NORWAY'S HYDRO PINS GROWTH ON EXPANDING LICENSE PORTFOLIO

David Knott
International Editor

Norsk Hydro AS, Norway's second largest oil company, is growing through a strategy of securing large stakes in preferred licenses on the Norwegian continental shelf.

Hydro's activities abroad have been small compared with those off Norway. But they are growing.

Adjustments to corporate strategy flowed from the business environment: lower oil price expectations, increased production costs with maturing of the Norwegian shelf, opening of prospective areas abroad, and structural changes in the European gas market.

Hydro's responses to those changes were to:

• Increase its focus on efficiency to reduce production costs.

• Exploit international upstream opportunities in areas with long term high potential for commercial production.

• Gain access to and exploit downstream opportunities in the European gas market.

Hydro is Norway's largest publicly owned industrial company with a government stake of 51% and the rest owned by the private sector in which each shareholder holds no more than 5%.

The company was founded in 1905 to develop Norway's hydroelectric resources for the world's first industrial production of nitrogen fertilizers. The company grew around its agricultural business, but in recent years the oil and gas division has dominated income and spending.

Last year, a weak year in some market sectors, Hydro's oil and gas operations brought in 80% of total operating income of 2.88 billion kroner ($400 million). Oil and gas investment is taking up an increasing share of Hydro's capital spending each year, last year accounting for 60% of the total.

The rising dependence on oil and gas for income led the company to look also to the oil and gas division for growth.

"Hydro's main asset base is on the Norwegian continental shelf, and only the authorities are limiting Hydro's exploration off Norway," said Vice Pres. Helge Haldorsen, responsible for international exploration and production.

"There are still prospects for giant discoveries off Norway, but to secure future resources and reserves Hydro is now also keen to begin expanding abroad. The target is to bring overseas production up to 20% of Hydro's total output by the turn of the century. By then Hydro's total production should be about 185,000 b/d of oil equivalent."

Haldorsen explained that Hydro's strategy is to use part of its growing Norwegian oil and gas production to fund exploration and field developments abroad.

"We have 7 years to get a firm foothold abroad," he said. "Hydro cannot succeed from sheer numbers of wells drilled, as can perhaps companies like Exxon and Shell. From August 1993 to March 1994 we will drill a number of extremely interesting wells, which will put our current exploration portfolio to the test."

Total exploration spending for Hydro was about I billion kroner ($150 million) in 1992. For the next few years the company aims to keep exploration spending at about that level.

CORE AREAS

Hydro decided the best way to grow abroad is to concentrate on core areas. By limiting the number of regions in which it expands, the company plans to be able to aim at gaining depth of knowledge in chosen areas.

"Some companies want--and can afford--to be everywhere," Haldorsen said. "Hydro decided to focus on areas where its combined database, competence, and experience will maximize its chances of success. We do not want just to scratch the surface. Exploration success is mainly based on competence below the surface."

The company uses six criteria to judge whether a region can develop into a core area: prospectivity, commercial framework, availability of projects, Hydro's competence profile with respect to the new area, its competitive position within the region, and evaluation of risks.

This policy has seen Hydro pull out of a number of projects in recent years. In Syria, Hydro did not make any major discoveries and decided to pull out. The same happened in Gabon.

Hydro's core areas are Europe, West Africa, North Africa, Middle East, former Soviet Union (F.S.U.), and Southeast Asia. Overall, the aim is to achieve a balance between deepwater high risk acreage, on which Haldorsen said Hydro has built significant expertise off Norway, and onshore moderate risk acreage.

EUROPE

Norway is Hydro's core area for exploration and production in Europe. However, with increased demand and market liberalization, gas will become more important in Europe beyond 2000. Hydro is looking to expand its activities in the downstream gas sector.

Off Norway, Hydro is involved in 10 field development projects and is operator of two: Brage field in Block 31/4 and the West Troll oil province in Block 31/2.

"The company's producing flagship on the Norwegian continental shelf, Oseberg field, is a great success, averaging more than 450,000 b/d in 1992," said Haldorsen. "TOGI, the Troll-Oseberg gas injection subsea installation, also is operating very well."

In 1992 Hydro spent about 4 billion kroner ($560 million) on field development and transport systems. Development spending will remain at about that level between now and 1996, with Hydro providing 13.2% of the 11 billion kroner ($1.5 billion) Brage capital and 7.688% of the West Troll 17 billion kroner ($2.4 billion) outlay, among others.

The Brage field platform jacket was installed June 9, with production due in November. West Troll oil province development contracts are being placed with an aim of first oil in 1996.

Hydro's other possible Norwegian field developments include Oseberg field's satellites, a thin oil layer in the West Troll gas province reservoir, Njord, and Visund.

