Statoil's Recent Discoveries Give It Excellent Position In Asia

| About: Statoil ASA (STO)

On June 14, 2012, Statoil ASA (NYSE:STO) announced a second high impact discovery in Tanzania's Block 2. This comes directly on the heels of the company's enormous Zafarani discovery which is located a mere 16 kilometers (approximately 10 miles) away. This new discovery, dubbed Lavani, has a preliminary resource estimate of 3 trillion cubic feet of gas in place. Statoil also increased its resource estimate for the aforementioned Zafarani well due to a recently drilled sidetrack. This added another 1 trillion cubic feet of gas in place, bringing the total estimated size of Zafarani up to 6 trillion cubic feet of gas in place. Tim Dodson, Statoil's executive vice president of exploration, had this to say about the Lavani discovery and the increase in the Zafarani resource estimate:

"The result from Lavani, which is only 16 kilometres south of our recent Zafarani discovery, confirms the high potential in Block 2. We are also pleased to announce that the recently drilled Zafarani sidetrack added another 1 Tcf of gas in place. This is in addition to the up to 5 Tcf announced in February. The results so far mark an important step towards a possible natural gas development in Tanzania."

Statoil has had great success in exploration since the beginning of last year. Statoil has had seven high-impact discoveries (defined as a discovery with at least 250 million barrels of oil equivalent or 100 million barrels of oil equivalent net to Statoil) over the past fourteen months. These seven high-impact discoveries are:

  1. Lavani In Tanzania's Block 2
  2. Zafarani in Tanzania's Block 2
  3. Skrugard in the Barents Sea
  4. Havis in the Barents Sea
  5. Johan Sverdrup (formerly known as Aldous/Avaldnes) in the North Sea
  6. Peregrino South in Brazil
  7. Pão de Açúcar in Brazil

One important factor to note is that more than half of these high-impact discoveries are located outside of Statoil's home country of Norway. This serves to illustrate Statoil's recent focus on expanding its international production. Last year, I stated in an article here on Seeking Alpha that Statoil's management has placed a high priority on international expansion because the company's historical base in the North Sea and on the Norwegian Continental Shelf is expected to see significant production declines beginning in 2020. The Norwegian Petroleum Directorate, meanwhile, expects that Norwegian oil production will continue to fall going forward. Recent technological advances and new discoveries have increased optimism in the area, however, and so some of these assumptions and predictions may need to be revisited. Regardless, diversification of its production base remains a major priority for Statoil.

The enormous size of the Block 2 gas fields offer opportunities for Statoil to tap into the profitable and growing Asian natural gas market. The opportunity here is similar to the one that Eni (NYSE:E) has with the Mamba North and South fields in Mozambique except that Eni's fields are much larger.

Tanzania is located on Africa's eastern shore, bordering the Indian Ocean and located directly north of Mozambique. This location on the Indian Ocean provides for easy and direct shipping to Asia. Additionally, natural gas is in great demand in Asia as indicated by the fact that natural gas prices in Asia are significantly higher than in either North America or Europe.

In a previous article (linked above), I discussed how natural gas is a growth industry in Asia. The U.S. Energy Information Agency projects that Asian OECD-member nations will increase their consumption of natural gas by 1.0% annually between 2008 and 2035. In addition, non-OECD member nations in Asia are projected to increase their natural gas consumption by 3.9% annually between 2008 and 2035.

An article published on June 15 in The Economic Times discusses a major reason why natural gas prices in Asia are so high: the tight supply. According to the article,

"Asian demand for LNG (liquid natural gas) has increased substantially in the last year due to the shutdown of Japan's nuclear power generation, which it tries to make up for with fossil fuels such as LNG and fuel oil."

In effect, demand for LNG is up in Asia due to Japan requiring it for the production of electricity. This same article goes on to predict that the tight supply in the Asian natural gas market will persist until at least 2014, when various projects in Australia will commence exports.

Statoil's position in Tanzania gives the company an excellent position to profit off of the high and growing demand for natural gas in Asia. The major wildcard here is Australia. The country is expected to become the leading exporter of natural gas by 2016 and is expected to see its natural gas production and export capacities grow significantly due to a series of projects that will come online beginning in 2014. Given the time that it takes to bring an offshore natural gas field online and into a production state, Statoil will not be able to begin exporting gas from this field to Asia by 2014. Therefore, the big question is what effect Australia will have on Asian gas prices. Either way though, the discovery does present an opportunity for Statoil. Asia is thirsty for natural gas, with demand expected to double over the 2010-2025 period.

Disclosure: I am long STO.