two main factors have been communicated earlier, as you have heard about. Firstly, the Ormen Lange license partnership had applied for an increase in the production permit for the gas years 2009 and 2010. This was not granted and resulted in lower production volumes for the year as a whole and for this quarter specifically.

Secondly, the C06 well incident at Gullfaks had a negative impact combined with the lack of drilling rig capacity at Gullfaks. The initial rig was not able to drill, it required wells and the new rig solution is now in place (inaudible).

Recently, two additional factors have triggered the adjustment of the production guidance below the previous range. Firstly, after very careful consideration, the relevant license group we are talking about here have now decided that we temporarily have to reduce the production from parts of both the Gullfaks South and Kvitebjørn fields. This is in order to maintain the necessary reservoir pressure conditions so that we can drill new wells into and through these reservoirs in a secure manner, and there by securing addition IOR volumes and additional values. The short-term effect of these IOR measure is that we will delay around 15,000 barrels a day of production for this year. It will also have some impact for 2011.

Secondly the Kollsnes processing plant experienced some operational problems related to the NGL processing following the turnaround in September. It has now been [completed] to that we have to repair for the NGL booster compressors and the drive of the engine. Consequently, the throughput will be negatively affected by this in this quarter and the problems are not expected to be solved during the fourth quarter, although we will try to compensate for ratios as much as possible and in the way we operate Kollsnes.

These are the factors which combined with the general uncertainty in relation to gas demand that has led us to reduce 2010 production guidance to around 1.9 million barrels per day. None of these factors, as I just talked about, triggering the down what adjustment had any impact on our third quarter production.

Our ongoing project developments are making good progress. We expect to deliver additional full year average volumes of 350,000 to 400,000 barrels per day in 2012 from this portfolio that you can see to the right on this picture compared to full year 2010 from this same portfolio. The new capacity and ramp ups will, however, be skewed for 2012 leaving gas with very limited production growth next year.

We have also made a minor adjustment to our unit production cost guidance for 2010 to reflect the reduced production. The other guidance that you can see remains, as we have previously communicated, and we will come back to further guidance at our fourth quarter strategy update event on the February 9, 2011.

With these words I am ready and we are ready to take your questions and I leave the word back to Hilde.

Hilde Nafstad

Thank you very much, Eldar. We will now start the Q&A session. For this session in addition to Mr. Helge Lund and Mr. Eldar Sætre, we are also joined by our Head of Corporate Accounting Mr. Kaare Thomsen.

In order to pose questions you’ll have to dial in to the phone conference unless you’re in the audience. The dialing numbers are available on our websites and I’ll now ask the operator to explain the procedure for posing questions. After that, we will take a few questions from the audience before we start taking questions over the phone. please operator, if you can explain the procedure for dialing in questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Hilde Nafstad

Thank you, operator. We’ll take a few questions from the audience. We have one already. Please state your name and the name of your company before stating the question.

Trond Omdal - Arctic Securities

First question related to the downgrade as latest three weeks ago. We understand on your website and IT confirmed your guiding, what’s the decision? You must have known about the decision related to Kvitebjørn and Gullfaks. So, that one of the outcomes could be lower production. Could you elaborate a little bit about that decision?

The other thing you say now very limited production growth next year. You had very low gas production this year, a lot of maintenance and troll has been very low, so does that even include the potential of increasing gas production if the market allows it?

Helge Lund

I'll take the first one and may be Eldar can comment on the later. As I explained our best assessment at that time early October was that we would be within the range despite the challenges with the Gullfaks and also the production permit on Ormen Lange and the decisions on Kvitebjørn and Gullfaks have been taken very recently and also not matured before now. On top of that, we had the issue on the compressor on the Kollsnes. That is not a new issue in itself but the assessment was that we would be able to solve it earlier which has now turned out not to be the case.

Hilde Nafstad

Do you have any further questions from the audience?

Eldar Sætre

(Inaudible) the gas question first. Obviously we had a significant maintenance activity this quarter 90,000 wells per day as I talked about. Most of that is on the Norwegian Continental Shelf and that adds up to on an annual basis definitely lower than that but is still maintenance activities that might be lower next year. When we talk about gas and limited growth going into next year, that kind of statement is taking into account consideration all elements of the gas equation to put that way both the flexibility that we have and in terms of million volumes forward, from a value pricing perspective. Also the fact that the production permit on Malanga have not been granted or extended for gas year 2010 which goes into the parts of 2011 which is relevant actually for this. Also the maintenance, the plant maintenance of the gas side for next year. So it’s all taken into consideration when you talk about limited growth for next year.

