(STO) Statoil ASA to Use Subsea Compression

Statoil ASA (STO) is on track to boost its gas recovery rate at subsea wells in various fields. Accordingly, the Norwegian company plans to implement subsea compression — an advanced process for production enhancement — at the Gullfaks field, offshore Norway.

Since 2008, Statoil and Framo Engineering have been working on technology upgrade for compressing wet gas on the seabed. Such compression also steps up production in a mature field that suffers from a decrease in natural pressure in a reservoir.

Now, Statoil has decided to take the compressing concept a step forward in the Gullfaks South subsea field. The company said that the new technology will substantially boost production volume. It would consequently lift the recovery rate for the reserves by three billion cubic meters of gas, implying a 6% increase from the current level.

Subsea compression, coupled with conventional low pressure production in the later phases, is expected to boost the recovery rate to 74% from the current 62%.

In recent times, Statoil have been engaged in three subsea compression projects, all in their early stages. Apart from Gullfaks, the company is working on the Asgard field that involves a subsea solution to raise pressure from the Mikkel and Midgard reservoirs.

This will in turn improve recovery by 28 billion cubic meters of gas and 14 million barrels of condensate. The company also remains busy on a similar project for Ormen Lange, together with the operating company Royal Dutch Shell Plc (RDSA).

Statoil is an international integrated oil and gas firm. Though the company has operations in all major hydrocarbon-producing regions of the world, it has an upstream focus on the Norwegian Continental Shelf (NCS).

We believe that Statoil is well positioned to sustain its steady production profile for the next few years on the back of its large resource base at NCS. Almost 50% of the company’s production comes from 488 subsea wells. Statoil’s proficiency in subsea activity is one of its key drivers of production and recovery.

However, Statoil’s weak reserve replacement ratio is expected to weigh on the stock. Despite a number of major acquisitions, Statoil lags meaningful improvement at its reserve-replacement performance. The company’s reserve replacement was 87% in 2010. Although Statoil avowed to increase its resources base by 30%, we believe this is a long-term story.

We maintain our long-term Neutral recommendation for the company’s ADRs. Statoil currently retains a Zacks #3 Rank, which translates to a short-term Hold rating.

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