Almost 50 years ago Norway's offshore adventure and success story commenced

September 5, 2013 | 00:00

Interview with Bente Nyland, Director General of the Norwegian Petroleum Directorate

Almost 50 years ago Norway’s offshore adventure and success story commenced

In 2015 Norway will be looking back on half a century of oil and gas production along its west coast. In 1965 the first licenses were awarded. Four years later, the first commercial find was made, which went into production in 1971 and is still on stream. Bente Nyland, since 2007 Head of the Norwegian Petroleum Directorate (NPD), describes the Ekofisk field as a “wonder”. In 2011, according to the latest available figures, Norway was the world’s fourteenth largest oil producer and the seventh largest oil exporter. For gas, it takes the sixth position as a producer and is the third largest exporter. The country is strongly committed to remaining a major player. According to Mrs Nyland the upcoming general election (September 9th) will not bring any major changes to the oil and gas industry despite the possibility of a change of government. There is a strong political consensus in the country. The future of the offshore industry is based on two pillars: More effective production in the 76 existing fields and the opening of new fields especially in the North, but not necessarily in the Arctic waters. Hydrocarbon exploration on the Norwegian continental shelf (NCS) is expensive. In addition to the exploration costs there are high taxes and fees. However, Bente Nyland, a trained geologist, states: “I am not aware of one company which has left Norway because of our taxes, fees and regulations.”

Bente Nyland (c) Norwegian Petroleum Directorate
Mrs Nyland, is Norway really expecting a booming 2013?

Yes, I guess we are in the middle of a booming year right now. It started with the prognoses for increased investments and then with the companies’ new drilling plans.

Compared with last year, are the investments increasing?

Yes, and even more than we had expected compared with our prognoses from last year which were based on company reports for one and five years ahead as well as for a longer perspective. That gives us a good view of the development for up to five years. Thereafter it is more uncertain. However, we look closely at how realistic the plans are, and compare them with the market conditions before we present our prognoses.

What are the reasons for this optimism? Has it got anything to do with the by now famous discoveries of 2010 and 2011?

These discoveries are one side of the coin. Equally important is that we now see the consequences of the Government’s changes in the oil policy from the first half of the last decade. As a result of this, more licences were awarded, which resulted in more wells drilled and in more discoveries. Of course, the favourable development of the oil price played a role too. We are now starting to see the real effects of the giant discoveries in the North Sea (Johan Sverdrup) and in the Barents Sea (Johan Castberg). Today’s improvements are mainly a result of the decisions taken some years ago.

How did you react when you learnt about the mega discoveries in the North Sea and the Barents Sea?

We were all really surprised about the discovery in the North Sea, since this area has been regarded as matured. We had had exploration activities there from day one. How was it possible to miss such a discovery? If you look at the wells drilled in this area, they were all drilled around this field and they were dry. Now, the successful wells were drilled in the continuation of the Edvard Grieg field. The oil emigrated from there into a structure which was up to now regarded as less promising because one could not understand how oil could get into this prospect. In fact, it was just one well which opened up to this structure. In addition, over the last years you had an explosion in seismic technology with the improvement of visualisation.

Were these discoveries enough compensation for the frustration you felt for the unsuccessful search for hydrocarbons over the last almost two decades?

Depends what you mean with frustration. In the North Sea we have always said there will be lot of opportunities but smaller discoveries. And the almost 40 years of history of this area confirms this. We have already made the giant discoveries. However, the beauty and continued attraction with the North Sea is that you have the infrastructure with a certain spare capacity in place on the platforms but also in the pipeline system. There is still a great potential and we hope that with the help of satellites we will make further discoveries and prolong the life time of the fields. We talk about thousand islands, not about another one giant island of oil. However, only three years ago no one had expected further stand-alone developments. In the best scenario the expectations were of smaller discoveries which could be connected to the existing infrastructure. And now we are talking about several stand-alone installations in the northern part of the North Sea. And then of course you have the higher oil price, which makes discoveries, that have been lying there untouched since the seventies, commercially attractive. And finally, new technology helps to get the development of smaller discoveries at a much lower cost. But one has to say, all the recent events in this area started with the discovery of Edvard Grieg in 2007, which is expected to start production in late 2015.

When we talk about big disappointments, then we have to look at the deep sea area in the Norwegian Sea. This area turned out to be less productive than we had first estimated. At the beginning we had four, five discoveries, but then it stopped, and the companies lost interest.

However, when we look at the Barents Sea, the big surprise for us was the discovery of oil. According to our first evaluation of this area, based on seismic data, pointed to mostly gas resources. However, the Barents Sea is not so difficult to map but to understand the migration of oil and gas.

Regarding the search results of the first half of 2013, they are not so encouraging. Are you disappointed?

The Norwegian Shelf is regarded as a mature area and the latest giant discoveries Johan Sverdrup and Johan Castberg are seen as the exceptions which confirm the rule. Generally, we are expecting lots of small discoveries and big ones would be a surprise. That applies to the North Sea as well as to the Norwegian Sea and the Barents Sea.