Trond Omdal - Arctic Securities

Even allowing for your best assessment of increased gas production next year you still see limited growth?

Eldar Sætre

Yeah, when we say something like that we take into account all efforts that we know now. Obviously this is something we will work on. We’re in the middle of a planning process now and we’ll feed in all the information and all our plans for the future but the best for now is that there will be limited growth for next year to also taking into account all the components of the gas side, maintenance, production permits and also the gas flexibility, as I talked about.

Trond Omdal - Arctic Securities

Just a quick one on Kollsnes follow-up. There’s the media reports on the certain shutdown. Could you confirm that or and will there be any extensive shutdown from lease and beyond when Kollsnes is down?

Eldar Sætre

As far as I know we’re in the process of resolving the issues on these and hopefully that should result during November. That’s the information I have now, but you never know when you really will have to solve that kind of issues but we think that can be solved.

Hilde Nafstad

W have another question from the audience.

Unidentified Analyst

(Inaudible) Capital Markets. When it comes to tax you previously guided around 70% tax actual on adjusted numbers is 6 to 8. With your assumptions of not much increase in production next year, is it then likely that we will have a tax rate approximately at the same level that we have seen now 6% to 8%?

Second question, when it comes to cost unit costs development is somewhat higher it does mainly because you had relatively low production control because it’s rather low unit cost there?

Final question, I would say that it must more and more difficult for this production guidance because of the natural gas market. Have you ever discussed to go away from the production guidance target to guide on production for example production capacity?

Helge Lund

Let me take the last two Eldar, and perhaps you take the first. You’re right in the sense that it’s more difficult to guide you due to the liberalization of the gas market and to optimize. That in a way that was reason why we moved from one point figure to range and I think that was explained itself subsequently that that was a right thing to do. How we would do this moving forward we just have to assess continuously and we need to find a way of communicating this that gives the best overview for our investors in understanding our business.

The slight increase in unit cost that we are now indicating for 2010 has nothing to do with the absolute cost level that is involved in trade given the fact that we take down the production volume. It’s just a function of that, not an issue with cost.

Eldar Sætre

On the tax rate, the tax rate for this quarter is particularly low because this quarter, most of this maintenance is on the Norwegian continental shelf part of the equation. So that gives us a relatively low because of the sort of uplift as on the Norwegian continental shelf. So it’s most special this quarter. The guidance that we have given of mid 70, 71% is still very valid guidance for next year.

Hilde Nafstad

We will then take some questions over the phone. Operator, could you please introduce the first question posed over the phone line.

Operator

First question comes from Hootan Yazhari from Bank of America.

Hootan Yazhari - Bank of America

Just one quick question. Just if you could give us a quick guide on when you expect your issues with the Ormen Lange constraints to start coming off and that you can start to see production growing more entitled with what you were expecting there?

The second question I have is, how management is thinking more about portfolio optimization at this stage? It seems like issues keep popping up in your mid-shore asset base in Norway and for one reason or another. How are you thinking at the moment about selling of assets and reducing your exposure to Norway? Thank you.

Helge Lund

In terms of portfolio high-grading, we have shown over the last few years both on the divestiture side and the acquisition side that this is an issue that we work with constantly to try to optimize the portfolio, balancing several sort of aspects. I cannot comment on individual plans or processes related to specific assets, and I don’t want to discuss that either on a geographic basis. We are running portfolio reviews every year very rigorously. Based on several considerations including the one you mentioned, we decide what to do with our portfolio and you should expect us to continue to do that.

In terms of production permits, it’s the Norwegian authority that decide. We have no reason to believe that they will change their historical way of dealing with this. Our assessment moving in to this year was based on our best assessment on the production permit for Ormen Lange, our own assessment, not the operator. This time we were not able to predict it in the right way. When it comes to more specific questions related to why the Norwegian authorities did it and whether they would like to change their policy, you have to address it with the Ministry. As we see it now, we have no reason to conclude that they will change their practices.

