VZCZCXYZ0000
RR RUEHWEB

DE RUEHNY #0126/01 0661311
ZNR UUUUU ZZH
R 061311Z MAR 08
FM AMEMBASSY OSLO
TO RUEHC/SECSTATE WASHDC 6666
INFO RUEHCV/AMEMBASSY CARACAS 0083
RUEHMO/AMEMBASSY MOSCOW 3986
RUEHOT/AMEMBASSY OTTAWA 3060
RUEHBS/USEU BRUSSELS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS OSLO 000126
SIPDIS
SENSITIVE
SIPDIS
EUR/NB (MMCDOWELL), DEPARTMENT OF COMMERCE (LMARKOWITZ), DEPARTMENT OF ENERGY (EROSSI,TSARKUS, JGIOVE), INR/I (SMCCORMICK); COPENHAGEN FOR ERIK HALL
E.O. 12958: N/A
TAGS: ECON ENRG EPET PGOV SENV NO
SUBJECT: NORWAY´S ENERGY PART I: ROUGH WATERS AHEAD FOR STATOILHYDRO 

1.(U) Summary: In this three part series, we look at Norway´s 
energy sector. Norway is the world´s fifth largest oil 
exporter and the third largest gas exporter. StatoilHydro, 
the new Norwegian national energy champion, is a Fortune 50 
company with worldwide production and export of oil and gas 
resources. StatoilHydro finished 2007 in a burst of 
optimism, completing the merger of Statoil and Norsk Hydro in 
October of 2007 with remarkable speed, riding a wave of high 
oil prices, and winning a 24% share in the Shtockman gas 
field. However, 2008 is off to a rough beginning for the new 
company, with declining projections of oil production, 
problems with their prestige LNG project, Snohvit, and 
pressure from the new Environment Minister, all while 
smoothing out the wrinkles of the merger and appointing new 
leadership. End Summary

Oil Shifting to Gas 
--------------- 

2.(U) Norway,s energy sector is transitioning from oil to 
gas, as oil production on the Norwegian continental shelf 
continues to fall. No major oil fields have been discovered 
in the past ten years and recently revised estimates indicate 
that oil production will soon begin its long-expected decline 
sooner and sharper than previously predicted. StatoilHydro 
is no exception to this trend and has adapted a multifaceted 
strategy to adapt, including investments abroad (in Canadian 
oil sands, Gulf of Mexico, Africa etc), shifting to gas 
production, ncluding LNG, and pushing for looser 
environmentl restrictions in the remaining areas in Norway 
hich have been closed to exploration. All of thes 
strategies have promise but so far 2008 has highlighted the 
problems inherent in each.

Internaional Investments Putting StatoilHydro on the 
Enironmental Blacklist? 
-------------------------------------------- 

3.(U) StatoilHydro has investents in 31 nations including 
difficult countries suc as Iran, Venezuela and Libya. 
Corruption hasbeen a problem for the company in some 
countries, most forcibly demonstrated by the forced 
resignation of former Norsk Hydr boss Eivind Reitan 
(previously slated to take oer as chairman of StatoilHydro) 
over a bribery sandal in Libya. These issues are common to 
mostinternational energy companies but StatoilHydro faces 
the additional challenge of maintaining an envronmentally 
friendly image.

4.(SBU) Events inlate 2007 and early 2008 have forced 
StatoilHydr to dfend its environmental commitment to both 
ublic and governmental critics. Public concern ovr an oil 
leak from a subsea pipe late in 2007 (cused by a ship´s 
anchor) foreshadowed the criticsm facing the company in 
early 2008. Environmenal Minister Erik Solheim (also 
Development Miniser and an influential member of Government) 
recenly attacked StatoilHydro for investing in the 
enironmentally damaging Canadian oil sands and for lbbying 
the government to open previously closed nvironmentally 
sensitive areasof the Norwegian Continental Shelf for 
exploration. Solheim expressed surprise and concern that the 
majority state-owned company was pushing the government to 
adapt environmentally unfriendly policies and was investing 
in environmentally harmful projects. StatoilHydro CEO Helge 
Lund reacted strongly to this criticism saying that it was 
the company,s &democratic right8 to express its opinions 
and that he could not accept Solheim,s attempt to silence 
the company. Oil and Energy Minister Aslaug Haga supported 
Lund but denied that there was disagreement in the 
government. Comment: Solheim,s citing of state ownership 
was interesting given the GON,s regular claim that the GON 
does not interfere in state-owned companies decisions, for 
example when pressed to end StatoilHydro,s investment in 
Iran.

Fairest of them all? Questions about Snow White 
--------------------------------------------- --- 

5.(U) Expected to be StatoilHydro,s flagship project for the 
next generation, the LNG plant Snohvit (Norwegian for Snow 
White) located in Hammerfest, has run into severe problems 
since operations began in August. The brand new facility 
will only reach a maximum of 60% of expected productivity in
2008 due to problems with a cooling tower that may need to be 
redesigned and rebuilt. This comes after a delay of one year 
in construction, a 50% increase in cost and a two month 
closure in December and January due to salt water leakage in 
the plant,s piping. In addition the projected CO2 
emissions from the plant are much higher than expected, 
further tarnishing the company,s environmental credentials 
(and damaging the GON,s plans to become carbon neutral). 
CEO Helge Lund was recently forced to admit that he did not 
know the reason for the delays in getting Snohvit fully 
online, earning him the derisive media nickname, "Mr. Know 
Nothing". One bit of good news is that the first shipment of 
LNG from Snohvit to the U.S. (to Cove Point, MD) was 
delivered on February 21.

New Leadership and the Outlook for the Future 
------------------------------------------- 

¶6. (SBU) Despite these challenges StatoilHydro,s leadership 
remains optimistic. In a talk January 9 with London 
financiers StatoilHydro,s CEO Helge Lund acknowledged 
problems with production but pointed to greater than expected 
synergies from the merger (savings of over $1 billion per 
year), the promise of new areas of long-term growth (Gulf of 
Mexico, Canada oil sands and most importantly Shtockman) and 
actual growth in international production as good news. 
Certainly if StatoilHydro is able to book the Shtockman field 
reserves it will help offset some of the setbacks. However it 
is still unclear what price StatoilHydro paid for its stake 
in Shtockman or when the project could be expected to move 
forward. Lund along with newly appointed Chairman Svein 
Rennemo (previously CEO of Geo-Services ASA) have their share 
of challenges for the coming year. How the company performs 
and how the GON interacts on controversial issues will be a 
strong indicator of both the viability of the company and the 
GON´s policy towards state-owned companies. Early signs are 
not promising with the latest corporate quarterly earnings 
report indicating falling earnings despite a sharp increase 
in energy production (which company execs attribute to 
increased operating/development costs). 
WHITNEY