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Statoil Energy Up for Grabs

October 18, 1999
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Statoil Energy Up for Grabs

Statoil Energy, the largest Appalachian Basin gas reserve holder and a top energy marketer and independent power producer, was put on the auction block last week after having failed in its attempt this summer to find a partner to invest about $1 billion in its future.

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

"In order to effectively execute its business plan, Statoil Energy needs to substantially increase the scale of its operations. The resources required to achieve such scale cannot realistically be supplied by the Statoil Group alone as there are numerous international investment opportunities competing for our limited capital," said Statoil Group Executive Vice President Johan Nic Vold, who also is Statoil Energy's chairman.

In May, the parent company announced it was searching for a partner 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 were willing to commit to the co-equal partnership the Statoil Group envisioned. "Our best candidates - those that share our strategic vision --- believe that these business opportunities are too central to their core business to be shared with a partner," Vold said. As a result, the company's decision to sell the entire unit is expected to generate a rapid response among those who previously had shown a strong interest, said a spokesman.

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

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

It plans to sell Statoil Energy as one unit, comprised of four tightly knit businesses - gas production, power production, energy marketing, and energy trading. "Much of our company's value arises from the operating synergies achieved through the interaction of our people across business unit lines" said Statoil Energy CEO David Dresner. "Accordingly, Statoil Energy will be marketed as an integrated enterprise."

Aside from a setback last summer related to power contract default by a counterparty, Power Company of America, Statoil Energy has shown strong growth. It posted a net loss of $7.6 million in 1998 mainly because of a $28.5 million pre-tax charge to earnings related to the power contract default and declining performance of its trading and energy services operations. After buying Appalachian producer Blazer Energy from Ashland in 1997, however, the company more than doubled its annual revenues last year to $3.6 billion. Its operating income before unusual items more than doubled to $50 million.

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

Rocco Canonica

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