Hydro also is evaluating discoveries that could add 750 million bbl of oil equivalent to its reserves. The discoveries lie near Oseberg, Gullfaks, Snorre, and other North Sea fields, with some in the Haltenbanken area of the Norwegian Sea.

Njord and Visund development applications were postponed last year so Hydro could conduct a cost optimization and reduction program aimed at cutting costs and development time. The goal is to apply in 1994 for plans for development and operation (PDOs).

Hydro's cost reduction focus involves reducing pre-PDO costs, development costs by 20%, development time by 20%, and operating costs.

Haldorsen said, "But we cannot focus only on cutting costs. Boosting income through innovative enhanced oil recovery applications is equally important."

He emphasized Hydro's role in applying horizontal drilling methods on the Norwegian continental shelf, on Oseberg's North Gamma satellite, Brage, and the West Troll oil province.

Elsewhere, Hydro has found nothing significant off Denmark. It pulled out of the U.K. in November 1991, selling all U.K. assets to British-Borneo Petroleum Syndicate plc, London.

In August/September Hydro expects to have its first production on stream off Netherlands from the F15 field operated by Elf Petroland BV. This will be Hydro's first production outside Norway since the sale of its U.K. assets.

"Since the Netherlands is not of strategic exploration and production importance to Hydro, we may approach the market with the intention of selling our Dutch portfolio," Haldorsen said.

GAS POLICY

Norway's present policy on gas sales is to arrange contracts through the gas negotiating committee GFU, of which Hydro is a member along with Statoil and Saga Petroleum AS, and decide later to which fields the contract is allocated.

Allocating gas from particular fields to contracts earlier in the negotiating process may be a future arrangement (OGJ, May 24, Newsletter). Hydro has a substantial share in Norway's massive unsold gas reserves.

Haldorsen said Europe's predicted boom in gas demand beyond 2000 encouraged Hydro to seek a share in Europe's pipeline infrastructure.

The company wants to expand further in downstream gas. By 2010 Hydro plans to boost gas sales to more than 180 bcf (5 billion cu m)/year.

In 1990 Hydro joined British Petroleum Co. plc and Statoil in forming Alliance Gas, an independent gas supplier targeting U.K. industrial and commercial customers. And Hydro is one of a group of companies involved in the study of the U.K.[Belgium gas interconnector project (OGJ, May 31, Newsletter).

WEST AFRICA

Hydro, in a 40-30-30 partnership with Saga and Statoil, last year won operatorship of the first concession off Namibia. The concession is Block Q1911, a deepwater tract with depths of 1,000-3,500 ft and covering the equivalent of 22 typical Norwegian blocks.

Hydro completed a seismic survey early this year. It has been interpreted, confirming Hydro's earlier evaluation of the block.

The first well on the block will be spudded Oct. 1. The combine has called for bids for rigs, helicopter support, and supply base services.

"Hydro's well will be the first on one of the few remaining virgin shelf areas in the world," Haldorsen said. "It will be high risk, high potential exploration. In frontier areas the two 'highs' always go hand in hand."

Three commitment wells will be drilled on the large block. Depending on the outcome, further acreage may be applied for in Namibia.

"The timing is good for Hydro to learn from the first licensing round in time for the second round expected in 1995," Haldorsen said.

Hydro also is involved in two licenses off Angola, where Ste. Nationale Elf Aquitaine is operator.

"In Angola Hydro decided the best approach was to align itself with a company successful in West Africa," Haldorsen said. "The obvious choice was Elf."

On Block 17 off Angola Elf has shot seismic and intends to begin drilling two commitment wells late in 1994. On Block 7 a fourth exploration well was spudded at the end of May.

Hydro pulled out of Gabon last year after participating in several dry holes.

"The high risk deepwater portfolio at the time was quite fat," Haldorsen said. "Gabon did not at the time look as promising as other opportunities. Hydro needs to open its other high risk deepwater prospects before taking on further similar acreage."

However, such offshore licenses fit well with Hydro's competence profile because North Sea experience in deepwater drilling and production travels well to West Africa without the attendant cost levels.

NORTH AFRICA

Hydro's North African operations center on its Cairo office. Hydro made a significant gas discovery last year in Egypt on the Ras Kanayes block in the Western Desert. Production tests have flowed 20 MMcfd of gas and 1,750 b/d of condensate.

"The challenge now is to develop commercially the Ras Kanayes resources," Haldorsen said. "This may be done in conjunction with other operators developing other discoveries in the vicinity.

