David Knott
Senior Editor
Norway's offshore theater has a long reputation for high development and operating costs.
Until recently, operators have been able to make enough money from Norwegian offshore fields to keep them interested in the area.
But this year, oil companies' attitudes have hardened as deteriorating returns have been made worse by Oslo's refusal to make licensing terms more attractive to industry.
Discussions between operators and government over a white paper to be debated in Storting (parliament), which sets out proposals for revised licensing terms, have so far brought little relief for oil companies.
While government has attempted to balance the income needs of its finance ministry with the industry and energy ministry's need to encourage growth:
- Operators have been turning a critical eye to returns from Norwegian field developments to date.
- Exploration and appraisal work has fallen away and operators have placed several field development projects on hold.
- Operators have increasingly voiced dissatisfaction with current licensing terms.
- The energy ministry has set out to rally support for a 15th offshore licensing round and outlined further rounds.
- Operators have hoped for news of concessions in the white paper before they decide further plans for Norway and have been disappointed.
MOUNTING PROBLEMS
Stig Bergseth, president of exploration and production for state owned Den norske stats oljeselskap AS, said oil prices last spring represented a 75% reduction from expectations at the beginning of the 1980s.
Expressed in constant value, he said, the oil price recently has been less than its value during the 1986 plunge. That has placed a damper on companies' view of Norway's viability.
The country's tax system and regulatory framework were set up in times of high expectations regarding oil prices, Bergseth said. There was a high rate of discovery with field sizes characterized by Ekofisk and Statfjord, and there was a correspondingly high earning power.
Ekofisk, Statfjord, Gullfaks, and Oseberg fields, all giants, provide most of today's oil from the Norwegian shelf. Production is expected to peak at 2.6 million b/d within 2-3 years.
Bergseth said, "Oil output from fields on production, including fields approved for development, is expected to fall rapidly toward and beyond the end of the century.
"This situation, combined with the fact that exploration during the last decade has not provided oil reserves sufficient to maintain the reserves/production rate on the shelf, leaves the oil industry in a position which calls for gathered attention and efforts."
Bergseth expects future discoveries off Norway to be 60-180 million bbl of oil each, with few expected to contain more than 600 million bbl of oil.
"The exploration history of the Norwegian continental shelf implies that successes of the last decade are hardly the solutions for the future," Bergseth said.
CASH COWS" DECLINE
Kyrre Nese, senior vice-president of Statoil exploration and production, said one of Norway's problems is that huge strikes scored shortly after exploration of the shelf began 25 years ago are being replaced by dramatically smaller finds.
"The change can be illustrated by Statfjord and Ekofisk," Nese said, "which have reserves of about 600 million cu m. Norne field, the biggest discovery in recent years, is only one tenth of Statfjord's size."
Total returns from the oil and gas industry in Norway, as in many other countries, depend heavily on a few major fields -Statfjord and Ekofisk in particular.
"As production from these two and other cash cows is approaching decline, exploration and planning of future development and production become vital," Nese said. "The important part of the business process is to transform volume discovered to value."
He said expected value of Norwegian discoveries in the last 10 years has not covered exploration costs, except in 1991 when Norne and Hermod fields were found.
"Even if each drilling project was profitable according to the required rate of return and economic assumptions at the time of go-ahead, total value creation has been negative when measured by today's required rate of return and today's economic realities."
Government takes and Norway's regulatory framework have not developed in a way that counteracts market conditions and changing views of prospectivity. "Attractive results from 'old' activities, including development and production, have masked emerging poor returns from 'new activities,' " Nese said.
UNCERTAINTY
Hans Christen Ronnevik, vice-president of exploration for Saga Petroleum AS, said despite the maturity of the Norwegian shelf, exploration is still characterized by uncertainty.
"The outlook now is more positive than it was 25 years ago when Norwegian exploration began," Ronnevik said. "Yet Norway lacks the entrepreneurial attitude to find reserves.
"Now we are looking at exploration in 800-1,200 m of water in the Voring basin. Today's oil price and the challenge of working at this depth make for prospects similar to 1972."
Ronnevik said Norway's main problem is that, although the discovery rate of the last 10 years has been high, many of the fields found in recent years have not gone on production.
