Norsk Hydro, whose exploration and production assets are being acquired by fellow Norwegian-based Statoil in a $30 billion stock deal, said it planned to write down the value of its Gulf of Mexico Front Runner field by after-tax $462 million based on a lower production profile and higher development costs than expected. The impairment amounted to $710 million before tax, of which $58 million was related to in-field prospects and was to be charged to exploration expense in the fourth quarter 2006.
The remaining book value of Front Runner was estimated at $201 million. Hydro has ownership interest in about 40 producing fields in the U.S. Gulf, some producing above and some below expectations, the company said, adding that it also would write down the value of 10 fields on the U.S. outer continental shelf with $87 million after tax, which corresponds to $134 million before tax.
Hydro’s proved reserves in the U.S. Gulf were to be reduced by roughly 7 million barrels of oil equivalents at year-end 2006, representing less than 0.4 percent of Hydro’s total reserves of more than 2 billion boe reported to the U.S. Securities and Exchange Commission at year-end 2005. Hydro maintains its worldwide company production target for 2007 of 605,000 barrels of oil equivalents per day.
Company remains confident in Gulf
“Although Front Runner has been a disappointment so far, we remain confident that the Gulf of Mexico with our significant exploration assets will continue to be an important core area in our international portfolio,” said Eivind Reiten, Hydro’s president and chief executive officer.
Hydro attained a 25 percent interest in the Front Runner field through the acquisition of U.S.-based Spinnaker Exploration in 2005, which Hydro said included several high-quality development projects as well as significant exploration acreage — both deepwater and shelf prospects. Front Runner’s performance was weaker than expected during 2006, with several wells collapsing and being shut down.
As announced in connection with Hydro’s third-quarter 2006 results, the development prompted the company to initiate an extensive review of the field. The review concluded that the geology of Front Runner is more complex and reservoir communication weaker than expected at the time of the acquisition. Expected recoverable reserves from Front Runner were reduced by 56 percent compared with Hydro’s initial valuation of the field due to lowered expected volumes of oil in place, reduced expected recovery rates and increased field development costs.