Hootan Yazhari - Bank of America

Just following up from that, do you see risks to your 2012 production targets should this problem persist?

Helge Lund

Of course, it's always better to have some predictability. This is, as you have seen, one of the important consideration, considerations that we have to make but you should assume management to be able to make estimates of this when we come forward with new guiding.

Hilde Nafstad

Next question please operator.

Operator

Next question comes from James Hubbard from Morgan Stanley.

James Hubbard - Morgan Stanley

Two questions please. The first which is kind of a extension of that last one, in your 2012 unchanged production guidance, what are you assuming about an increase in European gas sales over 2011 and obviously Ormen Lange may or may not play a part in that? If there is an assumption that you’re going to be selling more gas in Europe your 2012 over 2011, could you just give us a feel for what kind of scale of increase that is?

Secondly, just briefly on the Independence Hub, is that decline and was the entry pretty much as expected or was it earlier than expected and I surprised it might necessity the occasion of the remaining reserve there?

Helge Lund

On the Independence Hub, we knew it was getting towards the end but the time it took to get to the end was slightly shorter then we expected. So, that’s the best answer to it. We knew it has never sort of big part of 2012 target or anything like that but, it (inaudible) effect came slightly lower than we had expected and the search was a disappointment.

When it comes to the 2012, there are so many factors that goes into the adjustments two years ahead and the lot of assumptions that we have to make and basically what we typically do is to allocate certain risks to the various components and take a portfolio view and that’s what we’ve done on the Ormen Lange. It might not come, it might come.

On the gas volumes, what is the most likely is very difficult to say how the gas flexibility is going to look, how the gas the market, how the forward curve is going to look when you get into 2012 and forward. So, it’s pretty much reflecting a risk base and neutral preview on sort of the capacity that we’ll be able produce, that the market will be able to take. In terms of other kind of operations and market operations that is basically not reflected, it’s more reflected in the range that we have used to illustrate the 2012.

James Hubbard - Morgan Stanley

Could I take it that the bottom end of the range doesn’t reflect any assumption of increased gas sales into Europe because I know there are lots of moving parts here, but the one part that isn’t moving is what assumed gas increase you got in the bottom of your range number?

Helge Lund

It’s reflecting the sort of this underlying portfolio, the gas producing assets that we have in our portfolio and that capacity to (inaudible) gas. No specific sort of assumptions on gas markets and how they look and gas flexibility as such.

Hilde Nafstad

Next question please, operator.

Operator

Next question comes from John Olaisen from Carnegie.

John Olaisen - Carnegie

Couple of questions, if I may. First on the production increase with Gullfaks and Kvitebjørn, you say that the, the pressure in reservoirs as such has come down. Could you tell us a little bit more about that effect due to the field coming into more mature phase? Was that surprise for you or what was going on with the (inaudible) as well?

Helge Lund

This has been the issue with the BTBR reservoir for sometime. So we have had issue before, we had to shutdown production in order to drill additional wells. Basically, it's more a question of when these conditions occur and when the pressure development comes to a level where becomes too low and we simply cannot drill to reservoir. You need a certain pressure, and these type of reservoirs in order to drill into reservoir where there is already holes producing in it and there’s interconnectivity between the producing wells and the new wells. You take out the pressure from reservoirs. So when you drill it to those reservoirs you drill it will simply disappear and it’s a safety risk; you can do that. So you need a certain reservoir pressure in order to be able to drill in safe manner. If you don’t have those conditions you cannot drill at all you cannot spread.

Basically this is a adjustment as to when do these condition occur and this has been the difficult consideration. In this context we had seen that this situation by combat we have seen it more later, coming later and now this is, something you saw through the pressure observation that this is something we have do now. we couldn’t risk losing the opportunity and option to drill those wells.

John Olaisen - Carnegie

It’s just that’s it’s from two pretty mature fields and it’s all coming at the same time. It is a surprise to you after all. Is that correct so assume or was it a surprise that pressure was so low?

Helge Lund

This is fine tuning. It’s not a surprise. We observe the pressure everyday and so it's not a surprise that pressures are low, although this has to do with the specifics sort of reservoirs. When you have these specific conditions that you either drill through the rest of producing reservoir or you drill in another part of producing reservoir. Once you do that and there is connectivity and that does not occur in all instances.

