OSLO (Bloomberg) -- StatoilHydro ASA, the world’s biggest offshore oil and gas operator, is pressing ahead with investment in hard-to-extract U.S. shale gas amid slumping prices, calculating demand will rebound as the economy recovers.

StatoilHydro is ramping up gas drilling in the Marcellus Shale formation in Pennsylvania, West Virginia, New York and Ohio, where it bought a 32.5 percent stake in Chesapeake Energy Corp.’s acreage last year, according to Peter Mellbye, head of international exploration and production. It sees the Americas as the most promising area for operations outside Norway.
U.S. gas prices have fallen 27 percent this year on reduced demand and bulging stockpiles, missing out on a rebound in commodities. The price ratio of crude oil to gas is about double the five-year average, as gas demand declines in North America amid the worst financial crisis since the Great Depression.
“The idea is to build up a substantial profile by drilling a high number of wells,” Mellbye said in an interview at his office overlooking the Oslo Fjord. “The volume only starts to become significant after a few years anyhow, and by that time we think that gas prices will have come back. I think shale gas is an interesting and a competitive source of gas.”
Oil producers such as StatoilHydro and BP Plc are tapping unconventional sources to stem a decline in production from fields in the North Sea and other maturing areas. Shale-rock formations thousands of feet below the surface are more expensive to develop and need a greater number of wells than conventional reserves. They became economical to develop because of high oil and gas prices, and less so when prices fall.
-------------Shipment costs
Shale gas’s proximity to U.S. cities means “the costs of bringing it to highly valuable markets is very limited,” Mellbye said, noting this may outweigh higher output costs.
“The gas in this area can actually be marketed at a premium to the Henry Hub price,” he added, referring to the benchmark for New York futures. “It has a considerable advantage to the gas of Russia, or the gas of the Algerian desert.”
StatoilHydro and Chesapeake have drilled seven wells this year, slightly fewer than expected, Mellbye said. He would not specify how many wells the companies aimed to drill by the end of the year, which notably depends on the number of rigs available, he said. The companies expect to drill as many as 17,000 wells in the area.
StatoilHydro last year said it expects equity production from Marcellus of at least 50,000 barrels of oil equivalent a day in 2012, and a peak of at least 200,000 barrels after 2020.
----------------European investment
The credit crisis and the slump in U.S. gas prices have pared asset prices. BP last year bought shale assets for $3.7 billion from Chesapeake, which is raising cash and cutting debt to counter plunging gas prices.
Mellbye said StatoilHydro had “not felt any concern about Chesapeake’s financial position” and was looking for investment opportunities in shale formations with the company in Europe, to use the expertise acquired in the U.S.
StatoilHydro, which has operating rights on about 80 percent of Norway’s oil and gas production, is expanding to countries such as the U.S., Canada and Brazil to compensate for dwindling North Sea resources and to boost its reserves. Oil output on the Norwegian continental shelf is forecast to drop almost 10 percent this year by the country’s Petroleum Directorate. StatoilHydro’s reserve replacement ratio fell to 34 percent last year from 86 percent in 2007.
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“Their exploration program in the Gulf of Mexico is one of the most interesting aspects of their international program,” said Fondsfinans ASA analyst Carl Christian Bachke, who has a ‘neutral’ recommendation on the stock. “They’ve been aggressive in their policy of acquiring licenses there and I expect a fair amount of commercial discoveries to come out of this.”
Asked to identify the company’s most promising projects internationally, Mellbye pointed to the producer’s operations in the Gulf of Mexico and Brazil.
“In terms of short-term developments, we are approaching the season where we start drilling wells in Mexico, and that’s a very important event,” Mellbye said. “We are in the final phases of realizing the Peregrino project, which is a 100 percent StatoilHydro venture, which will bring about 100,000 barrels a day to the company. And we have our well-known oil sands activities in Canada, where we are working on the first phase of the development.”
StatoilHydro owns 25 percent stakes in two deepwater Gulf of Mexico projects. The Tahiti field, which is operated by Chevron Corp. and began production last month, is expected to produce 125,000 barrels of oil and 70 million cubic feet of gas a day when output peaks, according to the San Ramon, California- based company. Output at the Thunder Hawk field, initially scheduled to come on stream this quarter, has been delayed until next year, Mellbye said.
-----------------U.S. write-offs
The company will start the Tucker well in August with the aim of completing the drilling by the end of the year.
“They’ve acquired a lot of their international portfolio at quite high prices, so there’s a big depreciation burden on the company at the moment,” said Jason Kenney, an Edinburgh-based analyst at ING Wholesale Banking.
“We’ve seen write-offs from the U.S. Gulf of Mexico portfolio,” Kenney said. “The question is how much longer that is going to continue.” He has a ‘hold’ recommendation on the stock.
“We have had some write-offs, some related to disappointing exploration activity, some related to slight adjustments to the oil price, but we are not planning any write-offs,” Mellbye said. “There aren’t any fundamental changes that have happened in the last few years that have changed our long-term view on the oil price.”
----------------Peregrino field
StatoilHydro took control of the Brazilian Peregrino project offshore Rio de Janeiro in March 2008 after buying the remaining 50 percent interest from Anadarko Petroleum Corp. The company expects production to start in 2011, and would consider selling a stake of the field depending on how oil prices affected the value of the asset, Mellbye said.
The project had not been able to benefit significantly from a reduction in oil service costs as most of the contracts had been placed prior to prices declining, he added.
Oil producers such as Total SA and Statoil have called on suppliers to the oil industry to cut prices as a surge in costs and last year’s tumbling crude threatened investment plans.
“We’ve seen some response, but not by the amount and the proportions people have been talking about when they say 30 percent,” Mellbye said. For the oil sands project in Canada, “we’ve seen some response in the supply market, which was extremely overheated.”
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StatoilHydro has drilled about 19 wells this year outside of the Norwegian continental shelf, Mellbye said. The company has completed 24 wells domestically, it said in an e-mailed statement on Thursday. The total target for the year is about 70 wells.
The company, which is 67 percent government owned, expects equity oil and gas production to rise to 1.95 million barrels of oil equivalent a day this year from 1.9 million barrels a day in 2008. Equity production includes production-sharing agreements.