There is an average lead time of 8 years for an oil discovery to be placed on stream, while it takes an average 17 years for a Norwegian gas strike to be placed on production.
"We must cut our lead times," Ronnevik said. "If the Barents Sea were in Texas, the discoveries there would already be in production."
Ronnevik expects discoveries on the Norwegian shelf to amount ultimately to 8-13 billion metric tons of oil equivalent (MTOE).
"Even the most pessimistic outlook is more hopeful than when Norwegian exploration originally started," he said. "Yet only 22 exploration and appraisal wells will be drilled off Norway this year.
"The main challenge is to keep exploring while cutting exploration and production costs. At the same time, we must convince Norway's authorities that the legal and taxation framework, created originally for Ekofisk field, must be changed."
Petroconsultants SA, Geneva, estimated Norway's take from its most attractive field developments is 88.3%, the second highest in the world after Benin, where the state takes 88.4% (OGJ, Feb. 21, p. 38).
In March, Total Norge AS announced plans to change its operating strategy in Norway because of low oil prices and high operating costs.
For the next 5 years the company will not seek to operate licenses in exploration bidding rounds. However, it will continue to apply for partnerships in licenses.
Two field discoveries, Peik and Hild, on Total operated blocks have had development plans shelved as not feasible under current price and license conditions.
Yet Total remains the third largest owner of unsold gas off Norway after Statoil and Norsk Hydro. Total holds interests in all of Norway's pipelines and in 35 exploration and production licenses.
GOVERNMENT STANCE
Oil and gas revenues are a major contributor to Norway's economy, so government is keen to keep income from the industry high while not dampening enthusiasm for exploration and development.
"From a global perspective, the Norwegian continental shelf is still a very rich petroleum province," said Jens Stoltenberg, minister of industry and energy.
The state's net revenues from petroleum activities amounted to 9% of total revenues, 33% of total exports, and about 14% of gross national product in 1993.
Norway produced an average 2.3 million b/d of oil in 1993 and expects to produce 2.4 million b/d this year. Production is expected to peak at 2.6 million b/d in 1996.
"However," Stoltenberg said, "oil production may stay at a high level if fields under consideration for development are included." He reckons Norway could keep producing oil and gas at present levels for 20 years and 115 years, respectively.
"A major challenge will be to maintain Norwegian petroleum activities at a reasonably high level. The increasing ratio between exploration costs and new proven reserves and the diminishing average size of new fields will inevitably have impacts in the future."
To maintain profits, Norway's operators aim to reduce costs by almost 50% during a 5 year period, Stoltenberg said.
"About 40% of the Norwegian shelf is opened for petroleum activities. Continued exploration and development is necessary to prevent a plunge in investments and avoid too steep a decline in petroleum activities after the turn of the century."
1994 EXPLORATION
Arild Nystad, resources director for the Norwegian Petroleum Directorate (NPD), said more than 700,000 km of seismic data will be acquired off Norway in 1994. Less than 50,000 km of this will be 2D data. The rest will be 3D.
"About 400,000 km/year of seismic data have been acquired off Norway over the last 3 years," Nystad said. "We expect a drop in seismic activity over the next 3 years. There is no way work can continue at this high level."
However, Nystad reported 1994 drilling activity off Norway is down from 1993. Sixteen wells had been spudded by late August and 21 wells completed, while a total 23 or 24 spuddings are expected for the entire year.
Only three drilling rigs have been active this summer off Norway. Nystad said, "This is very low."
In spite of the low exploration level, industry has drilled 13 discoveries this year. This year's finds have reserves initially estimated to total at least 40 million MTOE, Nystad said. About 10 million MTOE were found off Norway last year, NPD estimates.
"Last year was not a good year," Nystad said, "but it is dangerous to look at 1 year's drilling results in isolation. "
NPD expects exploratory drilling to rebound because more reliable data from 3D seismic surveys reduce uncertainty.
"NPD is trying to map drillable prospects, Nystad said. "However, in the long term we need to be cautious about Norway's exploration future because lots of finds are not commercial at today's oil prices. We must gear development toward small fields."
FUTURE EXPLORATION
Norway has 41 fields on production, having original reserves in place amounting to 4 billion MTOE. Eighty development prospects have total reserves amounting to 2 billion MTOE.
