Statoil Energy, the largest Appalachian Basin gas reserve holderand a top energy marketer and independent power producer, was puton the auction block last week after having failed in its attemptthis summer to find a partner to invest about $1 billion in itsfuture.

The company’s parent, Norwegian government-owned Statoil Group,announced plans to sell the U.S. unit and has engaged Credit SuisseFirst Boston in the divestiture. The company’s 1.1 Tcf of gasreserves and top-30 trading operation are expected to be in thehands of some eastern-U.S. electric utility — possibly Akron,OH-based FirstEnergy, according to one inside source — before theend of the year.

“In order to effectively execute its business plan, StatoilEnergy needs to substantially increase the scale of its operations.The resources required to achieve such scale cannot realisticallybe supplied by the Statoil Group alone as there are numerousinternational investment opportunities competing for our limitedcapital,” said Statoil Group Executive Vice President Johan NicVold, who also is Statoil Energy’s chairman.

In May, the parent company announced it was searching for apartner to match its six-year investment in Statoil Energy,formerly The Eastern Group. While a number of prospective partners,mostly electric utilities, expressed a strong interest, none werewilling to commit to the co-equal partnership the Statoil Groupenvisioned. “Our best candidates – those that share our strategicvision — believe that these business opportunities are toocentral to their core business to be shared with a partner,” Voldsaid. As a result, the company’s decision to sell the entire unitis expected to generate a rapid response among those who previouslyhad shown a strong interest, said a spokesman.

The change of heart by parent Statoil Group also apparently wasinfluenced by the turmoil that occurred on its board earlier thisyear and that resulted in the hiring of a new CEO, Olav Fjell.Seven members of its 10-person board of directors did not havetheir directorships renewed because of poor management of theAasgard oil and gas field in the Norwegian Sea. The costs for thefield’s development surged to $64 billion crowns (U.S. $8.2billion) from an original $47 billion crowns.

Statoil Group now plans to renew its focus on its core North Seaoperation, where it is the largest hydrocarbon producer, and willconcentrate its energy marketing efforts in the Nordic region andits downstream natural gas operations in Northern Europe. Statoilalso has identified three core areas, beyond the North Sea region,where it is focusing its exploration operations including WesternAfrica, the Caspian Sea and Venezuela.

It plans to sell Statoil Energy as one unit, comprised of fourtightly knit businesses – gas production, power production, energymarketing, and energy trading. “Much of our company’s value arisesfrom the operating synergies achieved through the interaction ofour people across business unit lines” said Statoil Energy CEODavid Dresner. “Accordingly, Statoil Energy will be marketed as anintegrated enterprise.”

Aside from a setback last summer related to power contractdefault by a counterparty, Power Company of America, Statoil Energyhas shown strong growth. It posted a net loss of $7.6 million in1998 mainly because of a $28.5 million pre-tax charge to earningsrelated to the power contract default and declining performance ofits trading and energy services operations. After buyingAppalachian producer Blazer Energy from Ashland in 1997, however,the company more than doubled its annual revenues last year to $3.6billion. Its operating income before unusual items more thandoubled to $50 million.

Its total assets are valued at $1.1 billion and it has 650employees. As of the end of last year, the company had 1.1 Tcf ofgas reserves on 6,500 wells, located primarily in the AppalachianBasin. It traded about 1.6 Bcf/d of gas and sold 66.4 million MWhof power.

Rocco Canonica

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