OSLO, Oct 27, 2006 (Dow Jones Newswires) The director general of the Norwegian Oil Industry Association, or OLF, said Friday he fears an imminent drop in investment levels in the nation's oil and gas sector could impact future production and Norway's position as the world's third-biggest oil exporter.
"Activity is very high, we're at an all time-high when it comes to investment...but I fear a drop in investment to come," Per Terje Vold said in an interview with Dow Jones Newswires.
Investment in the Norwegian Continental Shelf, or NCS, oil and gas industry is expected to fall to NOK88 billion in 2007 from its current record high of NOK100 billion in 2006, Vold said.
The difference between the two years is stark because two major investment projects, Snohvit and Ormen Lange, are nearing completion and are expected to start producing oil and gas from the end of the 2007.
Despite the oil and gas output boost from these two giants, the impending dip in investment is expected to add momentum to a sharp overall fall in NCS production levels since the beginning of the decade.
Daily oil production in 2001 totaled 3.1 million barrels a day. Now it is around 2.4 million b/d, Vold said. "It's dropped (more than) 600,000 b/d over the last four or five years or 20%, a significant amount," he said.
Around 25% of the state's revenues are generated by the oil and gas industry, and economists estimate 50% of the manufacturing industry is directly linked to the petroleum sector.
"With the current high oil prices, (the oil industry) is working well," he said. "There's optimism all over the supply industry. But we also see the challenges we will have" when considering activities without the current attractive oil price, Vold said, adding, "There's greater attention on these facts on an international basis."
Norway is the world's third-biggest oil exporter, after Saudi Arabia and Russia.
With fewer than hoped-for exploration wells, Vold said Norway could start to see its position challenged as other producing majors such as Mexico, Venezuela and Iran increase their output. He also cited recent domestic production write-downs by Norway's biggest players, Statoil ASA (STL.OS) and Norsk Hydro ASA (NHY).
But Vold stressed that Norway faces "no crisis." High oil prices are encouraging investment in smaller and satellite fields that were previously uneconomic, to help fill the investment gap, he said. "The sum of the small and medium-sized fields altogether is significant," he said.
Additionally, older finds such as Ekofisk and Troll are being rejuvenated, as high oil prices drive research and innovation to stretch field recovery levels, and result in higher realized oil and gas prices.
The base-case oil price many oil companies now use to assess whether the profitability of oil and gas exploration and production projects is now $35-$40 a barrel, from around $20 in 2005, he said.
Vold said that he expects production on the NCS to stabilize over the next five years. In contrast, within 15 years, it will fall, he forecast.
OLF has an important role in informing industry, politicians and decision-makers about the impending challenges of promoting investment and arresting production falls.
"The biggest challenge is the drilling of too few exploration wells, and not making significant discoveries," Vold said. The size of discoveries is also decreasing, he added. Last year, Norway only drilled half of its target exploration wells because of a tight rig market and strikes.
He said one of the most constructive steps the Norwegian government can take is to increase prospective acreage. That means increased exploration drilling, which equals more discoveries, and a milder decrease in production, he said, citing blocks off the coast of Lofoten that are currently shut to exploration.
Norland 6, Norland 7 and Troms 2 are "regarded to be the most prospective areas, that's the common understanding on the oil companies' and government's side," he said. Under the government's NCS oil and gas management plan, the area is closed for development until at least 2010, though surveys of two of the blocks have begun.
He said that in the case of positive seabed logging "I'm quite sure the political pressure is so high (as) to release the areas" for development.
Improving industry reputations in the areas of fisheries and environment would help promote the oil industry's ambitions in closed areas, he said.
"There's pressure from industry because it's an area between two other rich prospects. And there's some resistance, but I think we will make it," Vold said.
Copyright (c) 2006 Dow Jones & Company, Inc.
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