These two reservoirs are complex, we have that situation. So then it’s the question of it's really when does this happen and we could take the risk actually and delay this for three months. We could take that risk and be happy about this year and its still could work out fine but, fine tuning of, considering the risk has led us to say, we have to do is this the safe way so we do it now and make sure that there is no risk we don’t lose this well. This is not a, sort of big surprise to us but sort of that this consideration led to this conclusion now that was not expected. So it’s a more small adjustment to the reservoir developments than sort of big surprises in terms of reservoir behavior.

John Olaisen - Carnegie

Then my second question, do you say that the new fields will contribute with 350,000 to 400,000 barrels in 2012 compared to 2010? Is that our estimated [platform] production for more than in these fields or it is the actual expected production for average for the full year ’12?

Helge Lund

It’s the last one; it’s the average for the full year. So, the capacity will be much bigger at the end of the year from these fields. It’s the average production from every month they produce during 2012 compared to every month in 2010.

John Olaisen - Carnegie

Do you have an estimate for the aggregates platform production will be from those new fields on a comparable basis to 300 to 400?

Helge Lund

Obviously, we have prepared that kind of information now, so our focus was now to create confidence on the more on the 2012 but obviously these assets are well known. I’m sure sort of the technical capacity and description of these platforms that’s something that is not a secret. So it can be made available at the proper time.

Hilde Nafstad

Next question please, operator.

Operator

Next question comes from Oswald Clint from Sanford Bernstein.

Oswald Clint - Sanford Bernstein

Two questions, first, about by this time last year you were having discussions with a lot of your European gas buyers regarding some changes with the contracts coming into this year. I just wondered if you’re having any similar discussions at this point in time or is there anything we should expect coming out of the January capital markets update?

Secondly, just on the Marcellus, it looks like you’re steadily increasing production over the last three quarters, despite in that US price declining over the period. Are you happy just to keep drilling to reach your target there and there's no strategy to potentially slow down or at least seek our more liquid rich wells in the Marcellus? Thank you.

Helge Lund

On the first question, we held discussions with most of our major clients during this year and last year to try to solve the best interest of both parties to current situation in the gas market as it looked that time. Most of these discussions, the good majority, is concluded and dealt it as we have communicated. As you recall partly was to take away some of the volume obligations and it was partly to move some of the pricing from the long-term contracts formula to spot pricing. We have also communicated that this is situation that we expect would last to 2012 in terms of the agreements that we have made

It follows with that that we have not have the same extensive discussions as we had the last time last year. So when they come back to the capital markets update in February you should expect us to have factor that into our communication about volumes moving forward.

On Marcellus, the view we’ve taken so far is of course that we have relatively marginal volumes at this stage on Marcellus. We partly and we have a carry structure. So we have in focus on building and industrial possession and partly also it’s driven by lease expiry so that there is certain incentives to push forward with production.

As the industry are solving some of these issues and some of the other carry structures including our onus is sort of concluded, I would expect that it’s more market based approach you will see in the industry altogether in the US as we move forward.

Hilde Nafstad

We’ve one more last question over the telephone line, operator.

Operator

Next question comes from Dominique Patry from Cheuvreux. Please go ahead.

Dominique Patry - Cheuvreux

In (inaudible) about the operational problem in Kollsnes, do you check then those operational issue increase the challenge for you to maintain stable your production in a way and increase your long-term addition?

Secondly, you have quantized the near term production decrease related to the (inaudible) recovery that you are putting in place in Gullfaks and Kvitebjørn. Could you maybe help us quantify the upside related to those program? Last question to which extent Valemon that are leading you to downgrade today your production guidance? Could you help us quantify the impact of those elements into your 2011 newly set guidance of limited production growth? Thank you.

Helge Lund

Maybe you can answer the (inaudible) Eldar but if we speak a little bit about, the operational issues in 2010 at a Norwegian Continental Shelf, those have been very specific unrelated items, very specifically the well incidents at Gullfaks. We have one rig that we planned to do production drilling at Gullfaks that didn’t work and there has been a legal process related to that. Then you have had this very specific Kollsnes issue. So you cannot infer or conclude that this is a pattern that will continue.

