IHS Global Insight Perspective | |
Significance | The Norwegian Petroleum Directorate (NPD) has updated its oil and gas production estimates for the next five years, projecting that oil production in Norway will decline further whereas natural gas recovery is expected to rise. |
Implications | In the short term, Norwegian natural gas production is boosted by continuously high investments, expanded infrastructure, and demand picking up in Europe. |
Outlook | Beyond 2020, however, Norway's future position as the world's fifth biggest gas producer will be determined by major investments in reserves growth. |
Oil Declining, Gas Production on the Rise
The Norwegian Petroleum Directorate (NPD)'s July production data once again confirm the downward trend in Norwegian oil production. Estimates for 2010 output at 1.87 million b/d fall short of the country's 2008 production levels of 2.4 million b/d, and oil production between 2010 and 2014 is expected to total 1.6 million b/d less (at 4.91 million b/d) than during the preceding five-year period. BP's Statistical Review of World Energy (June 2010) gives a longer-term picture of declining recovered Norwegian oil, which fell from 3.1 million b/d in 1999 to 2.3 million b/d last year. Despite continued high exploration activity in the North Sea and interest in the Barents Sea, Norwegian oil reserves have also fallen by about 30% to 7.5 billion barrels between 1999 and 2008.
Norway's outlook for natural gas seems more favourable. According to BP's Statistical Review, natural gas production in Norway has almost doubled in the same reference period (1999–2008) from 48.5 bcm/y to 103.5 bcm/y, making Norway the second biggest gas exporter in Europe. Proved reserves also grew by approximately 78% between 1999 and 2008. The opening of exploration areas further north has aided this development, accompanied by planned expansions in natural gas infrastructure to transport the fuel from major fields such as Snøhvit and Ormen Lange, driven by the country's natural gas champion Gassco (see Norway: 27 July 2010: Norway's Gassco Announces Results of Offshore Network Expansion). The NPD estimates gas production to grow to 112.2 bcm/y in 2014 after reaching 105 bcm this year.
However, overall production in Norway has seen temporary dips in recent months as a result of high maintenance and technical problems. The NPD said that oil, natural gas liquids (NGL), and condensate production stood at a preliminary 1.823 million b/d in August, down from 2.117 million b/d a month earlier. The effect on natural gas production was a significant 8.5 bcm in June and preliminary 6.0 bcm in August. Even though repairs were scheduled for the Ekofisk and Heidrun fields, output from the Vale and Gullfaks/Tordis areas had to be cut following unexpected well problems. The Gullfaks C platform had to be evacuated in May after a destabilised well almost resulted in a blow-out, the third incident of its kind at the platform since December 2009. In the wake of the Gulf of Mexico oil spill in the United States, Norway has said the country will review offshore drilling regulation (see Norway: 20 August 2010: Norway to Increase Safety Regulations Governing Offshore Activities). Stricter equipment requirements could potentially add costs to already high expenses incurred in the NCS as a result of smaller field size and the necessity for enhanced recovery technology in mature fields.
Resource Growth and High Investment Expectations
Despite safety regulation reviews, the prospect of a long-term decline in Norway's oil production means that it is still progressing its offshore agenda, as exemplified by the latest (21st) licensing round for 94 blocks, focusing on the Barents and Norwegian Seas, including 12 areas in the deepwater region (see Norway: 24 June 2010: Norway Will Offer Deepwater Blocks in Forthcoming Licensing Round). The NPD estimates total recoverable resources of 8.1 bcm oil equivalent, of which about 40% or 3.3 bcm oil equivalent, more or less equally spread across the Norwegian, North, and Barents Seas, have not been tapped into yet. Exploration and production in the Barents Sea has recently become more viable as Norway and Russia have come to an agreement on a long-disputed demarcation line through the sea that determines natural resource ownership (see Norway: 28 April 2010: Norway, Russia Make Progress on Barents Sea Border Dispute).
Meanwhile, Minister of Petroleum and Energy Terje Riis-Johansen confirmed that efforts to increase oil exploration as well as enhance recovery must be strengthened if Norway is to meet its NCS reserves growth goal of about 5 billion barrels of oil until 2015. Statoil is leading the efforts, fast-tracking the development of smaller fields through connecting them to existing operations and infrastructure (see Norway: 25 August 2010: Norway Looks Beyond 2020 in Hydrocarbon Strategy). Statoil intends to bring its capital spending on Norway's offshore oil and gas resources up to US$13 billion this year, focusing on development and enhanced recovery in the Skarv, Morvin, Gjoea, Goliat, and Gullfaks fields. Another hotspot is Norway's Sleipner area, with total oil and gas resources of about 110 mmcm oil equivalent under development in the area, as the NPD sees oil and gas development activity in the region accelerate (see Norway: 30 August 2010: NPD Sees Major Investments Upcoming in Norway's Sleipner Area of North Sea).
As demand this year is picking up from Continental Europe, Norway expects major investments for 2011. Statistics Norway revised its forecasts for oil and natural gas investments next year up to US$24 billion from estimates of US$21.5 billion in the first quarter of 2010. Included in this number are expected investments of US$13.23 billion in operating fields, while exploration spending is assumed to reach about US$5 billion, up from US$4.5 billion in 2009. Another major player in Norway, Shell, has also confirmed its commitment to Norway's undiscovered oil resources. Despite recent setbacks in the company's Norwegian natural gas exploration activities, which resulted in lower expectations for the Ormen Lange and Gro fields' recoverable resources, Shell still sees great potential for Norway's oil and gas exploration and highlighted the close proximity to markets in Europe as a competitive advantage (see Norway: 31 August 2010: Less Natural Gas in Norwegian Gro Discovery for Shell than Expected).
Outlook and Implications
As new areas in the Barents Sea open up, natural gas production and related infrastructure expands, and smaller oil discoveries benefit from integration with existing operations and marketing networks, Norway seems well positioned to meet demand increases from Europe in the short term. The number of technical glitches in 2010, however, does require attention as it could drive prices up in the short term. In fact, political relations were strained between the United Kingdom and Norway earlier this year as the former demanded an investigation into why supplies from Norway's Langeled pipeline had been halted after the network reportedly experienced only minor hiccups (see United Kingdom: 26 May 2010: U.K. Gas Futures Rise As Langeled Flows Hit Zero). Following these squabbles between Norway and the United Kingdom, the Norwegian Kollsnes gas plant, which processes about 40% of Norway's gas exports (mostly to the United Kingdom), is currently idled for scheduled maintenance from 13 September until 27 September, which is expected to put more pressure on the United Kingdom's gas supply situation and the relationship between the two countries.
Nevertheless, supply interruptions of this kind do serve to illustrate the broader strategic role of Norway as one of Western Europe's leading energy suppliers. Maintaining this position in the future and performing consistently at the highest level will be absolutely essential for Norway's future supply relationships with the European market. As oil production decline rates seem unstoppable, new discoveries are in the stars, and natural gas production could become more costly with stricter safety regulations, the one stable factor in an overall rather foggy Norwegian long-term outlook is the country's long-standing reputation for supply reliability, a status that should not be jeopardised.