Quotes of the Day

It was a week Eivind Reiten is unlikely to forget. On Oct. 1, the oil and gas arm of Hydro, an Oslo-based energy and metals company he was running, completed a $36 billion merger with Statoil, its beefier Norwegian rival, creating the world's largest offshore energy operator. Five days later, Reiten hosted his country's King and Queen in Nyhamna, a third of the way up Norway's west coast, at the official launch of a record-breaking gas production and processing project forged by Hydro to harness gas from 120 km away under the Norwegian Sea.

But the week wasn't all sweet. Between the creation of StatoilHydro, as the company is known for now (the firm is still mulling over a permanent name change), and the royal ceremony, Reiten was generating headlines of his own. On the day of the merger, StatoilHydro announced it had launched a probe into the legality of approximately $7 million in consultancy fees and expenses Hydro paid as part of its oil operations in Libya. Although it has not disclosed the name of the consultancy Hydro paid or what laws it might have broken, StatoilHydro said the payments came to light during the merger process. Reiten wasn't involved in Hydro's energy operations when those payments began in 2000 — he was boss of the company's aluminum division at the time — but the potential conflict of interest during the investigation left him little choice but to resign as the combined company's first chairman. (He remains CEO of Hydro's aluminum and power businesses, which were not part of the merger.) "It's been an eventful week," Reiten, 54, told TIME amid the icy rain in Nyhamna. "Both for good and bad."

Quite an understatement. But for all the embarrassment of Reiten's early exit, StatoilHydro faces challenges that will linger long after this hubbub is over. StatoilHydro is operating in a market that has changed drastically since oil was first struck off the coast of Norway in the late 1960s. After waves of mergers in the U.S. and Europe, and with the growing dominance of nationally owned energy companies worldwide, the oil and gas industry is increasingly ruled by a handful of giants. Though StatoilHydro leads the world in offshore extraction, it's dwarfed by diversified behemoths like BP, Exxon-Mobil and Gazprom. How can a mid-size niche player from Norway possibly thrive in this new, hypercompetitive era?

For decades, Statoil and Hydro relied on the plentiful reserves on the Norwegian continental shelf for almost all their output; last year, that area off the country's north and west shores accounted for more than four-fifths of the two firms' production. That bounty has made this nation of just 4.6 million people rich. Government taxes on the country's oil business — Norway is the world's fifth largest exporter by volume — have helped bloat Norway's national pension fund to around $350 billion. But those good times couldn't last forever. With fields beginning to dry up, oil production has slid to 2.6 million bbl a day this year from 3.5 million six years ago, says John Olaisen, Oslo-based energy analyst at Carnegie, a Nordic investment bank. For Helge Lund, 44, formerly CEO of Statoil and now chief of the combined company, the message couldn't be clearer: "If we're going to grow the company," he says at StatoilHydro's office in Oslo, "we have to grow outside Norway."

And outside Norway, the competition is fierce. As the world's demand for energy swells, petroleum-pumping countries like Russia and Venezuela "are asserting a higher degree of national control over [oil and gas] developments and leaving less room for non-national companies to participate," says Peter Mellbye, StatoilHydro's head of international exploration and production. While key Middle Eastern nations have long held their domestic oil companies and development projects in a tight grip, a more protectionist stance among energy powers elsewhere has, Mellbye says, "fundamentally changed the picture."

The trends toward consolidation and nationalization, in fact, helped drive the Norwegian merger. To a government or national oil company looking for overseas partners to help exploit domestic resources, seeing two Norwegian firms, both largely state-owned, jostling for the same openings could be "confusing," says Mellbye. "They thought there would be some political preference given from the Norwegian authorities and then on that basis they could make a choice," he says. "But that was never done." The two companies began negotiations late last year, and when in December they brought their merger proposal to the government it was quickly approved. (The government owns about two-thirds of StatoilHydro.) Now that the two firms are one, says Mellbye, foreign partners will know that Norway's political support for the company's participation is unconflicted.

The first test of StatoilHydro's newfound unity is playing out in Russia. The company is in talks with Gazprom, Russia's state-owned energy company, about securing a role in developing Shtokman, a vast gas field in the Barents Sea. French rival Total earlier this year secured a partnership role through a share in a specially created company that'll own the project's infrastructure; the remaining 24% stake in that company is still up for grabs.

Still, a united front won't always be enough to eclipse StatoilHydro's biggest rivals. After the megamergers of the late 1990s — such as Exxon with Mobil and BP with Amoco — the Norwegian firm ranks as only the 10th largest in the world in production. StatoilHydro might churn out 1.9 million bbl per day, but that's less than half the daily output of, say, BP.

But what the Norwegian firm lacks in size, it could well make up for in expertise. Many onshore reserves, which are relatively easy to exploit, are being depleted. So Big Oil is being forced offshore into increasingly complex projects, often at great depths and in harsh conditions. "Each barrel of oil produced tomorrow contains a higher degree of R&D than a barrel produced yesterday," Reiten, a former Norwegian Minister for Petroleum and Energy, told TIME a couple of days before his resignation. With StatoilHydro's decades of experience operating in the tricky terrrain and climate off Norway's coast, the company could become the industry specialist at tackling the world's most difficult jobs.

Take Ormen Lange, the name of the deep-sea field 75 miles (120 km) from Nyhamna. Hover over the sea above the enormous gas reservoir and you won't see a rig. Instead, the company overcame under-water peaks, subzero temperatures and powerful currents to build extraction installations directly on the seabed half a mile (1 km) below the surface. In a couple of hours extracted gas reaches the Nyhamna plant, where it's processed and sent to the U.K. via the world's longest underwater pipeline (it's a trip that can take as little as two days). In full swing, the $9.2 billion project will pump up to a fifth of Britain's gas. More than that, though, StatoilHydro's technological muscle on show at Ormen Lange can give it an advantage when bidding for projects in places like the Arctic, says Kjetil Bakken, an analyst at investment bank Fondsfinans in Oslo.

Such skills will come in handy elsewhere, too. The group plans to build on its presence in key deepwater areas from the Gulf of Mexico to Angola, Statoil's largest production site outside Norway. The expected result: while just 14% of the combined firms' output would have been outside Norway in 2006, that figure will rise to 25% in 2009, forecasts Carnegie's Olaisen.

For now, however, the company must also focus on investigating those suspect payments in Libya, and limiting the damage if wrongdoing is uncovered. On Oct. 4, Hydro said it had contacted Okokrim, the Norwegian national authority that investigates economic crime, after an initial probe suggested Hydro had done more business with the consultancy than was previously thought. Packed into a room with reporters in Molde, a short drive and ferry trip from Nyhamna, StatoilHydro's new boss Lund scoffed at any talk that the revelations might disrupt the smooth integration of the two firms. "I'm the strongest guarantor for that," he said, shortly before heading to the Ormen Lange celebrations, "and that is my responsibility." As the head of Norway's new, next-generation energy firm, his responsibilities have only begun.

• ADAM SMITH/NYHAMNA
• Norway's newest, biggest energy company needs to look overseas to keep growing but can it compete with the industry's global giants?