STO-Rosneft Tread Gently in Arctic

Statoil ASA (STO - Analyst Report) and Russian state-owned oil company OAO Rosneft have joined forces to develop the oil prospects in the Arctic without ignoring the impact on the indigenous population and climate change.

The declaration signed by Russia's largest crude producer Rosneft and the world's largest offshore operator Statoil recognizes the need for protecting the environment as well as the biodiversity of Russia's offshore region during exploration and development operations. The oil firms reassured that they will regularly monitor alterations in the natural landscape as well as in the Arctic seascape.

The parties also hope to establish a Coordination Centre to implement provisions of the declaration. This would involve the participation of representatives of Roskosmos, the Ministry of Transport of the Russian Federation and the Ministry of the Russian Federation for Civil Defense, Emergencies and Elimination of Consequences of Natural Disasters (EMERCOM).

In May 2012, Statoil and Rosneft entered into an agreement by which the Norwegian oil giant will jointly explore and develop Russian offshore deposits in the Barents Sea and Sea of Okhotsk. The venture is expected to involve an investment of approximately $100 billion spanning over decades. In August, the two parties signed shareholder and operating agreements to form joint ventures to explore the related licenses.

The agreement calls for the exploration of the Perseevsky licence in the Russian part of the central Barents Sea and three licenses — the Kashevarovsky, Lisyansky and Magadan-1 — north of Sakhalin island in the Sea of Okhotsk. Both parties intend to jointly explore, with Statoil holding 33.33% stakes in each activity.

In this connection, it is important to note that Rosneft has also struck agreements with Italy's Eni SpA (E - Analyst Report) and U.S. energy behemoth ExxonMobil Corporation (XOM - Analyst Report) for the exploration of oil in Russia's Arctic region.

Exploration projects in the Artic region are especially scrutinized for possible spill related danger. Environmentalists generally oppose exploration ventures in the Artic zone for the lack of technological infrastructure to deal with unexpected mishaps.

We believe that Statoil is well positioned to sustain steady production growth for the next few years on the back of its sustained upstream activities. However, taking into consideration the volatile macro environment, fluctuating oil and natural gas prices and geo-political disturbances, we remain on the sidelines and maintain our Neutral recommendation on the stock for the longer term.

Statoil holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.