The Norwegian Continental Shelf: Short-term boom with long term worries

August 15, 2018

First published by Offshore Magazine

The Norwegian Petroleum Directorate summed up its review of activity in the first half of the year on the Norwegian Continental Shelf (NCS) by commenting that the 20 projects currently ongoing on the NCS is a record for the region. This comment offers a good image as to the status of the region where cost improvements and project resource increases together have secured highly competitive development projects. However, the short-term boom is clouded by a dearth of new projects after 2020 leading to an expected sharp decline in production from the mid-2020s onward. The question then is  how to meet the strong growth ambitions from a vivid player landscape without the necessary resources discovered to enable such growth.

The oil price downturn in 2014 questioned the continued competitiveness of offshore resources, in particular those resources located in harsh weather conditions. The industry responded to the challenge by reducing costs and increasing the resource base for various projects, which led to an average reduction in breakeven prices between 20 and 40%, the same as for North American shale resources. Offshore resource therefore maintained their competitiveness in the global oil supply stack. The latest third-party valuation of the State’s Direct Financial Interest released in June 2018 indicated that the portfolio managed by Petoro increased in value from NOK 810 billion to NOK 1093 billion, primarily driven by increased resources and lower costs.

With competitiveness secured, the various licenses were able to sanction the projects currently under development. The resulting project sanctioning activity on the NCS has been the highest in the world in terms of offshore projects. Johan Castberg, Snorre Expansion and Trestakk are all examples of projects that were struggling with high cost, over-scoped concepts and delays to sanctioning. Equinor, the operator of the field, was nevertheless able to get the projects through to development phase at breakevens in the low $30 per barrel.

Competitive resources also attract new players. The player landscape on the NCS has changed since the oil price drop with majors abandoning their operated positions in favor of dedicated NCS organizations furthering development of fields. At the same time, Equinor has also stopped divesting NCS resources and has instead used the downturn to grow its position via acquisitions of Total-operated Martin Linge and Lundin. Private equity has also further increased its reach on the NCS with Neptune Energy and Point Resources making major acquisitions. Finally, there are also industrial players from the East chasing growth on the NCS with Kufpec making acquisitions and Gazprom making a swap with OMV. Common for all these companies is significant cash flow generation following the latest oil price surge and the ambition to grow further with significant investment capital at their disposal.

However, with poor exploration results since the 2014 Alta discovery, the contingent resource base is diminishing along with the project portfolio. Average discovered resource per year since 2014 has been just 250 million barrels of oil equivalent (boe). The high-impact wells drilled in the Barents Sea in 2017 disappointed especially. With the influx of new players, growth ambition and capital, the limited project portfolio will likely force additional investments into existing fields to increase recovery and increased exploration. 2018 has already showed early signs of these developments with a net NPD reported at 1.2 billion boe increase in reserves from existing fields from year-end 2016 to year-end 2017 and booming exploration activity moving back towards the levels seen during the high oil price era with around 50 wells per year. The latest Statistics Norway projection for 2019 exploration spend also indicated further activity increase with spend increasing from NOK 25 billion to NOK 33 billion.

Increased activity has already helped refill the project portfolio with 2018 exploration already sporting resources discovered at about 350 million boe, already higher than 2017. The results are driven by high-value discoveries at Hades/Iris, Frosk and Lille Prinsen. Several high-impact wells will also be drilled later in 2018 with the Mandal High area covering the 400 million boe Oppdal/Driva prospect, Aker BP drilling the 250 million boe JK prospect north of Johan Sverdrup and Total drilling its 400 million boe Jasper prospect in the Norwegian Sea. Despite a disappointing 2017 campaign, the Barents Sea will still see high activity in 2018 with the billion-barrel potential at the Gjøkåsen prospect as the biggest prize.

A high-impact exploration success with stand-alone development potential will be welcomed by all stakeholders from the Ministry of Petroleum and Energy to the oil service industry looking for its next big project. Back in the early 2000s, the NCS also faced similar expected decline, which ultimately did not manifest. It remains to be seen if history will repeat itself, but at least the industry continues to explore for the next high-impact discovery and chase increased recovery from existing fields which ultimately is what is needed to arrest decline and alleviate worries about the long term.