Oil and Gas in the Capitals

 Vol. 233 No. 4

Proponents of the Peak Oil theory often point to Norway as evidence of an oil province, whose output at first soars in the 1980s and 1990s, then peaks in 2001, and subsequently declines by 40% until 2011. This is taken as proof that the asymmetrical curve identified by Marion King Hubbert has a general validity, and output decline is inevitable. From that perspective, Norway’s performance in 2011 is astounding. Several finds in different parts of the Norwegian Continental Shelf (NCS), plus upward revisions of producing assets, added up to a reserve replacement rate of 117% for petroleum (oil and natural gas). The bulk of the resource growth is in the giant Johan Sverdrup field, estimated to contain between 1.7 billion and 3.3 billion boe of gross recoverable resources.

Limited exploration means that the notion of resource base maturity should be applied with caution to the NCS, especially as the little-explored northern waters are opened. Some areas are well-explored and appear fully mature, with fewer, smaller and more adverse prospects. Other areas are hardly explored and have considerable potential. Possibly, the NCS has resources for petroleum activities for this entire century; there is a need for industrial continuity, as well as more diversity and competition throughout the value chain.

Geology opens up new wrinkles. The opening of new territories in the north, and recent discoveries in the south, indicates that Norway may be a less-mature petroleum province than often assumed. Indeed, huge prospective areas are fallow. After the agreements with Iceland and Russia, the NCS, from the base line to the borders, is larger than the entire Gulf of Mexico. According to the Norwegian Petroleum Directorate, about one-half of the area has rocks with a petroleum potential. Most of it has not been explored. Exploratory drilling has taken place on blocks representing a few percent of the prospective territory. The historical finding rate has been 43%, against 23% on the UK Continental Shelf—in Norway, less drilling has found more resources than have been found in the UK. The giant 2011 discovery was made in an area considered mature. It may turn out to be one the largest finds ever made in Norway, producing half-a-million bpd for years. Total cost per barrel is estimated at less than $15.

Norwegian petroleum policy is marked by restrictive licensing—keeping much acreage off-limits to the oil industry—high taxes and a high degree of state participation, in addition to strict environmental safeguards. Labor costs and conditions add to the generally high cost level. Nevertheless, the petroleum industry is thriving, as measured by investment levels. Exploration is modest; at the moment, 10 rigs are drilling exploration wells. Nevertheless, there are many successes, and the potential is substantial. 

The Norwegian part of the North Sea, the southernmost part of the continental shelf, has been much less explored than the neighboring UK side, but with more finds. The Norwegian Sea, the middle part, has indications of an oil and natural gas potential almost as large as that of the Gulf of Mexico, but with far less exploration. Technical challenges and costs are, however, substantially higher, partly due to a basalt layer. The Barents Sea, the northernmost part, has promising geology, with both oil and natural gas finds in recent years.

Assessments based on new finds and new technology brighten the outlook for Norway’s petroleum industry. Declining output no longer seems inevitable; some scenarios indicate sustained growth. Most noteworthy, the giant find was struck by two smaller companies, Lundin and Det Norske, on acreage overlooked by Big Oil, and led by two senior geologists, Hans Rønnevik and Torstein Sannes, whose advice had been disregarded by former employers.

Peak Oil bloodied again. The situation in Norway throws critical light on the “Peak Oil” theory.  It refers to U.S. experience with private ownership of resources, seeking rapid maximization of extraction and income, with no or weak government regulation. In sum, commercial considerations, to cover immediate needs, has driven U.S. exploration for oil and the development of fields. These conditions do not apply outside the U.S. and parts of Canada.

Any estimate of future oil production by Hubbert’s or other models needs assumptions on reserves, and producers’ interests and strategies, but they are not constant. In the U.S., the oil reserve-to-production ratio has been about ten-to-one for the past 30 years, but the country is still a leading oil producer.

“Peak Oil” rests on six key assumptions: knowledge of the world’s oil reserves is complete; reserve estimates are constant; extraction inevitably takes the shape of a fairly symmetric curve; technology is constant; oil prices do not matter; and all oil producers have the same revenue/profit motive and goals.

None of these assumptions corresponds to reality. In the oil industry, all important parameters are dynamic. Knowledge of the world’s oil reserves is changed by exploration. Insight and technology cause a continuous update of reserves. The actual extraction can take many different shapes, depending on the interests and strategies of the resource owner, in addition to technology and economics.

The Norwegian petroleum experience proves several points. Technological development continuously lowers costs; a globalized oil industry disseminates innovation. New technology and lower costs make new resources available. Smaller, more adverse prospects become economical. New sites with potentially large resources open up. Experience lowers costs and enables new, smaller and less-accessible fields to replace mature fields. Newcomers have fresh minds.