Statoil: How Financially Strapped Governments Might Drive Up Oil Prices

| About: Statoil ASA (STO)

It's certainly not startling news that government actions affect how companies conduct their business, often resulting in unintended consequences. A prime example would be the results of the recent announcement by U.K. Chancellor of the Exchequer, George Osborne, that a higher tax is to be levied on the production from the U.K.'s offshore fields.

This is somewhat similar to the "windfall profits tax", talk of which seems to crop up in the U.S. anytime oil gets uncomfortably high in price. The U.K. plans to increase the supplementary charge on U.K. oil and gas production to 32% from the current 20%. This tax is over and above the "normal" U.K. corporate tax rates.

It's often said that the cure for high prices is high prices, especially when one is talking about natural resources. It makes sense that climbing prices make it more attractive for firms to make the needed investment to increase production. However, it still must make economic sense for the firms to make the investment.

Statoil (NYSE:STO) is having some second thoughts about proceeding ahead with a couple of North Sea projects because of the new tax regime. Both the Mariner and Bressay field projects have been put on hold as a result of the new tax structure. According to a Statoil spokesperson, both projects were considered "marginal" under the previous tax rate.

Given the U.K.'s sagging economy, it's somewhat understandable that the government would be looking at any possible means to bolster revenues. But there's definitely a risk of killing the goose that lays the golden egg. I don't want to appear to be picking on the U.K., as the government there is certainly not the only one to have undertaken actions that pose a marked negative effect on the major oil companies' fortunes.

The latest round of lease blocks to be auctioned off in Brazil's offshore fields had much less favorable terms than the initial Tupi field concessions did. The same is true of the latest auctions recently completed in Iraq. In some cases, they practically downgraded the status of the firms involved to that of drilling operators; being paid a fixed price per bbl. of production.

Such actions by various government bodies and entities such as NOCs (National Oil Companies) will have a negative effect on any company seeking to acquire such concessions.

There are two ways that companies can minimize such earnings-killing actions:

First would be a broad footprint that might help mitigate adverse actions in any single given locale. Second would be a particular area of expertise, which might provide a negotiating edge in comparison to the competition.

Statoil has such an edge due to its history of successful operations in extremely harsh marine environments. And although the company currently lacks the far-flung operations of the larger majors, it's made a dedicated effort to remedy that situation by expanding its reach from the Canadian tar sands to participation in various African and Middle East projects.

Source: Dow Jones Newswires

Disclosure: I am long STO.