Oil price fall threatens Norway development

The continuing slump in oil prices has cast doubts on the likelihood of near-term development of some of Norway's portfolio of discoveries.

Wood Mackenzie Consultants Ltd., Edinburgh, notes that several current Norwegian developments, including Njord, Åsgard, Varg, and Visund have been hit by substantial cost overruns and construction delays.

"In the current low oil price environment," said the analyst, "continued delays and cost overruns must raise questions as to the economic viability of Norway's future developments."

Many of the delays and overruns are attributed to teething troubles with new technologies. Also, Norwegian operators have recently been opening up frontier acreage in deepwater and hostile weather conditions.

"The upstream industry in Norway," said Wood Mackenzie, "has been developing and utilizing cutting-edge technology in many of its field developments, which, although encouraging for the continued advancement of the industry as a whole, could be viewed as having come at a high price for several of the projects.

"Areas such as the U.K. continental shelf and the Gulf of Mexico have tended to continue to rely more on proven technology and, as a result, despite some notable exceptions, can be regarded as having suffered from fewer such problems."

Development on tap

Norwegian offshore operators have nine oil and gas fields under development and more than 20 development prospects lined up (OGJ, Aug. 17, 1998, p. 82).

Wood Mackenzie said that the average breakeven point for the development prospects as stand-alone projects is $13/boe, although this falls to $12/boe when corporate tax breaks are included.

"At this breakeven price," said Wood Mackenzie, "a minimal return on investment will be made by the bulk of the projects, even in the present low oil price environment."

Yet the range of breakeven points for the potential developments is $6-20/boe. The analyst said that this makes about a third of the fields in the potential developments portfolio uneconomic at present prices.

"Given the experience of cost overruns and delays that characterize many of the ongoing developments on the Norwegian shelf," said Wood Mackenzie, "there must be concern in the industry that current cost and timing estimates for the probable developments may prove to be optimistic.

"Indeed, further development delays for Norway's future portfolio of fields have already become apparent, with Norsk Hydro AS recently postponing the development of its Fram and Gjøa projects by 12 months.

"It therefore remains to be seen how many of the projects we currently regard as being probable developments in Norway will actually proceed to the development stage."