Nystad said enhanced oil recovery in today's fields is expected to add 500 million MTOE to total reserves.
NPD reckons 200-400 fields are still to be discovered off Norway, with estimated reserves amounting to 3.7 billion MTOE.
In late August NPD asked Norway's oil companies to nominate blocks for the 15th offshore licensing round. The companies have until Sept. 26 to submit their requests.
Nystad said the Norwegian Sea off Central Norway will be the focus of the 15th round. It will be 1997 before North Sea acreage is offered again, under a 17th licensing round.
A 16th round is in preparation, but this will be entirely dedicated to Barents Sea acreage. This area is being offered separately because of different licensing terms from the rest of the shelf.
Nystad said, "Our impression is that the industry still finds Norway attractive because of the high probability of discoveries in the North Sea and Norwegian Sea."
Many prospects are said to lie in 800-1,500 m of water. Nystad pointed out that other regions with such deep water have been developed, so there should be no problem applying the techniques to Norway.
1994 PROJECTS
Phillips Petroleum Co. Norway and Statoil are the only operators pushing Norwegian North Sea development programs at present.
However, development is under way farther north on the Norwegian shelf. The Conoco Norway Inc.'s program in Heidrun field in the Norwegian Sea frontier is an example (OGJ, Aug. 15, pp. 40 and 62).
In the North Sea, Phillips is working on redevelopment of Ekofisk oil and gas field, while Statoil expects in October to place on stream the first of its Statfjord subsea satellite field developments.
Phillips won relief on royalties under its Ekofisk IIA plan of development, which provides for extension of production from the field well into the 21st century.
Like other operators, Phillips is looking for more lenient licensing conditions from the government's white paper.
The company also is anxious that favorable terms are included in the white paper's regulations for abandonment, a looming issue for Ekofisk.
The Ekofisk redevelopment plan calls for two platforms to be installed by 1998 to take over functions currently carried out on platforms that are sinking below a safe level because of seabed subsidence.
"The Ekofisk partnership hopes Storting will agree that platform abandonment can be carried out at the end of the field's life," said Rolf Wiborg, deputy managing director of Phillips Norway.
"We want to wait until the next century to begin abandonment, when mass abandonment of the shelf begins and costs will therefore be lower."
Wiborg reckons Ekofisk abandonment using equipment and vessels available today would cost 10-20 billion kroner ($1.5-3 billion). Under current agreements, the government will have to pay 70-80% of abandonment costs.
Meanwhile, Norway's operators are said to have imposed a moratorium on major field developments, with Norne, Njord, and Visund field projects shelved until Oslo offers improved field economics.
WHITE PAPER
The government white paper, which sets out proposed changes in Norway's petroleum legislation, is controversial for what it leaves out rather than for what it contains.
Prior to the industry and energy ministry's drafting of the white paper, the Norwegian Oil Industry Association (OLF), Stavanger, submitted a status report on Norway's offshore industry to the minister of industry and energy.
The report said levies have risen since Norway's petroleum tax regime was established in 1975, while oil revenues have dropped considerably. It made a plea for reduced taxes.
Stoltenberg last February gave the first government response to the report when he ruled out tax concessions, saying they were not among issues to be covered by the white paper.
Wood Mackenzie Consultants Ltd., Edinburgh, said most of the white paper's recommendations are minor adjustments of the regulatory system toward more effective area management.
"Two of the proposed changes stand out as being potentially significant," the analyst said.
"If the proposal to allow geographical division of licenses applies to existing as well as new licenses, it could help to raise asset deal activity.
"In addition, the proposal to simplify the approval process for altering state interests could have a similar effect. The state portfolio could be viewed as being rather imbalanced between interests in new production and certain key infrastructure.
"This could offer the opportunity, not only for the state but also for other companies, to construct a more logical mix of assets within their portfolios."
Wood Mackenzie sees key proposals of the white paper as:
- Extension of initial license periods to 10 years from 6.
- Exemption from 50% relinquishment of acreage after initial exploration.
- Allowance of partial relinquishment after exploration.
- Abolition of government ability to transfer operatorships at approval of development or completion of development.
- Distribution of costs accrued in fields prior to unitization according to unitized shares.
