OSLO (Reuters) — Norway's Statoil has agreed to acquire the oil and gas activities of Norsk Hydro to create a national oil giant, the companies said on Monday, driving their shares up sharply.

The new company will have combined production of 1.9 million barrels per day in 2007 and proven oil and gas reserves of 6.3 billion barrels of oil equivalents, and will become the world's largest offshore operator, the companies said.

"The recommended merger is driven by an ambition to grow in Norway and internationally," Norway's two biggest companies said in a joint statement.

The proposed merger is subject to approval by the general meetings of the two companies as well as by regulatory authorities, they said.

Shares in Norsk Hydro leapt 24.2 percent to 194.0 kroner ($31.22), and Statoil's stock jumped nearly 6.7 percent to 184.50 kroner, driving the Oslo bourse benchmark index to new all-time highs.

The new company would be worth 577 million kroner, around $93 billion, according to the Wall Street Journal.

Norsk Hydro, the energy and aluminum group, will continue as a leading, focused global aluminum company, Hydro said.

Hydro shareholders will hold 32.7 percent, and Statoil's shareholders would hold 67.3 percent of the new company.

"Hydro's shareholders will receive 0.8622 shares in the new company for each Hydro share and continue as owners of Hydro. Statoil shareholders will maintain their holdings in the new company on a one-for-one basis," the companies said.

The Norwegian government will raise its stake in the new company to 67 percent from an initial 62.5 percent, the government said in a statement.

"Final closing is expected to be in the third quarter 2007," the companies said and added that in the meantime, Hydro and Statoil would be managed as separate companies. "The new company will create huge values for Norway," Prime Minister Jens Stoltenberg said in a statement. "And the merger is an excellent foundation for meeting the challenges facing the oil and gas industry. The government sees the recommended merger as industrially and strategically well founded."

Norsk Hydro will remain a separate listed company based on its aluminum and power generating business, the government said. "This creates the basis for an even further development of the aluminum business," the government said.

"By combining forces, the new company will be a highly competent and financially strong Norwegian-based energy champion, well positioned to ensure continued domestic excellence and pursue international business opportunities for long-term growth," Jan Reinaas and Jannik Lindbaek, respective chairmen of Hydro and Statoil, said in a joint statement.

"The industry faces an increasingly challenging international landscape. To merge now makes perfect sense," said the chairmen of the firms which will be present in 40 countries.

Statoil's Chief Executive Helge Lund will become CEO of the new company, and Norsk Hydro's Chief Executive Eivind Reiten will become chairman and continue as head of Norsk Hydro's aluminum company.

The market has long seen a combination of Hydro's and Statoil's oil and gas business as a likely scenario to make the companies able to compete with bigger international rivals.

But Lund had told Reuters as recently as Oct. 17 that a merger with Hydro was not on the agenda. Carnegie's oil analyst John Olaisen said: "Very positive for both. A very reasonable transaction." DnB NOR's oil analyst Bjoern Inge Toennessen said: "This will give more punch to the international presence of the two." Hydro said it would propose a dividend for 2006 of 5 crowns per share, totaling about 6.1 billion crowns, subject to approval by shareholders. "This dividend is to be funded entirely by Hydro's oil and gas activities."

Statoil will propose a dividend of 9.12 crowns per share for 2006, in total about 19.7 billion crowns, Statoil said.

"Furthermore, it is the combined company's intention to return to its shareholders, through cash dividends and share repurchases, an amount in the range of 45 to 50 percent of consolidated net income as determined in accordance with U.S. GAAP," the companies said.

In any one year, however, aggregate cash dividends and share repurchases may be higher or lower than 45 to 50 percent of net income, they said.

Statoil's main competitors in oil and gas exploration are BP, Royal Dutch Shell and TOTAL.