New Coalition To Provide Incentives But No Major Change

BMI View: The incoming Conservative coalition could have made significant changes to improve the prospects of Norway's declining oil production, including reversing tax increases and opening new controversial areas to drilling. It now appears that little will change, however incentives being considered for development of mature areas could help stem production decline before Svedrup and Castberg be gin production.

As the new Norwegian minority government prepares to take office on October 14, more det ails are emerging around policy developments proposed for the oil and gas sector. Following the election results , which saw the Conservative s join with the Progress Party to form a minority coalition government to oust the Labour -led government , a number of major oil and gas issues were brought to the bargaining table.

No Progress On Lofoten And Vesteralen

Oil Output In Long Term Decline
Norway Oil Production, 2002-2022 ('000 b/d)

BMI View: The incoming Conservative coalition could have made significant changes to improve the prospects of Norway's declining oil production, including reversing tax increases and opening new controversial areas to drilling. It now appears that little will change, however incentives being considered for development of mature areas could help stem production decline before Svedrup and Castberg be gin production.

As the new Norwegian minority government prepares to take office on October 14, more det ails are emerging around policy developments proposed for the oil and gas sector. Following the election results , which saw the Conservative s join with the Progress Party to form a minority coalition government to oust the Labour -led government , a number of major oil and gas issues were brought to the bargaining table.

No Progress On Lofoten And Vesteralen

Both the Conservative and Progress party were in favour of moving forward with a study into the impact of oil and gas exploration in the Lofoten and V esteralen a rea s . However, an agreement to secure parliamentary support was struck between the Conservatives, the Liberals and the Christian Democrats , which outlined ten political topics of agreement valid over the term of the new gover nment. One of these points covered the c ontinued ban on drilling in waters outside of Lofoten, Vesteralen, Senja and the Jan Mayen R idge . The areas subjected to a continued halt to oil and gas exploration and production are thought to be highly prospective for oil, and could hold around 2.3bn barrels of oil equivalent (boe).

Thus, in the next four years exploration and development in Norway will remain focused on the Norwegian Continental Shelf (NCS) and the Barents Sea. This will damage the long term prospects (post our forecast) for Norway's oil production outlook , which is expected to fall for the 1 2 th consecutive year in 2013.

No Tax Reversal

Prior to the election the Progress Party supported the reversal of the tax changes on oil and gas companies brought in by the previous Labour government. The decision limited the amount of tax deductions available for oil companies, having a large impact on cash flow. The tax change was listed as a cause for Statoil's decision to postpone development of its Johan Castberg project, though it appears to have had little further impact. However, the new coalition government recently announced that it would prefer to maintain continuity in its legal and fiscal framework rather than create unpredictability by reversing the policy.

Oil Output In Long Term Decline
Norway Oil Production, 2002-2022 ('000 b/d)

Where the Conservative coalition may provide upside for Norwegian oil and gas is through incentives for producing from marginal fields and enhancing recovery rates. The incoming government hinted that incentives would be considered for these areas, though it failed to outline any clear structure to how this would be undertaken.

With the continued moratorium on drilling around Lofoten, providing an improved fiscal outline for marginal fields and enhanced recovery projects will be a crucial move for Norway's oil sector in particular. The use of existing infrastructure to develop marginal fields before it is decommissioned will reduce costs, while potential incentives to carry out this work could accelerate progress.

There was strong interest in Norway's most recent mature licensing round in the North and Norwegian Seas, with a record 50 oil firms applying to participate. Awards for the blocks are due to be announced in Q114, with some 103,029 sq km distributed in 377 blocks or parts of blocks up for licensing. With such strong interest including many of the oil majors, incentives to optimise development of mature areas could lead to the stemming of oil production decline. As has been seen with the discovery of the 1.76bn boe Johan Svedrup field, mature areas still hold significant prospects.

The incoming Norwegian government is therefore in a comfortable position to remain moderate in regards to the oil and gas industry, though it could provide a hint of upside if it goes through with new incentives. Our forecasts for Norwegian oil production currently see long term decline , with growth returning in 2020 on the back of ramp up from the Johan Svedrup field with the Johan Castberg and Barents Sea developments also adding to output. More enticing policy to incentivise enhanced oil recovery and the development of marginal oil fields could help to reduce the decline rate sooner, leading to stronger performance during the mid-part of the forecast.

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Sector: Oil & Gas
Geography: Norway
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