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Norway: a haven for oil production

NORWAY’S oil and gas industry looks set to have a longer shelf life than its counterpart in the UK sector, largely due to the Oslo government’s more disciplined approach to husbanding its offshore assets.

These are the views of Henrik Carlsen, executive vice-president of exploration and production at Statoil, the state-owned energy giant which was partially privatised in June 2001.

Carlsen, speaking in his Stavanger office, says: “The Norwegian part has had a much more measured development [than the UK continental shelf].

“We have concentrated first on the North Sea, where we did very good exploration work and proved we could operate without harming the environment. Then we moved into the deeper water part and applied the experience we had gained in the North Sea as we moved gradually further north.

“The main difference is the government in Norway has put a stricter control on development, which has meant we have a production plateau that has been sustained for longer than in the UK.”

“The government is much more interested in increased oil recovery, so we are taking out as much as possible from the fields that we are currently producing.”

Tony Wood, senior economist at the Royal Bank of Scotland, says: “They have a political imperative in Norway not to develop their oil reserves too quickly, because revenues from oil account for 30% of GDP. They have been careful to avoid a Middle East effect [a sudden tail-off in production].

“In the UK we have had a more open marketplace with licences granted to private companies that are then free to develop fields at the rate they want. [A sudden depletion of reserves] would have a much less destabilising effect on the UK economy. There is also a geological reason as field sizes are much bigger in the Norwegian North Sea.”

Norway is currently pumping out 3.2 million barrels per day (bpd) from the Norwegian continental shelf (NCS), a level of output the country’s energy ministry believes can be sustained until at least 2008. For an international perspective, that is more than the individual outputs from Iraq, Kuwait and UAE.

In the UK, however, crude oil production peaked at 2.62m bpd in 1998 and has now dropped to 1.98m bpd. Experts predict UK production will decline by 5% a year for the foreseeable future.

The picture in natural gas is similar. Norwegian fields are expected to climb from their current production level of 73.4bn standard cubic metres (scm) in 2003 to around 120bn scm in 2014, with the potential to last another century. But the UK is expected to become a net natural gas importer by next year, with Statoil the biggest supplier.

Carlsen says one of the biggest challenges to sustaining exploration and production levels on the NCS is the environment, especially in sensitive areas such as the Lofoten Islands and Barents Sea.

Environmental organisation WWF and other lobby groups insist the Lofoten Islands, located north of the Arctic Circle off Norway’s northwest coast, and surrounding areas must remain a no-go area for oil drilling.

WWF says any drilling there would be catastrophic to wildlife. Lofoten is home to the world’s largest cod and herring stocks, schools of sperm and killer whales and extensive sea birds colonies. The sea also contains the world’s largest cold-water coral reef, discovered and protected in 2002.

Dr Simon Walmsley, marine policy officer for WWF UK, says: “The marine environment of the Lofoten Islands is one of the most wildlife-rich in the world. Oil drilling there would destroy this cold-water habitat, and will not even provide a significant number of new jobs.”

According to Walmsley, the Norwegian government’s own scientists believe the impact of oil development would be disastrous to the marine environment.

Following environmental analysis, the Norwegian government last year decided the Nordland VI area off Lofoten would not be opened to further oil activity. But this is to be reconsidered once a management plan for the Barents Sea is put together.

However, the government did allow continued activity in the already open parts of South Barents Sea, except for the coastal areas of Troms and Finnmark, and the vulnerable areas of the polar front, Bear Island and the Tromsø Patch.

Statoil’s Carlsen seems unfazed by the environmenalists’ anti pathy to oil work in the area. “We have been producing in the North Sea for more than 40 years without any proven damages to sea life. There have been spillages, but we cannot say they have had any effect on the fish living there. Nature is taking care of cleaning up after a while.

“There are places on the Norwegian continental shelf that are more sensitive than others, and we recognise there is a larger challenge with regard to the environment in this area. We are working together with the authorities to show that we can operate in this part without doing any harm.

“The WWF will not change its opinion no matter what we are documenting. There will be a lot of protests but I think [the area around Lofoten] will be opened up in 2006 or 2007.”

Carlsen adds: “There is also a lot of opposition to drilling for oil in the Barents Sea but we have now got permission to drill three exploration wells this winter. ”

Carlsen believes the Barents Sea offers excellent long-term potential. Improved technology means that better quality seismic surveys can be made: “Most of the wells were drilled in the early 1990s. We are confident we can map the area much better than we could 10 years ago.”

But he bridles at suggestions that it is more expensive to extract oil and gas from the Arctic Circle. He says that oil was never a problem, unlike gas. “ Gas was a problem, but now we are building the liquefied natural gas factory up there for gas from Snøhvit.”

The planned processing plant, which is to be sailed up from southern Europe on giant barges, will cost £4bn, with the costs having risen recently by £390m . “We are having negotiations with the suppliers Linde and Dragados with regard to how much they will contribute to the extra work that this delay has necessitated.”

But Carlsen remains confident that the critical natural gas processing plant will be up and running by October 1, 2006.

“We are not happy about the cost increase . But when looking at the entire project we have a fairly good track record of managing projects like this. It happens to other companies too but they are not given the same publicity as we are in Norway because the oil industry is extremely important for Norway, accounting for 30% of the government revenue – and therefore the interest in the projects is quite large.”

Carlsen certainly has a lot on his plate right now. He recently helped end an offshore workers strike that was preventing around 450,000 bpd of production from the NCS – and which might have brought the entire Norwegian sector to a standstill.

But he is not entirely pleased that, in May, Norway’s government failed to respond to industry pressure and declined to offer any tax breaks to the sector.

In Norway, oil firms pay corporation tax at 28%, as well as a “special tax” of 50% on oil profits. Taken together this means the tax on oil profits is 78%, one of the highest tax rates in the world.

Carlsen says: “We were not expecting them to change the tax regime on fields that are currently producing. The challenge for us is that we are discovering smaller and smaller fields on the Norwegian continental shelf and there are challenges with regard to having a good economic outcome from these fields. We had asked that the special tax be reduced, perhaps down to about 25% for such fields.

“The other thing is, in order to get more out of fields that are already producing we asked for tax relief on the extra volumes produced from fields which are in tail-end production phase.

“But the government did not support this . We now have to do our best to develop the fields that we believe are ready and we will continue to invest as much as possible in increased recovery.”

Carlsen says one consequence is that firms such as Statoil will now place greater emphasis on cost-reduction and efficiency gains. Costs on the NCS are currently 10% above those in the UK sector, partly due to different rules regarding offshore safety and working hours.

In a bid to ensure that overall production does not start to tail off, the government recently allocated 96 further exploration blocks, of which Statoil secured 27. “That is an example of the government doing something to open up the NCS for further exploration,” Carlsen says. Its partners in the new blocks include Shell, Gaz de France, Total, RWE and Norsk Hydro.

“We are still confident that there are a lot of resources to be found on the Norwegian continental shelf, especially in the deep-water part where we have the new licenses and also up in the Barents Sea. We think it is important that the government releases as much as possible, and we want the Lofoten area to be opened in 2006.

“We are confident we can find and develop more oil . We are also confident that we can reach this long-term production [targeted by the government] if we just are given the opportunity to do the exploration.”

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