Centrica buys $1.63 billion Norwegian upstream assets

OSLO Mon Nov 21, 2011 12:40pm EST

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OSLO (Reuters) - The UK's Centrica (CNA.L) boosted its oil and gas production by a quarter on Monday through buying a string of assets from Norway's Statoil (STL.OL) and signing a 10-year gas deal that will improve the UK's energy security.

Centrica, the parent of household energy supplier British Gas, will buy 5 billion cubic meters (bcm) of natural gas per year - about 5 percent of the UK's annual gas needs - between 2015 and 2025 in a deal worth about 13 billion pounds ($20.5 billion).

It will also buy from Statoil oil and gas production and development assets off Norway for up to $1.625 billion, lifting its output by around 12 million barrels of oil equivalent per year and its probable and proven reserves by 29 percent.

"We believe that these are good moves that will underpin Centrica's position on both the Upstream and Downstream side ... (and) the share price is now factoring in unreasonably pessimistic scenarios on the supply side," the UK's Investec Bank said in a research note.

The gas deal, an extension to a contract set to expire in 2015, lets Statoil maintain its 16-18 percent market share in the UK, a vital market for Norway's biggest energy firm, and the divestments confirm relatively high asset values for the firm.

Although the agreed price was slightly above average, analysts said that the deal was positive for Centrica.

"They are selling the stakes for about $12.5 per barrel of oil equivalent, and most of it is gas, so this is a reasonably good price. Most North Sea deals that have included oil and gas over the last year have been at around $11-12," Fondsfinans analyst Magnus Smistad said.

"It's a bit higher than the average gas stake prices of recent (times). Centrica and Shell recently did a deal that was below $10," Smistad added.

CENTRICA NEEDS THE ASSETS

The natural gas deal, though large, was expected as the UK's output is declining, while Statoil has gas enough to place.

"The UK's production is falling sharply, and it's natural for Centrica to want to have parts of its portfolio in Norway," Arctic Securities analyst Trond Omdal said.

"After making large discoveries on the Norwegian shelf and expanding internationally, it's natural for Statoil to cut some stakes," Omdal added.

Statoil has said a recent North Sea oil and gas discovery may be the world's biggest in 2011, breathing new life into a mature oil region largely written off by the majors.

Statoil said on August 8 it had struck oil in the Aldous Major South prospect in the North Sea, estimated at between 200 million and 400 million barrels of oil equivalent (boe).

This means that the deal with Centrica frees up cash which allows Statoil to focus on new core assets.

"The reserves and assets being sold today ... have an associated capex of about $2 billion. This means we have liberated about $3.7 billion for redeployment," John Knight, a Statoil executive vice president said.

HIGH GAS PRICES DESPITE GOOD SUPPLIES

Overall European gas reserves look healthy, with the European Union's 27 members expected to have around 50 bcm more excess supply in 2011 than it did last year, and the system is likely to remain similarly long in 2012, according to Reuters research and analyst data.

Despite this healthy supply outlook, analysts said that the deal indicated upside in North Sea asset values.

"Centrica's desire to improve its energy hedge would suggest it doesn't see commodity prices going lower, and therefore the implication is that the value of North Sea assets are at the very least underpinned at these levels, if not likely to rise," Evolution Securities said in a note.

Gas prices are being held high through an indexation of long-term gas supply contracts to the oil market, and because of high Asian demand for liquefied natural gas (LNG).

The UK is particularly exposed to the LNG market. Around 50 percent of its gas imports this year have so far come from LNG tankers, according to figures from the UK's department for energy and climate change (DECC).

TAX REGIME A FACTOR

Centrica said it picked Norway for its strong prospects and stable tax regime.

"The UK clearly is becoming more mature, and the opportunities in Norway, we think, are great ... We do take into account fiscal stability, and there have been fewer changes in the tax regime in Norway than there have been in the UK over the last 10 years," Centrica Chief Executive Sam Laidlaw said.

Centrica will gain minority stakes in the Kvitebjoern, Heimdal and Valemon fields while exiting the Skrine-Byggve, Fulla, Frigg-Gamma-Delta, Vale and Rind prospects.

Kvitebjoern, the main asset in the deal, produces around 60 million of barrels of oil equivalent (mmboe) per year of gas and oil, of which Centrica's 19 percent share will be 11.4 mmboe per year. ($1 = 0.633 British Pounds)

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Table of 2010-2012 EU gas supply outlook:

link.reuters.com/wex54s

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(Additional reporting by Henning Gloystein, Joachim Dagenborg and Adveith Nair)

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