- Specific measure to revive Barents Sea exploration, including allowance of group applications, reduction of area fees, larger license areas, longer license periods, more flexible work obligations, and reduced prices for NPD data.
OPERATORS' VIEWS
The view of Norske Shell AS, in common with other operators, is that development and operating costs must be reduced and profits must increase if Norway's competitive position is to improve.
Operators have started a program aimed at halving development and operating costs on the Norwegian shelf. They are looking to white paper proposals for extra help.
Most of all, operators want Oslo to abolish its sliding scale option on Norwegian production licenses. Under this arrangement, government can increase its share in a license when a discovery is made.
A Shell official explained that if a company had a 30% interest in an unexplored block, it eventually could find its interest reduced to 8-10% as government increased its cut. Government share of licenses containing discovered fields averages 50%.
The energy ministry's 14th offshore licensing round is the only one under which government is obliged to set its interest in a license at the outset and thus pay its way in exploration. Operators want the sliding scale scrapped on all existing licenses, too.
Other company requests include larger license shares for companies and allowance of group applications for licenses. This latter condition is proposed to encourage Barents Sea exploration, but companies want it to apply across the board.
Last year's 14th offshore licensing round drew little industry interest companies in further exploration of the Barents Sea off northern Norway. Only two production licenses were awarded.
The ministry modified its licensing terms for Barents Sea acreage in a try to revive operators' enthusiasm. Government also agreed to open the Voring plateau area of the Norwegian Sea for exploration in an attempt to whip up support for the 15th round.
DISAPPOINTMENTS
Behind the debate over Oslo's white paper has been a conflict of interests between the energy and finance ministries, which is thought to make resolution of government participation issues in favor of oil industry unlikely.
Government intends to pass oil industry legislation in October so any fiscal changes can be included in the 1995 budget. Announcement of oil industry concessions has been expected several times this year.
Operators anxious for more substantial improvements than were set out in the white paper received their first disappointment from Prime Minister Gro Harlem Brundtland.
Speaking at this year's 14th World Petroleum Congress in Stavanger last May, Brundtland said only that her government will drop plans to tighten taxes on the Norwegian oil industry.
Brundtland delivered a second disappointment at the Offshore Northern Seas conference in Stavanger last August.
There had been speculation she would unveil tax reforms in her conference speech. Instead, Brundtland cited drawbacks of free market economics, saying low prices were threatening future energy security and the benefits of Norway's plans to enter the European Union.
Stoltenberg also disappointed operators the next day when he announced no new terms, saying instead he took operators' concerns seriously and recognized companies' need to plan.
"We acknowledge the importance of a stable fiscal framework as a basis for long term investment commitments," Stoltenberg said. "But this has never meant that fiscal rules should remain unchanged irrespective of important factors such as the level of the world market price of crude oil.
"The government is now evaluating fiscal terms for the oil and gas industry in Norway in light of oil price developments. We will clarify our position in the near future, which should secure the long term goals of our national energy policy."
NEW CONCESSIONS
The much anticipated clarification of government's stance on the white paper came at a press conference called by Stoltenberg in Oslo on Sept. 15.
The minister announced there would be greater flexibility in government use of the sliding scale on existing licenses. He said the sliding scale will not be applied on any unexplored licenses, Barents Sea licenses, and any discoveries of less than 50 million MTOE.
However, Stoltenberg said government retained the right to apply the sliding scale to any past discoveries greater than 50 million MTOE. In particular, he said, the sliding scale ruling would not be waived on six of Norway's largest development prospects: Hermod, Norne, Midgard, Smorbukk, South Smorbukk, and Visund.
A ministry official added there would be no sliding scale in the 15th and subsequent licensing rounds. Also, the state will continue its policy of reducing the number of companies in licenses and seek to reduce state participation. On some licenses, the state may even consider taking nothing, the official said.
A straw poll of oil company spokesmen showed disappointment at the minister's concessions.
One spokesman said it was hard to say if the measures were enough to revive foreign oil companies' interest in the Norwegian shelf. He said debate between oil companies and government over what kind of measures are needed will need to continue.
Another spokesman said it will be hard to squeeze more concessions out of the Norwegian government this year. He added that the latest concessions are unlikely to change the way his company is looking at the 15th licensing round, whereas tax reforms would have enhanced its interest.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
