StatoilHydro CEO Talks of 'High Costs' and 'Middle-Class Quality'

Norwegian oil major StatoilHydro said on Tuesday the oil and gas industry was facing its gloomiest outlook in years and blasted oil services companies for charging top dollar for often sub-quality work.

Chief Executive Helge Lund said the international petroleum industry faced a cost "tsunami", a "bust" in the oil price and tighter lending conditions due to the financial crisis.

"I now see more downside risk for our industry than in a long time," Lund told a seminar on the world energy outlook with oil prices below $60 per barrel, down from $147 in July.

"The industry's attention is clearly very quickly shifting from production and growth to cash flow and flexibility...Oil and gas companies all over the world are revisiting plans and investments, and projects are put on hold," he said.

Lund said StatoilHydro would stick to its dual strategy of "capturing the full potential" of the Norwegian shelf and seeking long-term international growth, while maintaining financial flexibility and controlling costs.

"Our short-term response is capital discipline and controlling our cost base... We will use all levers at our disposal, including a dialogue with our suppliers," Lund said.

"Keeping financial flexibility is my top priority in steering through the economic crisis...whether it lasts one, two, three, four, five or six years," he said.

Lund said the explosion in exploration and production costs over the past four to five years, which accompanied a surge in energy prices and a push by producers to tap new resources, had led to a worse quality of services and delays.

"Nobody will benefit in the long term if we continue on the path we are now on -- with high costs (of oil and gas services) and rather middle-class quality," Lund said, adding that in the time ahead suppliers should readdress quality issues.

Unlike many peers, StatoilHydro has not cut its investment plans for 2008, when it intends to spend about 65 billion crowns ($9.24 billion) on exploration. But it has not revealed its 2009 capex budget, which many analysts expect to be lower.

Lund said StatoilHydro's strong balance sheet and cash flow have already helped it secure a $3.4 billion purchase of a 32.5 stake of U.S. shale gas assets of Chesapeake Energy, a company hit by the global credit crunch.

"We are not pulling the handbrake. We will act on opportunties when we see them, as our recent deal with Chesapeake showed," he said.

Lund said that if too many projects were delayed or shelved due to capex cuts, the oil industry could have difficulties boosting output once the global economy picks up.

He said he would not be surprised "if a new wave of mergers is looming" in the oil and gas industry.

But when asked by Reuters if StatoilHydro would take part in this M&A activitity, he said the group was focused on executing its 2007 merger with the oil assets of Norsk Hydro and it has just done the "quite sizable" Chesapeake deal.

Author: Jo Amey