Norwegian Oil and Gas: Managing Decline of a Sunset Industry
With Norwegian production now passed its peak, oil and gas output is expected to drop rapidly within relatively few years, combined with the absence of major discoveries over the last decade, this will present a considerable challenge for maintaining value creation and a sustainable level of activity on the Norwegian Continental Shelf.
The remaining resource potential is large but will this decline be adequately met by the commercialisation of many smaller finds in mature areas of exploration?
Opportunities for future output growth rest primarily on large new discoveries but this is an unlikely prospect at best. In light of this reality how is the Norwegian oil industry seeking to manage its decline?
In May of 1963, Norway asserted sovereign rights over the natural resources in its sector of the North Sea. Exploration started on July 19th, 1966 when Ocean traveller drilled its first well. Initial exploration proved fruitless, until Ocean Viking struck oil on August 21st, 1969. By the end of that year it was clear that there were large oil and gas reserves in the North Sea. Against this backdrop Norway moved quickly to establish a national energy policy, eschewing membership of OPEC and pledging to spend its oil revenues, known as the, “currency gift”, wisely.
Looking towards future prosperity
The government established its own oil company Statoil and began funnelling its revenues into pension funds as part of several efforts to hedge against dependence on petroleum revenue and preserve its precious oil wealth for the future prosperity of its people.
Since then Norway has risen to become the World’s fifth largest oil exporter and third largest gas exporter, her companies have become World leaders for production and offshore technology and provide much of Western Europe’s oil and gas. This bonanza contributed vastly to Norwegian Economic vitality, affecting virtually every sector in the economy.
Norway’s last big offshore strike however was the Ormen Lange field in 1997 and the petroleum sector’s current portfolio of new discoveries is not sufficient to maintain a high level of investment. Norway’s greatest concern is now the prospect of a rapid decline in production whilst economic diversification has become the government’s greatest challenge.
Norway’s production peaked in 2001 at a rate of 3.4 million barrels per day (Mbpd) and has been in steep decline since then. Production fell in April to 1.99 Mbpd. With production of natural gas liquids (NGL’s) and condensates falling to a preliminary 350,000 barrels per day in April from 389,000 in March. Meanwhile gas production fell to a preliminary 8.76 billion standard cubic meters in April from 9.7 billion in March. Norway is now struggling to maintain production against a long term backdrop of maturing North Sea fields and the dwindling prospect of any new large scale discoveries.
Norway has been historically reliant on its giant oil fields. Constituting some 75 per cent of production as against 16% from all of dwarf fields and it was only in the mid 1990’s that condensate and NGL started to contribute significantly to total production at around 3 and 7 per cent respectively.
According to the Norwegian Petroleum Directorate the gas export is expected to increase from nearly 100 billion Sm3 in 2008 to between 115 and 140 billion in 2020.
Despite rapid development of dwarf fields and increased production of NGL managing to offset part of this decline, more and more giants have now started to decline and the trend has become irreversible. There are still a large number of smaller fields-with 34 dwarfs still in production- but compared to the giants they are small in both absolute reserves and total production. A number are expected to come into production with eight new dwarf fields expected to come on stream in the coming years.
In spite of maintaining an active exploration program the Norwegian Continental Shelf is classified as a mature region. Most of the fields and promising structures have already been surveyed with the peak of giant oil field discovery reached in the early 1980’s.
Norway’s ultimate recoverable reserve all oil and gas encompassing; giant, dwarf, condensate and NGL, is estimated, (using a logarithmic-extrapolation technique) at close to 35 GB by 2030.
The Norwegian Petroleum Directorate commented that, “Norwegian oil companies are working hard to maintain production from maturing North Sea fields. And furthermore, “It is assumed that the North Sea holds about one third of the undiscovered petroleum resources on the Norwegian continental shelf. The recovery rate is high compared to other countries with offshore production at around 46 per cent”.
The Barents Sea
The most important factor for future Norwegian production is the development of the giant oil fields and in managing as effectively as possible their decline. Much hope is being pinned on discoveries being made in the Barents Sea. Which is not yet fully explored and so may yet offer up a few more giants.
A new management plan is in place which is expected to give the go-ahead for further petroleum exploration with the government attaching particular importance to the High-North of Norway. Ominously though the geology of the Barents Sea has proved generally unfavourable in the past.
Finding more oil fields is therefore essential to cushion the decline from existing fields. “Opportunities for future production growth and industrial development depend primarily on making large new discoveries”, observes Bjørn Harald Martinsen, manager economics at The Norwegian oil industry association and unless new discoveries are made Norway will barely be self-supplying in oil by 2030 at around half a million BPD, a dramatic decrease from today’s export volume of just under 2 MBPD.
The Norwegian Government was prescient in recognising that the oil will run out and that the wealth must be husbanded for future generations, establishing two separate sovereign wealth funds known as the Global and Domestic Government Pension Funds. Managed by the Norwegian Central Bank on behalf of the ministry of finance, their total value as of December 2008 stood at some $325 billion, holding 0.77 per cent of global equity markets and with 1.25 per cent of European stocks, it is said to be the largest stock owner in Europe.
Moreover successive Norwegian governments have been reluctant to use petroleum revenues in the state budget fearing “Dutch disease” whereby increased spending will lead to higher inflation and currency appreciation damaging the economy and “crowding out” other economic activity.
Financial turmoil in recent months has of course taken its toll on the pension fund. And due to it large size relative to the low number of people living in Norway (4.7 million in 2006); the petroleum fund has become politically contentious. The three dominant issues being; whether the country should use more of the petroleum revenues for the state budget instead of saving for the future, to what degree increased government spending will effect inflation. Whether the level of exposure, (around 60 per cent in 2008) to the stock market is prudent given its volatility, and finally whether the investment policy of the petroleum fund is ethical enough.
Norway’s emergence as an oil exporting nation has also raised a number of issues for its economic policy. There is concern that too much of Norway’s human capital is concentrated in the petroleum sector. If the overall economic structure is too highly dependent on natural resources, making economic growth vulnerable to fluctuation in demand and if as a result of the oil boom Norway has had little incentive to encourage new industries in contrast with other Nordic countries.
Critics have argued that Norway’s peak production coincided with very low oil prices at the turn of the millennium, effectively meaning that Norway sold its precious oil at the worst possible time.
Looking into the future, with the inevitable peak in global oil production, it may well make strategic sense to re-evaluate production policy and assess what kind of investment is best to secure oil wealth for future generations. The rapid decline rates that Norway is experiencing across all classes of fields should be taken very seriously as they imply that oil production could go down very fast in the region.
This will have dramatic consequence for the Norwegian economy, and the world and given the extensive transparency of Norway’s technical data this will be of critical importance and offer a better understanding of the future behaviour of other regions and the speed of production decline after the moment the World as a whole does eventually reach peak oil.
by Scherzando Karasu