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Statoil ASA (STO - Analyst Report) has awarded new drilling service contracts on several fixed installations on the Norwegian Continental Shelf (NCS). The contracts are worth NOK 30 billion (US$5.03 billion) and are believed to be the biggest awarded by Statoil on the NCS since 2010.

Drilling service contractors operating offshore Norway, namely KCA DEUTAG, Odfjell Drilling and Archer have received the tender for drilling new wells, plugging old wells as well as workover and maintenance of drilling facilities on 18 of 20 fixed platforms, owned by the Norwegian company and located on the NCS.

KCA DEUTAG will be permitted for the drilling services on three Gullfaks installations A, B and C, along with four in the Oseberg area; Oseberg B and C, Sør and Øst. Odfjell's contract includes Brage, Grane, Heidrun, Njord, Snorre A and B, Sleipner A and Visund. Archer's award covers drilling services on three Statfjord installations -- A, B and C.

Each contract has a term period of 10 years, including four firm years along with options for three extensions of two-years. This accord grants a long-term perspective on drilling services for both Statoil and the supplier industry.

We believe these contracts underline the Norwegian company’s constant attempts to sustain its steady production growth by improving recovery of resources in mature fields. Statoil is increasingly shifting its focus to the still-unexplored areas of the Norwegian Sea, and intends to achieve an equity production of above 2.5 million barrels of oil equivalent in 2020.

The growth is expected to come from new projects between 2014 and 2016, resulting in a CAGR of 2% to 3% during that period. For achieving the production target in NCS, efficient drilling and well services on existing fields are the key factors. The second stream of projects is expected within the 2016−2020 period, and would likely lead to a CAGR of 3% to 4%.

While the company is fairly active in its development operations, its rising production costs (which leaped 10% year over year in first quarter 2012) and a higher capex remain our concerns. Additionally, Statoil’s performance will likely be affected by the volatile macro environment, fluctuating oil and natural gas prices and geo-political disturbances.

Considering these factors, we remain Neutral on Statoil for the long term. The company, which competes with Eni SpA (E - Analyst Report), also holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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