International Politics
High oil prices and the North Sea. High prices have had a considerable impact on North Sea oil and gas activities, with investment picking up noticeably. Other sources of encouragement are new discoveries and a reappraisal of prospectivity in Norwegian and UK waters. Exploration activity is rising, but it is hampered by a rig shortage. In any case, high oil prices, together with enhanced knowledge of the geology; progress in management, organization and technology; and a stable regulatory environment, give new life to an oil province hitherto considered mature and in decline. In Norway’s 19th Licensing Round, in late March 2006, 17 companies were offered participation in 13 new production licenses. The smaller and medium-sized oil companies that have risen with geological maturity in the US Gulf of Mexico, and in UK waters, are now active in Norway. With a focus on smaller prospects, and with slim organizations and low overhead costs, they are well placed to take on the large number of smaller and medium-sized prospects that have been found but not yet committed for development, or that are yet to be discovered. Exploration activity on the Norwegian Continental Shelf has been higher in first-half 2006 than in 2005, but rig availability remains a problem. The Norwegian North Sea is usually considered a mature oil province, with familiar geological conditions and many old fields. This is contrary to the Norwegian Sea and the Barents Sea further north, which have attracted most of the attention in recent years. The Norwegian North Sea could still give surprises. This year has seen the resumption of exploration in the eastern part of the Norwegian North Sea, which, at an early stage, is considered geologically promising, although with comparatively deep structures. As finds have been essentially natural gas and condensate, the area has been overshadowed by larger oil finds further south and west in Norwegian waters, closer to the borders with Denmark and the United Kingdom. Government policy at one time was to map the resources in the areas close to the border, to defend Norwegian resource interests and neglect areas further east, closer to the coastline. Subsequently, government priority was exploration further north. Major advances in drilling technology have improved the economics of exploring this area’s deep structures. Several wildcat wells are being planned here for the near future. Areas further north also attract oil company investment, with new finds in the Barents Sea. This could improve dramatically. Statoil’s former CEO, Arve Johnsen, in a report commissioned by the Norwegian Ministry of Foreign Affairs and released on Sept. 15, proposes Norwegian-Russian cooperation in the Barents Sea to build common infrastructure for the development of the region’s petroleum resources. This would permit Norway to influence technical and environmental standards, and it represents a springboard into northern Russia for Norway’s oil companies and service industry. Russian President Vladimir Putin has explicitly stated his high regard for the Norwegian oil industry. The concept of a common zone might help to overcome the hurdles of a pending maritime border dispute, but a settlement for the contested area would be needed. Huge current account surpluses mean that neither Norway nor Russia is in a hurry. Cooperation would represent a significant step in opening the Arctic as a petroleum province. The proposal has met criticism from Norway’s environmentalists, but it is likely to be received positively by industry and the present government. Oil company information indicates a high level of exploration activity for the rest of 2006, rising markedly to a record level in 2007. The critical factor is not acreage awarded, but rig and labor availability. Total investment for 2006 in Norwegian offshore petroleum-related activities, including pipelines, is estimated at about NOK 100 billion, or about US$16 billion, an increase of about 10% compared to 2005. The largest increase is in exploration expenditures. There are worsening capacity problems and bottlenecks in the oil companies, as well as the oil service firms, so that several projects have been deferred, a practice that is likely to continue. UK activity picked up first. On the UK side, things are moving as well, but the cycle seems to be slightly ahead of Norway. The latest round of bids for North Sea operating and production licenses had a record response, with 147 applications from 121 companies, of which 25 were new bidders. In UK waters, exploration and appraisal drilling picked up markedly in 2005, and in 2006 development drilling is gaining, indicating a redeployment of available rigs. The boost in UK offshore investment, set to exceed £10 billion ($18.8 billion) in 2006 (a slight increase from 2005), is likely to create up to 15,000 new jobs in 2006. However, in 2005, as many as 25,000 new jobs were created. The bulk of the impact will be on the Scottish economy, especially in the Aberdeen area. The investment boom will not only extend the life of the UK sector of the North Sea, but it will also enhance continuity in employment and skills, and accelerate technical and managerial progress. New technology has permitted smaller operators to run fields and begin tapping previously unreachable or non-economical prospects. The UK oil industry is a leader in subsea oil and gas technology, moving to keep unit costs down in spite of ever smaller prospects. In the Norwegian and UK offshore oil industries, there is a new sense of optimism, not only fueled by high prices, but also by progress in technology. In both cases, geological maturity fosters a diversity of companies. At the premature stage, a small number of large prospects were matched by a small number of large companies. As the large fields were depleted, several of the large companies preferred to leave or to scale down their presence, leaving the arena to smaller companies with lower costs and more flexibility. UK North Sea oil extraction has peaked twice, and it is doubtful, even with high prices, whether a third peak will be reached, unless there should be major finds west of Shetland. Norway’s oil extraction has peaked once, but a second peak should not be excluded, and the natural gas output continues to
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