Yes, I guess we are in the middle of a booming year right now
Until recently, we had not opened for new areas since 1994. That means that we have explored most of the area and have found the big cats at least in the North Sea and the shallow parts of the Norwegian Sea. In the North Sea this is fine, because we have the infrastructure to take care even of the smaller finds. The same applies to the shallow part of the Norwegian Sea, where we started explorations in the Eighties. In the Barents Sea there have been ups and downs. We know that there are hydrocarbons. But we have not learnt the codes yet to fully understand what is going on there. We have the Snøvhitt, the Goliat and maybe in the future the Castberg development. But we have to learn much more in order to be able to make reliable estimates about the volume of undiscovered potentials.

Do you share the view of Jarand Rystad, founder of Rystad Industry, who said that in the Barents Sea there is oil and gas all over the place?

Where we drilled, we found oil and gas, but it was not commercial. There was rarely any well in which did not find oil and gas, but it was not enough, and that is the strange situation in the Barents Sea.

Are you waiting for any technical improvements to get better results?

In some ways technology could help, but we also face geological problems. Here we have mostly flat structures and it is difficult to find the right closures. In the southeast of the Barents Sea and north of the 74th degree, which is not open yet, we see potential, and from other areas we have seismic data which indicate huge gas reserves. And now we are quite excited to see the results of the drillings at Norvarg, a gas field.

Sometimes one gets the feeling that you are getting impatient with the performance of the companies active on the Norwegian continental shelf, is that a correct impression?

Regarding the exploration activities, we got concerned at the beginning of the century, when the drilling activities dropped down to ten to fifteen wells a year. That was too little. Now we are up from forty to sixty, and that is ok. We need thirty to thirty five wells a year in order to avoid the increase of the gap between production and discovered resources. Our biggest concern is however how we can increase the recovery in existing fields. Today we are not concerned about the activity level on exploration, but on measures taken when it comes to the end of the production period. We do see that it is very easy to take your best staff to exploration and new developments and forget about the improvement of existing fields. That is why we are sometimes not so pleased with the industry.

Should it not be in the interest of the companies to produce as much as possible in an active field after all the investments they have done?

That should be the case, at least in theory. There are of course cases where we say it is ok to leave the field. But as long as we calculate a socio economic value in the continuation of production, even if it needs further investment, we would point that out. Sometimes we are disappointed in the lack of interest.

What reactions do you get from the companies when you put your scepticism to them?

Oh, then they put forward their investment sheets and argue that further investments are not commercially justified. Then we ask them not to look only at the down side of the business but to look at the upside potential as well. Why should you be pleased by only producing half of the resources, we ask.

When you detect something which you interpret as a lack of interest, do you approach the companies?

Yes, of course. Sometimes we do our own research and put the results to them. Sometimes it helps. We have to look at the tools we or the authorities can use. We do not have the experience or the capacity which the companies have. But we can do some simple calculations and ask them why they do not do more, since they are sitting on more resources than they take care of.

Today, are you satisfied with the investment level?

Yes. At the beginning of this century it was definitely too low, partly because of the low oil price. Then we made some changes in the licensing process and in 2004/2005, changes in the tax system.

But recently the Government made further changes to the tax system. What reactions did you get?

Yes, and the companies do not like changes. However, the Government prefers stability too, but also has to look at the balance between the economy on land and offshore.

We talk about thousand islands, not about another one giant island of oil
By the way, the companies are still earning a lot of money. And they show no intention of leaving the shelf. I understand that there is some disagreement between the Ministry of Finance and the industry on the effects of the changes. I think, regarding the new developments, they will not make any major difference. The main line is still: The system has to be predictable. And up to now there is no one who has left Norway because of the tax system.

Another argument from the industry is that there is a permanent deficit of drilling platforms. Do you agree?

Yes, there is a deficit. But who should regulate it? Is this a task for the authorities or the market? If you as a company are applying for a licence, we take it for granted that you have solved the platform issue. Yes, it is a concern for us, since it is even pushing up the platform prices. On the other hand, we have high working and health standards on the platforms and the major cost difference between a British and a Norwegian rig is not the price of the platform but for the staff. To run a platform in the UK you need two crews, in Norway three. In general, we do not want to interfere with the market. We do not want to take this responsibility. There are two tools which have an impact on the platform price: the demand and the oil price.

Is unconventional gas a threat to Norway?

So far we have not seen any effect in Norway. We see it more as an US issue. It will be exciting to see how long it will last. We do not have any shale in Norway, despite assertions coming from the US. One thing is of interest for us: If you can improve the fracking technology, we could look at that from a cost point of view in order to use it in the offshore sector.

On the 9th of September a general election will be held. According to the opinion polls, a change of government is likely. Do the companies have any reason to be hesitant regarding Norway’s oil and gas policy after a change of government?

No, I do not think so, because there is an agreement among the political parties that the offshore industry should be stable. Of course, we have a debate about the opening of new areas and the increase in activities. Even the far left parties point out that even though they do not agree with parts of today’s policy, they are interested in keeping a Norwegian offshore industry. The parties cannot ignore the importance of the industry for the national economy and the labour market. Under any circumstances, there will be a majority in parliament for the continuation of day’s oil and gas policy.

