WORLD OIL SPECIAL REPORT

Volatility demands new solutions from operators

Morten Ruud, President, Exploration & Production International, Norsk Hydro, Oslo, Norway

At the beginning of 2001, the oil industry still savored the previous year’s high prices. It was another story for consumers. The ensuing imbalance was particularly evident in the turbulent U.S. gas market, demonstrating just how volatile the energy business can be.

Since then, there has been a long, slow decline in oil prices – until September 11. The terrorist attack on the U.S. triggered a sharp fall in prices and a general slowdown in global consumer product demand. We are now witnessing a depressed world economy that will inevitably impact the E&P industry in 2002.

Our industry has suffered economic depressions before. It is a consequence of the game. Current uncertainty surrounding oil and gas pricing will affect not only projects and developments, but also the total business picture, from exploration to production. The repercussions will especially impact the offshore portion, where costs are inherently higher.

To survive in this business, you must be able to ride out fluctuations. The past few years have witnessed big corporations growing bigger, mostly through the acquisition of other companies. The "super majors" must now rely on organic growth and refining of their portfolios to continue expanding. Buy-outs and mergers will be scrutinized increasingly by competitive authorities, both in Europe and the U.S. Generally, the industry will have problems reaching growth forecasts and meeting financial goals.

Gas plays a more important role than ever before in company portfolios. On a global scale, gas is the fastest growing energy source, whether consumed directly or by power generation stations. The European energy market is liberalizing, opening up new market opportunities. There is more focus than ever before on capturing the margins in the "energy value chain." An additional aspect is that the Atlantic LNG market becomes increasingly important, as seen by the recent contract signed between a Norwegian consortium and a U.S.-based LNG buyer, targeting a production start in 2006.

As a whole, Norway exports almost 60 Bcm (2 Tcf) of gas per year to the European market. This is set to increase in the next few years. Norwegian gas consumption is minimal, mostly due to the hydroelectric power base and a vigorous public debate about CO₂ emissions from gas-fired power stations. Some gas-fired power projects may be decided on during the next several years.

"Capex tends to grow with increasing water depths. We must find new solutions to stop this trend."   – Morten Ruud

The year 2001 has been a good one for our company, with strong financial results. We also continue to expand our international activities. Our home base is the Norwegian offshore sector, where we are a major exploration, development and production player. Norway’s daily oil production is 3.1 million bbl, and we are the operator for 1.2 million of them. Norway will definitely continue to be our core area, but we will also strengthen our position in the overall European energy market.

We intend to maintain our activities offshore Norway, focusing on production performance and keeping a close vigil on costs. From thin oil zones underneath the huge Troll gas field, Norsk Hydro now operates oil production of 350,000 bpd, the largest Norwegian producing field at this time. Troll is a field where new technology, advanced drilling and reservoir management make it possible to extract resources that just a decade ago were thought to be uneconomical.

The Norwegian offshore sector is becoming more mature, but there are still many exciting possibilities and challenges. The infrastructure is well-developed, enabling profitable exploitation of more marginal fields. The Norwegian shelf will also still be an important part of our company’s total exploration portfolio. Internationally, we are active in Angola, offshore Canada, Russia, Iran, Libya and, since September, the Gulf of Mexico.

In Angola, we are a partner in prolific Block 17, where water depths drop to 1,500 m (4,921 ft). We consider offshore Angola one of the most interesting places to be right now. Angola is moving into ultra-deep waters, and we will take part in developments there. Russia and the Former Soviet Union countries have great resources, but they are still sleeping giants. This region takes time and patience, but it is moving forward.

The Gulf of Mexico is new to us, but it is a front-runner in exploration techniques and deepwater developments – definitely an interesting place to be. The challenges of ultra-deep waters are testing the whole industry.

Capex tends to grow with increasing water depths. We must find new solutions to stop this trend, which has to be tackled from exploration to project development. Since drilling and completion costs represent almost 50% of deepwater development costs, I feel certain that drilling contractors will strive toward technological innovation and cost efficiencies.

Technological solutions for subsea installations and floating production units (including risers, station keeping and mooring) are all problems demanding continuous research. Improved solutions will certainly find their way into the market. The oil and gas industry always seems capable of finding new solutions when confronted with difficulties and challenges. This is what makes working in the industry genuinely interesting, as well as demanding.