"The gas market is increasingly important in Egypt. Hydro hopes to get a pipeline from the Western Desert into the existing gas grid in cooperation with Repsol SA and Agip SpA. Also, Shell International Petroleum Co. Ltd. is down the road with more gas."

A pipeline feasibility and route study for Western Desert gas resources is under way. It's due for completion by the end of the year.

Hydro is operator with a 63.6% interest in Ras Kanayes. Kuwait Foreign Petroleum Exploration Co. holds the balance. Gas is planned to be delivered to the Epytian gas grid, with condensate being exported via available crude oil systems. Egyptian General Petroleum Co. will sell LPG on the domestic market.

In the Gulf of Suez, Hydro is operator and 35% shareholder on the South Darag concession in partnership with Repsol and Phillips Petroleum Co. of Egypt, each a holder of 32.5%.

The block lies north of the British Gas plc Warda discovery. Drilling is scheduled for 1995.

MIDDLE EAST

Hydro views many North African and Middle East exploration possibilities as high to moderate potential and moderate risk, balancing its exposure to high risk deepwater acreage. Besides existing concessions, Hydro is watching events in Libya and Algeria.

The "Norwegian troika" of Statoil, Hydro, and Saga is holding meetings in Iran in pursuit of exploration and field development opportunities. So far, these have been limited to "informal but constructive" meetings in Tehran with National Iranian Oil Co. on how to proceed. This is a follow-up of a meeting of the Norwegian and Iranian oil ministers last year.

Hydro's concession in Yemen's Block 32 is viewed as very exciting. Hydro has a 31% interest in this block, operated by Clyde Petroleum plc, London. The block lies just north of discoveries by Canadian Occidental Petroleum Ltd. and Total SA.

Clyde is shooting seismic surveys on Block 32 with a view to drilling late this year. The group is convinced the trends on which CanOxy and Total made finds goes right onto Clyde's block.

F.S.U. FRONTIER

Like many companies, Hydro regards the F.S.U. as an interesting frontier area. Hydro is exceptional in having a track record in F.S.U. The group's fertilizer division has been trading with Russia for 50 years. The company has a Moscow office and looks on its history as a long term basis for cooperation with Russia and other C.I.S. republics.

Like many companies, Hydro has had its setbacks in the F.S.U.

Hydro was one of the western partners originally studying the Shtokmanovskoye field development project in the Barents Sea and helped conduct a feasibility study, along with signing protocols and agreements with Russian organizations and authorities.

Originally the interests were split 5050 between Russia and western partners, with Conoco Inc., the Finnish Barents Group, and Hydro each holding a 16.66% stake.

In December 1992 the license was given to Russian company Rosshelf, after western partners had spent a significant amount of time and money on the feasibility study, Haldorsen said.

"Hydro has since met with Rosshelf with a view to further participation in this interesting and important gas project."

The Conoco-Barents Group-Hydro combine has staved together with the hope of recouping a significant future role in the project, which was tendered for foreign partners in April.

In the Barents and Pechora seas, Hydro is interested in winning prospective acreage in future Russian rounds.

Several Russian companies, including Rosshelf, have acreage in the Pechora Sea, which includes the Prirazlomnoye oil discovery. A development project for this strike also was tendered in April.

The role of western companies in developing Prirazlomnoye was not spelled out clearly in the tender documents, Haldorsen said. Hydro submitted a letter of interest.

"Hydro is looking at a number of projects in western Siberia and areas in and around the Black Sea and Caspian Sea."

Elsewhere, Hydro holds an 11% interest in the Block 11-1 concession operated by Total off Viet Nam. The tract lies close to Dai Hung field. Seismic data has been acquired, and drilling will start this year.

This autumn the company intends to open an office in the region to act as a focus for Southeast Asia exploration and production operations.

RESERVES, PRODUCTION

By the end of 1992, Hydro held reserves of 1.6 billion bbl of oil equivalent with a reserves:production ratio of 14 years for oil and 80 years for gas.

The company claimed to be second largest operator on the Norwegian continental shelf in terms of number of licenses, operatorships, proved reserves and production. State owned Statoil is No. 1.

Bengt Lie Hansen, Hydro senior vice-president, said the Norwegian continental shelf will remain the company's main area for exploration and production.

"It will be many years--if ever--before we establish international activities that are comparable with our activities in Norway," he said.

Haldorsen, the man responsible for boosting Hydro's profile overseas, noted that his target of 20% overseas production by the turn of the century is a tall order. But he is confident it can be done.

"Apart from successfully choosing between 'rocks and hard places' for exploration based on data, experience, and competence, we want to participate in development of discovered resources. A good strategy is very important, but only people can make it happen."

Copyright 1993 Oil & Gas Journal. All Rights Reserved.