When we have talked about and continue to talk about the ambition or keeping the production level for the next 10 years at the current level, we have tried to factor in these factors. As I see it now, we have the resources. So the question is more and that we have to assess over time whether we as an organization are able to put in place sufficient mechanisms to counter the fact that our installations are getting older and we have done quite significant measures so far in terms of changing the offshore organization. We have moved all our drilling engineering to one drilling unit to standardize and industrialize the well delivery and the quality in that.

As you know, we have recently embarked on very aggressive process to have the time you take from you discover resource base until you get it into production on so called fast-track projects. So, we work diligently and very focused to contradict these forces and we have no information as of today that lead us to change our ambition of keeping the production at these levels no doubt require very, very high effort from the organization.

In terms of enhanced our recovery on the Gullfaks and Kvitebjørn issue, these decisions are made in the way where we try to optimize the resource utilization and it’s done on a net present value basis individually. You should not expect that immediately that will lead us to change our guiding for 2010 or 2011. Rather, at this stage, you should conclude that this is included in our statements about the future and then we will come back in much more detail on 2011 and the period beyond in February.

I could add on the Kvitebjørn and Gullfaks South, it's a question of three wells that needs to be drilled and basically these wells they are into accounts. It was a question of when we start to get the reservoir conditions to do it. It’s included in the long-term guidance. As such to make sure that we’re able to do it is an (inaudible) measure as such.

The same is the case for Kvitebjørn; it's one well. It’s a big plan for a long time, it’s in the schedule but this was to make sure that we had (inaudible).

Dominique Patry - Cheuvreux

If I may just come back to my third question about the quantification of recent elements led you to downgrade in 2010 guidance, to which extent can you help us assess the remaining (inaudible) impact there are acting on the 2011 guidance?

Helge Lund

I am not sure I captured the question but none of these things has any (inaudible) on your comments on the 2011. We have seen for long time that 2011 and the build up of the new assets that’s going into 2012 would start to large extent during 2011 and into 2012. We have very limited additional capacity in place this year and in order to have really boost next year, we would have had to have lot of new capacity in place this year actually. Basically this year we’re talking about Europe and Morvin in terms of new capacity and only for a small part of the year.

Just to say something which is if you put all these together and combined with Ormen Lange issue that we also talked about we're just putting pressure on the 2011 numbers, that’s what sort of led us to reiterate something we have seen for long time. We have all stated that there is no linear growth taking us to 2011 but will be variances. Basically, there is nothing new in this from our side except for the Ormen Lange, the project portfolios developing. It's simply the profile of this new asset and when they kind of sort of give us the annual average production.

Hilde Nafstad

Do we have any more questions over the phone, operator?

Operator

Yes, there is one more question from Kim Fustier of Credit Suisse.

Kim Fustier - Credit Suisse

A couple of questions, the first one is again coming back to gas, you’ve cited a lot of factors that explain the lower gas production in Norway in the third quarter but one you didn’t really mentioned was the lower customer off take under your long-term contracts. So, I was just wondering if you could give us any color on this?

Secondly I see you’ve recently submitted application to drill on the Barents Sea. Could you just talk about your plans there, and what’s the prospectivity of the area? Thank you.

Helge Lund

I can take the latter; perhaps the new gas portion Sætre will talk to the later subsequently. On the Barents Sea, historically we’ve drilled the industry and all together between 65 and 75 wells altogether in the Barents Sea. So far it's only there is no big project that is sort of producing from that well history and there is one more project now under execution, the Goliath project where E&I is the operator and Statoil is a big partner.

We’re now into a new phase where we will over the next year or two drill additional wells in the Barents Sea. That will be in several areas of the Barents Sea and we’ll test some new place among others in the Western part of the Barents Sea where we’ll drill a well where we think is a high impact well called Snøhvit later or during next year.

Then we had the application, the recent application that (inaudible) it was in Norway and where the focus in really on the Norwegian Sea and some acreage that has not been picked up earlier in the Barents Sea. That is also is now positioned in this round.

If I think about the strategy in this, we still have an incentive to drill around this Snøhvit and Goliath field to find these new resources. Secondly we’re testing some new place particularly on the western side of the Barents Sea. Then of course in a longer term horizon the recent agreement that is subject to ratification in the Norwegian Parliament and the Duma in Russia of the disputed soil might create new opportunities for drilling gas companies longer term. This is a bit more, longer term issue as we first have to have the agreement ratified and subsequently we have to sort of been given access to that area and do seismic and exploration.