Almost 50 years ago, Norway’s offshore history commenced, and it is regarded as a success story. In this context, are you happy and satisfied when you hear the Norwegians being described as the blue eyed Arabs?

I do not know, since you can put it in a negative or positive way. The positive thing is that from the beginning, the development of the offshore sector was a political issue and a thing for the entire society. The aim was to build a platform which would gain all parts of society. Here we probably distinguish ourselves from some other countries in the same situation. There has always been the political willingness that the oil industry should be to the benefit of all Norwegians. Furthermore, the strategy of issuing blocks step by step proved wise. Even so some US companies would not agree. But Norway’s offshore adventure is not just to the benefit for one generation. We have a lot left for future generations.

Have the centre of the oil and gas industry already moved to the North?

The main activity is still in the North Sea and will be there for many years to come. If we are lucky, the activities will move to the North. But look, we have been active in the Barents Sea since the Eighties and up to today we have just one field in production, one under development and one is coming up.

And up to now there is no one who has left Norway because of the tax system
The start in the Barents Sea was very promising with the Hammerfest Basin (Snøhvit). But when they moved out, it became a disappointment and interest dropped drastically. Furthermore, in this area one face quite a few new problems, from technology to logistics and safety. Wells, drilled today in the Norwegian part of the Barents Sea, are at the limit of what we can afford and control. It is not just an issue of finding oil and gas. However, even Norway will face the question whether we should move further north. By now, Norway has no plans to open up north of 74th degree.

There are now intense discussions to open up the Arctic waters for oil and gas exploration. Is this even part of your agenda?

No. At least, it is not on the political agenda, but it will be interesting to see what will happen in Russia. If Russia makes a major find on the borderline, we will have to discuss the issue.

We do not have to go so far northto find another issue very much discussed in Norway: The future of the Lofoten/Vesterålen area. Do you think you will be able to find a compromise between the interests of the offshore industry, the fishery industry and the environmental organisations?

Technically there should not be a problem, there would not be anything new which the industry has not faced somewhere else. But there are other issues, for example the feelings of the people, and they should be recognised. Regarding the fishery industry, since we are discussing shallow waters, the question is whether there is space enough for oil and gas production, and the fishing boats. The emotions are strong and today the fishing industry is not prepared to go into this sort of negotiation. Another issue is the view of people not involved in fishery. There are rarely any new jobs on the islands, and the offshore industry can offer at least some. At the end it is a political and emotional issue. We, as the NPD, are neutral on this issue.

Recently the NPD sold seismic data from the Southeast Barents Sea and the area around Jan Mayen. What is the intention with this?

It is normal for the NPD to gather seismic information from all parts of the continental shelf in order to find out what the conditions for oil and gas exploration are. And why should we sit on this information, so we sell it to interested parties to cover the costs, since this work is funded by parliament. Furthermore, this area will be part of the next concession round (2015). A part of the island’s shelf is the rest of the split between Norway and Greenland and therefore of interest to us. The other part of the Jan Mayen shelf belongs to Iceland, which has already issued two drilling licences in the border area. We made the mapping but are not very happy with the results. There is a fair chance of finding nothing. On the other side, the Icelanders are quite optimistic.

It is obvious that there has been a change is the structure of the companies engaged on the Norwegian shelf. At the beginning there were almost only Norwegian companies and the multinationals. Now medium sized and European companies are important players on the shelf. Was that a deliberate decision from the Norwegian side or market initiated?

At beginning it was market orientated. The multinationals are still here, they are sitting on old licenses, but are not so active today. For them it is not very attractive to go into the smaller areas. They are only out after the big cats. However it is still important to have them on the Norwegian shelf. They have money, people, technical capacity and experience. For us, around 2000, the big issue was the disinterest of the big companies and in addition, the midsize companies had been purchased by the multies and had partly disappeared from the shelf. So we were left with small companies, which did not have the money or the capacity. We had to make some changes in the license system and the tax regulations. Soon we saw a positive result. We got middle sized companies even from the US and Canada, which we did not have before on the shelf and in addition to that quite a few European companies, who in fact are rather big internationally but are new to Norway. In March 2013 Norwegian companies held 31% of all licenses on the Norwegian shelf (1998: 53%). The second largest group today are the medium sized companies with 27% (16%). Equally, 27% are held by European gas and electricity companies even they are very new on the Norwegian shelf, plus small companies. The international companies’ share dropped from 23 to 15%. The system worked, we are satisfied. In the future we have to look whether there is food for all of them, especially for the smaller ones. The big surprise for us was the appearance of the European gas and electricity utilities.

What will the Norwegian shelf look like in 50 years?

Ekofisk, the first Norwegian field which went into production 1971, will still be producing. The production will rapidly decline if we do not put a lot of effort into field development over the coming years. We will still produce oil and especially gas from today’s existing areas and I hope that there will be alternative energy resources. We look with interest to the developments in Germany and France. And we hope that petroleum is still in demand for the more technically advanced industry.

 

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