Statoil to Boost Output with Cat J

Norwegian oil giant, Statoil ASA ( STO - Analyst Report ) is planning a new rig concept to enhance the recovery rate of the mature fields on the Norwegian continental shelf (NCS).

The company is set to launch a tender for a minimum of two rigs known as Category J, for drilling wells at North Sea fields such as Gullfaks, Mariner as well as Johan Sverdrup, which is set to come online in 2017. The new jackup rigs will be able to operate at water depths ranging from 70 meters to 150 meters and drill wells down to 10,000 meters, and are expected to reduce production costs by approximately 20% and yard delivery costs by 10%. These tailor made units will drill wells both from surface and subsea, as well as function in harsh environments.

Each unit will cost around $450 million to $500 million and will be owned by the licenses for each field. These GustoMSC CJ70 designed, high-specification, super-sized jackup rigs are slated for delivery in the second half of 2015 and Statoil plans to issue the invitation to the tender in July and award contracts by the end of this year.

We believe Statoil’s venture to improve recovery of resources in mature fields is commendable and vital at a time when production is declining by approximately 5% a year from its existing fields. The company is also in discussion with other industrial co-partners, like Norway’s Seadrill, Denmark’s Maersk Drilling and U.S. oil companies Rowan Companies ( RDC - Analyst Report ) , Ensco Plc ( ESV - Analyst Report ) , Transocean Ltd. ( RIG - Analyst Report ) and Noble Corporation ( NE - Analyst Report ) , for the development of the rig.

Apart from its efforts to increase the recovery rate from the matured oils, Statoil is also increasingly shifting its focus to the still-unexplored areas of the Norwegian Sea and aims to achieve an equity production of above 2.5 million barrels of oil equivalent in 2020. In 2011, Statoil delivered strong exploration results, adding more than 1 billion barrels to its resource base. The company also makes significant discoveries in the mature North Sea as well as in the Barents Sea, reaffirming the potential of the NCS.

Of late, Statoil − the world's largest offshore operator − is developing several large fields that include Gudrun, Dagny, Valemon, Luva, Skrugard and Avaldsnes/Aldous. The company is also working on several oil recovery projects, including Snorre, Statfjord, Troll, Oseberg, Gullfaks and Asgard, and fast-track developments on fields like Stjerne, Visund Sor and Hyme.

While the company is fairly active in its development operations, we remain on the sidelines due to its weak fourth quarter 2011 production profile. In the recently reported fourth quarter, equity and entitlement production increased only by 2% and 1% respectively, from the year-earlier period. Hence, our long-term Neutral recommendation remains unchanged and the company holds a Zacks #3 Rank (short-term Hold rating).