International Politics

	Vol. 227 No. 4
ØYSTEIN NORENG, CONTRIBUTING EDITOR, NORTH SEA

The Norwegian Arctic – the new frontier. Norwegian officials announced that huge areas in Norway’s northern waters will be open for bids as “awards in predefined areas” (APA). This signifies acreage in mature areas that were already open to exploration, but many were relinquished by licensees. This is according to the rule that after six years, half of the license area must be returned, as a contiguous area.

The APA system was introduced in 2003. The 2006 APA is the fourth round of this kind, and it is the third largest grouping since the first licensing round in 1965. It has 192 blocks or partial blocks, an expansion of 11 blocks over last year’s APA. It opens large areas in the North, Norwegian and Barents Seas. Deadline for applications is Sept. 29, 2006, and licenses will be awarded by December 2006. This APA round is in addition to the 19th ordinary licensing round, with blocks set to be awarded by the end of first-quarter 2006.

The number of blocks offered should ensure a high exploration level, if rigs can be found. Block quality seems to vary, so not all may be explored in the next few years. Nevertheless, parallel to more aggressive licensing, the government accelerates prequalification of new, smaller and medium-sized operators. Latest additions are Hunt Oil, Mitsubishi and OMV. The large area and diverse prospects should attract a varied group of companies.

In the mature North Sea, finds will be smaller prospects in relatively shallow waters, close to existing infrastructure. This may interest smaller independents. Farther north, the Norwegian Sea’s risks are higher, but so are the potential rewards of larger fields. The Barents Sea seems to contain natural gas and condensate, and less crude oil. However, the area is under-explored, with potential for disappointment and pleasant surprises. Some geologists think that there is a huge gas potential between Norway’s Snøhvit field in the west and Russia’s Shtokman field in the east.

Part of the potential is in the contested area between Norway and Russia. Before that part of the Barents Sea is opened for exploration, a border solution must be found. Neither Norway nor Russia is in a hurry, which frustrates a US government that wants to speed up development outside the Middle East. For the moment, both Norway and Russia are comfortable financially, based on high oil prices. Neither country has an urgent need to develop the Barents Sea.

For Norway, taking time may have the dual advantage of permitting more thorough analysis of potential environmental consequences and eventually showing even less hurry than Russia. Last winter, an agreement was reached with Denmark on the maritime border between Greenland and Norway’s northern possessions, based on the median line principle. Norway hopes that this is a precedent for negotiations with Russia, but that might take time.

Even if developing gas finds would be a long haul, the Arctic is opening up as a new province. There are only five adjacent countries – Canada, Denmark (with Greenland), Norway, Russia and the US. Norway’s ambition is to pioneer standards in technology, health, safety and the environment. This is not entirely unrealistic, given that among these countries, Norway has the longest, broadest experience operating in northern waters, but Norwegian priorities and regulations are somewhat based on politics, which are different in, e.g,. Russia.

Norway’s highly vocal environmentalists are represented in the red-green coalition government. Objectives are often more symbolic than real. In principle, the environmental lobby does not want any E&P activity, especially not in northern waters. On this issue, it clashes with local residents and businesses that welcome E&P activity. Moreover, to set environmental protection standards, Norway must have an extensive, Arctic petroleum industry. Otherwise, Russia will have no Norwegian example to copy. Also, there is a collision of mindsets. Norwegians are often concerned if something can go wrong, and environmentalists want to have a zero-risk industry in the Arctic. In Russia, however, there is generally concern, only if something does go wrong. 

The Arctic may become a major new province that, in 10 to 15 years, could offset the world’s Middle Eastern dependence. Russia’s Shtokman field might, before 2020, provide 100 Bcm/year of gas for markets in Europe and the US. Other area prospects might double that figure. The oil potential is less certain but could be considerable. The condition for developing these resources is a stable, high oil price. Even if the industry continues its trend of annual efficiency gains of 3% to 5%, Arctic development would need prices of at least $30/bbl or higher. To encourage operators, Norway has abstained from raising petroleum taxation with the present high prices, contrary to the UK.

UK treasury sees small output drop. In its annual Budget Report, the UK Treasury has downgraded its forecast for 2006 North Sea oil and gas output to a slight drop that will contribute to lower-than-expected oil tax revenue. The Treasury’s report also confirmed a 10-percentage-point rise in taxes on North Sea operators. The industry says the tax increase could stifle investment.

“Production is expected to show a modest, temporary drop in 2006, based on a survey of North Sea producers, compared with the small rise assumed” in the December Pre-Budget Report, said the Treasury. “From 2007 – 2008 onwards, production returns to levels only slightly below those in the 2005 Pre-Budget Report projections.”

Lower oil production is expected to have a marked effect on North Sea revenues in 2006 – 2007, indicating a £1.5 billion (US$2.6 billion) decline in those revenues. The report said that North Sea tax modifications – including the rise in corporate taxes and investment-related exemptions – should net an additional £900 million (US$1.57 billion) in 2006 – 07 revenue, compared with an earlier estimate of £2 billion (US$3.5 billion). The Treasury suggested that the lowered estimates are due partly to the tax exemptions.

The government “has given a commitment to no further increases in North Sea taxation for the lifetime of this Parliament,” the report said. The next UK Parliamentary elections are expected in 2009 or 2010.