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Vol. 224 No. 4 |
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| ØYSTEIN NORENG, CONTRIBUTING EDITOR, NORTH SEA |
Creating value offshore Norway. The activity level in the Norwegian offshore petroleum industry is falling quickly, and the 18th licensing round comes next year. In 2002, exploration was at its lowest level since 1968. For several years, no major finds have been made. Development increasingly is based on discoveries made in the 1970s and 1980s, then considered marginal and not sufficiently profitable, yielding to larger and more profitable prospects in the development lineup. Chances are that Norway’s oil output will decline after 2005.
An immediate concern is the downsizing of the offshore supply industry and loss of competent personnel. A further problem is the expected decline in government oil revenues. The Norwegian continental shelf still has considerable prospective areas; the level of activity is insufficient, even with the high oil prices of the past few years. The 17th licensing round showed declining interest in the Norwegian continental shelf among the international oil industry, because the acreage offered was considered of marginal interest within the fiscal framework. The acreage offered was not even fully licensed, creating more disappointment and lowering the level of activity.
Whereas the Norwegian government was previously concerned about too high a level of activity, the concern today is the opposite. The causes of the declining level of activity are a combination of geological maturity, company structure, and fiscal and regulatory conditions.
Historically, Norwegian offshore petroleum activity has been carried by a small number of fields that by international standards are large, such as Ekofisk, Statfjord, Troll and Ormen Lange. Many smaller and medium-sized finds were put on hold. Now, the resource basis is maturing quickly, especially in the North Sea. Fields to develop are more numerous, smaller and often more difficult, as well as more different. Hence, economies of scale are diminishing.
The problem is that petroleum taxation is tailored to capture economic rent from large fields and that licensing policy for decades has been to concentrate operator responsibility with a few companies, preferably Norwegian. Present needs are to improve profits on smaller prospects and to diversify the club of operators. This is essentially a political problem. Many politicians’ minds seem to remain in the 1970s or early 1980s, not catching up with resource-base maturity.
Since the early 1970s the Norwegian offshore petroleum industry can show an impressive record of cost-cutting, which accelerated in the 1990s. It was the outcome of a joint effort between the government, the oil industry, the supply industry and research institutions, aiming at a systematic improvement of technology. The outcome is in enhanced drilling, much higher recovery rates and lower unit costs. For the government landowner and the oil business, it has meant more value creation and an improved competitiveness.
The cost difference between the North Sea and the Middle East has been much reduced over the past 20 years. In both Norwegian and UK waters, the estimated production costs for fields under development are lower than for fields in production. For practically all prospects, total production costs are below $12/bbl. Likewise, operating costs tend to be below $5/bbl.
Overall costs in the Norwegian petroleum industry are still somewhat below the UK level, essentially due to larger prospects and a less advanced maturity. In petroleum development, capital costs are clearly lower in Norway, but operating costs are higher, largely due to high salaries and expensive shift routines. Nevertheless, the lower Norwegian capital costs are not entirely offset by higher operating costs. The exception is smaller fields, and that is a big problem with maturity.
The current government cannot show an impressive record to improve conditions for the oil industry. A white paper published last year recognizes the problems, but announces few concise steps to set things right. To many observers, the minister seems more interested in environmental issues than in energy supplies.
So far, the Norwegian government has been slow in implementing the reforms required. Admittance criteria have been modified to allow smaller oil companies, but otherwise not much has changed. More needs to be done to reduce the concentration of operator tasks and to attract smaller and medium-sized oil companies. Also, it must become easier to transfer operator responsibility during the lifetime of a field.
Petroleum taxation favors incumbents over newcomers and hampers an active second-hand market in license shares. Taxes on CO2 emissions and the exclusion of the petroleum activities from any emissions permit trading function as a royalty, detrimental to the development of smaller prospects. An accelerated depreciation schedule, e.g., from six to three years, would help newcomers, smaller companies and smaller prospects. Eventually, this measure could be combined by an expanded allowance. In the longer run, the Special Tax (50% in addition to the 28% corporate income tax) should be restructured and possibly reduced when oil prices fall again.
The 17th licensing round, held in 2002, excluded some of the most prospective areas because of concerns for the environment and fisheries. The minister has talked about “petroleum-free zones,” although the historical record is that petroleum and fishing can go well together when strict standards are enforced, as seems to be the case in Norway. Against this backdrop, more attractive areas should be offered and the companies should have a greater say in nominating acreage for licensing. The industry also needs better continuity in licensing, and the areas announced should be awarded. There is a need to license acreage in the proximity of time-critical infrastructure. Finally, there should be no “petroleum-free zones” without a time limit.
To sustain exploration and development, changes are overdue. The risk is that the major oil companies reduce their exploration interest before barriers have been lifted for the smaller and medium-sized oil companies. To sustain cost-cutting, a greater effort is needed for research and development, preferably with a new joint program. 
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