Equinor delays decision on frontier Arctic oil project Wisting citing inflation, supply chain

State-controlled Equinor is postponing a final investment decision on the frontier Wisting oil project in the Barents Sea, it said Nov. 10 citing cost increases and supply chain issues, in a blow to industry ambitions in the Arctic and Norway's long-term production prospects.

The 500 million-barrel field is one of the largest potential oil projects in Northwest Europe and comes with particular challenges relating to its remoteness, some 300 km north of the Norwegian mainland.

Analysts at S&P Global Commodity Insights have noted inflationary and supply chain pressures on the industry generally, but also argued inflation should not pose a significant long-term threat to supply, given oil prices forecast to average around $80/b for the next few years.

However, Equinor chief financial officer Torgrim Reitan said Oct. 28 the industry generally faced "bottlenecks and delays and risks of a drop in quality in the global supply chains" along with a tight market for offshore and harsh-environment rigs.

Announcing the postponement Nov. 10, Equinor said it would continue working on viable solutions for Wisting, but was targeting a final investment decision by the end of 2026 rather than the end of 2022, in effect pushing the expected startup to the turn of the decade.

It comes after reservations were voiced by Equinor's main partner in the license area, Aker BP, which obtained its 35% stake through its recent purchase of Lundin Energy's upstream oil and gas business. It has previously set a tough breakeven target of $30/b for approving new projects.

"Equinor and partners have worked in close cooperation with the supply industry and developed a technically feasible and environmentally safe [project that] will generate substantial value for society and ripple effects in the north and nationally," Equinor executive vice president for projects, drilling and procurement Geir Tungesvik said.

However, "in our updated investment estimate... we see a cost increase due to increased global inflation and cost growth in the supply industry nationally and internationally," he said. "There is also uncertainty about the framework conditions for the project and execution capacity in the supplier market. Based on an overall assessment, we choose to postpone the investment decision."

The Wisting cost estimate has now risen to NOK104 billion ($10.01 billion), Equinor said, adding: "Global inflation and challenges in the energy markets because of the war in Ukraine create capacity challenges and bottlenecks among international and Norwegian suppliers."

Equinor stressed the decision did not mean an end to Barents Sea oil and gas activity, noting the Johan Castberg oil project is due on stream in 2024, supplementing the producing Goliat oil and Snohvit gas fields.

Separately, Aker BP CEO Karl Johnny Hersvik alluded to a recent government proposal to modify a tax incentive on project spending as a factor in the decision. Hersvik previously voiced skepticism about Wisting and said it would prove a test case for further Barents Sea development. He described the latest Wisting plan as "technically feasible and environmentally safe" in his latest statement, but added: "In the current context of cost pressure and potential capacity constraints in the supply industry, combined with proposed changes in the temporary petroleum tax system, it has become more challenging to secure sufficient economic robustness in the project."

Norway's oil output, currently approaching 2 million b/d, is due for an imminent boost with the expected December startup of the second phase of the Johan Sverdrup development in the North Sea, expected to lift production levels from the field to some 755,000 b/d.

Location challenge

Wisting would be the Norway's most northerly oil project and comes with sub-surface challenges, notably the shallowness of the reservoir, just 250 meters below the seabed, which has raised a potential risk of leakage during water injection operations.

Another obstacle is Norway's commitment to providing low-carbon electricity to offshore oil and gas facilities, needed for activities such as process heating and powering turbines, as this would necessitate upgrading inadequate electricity infrastructure at the north Norwegian coast, from where a power cable would run to the offshore site.

Rene Santos, an analyst at S&P Global Commodity Insights, said: "Wisting is an outlier... It has bigger problems than inflation and supply chain issues."

"Inflation is not a major issue as long as project breakevens [less than $50/b Brent equivalent on average] stay below oil prices," he added.

Norway's oil and gas industry is expected to finalize a number of investment decisions in the coming weeks to meet a deadline for tax reliefs granted after the pandemic-induced oil price crash in 2020.