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Statoil ASA (STO - Analyst Report) has finally decided to give up the Kazakh Caspian oilfield project, following unsuccessful negotiations to initiate exploration operations there.

In April 2011, the Norwegian energy major and Kazakh national oil and gas company KazMunaiGas (KMG) signed heads of agreement for the Abay block in the Kazakh sector of the Caspian Sea.

Located 65 kilometers from the shore, the Abay block holds an estimated reserve of 387 million tons (2.8 billion barrels). Kazakhstan’s main source of revenue is hydrocarbon production. However, delays and cost effectiveness have hindered the country’s endeavors to intensify its offshore production.

Late last year, ConocoPhillips (COP - Analyst Report) planned to sell off its interest in Kazakhstan's giant oilfield, Kashagan, to India’s major energy explorer, ONGC Videsh Limited. ONGC Videsh is the international arm of India's Oil and Natural Gas Corporation Ltd.

The to-be sold properties include ConocoPhillips’ 8.4% interest in the giant Kashagan field in Kazakhstan that will fetch $5 billion. Kashagan has estimated reserves of 30 billion barrels of oil, of which 8 billion to 12 billion are potentially recoverable. However, the project ran into delays since its discovery. Besides these hurdles, rising costs have been an impediment.

Kazakhstan holds the second position among the oil producing countries in the former Soviet Union. However, the country needs Kashagan, Chevron Corp.’s (CVX - Analyst Report) Tengiz and the Eni SpA (E - Analyst Report) and BG Group plc-operated Karachaganak production to maintain its production level above 80 million metric tons of oil a year after 2016.

Although Statoil’s attempt in the Kazakh Caspian oilfield project failed, it delivered strong exploration results in 2012, adding significantly to its resource base by making several high impact discoveries, since the last 2 years.

Following a surge in global oil demand, we see the Norwegian oil major as likely to benefit from its cooperation alliance with Russia-based Rosneft – the world's largest hydrocarbon-producing company.

Statoil holds a Zacks Rank #3 (short-term Hold rating).

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