UPDATE 2-Statoil calls off Snoehvit expansion in Norway's Arctic

* Expansion of natural gas facility called off

* May look at expansion again with new gas discoveries

* Expansion had been planned for past 18 months

* Decision increases likelihood of a new pipeline

(Adds analyst comment, background)

OSLO, Oct 2 (Reuters) - Norway's Statoil has dropped plans to expand its Snoehvit natural gas field in the Arctic due to insufficient reserves, raising the chance it will back the building of a pipeline that could also benefit rivals.

Statoil said there was simply not enough gas in place at Snoehvit to justify a new liquefaction facility and the firm would instead focus its efforts on improving its existing liquefied natural gas (LNG) operations.

Analysts said the decision means Statoil was now more likely to back a pipeline, which may cost $4.4 billion, to bring gas south and connect into existing infrastructure.

"I think it looks more likely that we will see a pipeline, and this will be positive for companies not involved in Snoehvit as it will increase possibility to export their gas," said Carnegie analyst Martin Vold.

The government has said the 1,000 kilometre pipeline, one of the longest in the world, would have to be funded by the private sector and would have to be financially viable on its own.

Statoil had been studying an expansion of Snoehvit, the first field to begin production in Norway's Arctic region, for the past 18 months and the new facilities were expected to come online after 2022.

Norway is expected to increase exploration in the Arctic in the coming years as it offers a record number of blocks in the region in its upcoming licensing round.

Norway will offer a 86 blocks by next summer, of which 72 will be in the Arctic, a record number for the region.

A string of major finds, including the Skrugard and Havis discoveries, have increased appetite for exploration but energy firms need critical mass to justify building costly infrastructure.

Oil can be transported easily by tankers but most discoveries also contain gas so firms would benefit from pipeline infrastructure.

Trond Omdal, analyst at Arctic Securities, said he saw Statoil's decision on Snoehvit more as a postponement, not the end of the expansion.

"There is not enough gas for pipeline either," he said. "But there is going to be an active drilling program in the Barents Sea next year," he added.

Earlier this year, Statoil revealed it had increased the reserve estimate at Snoehvit, fuelling hopes the company would go ahead with the expansion.

The Norwegian Petroleum Directorate estimated the field had 157.6 billion cubic meters of gas remaining at the start of 2012 and also had another 19 billion cubic metres of condensate.

For now, Statoil will focus on optimising and upgrading the existing liquefied natural gas facility.

Statoil is Snoehvit's operator and holds 36.79 percent while state holding firm Petoro has 30 percent. Other owners include Total (18.4 percent), GDF Suez (12 percent) and RWE (2.81 percent).

(Reporting by Balazs Koranyi and Nerijus Adomaitis; Editing by Mark Potter and Louise Heavens)

((Balazs.Koranyi@thomsonreuters.com)(+47 22 93 69 62)(Reuters Messaging: balazs.koranyi.thomsonreuters.com@reuters.net))