Exactly fifty years after the beginning of its impressive offshore adventure, Norway is facing significant changes. 2015 is set to bring a drop in offshore investments by 20 percent and a further ten percent in 2016. An almost stable production level is predicted at least for the coming five years. A loss of 10,000 to 15,000 jobs is expected. A drastic fall in revenue for the companies active on the Norwegian continental shelf (NCS) and an equally heavy fall in tax income for the Norwegian state is unavoidable. These are the parameters Norway is currently looking at. The country with just 5.2 million inhabitants became, according to some criteria, the richest country in the world, but has now reached a turning point. However, as a representative of a foreign oil company put it, “There is no reason to be pessimistic.”
Of course, the main reason for this dark prediction for the Norwegian petroleum industry is the approximate 50 percent drop in oil price. According to Statistics Norway, the state agency for statistics, in 2015 Norway’s petroleum industry’s revenue will fall by about 30 percent compared to 2014, which will reduce the GDP by six percent. At the beginning of last year, some of the petroleum companies calculated with a long term oil price for Brent oil of USD 80 to 85 per barrel (€ 73.5 - 78.1). Now they are down to USD 60 to 65 (€ 55.2 - 59.8), and that is, Statistics Norway points out, 'not a low oil price from a long term perspective'. The agency reaches the conclusion, shared by the Norwegian Petroleum Directorate (NPD), that 'most of production and many of the fields under development will be profitable even in the future. Even today’s oil price yields profits for a major part of oil- and gas production joined by demand for products and services from Norwegian suppliers. This will be the case for many decades to come. For example: Statoil, 67 percent owned by the Norwegian state and the largest producer on the NCS, received in 2014 USD 98.3 per barrel (€ 90.37); 2013: 109.1 (€ 100.29) compared to production costs in 2014 of NOK 53 (€ 6.15); 2013: NOK 50 (€ 5.80).
Despite seeing the beginning of the fall in the oil price, 2014 was still a good year for Norway’s petroleum industry and the Norwegian state, at least from the production point of view. With 216.7 million saleable standard cubic metres of oil equivalents (Sm3 o.e ; 1 Sm3 = 6.29 barrels), the production was only 47.4 million Sm3 o.e. lower than in the record-setting year 2004, and 1.4 percent higher than in 2013. Whilst, according to the NPD, over the five-year period 2010–2014, 1.104 million Sm3 o.e. were produced, the production for the coming five-year period until 2019 is expected to total 1.080 million Sm3 o.e. After a steady decline since 2001, oil production has turned upwards again, by three percent to 87.8 million Sm3 (1.51 million barrels per day). For the period 2015-2019, oil production is projected to reach 422 million Sm3 (1 Sm3 = 6.29 barrels). This is just 42 million Sm3 less than in the previous five-year period. 2014, sold gas production reached 109 billion Sm3, 0.2 billion Sm3 more than in the previous year. Overall, petroleum production in 2015 is presumed to total 215.6 million Sm3 o.e., somewhat lower than in 2014, but will then remain relatively stable.
All the production figures for the future bear a question mark. NPD states: 'If the price level remains much lower over time, this will most likely have an impact on the activity level and thus also on production.' Furthermore, 59 wells were terminated on the NCS in 2014, the third highest total ever. 22 new discoveries were made, which added 40–110 million Sm3 of oil/condensate and 25-75 billion Sm3 of recoverable gas to the Norwegian resources.
The most important signs of impact as a result of the drop in price are clearly visible in investment expectations. Thina Saltvedt, Chief Analyst at Nordea Markets, expects investments to drop by 20 percent in 2015 and by ten percent in 2016. According to Statistics Norway, 2015 investments will decline by 16 percent, although, as it points out, from a record level in 2014, and in 2016 by eight percent compared with the previous year. NPD is projecting a drop by around 15 percent in 2015. Total investments between 2014 and 2017 will decline by 21 percent and will then plateau with a moderate increase from 2018 onwards.
The reason why all prognoses show a lesser investment drop after 2015 is connected to one name: Johan Sverdrup. In 2010, the Norwegian subsidiary of the Swedish company Lundin petroleum made the first discovery in the southern part of the North Sea, 155 west of Stavanger. In 2011, Statoil followed with another discovery in the same area, which was then ranked as the world’s largest discovery that year. In the end, with three licenses involved, discoveries of what has been called a miracle were made. The three licenses are now part of the Johan Sverdrup field which is regarded as a giant discovery, the fifth largest in Norway’s fifty years of offshore activities. The field covers an area of 200 km2. In mid-February, Statoil submitted the Plan for Development and Operation (PDO) on behalf of the partnership to the Minister of Petroleum and Energy. The final decision lies with Parliament, which is expected in spring this year.
Johan Sverdrup is regarded as one of the biggest industrial projects in Norwegian history. It will be developed in multiple stages. The PDO comprises the first stage of production with overall investments estimated at NOK 100 to 120 billion (€ 11.61 to 14.05 billion). Planned are four bridge linked platforms as well as three subsea installations. Phase 1 is scheduled to start production in late 2019 with a forecast gross production level of between 315,000 and 380,000 barrels of oil per day. Phase 2 of the Johan Sverdrup development is expected to commence production in 2022. Up to now there is no final development plan, and Lundin expects total full field capital costs in the range of NOK 170 to 220 billion (€ 19.9 to 25.76 billion).
