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Norwegian state oil company Statoil ASA (STO - Analyst Report) has farmed out its 18.75% stake in Iraq’s West Qurna 2 field to Russia's biggest privately owned oil producer, Lukoil (LUKOY). However, the financial terms of the deal have not been revealed.

Statoil’s decision to sell its interest in the huge development project stemmed from its inability to fulfill the profitability criteria. The transaction has also received Iraqi authorities’ consent.

Statoil and Lukoil have been partners in the West Qurna 2 project since December 2009, when they were awarded a 20-year service contract in Iraq’s second licensing round. Following the farm out, Statoil will have no financial obligation relating to the project as of January 1, 2012.

As the operator of the field, Lukoil will hold 75% stake in it post acquisition, while state-owned North Oil Company will hold 25%. The Russian oil giant is also seeking prospective partners for a probable farm-in deal.

The operator proposes to expend $25 billion for the development of the West Qurna field. The drilling on the field commenced in April 2012, targeting an output of 150,000 barrels per day (bpd) by the end of 2013 that is expected to scale up to 500,000 bpd by 2014.

Over the last few quarters, Statoil has been divesting low-profit generating assets, particularly those that do not fit the company’s long-term growth plan, and engaging in lucrative deals in an attempt to streamline its operations.

Despite exiting from the West Qurna 2 project and confirming its decision to not take part in Iraq’s latest licensing round, Statoil maintained that it is keen to invest in new business prospects in the resource rich country. However, in recent times, foreign companies have been reluctant to continue their operations in Iraq due to tough contracts, a lack of financial incentives for investment and constant insecurity.

Statoil holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. Longer term, we maintain our Neutral recommendation on the stock. The company faces tough competition from Eni SpA (E - Analyst Report).

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