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Norwegian state oil company Statoil ASA (STO - Analyst Report) has extended its exploration agreement with its partner Centrica Plc until June 2013. Statoil’s deal with the UK utility firm includes joint exploration of gas resources in the British and Norwegian waters.

With the backdrop of uncertainty regarding renewable subsidies and uncertainty regarding the future of low-carbon power generation in the UK, the contract extension comes as a big help in enhancing activity and restoring the deteriorating North Sea yield.

Originally signed in November 2011, the £13 billion 10-year memorandum of Understanding resulted in the companies bidding jointly for land to explore in UK’s 27th North Sea licensing round. The extension agreement was also signed at an energy summit called by the Prime Minister’s of the two countries.

The deal is expected to augment oil and gas deliveries from Norway to Britain and at the same time, promote joint exploration operations in the North Sea and Arctic waters.

In Europe, Norway is the second largest gas supplier after Russia, and thus fulfills over a third of UK’s gas requirements. The two dedicated subsea pipelines as well as the yield from its Snoehvit production plant in the Barents Sea help in the steady delivery of liquefied natural gas to the UK, Europe, North America and Asia.

The UK is struggling to meet its domestic gas needs, with declining yield from old North Sea fields and an increasingly rigid taxation regime on oil and gas profits, pushing investors out of the region. This has compelled the UK to depend on imports.

Despite these hurdles, Britain's energy security policy is centered on bringing back investments into the North Sea and marketing the remaining billions of barrels of oil and gas in offshore reservoirs. Thus, Statoil is advantageously positioned to benefit from these incentives.

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 competition from Eni SpA (E - Analyst Report).

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