Johan Sverdrup is already called the new milking cow of the NCS. The production costs are extremely favourable. With a water depth of 110 to 120 metres, the reservoir lies about 1,900 metres below the sea bed and consists according to Lundin of 'exceptional quality' and a very high well productivity is expected. Since the reservoir is relatively easy to access, Fridtjof Riis, geologist at the NPD, expects a recovery rate 'which could exceed 60 percent'. For this giant field the full field gross recoverable contingent resources range is estimated at between 1.7 to 3.0 billion barrels of oil equivalent with approximately 95 percent being oil. When with 550,000 to 600,000 barrels per day, peak production level is reached, about 25 percent of all oil from the NCS – where the first licence was awarded in the very first licensing round in 1965 - will originate from Johan Sverdrup, and that at an operating cost of less than USD 5 (€ 4.6) per barrel (calculated for Phase 1). It has to be mentioned.
Since Johan Sverdrup comprises three licences, a new allocation of resources had to be found. According to a proposal by the majority of the partnership, Statoil (the operator) is supposed to take 40.0267 percent, Lundin Norway 22.12 percent, Petoro, the administrator of the Norwegian state’s share in the development, 17.84 percent, Det norske oljeselskap 11.8933 percent and Maersk Oil 8.12 percent.
The drop in oil price came for many companies too late to have a major impact on this year’s investment program, and 'who would leave a half finished development?' as one company representative put it. However, the first consequences are clearly visible. NPD writes: 'The development in oil and gas prices in recent months, combined with a high cost level, has created considerable uncertainty surrounding developments in the petroleum industry.' However, if the oil price remains at USD 50 to 60 (€ 45.96 to 55.16), the investment levels could decline further, starting in 2016. Talking to people active on the NCS, the impression prevails that only a few have a pessimistic outlook. 'Long term development is still on our side', as one put it. More sceptical is the view on the activities in the arctic waters. 'I will say that projects as Johan Casteberg, Gotha and Alta in the Barents Sea are the ones under most pressure as the break-even prices in this area are higher (around USD 80-100++/barrel) and infrastructure needs to be built', says Thina Saltvedt. Only the very big companies will have the resources to engage in these projects or additional exploration activities.
The development on the Norwegian shelf is not just a matter for the oil industry and the onshore suppliers. In Norway, it involves the entire nation. The state took care of the oil revenues in a very clever way. As a result, Norway holds with NOK 6,500 billion (€ 5,598 billion) the world’s largest investment fund, today twice the size of the country’s GDP and 1.25 million (€ 145,125) per inhabitant. Following strict rules, the government is allowed just to use a certain part of the fund’s profit to run the national budget. The politicians however got used to this seemingly endless resource. In 2001, an equivalent of 1.8 percent of mainland GPD came from the Government Pension Fund Global (its official name) established in 1990. This year’s budget is strengthened by NOK 16 billion (€ 1.86 billion), or 6.4 percent of mainland GDP. However, the recent message by Øystein Olsen, Director General of Norway’s Central Bank, to the government was clear: The increasing use of fund profits to boost the national budget must come to an end.
In Norway, the drop in oil prices has left its mark. However, it will not hit the Scandinavians in the same way as other countries in a similar situation. Parallel to the oil price development the US Dollar performed much stronger, at the same time the Norwegian kronor weakened by about 25 percent. About 240,000 people are directly or indirectly earning their living in Norway’s offshore industry, 8.7 percent of the total labour market. By now, more than 10,000 people have lost their jobs, however most of them are foreigners and have left Norway. The unemployment rate is expected to increase only minimally to 4.1 percent by 2016. Especially engineers do not have to wait for long to get another job. In the industry there is the hope that the changes in the labour market will put pressure on labour costs, a 'normalisation of the market'. In this year’s pay negotiations, Statistics Norway expects wage increases by less than 3 percent and estimates for 2015 an increase of mainland GPD by 1.1 percent, compared to 2.3 percent in each of the two previous years. The first major agreement of this year between the Trade Unions (LO) and the employers (NHO) resulted in a 2.7 percent increase, focused on the lower incomes.
Commenting on the Director General’s warning, the conservative Prime Minister Erna Solberg said: 'We face a serious change of attitude. The government got the message and has started working on it.' Norway has to tighten its belt. Even though there is much space left.
Image: Marcus Roos under GNU Free Documentation License
- on Energy
Norway at a Turning Point
April 16, 2015 | 00:00
Exactly fifty years after the beginning of its impressive offshore adventure, Norway is facing significant changes. 2015 is set to bring a drop in offshore investments by 20 percent and a further ten percent in 2016. An almost stable production level is predicted at least for the coming five years. A loss of 10,000 to 15,000 jobs is expected. A drastic fall in revenue for the companies active on the Norwegian continental shelf (NCS) and an equ...