Policy Change Key To Stem Decline

BMI View: The Norwegian oil and gas sector is seeing challenges from rising costs and the scaling back of investment, which could force the delay of some projects as higher margin developments are prioritised. We therefore see downside risk to the short-term oil production outlook. However, we expect the Norwegian government's review of fiscal policy to culminate in better terms for improved oil recovery and marginal field developments, which would support greater investment in the maturing Norwegian continental shelf, stemming the decline rate.

The Norwegian oil and gas sector is being impacted from two sides as industry costs continue to rise, while companies rein in spending and prioritise their projects. State-owned oil company Statoil will be at the centre of this development, having many of the most significant investments on the Norwegian continental shelf (NCS).

In 2013, Statoil announced its plan to invest US$6.8bn in redeveloping the Snorre oil field through drilling new wells and installing an additional production platform at the field. However, the final investment decision (FID) on this project, which was outlined for 2015, may be delayed as Statoil looks to prioritise its spending due to recently introduced capital expenditure (capex) restrictions. Following the company's full year results in February 2014, CEO Helge Lund announced an 8% reduction on capex, targeting average expenditure of US$20bn a year from 2014-2016. With Statoil's large number of domestic projects and a growing international portfolio, projects outlined for development will come under growing pressure as margins will be more closely scrutinised.

12 Years Of Decline
Norway Crude Oil, NGPL and Other Liquids Production ('000b/d)

BMI View: The Norwegian oil and gas sector is seeing challenges from rising costs and the scaling back of investment, which could force the delay of some projects as higher margin developments are prioritised. We therefore see downside risk to the short-term oil production outlook. However, we expect the Norwegian government's review of fiscal policy to culminate in better terms for improved oil recovery and marginal field developments, which would support greater investment in the maturing Norwegian continental shelf, stemming the decline rate.

The Norwegian oil and gas sector is being impacted from two sides as industry costs continue to rise, while companies rein in spending and prioritise their projects. State-owned oil company Statoil will be at the centre of this development, having many of the most significant investments on the Norwegian continental shelf (NCS).

In 2013, Statoil announced its plan to invest US$6.8bn in redeveloping the Snorre oil field through drilling new wells and installing an additional production platform at the field. However, the final investment decision (FID) on this project, which was outlined for 2015, may be delayed as Statoil looks to prioritise its spending due to recently introduced capital expenditure (capex) restrictions. Following the company's full year results in February 2014, CEO Helge Lund announced an 8% reduction on capex, targeting average expenditure of US$20bn a year from 2014-2016. With Statoil's large number of domestic projects and a growing international portfolio, projects outlined for development will come under growing pressure as margins will be more closely scrutinised.

The Snorre redevelopment project was due for a FID around the same time as the higher output Johan Sverdrup project. The development concept for Johan Sverdrup was chosen in February 2014 and is due to be submitted to Norwegian authorities in early 2015. A FID for both Johan Sverdrup and the Snorre redevelopment were therefore both expected in 2015. With the far greater oil yield, the Johan Sverdrup development is far more likely to take priority over the Snorre project and other smaller field developments in Norway. Additionally, with industry costs putting greater pressure on the Norwegian oil sector, more capital may be focused on higher margin projects in Statoil's international portfolio and diverted from the NCS.

Sverdrup Trumps
Project Investment (US$bn) Additional Production ('000 boe/d)
Johan Sverdrup 16.5-19.5 315-380
Snorre Redevelopment 6.8 35*
Johan Castberg 15 200
* Estimate based on Statoil's 300mn barrel production target to 2040 period. Source: BMI Research

Furthermore, with the Conservative-led government currently engaging with the industry in an effort to counter-act the number of projects being impacted by cost restraints ( see, 'Fiscal Evaluation To Boost Oil Sector Competitiveness', February 18), Statoil may be waiting on greater clarity of potential fiscal changes before moving ahead with lower margin projects. Among the possible changes that may be introduced are fiscal incentives to promote the development of marginal field production and improved oil recovery (IOR) projects. We believe these two areas will be most beneficial to the Norwegian petroleum sector considering the maturing NCS, and are two policy areas likely to be closely reviewed. If improved fiscal conditions for IOR projects are put in place over the next year or so, we would expect to see greater priority given to the Snorre redevelopment project.

We strongly believe the Norwegian government will bring in new measures to promote development of the NCS and attempt to tackle growing industry cost increases. The Norwegian oil and gas industry is becoming increasingly uncompetitive, while the maturing NCS is seeing smaller discoveries. This has led to a slowdown in new reserves growth ( see, 'Poor Reserves Growth Highlights Increasing Costs', March 6), while the country reported its 12 th consecutive year of oil production decline in 2013.

12 Years Of Decline
Norway Crude Oil, NGPL and Other Liquids Production ('000b/d)

Further downside risk to Norway's oil production comes from potential delays to Eni's Goliat project ( see, 'Goliat Struggle Highlights Barents Cost Challenges', February 17). While Eni initially chose to build the production platform in Korea due to better cost structures, it now appears the facility may be moved to a Norwegian shipyard for final commissioning due to the lack of experience of sub-contractors in Korea with Norwegian safety standards. The start up date for the project has already been delayed by one year to late 2014, and while the floating production platform may be shipped from Korea to Norway in the spring of 2014, it reportedly still requires around 3 million man hours of further work, according to upstreamonline.com. We currently have first production from Goliat forecast for mid-2015, though we highlight that lengthy delays could put this back further.

While IOR efforts will help slow decline rates on the NCS, it is the major projects including Goliat and Johan Sverdrup that will be key to boosting long-term oil production. We therefore expect oil output declines to 2018, although at a far slower rate than previous years. The introduction of new incentives or improved fiscal conditions over the coming year could therefore play a significant part in offsetting growing industry costs and allow for additional lower margin projects to be developed. Thus, we see much of short-term upside risk to Norway's oil sector in the hands of policy makers.

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Related sectors of this article: Oil & Gas, Upstream, Development, Energy Policy, Marine and Subsea
Geography: Norway
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