In summary, so far the Barents Sea, on the Norwegian side, has been I think we have not been able to identify the key to the Barents Sea yet. Maybe on a more disappointing side compared to what you saw 10 years ago, but we still have very specific plans and we will know more within the next two to three years.

Eldar Sætre

In terms of the gas aspect it’s, I didn’t mention it. When you look at the gas year 2009 gas year which ended this quarter actually, the overall gas off take is pretty much what we have seen over the last year. No surprises in either direction. It is true that the off take in the third quarter, the last quarter the last year might have been slightly lower, not significantly lower but slightly lower than typically. This has, however, not been the limiting factor in our production this quarter because of the extensive maintenance the production capacity and the processing capacity in order has been the limiting factor. So to the extent it has been lower off take that has simply led to lower sourcing in the gas in the market and third party gas.

Hilde Nafstad

We have another question from the audience.

Trond Omda - Arctic Securities.

Question on the portfolio management. You have made significant divestments and strengths in your balance sheet considerable this year while we see other of your players may be with expectation of BP moving more into M&A and looking at (inaudible) growth. Given that you know how very uninspiring production this year and also next, could you explain your thinking why you didn’t prioritize acquiring more near term production versus longer term? Also why is the macro outlook that’s made you strengthen your balance sheet compared to during increasing production through acquisitions?

Helge Lund

First of all, I would like to say that I take and we take a quite pragmatically as to how we developed the portfolio. I mean exploration business development and the merger on the acquisition and we still will do that. Secondly, we have been last five to six years we’ve been pretty active in terms of building our portfolio also through acquisitions and partnerships.

On the divestment side we have done basically two main efforts, the first one has to do with the Peregrino asset where we had a 100% position. We like the asset, it’s a beautiful asset, we like it. We have together created value on that asset. It is part of our risk management strategy all together when we look at our portfolio. Then we have the SFR sort of deal done a few weeks back. This was driven by industrial logic really that we felt that this company and Statoil could (inaudible) as separate companies. Also we felt that the market was not willing to put a value on that part of the business; and we’ve visualized that in a better way, the way it’s structured now.

In terms of how have the market been for acquisitions for assets recently, our observation is that despite the financial crisis, we’ve not seen a significant impact on the asset prices over the last few years.

In terms of just buying production, we have not had that as a part of our strategy. We would like to move into areas that have a strategic perspective and where we believe that we can with our competence add value much more than buying a short-term income stream.

Hilde Nafstad

Do we have any further questions over the telephone, operator?

Operator

There are no further questions on the telephone.

Hilde Nafstad

Are there any further questions from the audience. If not, this will conclude…

Unidentified Analyst

Just one final question on (inaudible) of course that was written down on the Q2, but some of the comments on NPD have been somewhat critical (inaudible) that Statoil is not doing enough to IOR on the Continental Shelf. Do you see is there anything in the Hadron story that could have been done better by Statoil and I know the answer but do you think you’re doing enough to maximize the recovery on your assets in Norway?

Helge Lund

First of all, I think the history on the Norwegian Continental Shelf is actually and a history of a enormous focus on resource management and Statoil has been a very important player in that. Given how we see the oil and gas industry developing we have all the incentives in the world to do, profitable projects within this area and we're constantly working on this by applying new technology, developing new technology. Most recently (inaudible) and the corporate management team that already last Monday to be given an update on this.

Then there will be older players that are critical to what we are doing. That is fair since we have such a big position at a Norwegian Continental Shelf and they’re approaching us and they should. I am not saying that we’re doing everything as it should be done optimally but I can only assure you that we have an extremely intense focus on IOR. I want to comment at this stage specifically on individual assets but that is our thinking.

Eldar Sætre

Could I just add, I thought you said that there was written down in the last quarter, why it has not has been (inaudible).

Hilde Nafstad

That’s concludes our Q&A session today. Today's presentation and the Q&A session can be replayed from our website, and in a few days it will also be available to find the transcript of the presentation and the Q&A session. With that, I will just thank you all very much for participating and wish you all a good day.

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