Norway Oil Industry Seen At Risk If New Areas Not Opened

Troms II
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LONDON (Dow Jones Newswires), Apr. 17, 2009

Norway's oil and gas production and industry risk going into serious decline by the mid-2020s if a ban on exploration in unexplored offshore areas in the North isn't lifted quickly, oil chiefs say.

Combined oil and gas production from Norway, the second-biggest gas exporter to Europe after Russia, and the world's fifth-largest oil exporter, is at a peak that operators hope to sustain until at least 2015, while stemming the decline beyond that.

To achieve that, industry leaders say areas currently off-limits - Nordland VI, VII and Troms II - will need to be opened up. But there's strong opposition to drilling in the region off northwest Norway, which has important fishing grounds as well as a natural beauty that attracts many tourists.

A Norwegian parliamentary vote on the integrated management plan for the area decreed it closed to oil companies for the lifetime of the current parliamentary session. But that ends in September, when there's a general election, so the issue will come up for review in spring 2010. It's expected to be a divisive topic during the election run-up.

With an average lead time of 18 years between the award of licenses and production coming onstream, "there's no time to waste" in opening Norway's most prospective blocks offshore the archipelagos of Vesteraalen and Lofoten, said Per Terje Vold, the chief of Norway's oil industry association, or OLF.

Together those areas are estimated to hold 3.4 billion barrels of oil equivalents in remaining resources.

Norwegian producers face a sea change in 2013-14, as they respond to the challenges of dwindling output from mature oil fields, which means Norway's steadier gas production will soon overtake oil volumes.

Oil output has fallen from a peak of 3 million barrels a day in 2000 to 2.1 million barrels a day now, although gas output will continue to rise for the next couple of years as large new fields like Ormen Lange and Snoehvit ramp up.

Production on the NCS would fall to around 1.6 million barrels of oil equivalents a day by 2030, roughly 60% below current levels, unless new acreage is made available, the OLF estimates.

"I think that Norway (could) supply Europe with significant volumes of gas for many, many years to come and play the same important role in energy supply as it has done," Vold said.

But to do that, OLF says half the country's potential oil and gas output by 2030 still needs to be found and brought on stream.

"Time is limited. We need to use this scenario to demonstrate why we need new acreage for oil companies now. Those three areas are the most promising, with the possibility of making some (decent) mid-sized discoveries," he said.

If the blocks were opened for exploration between 2010-14, drilling would start in time to replace Norway's dwindling oil - and soon gas - reserves.

StatoilHydro ASA (STL.OS), Norway's biggest oil and gas company, said it's necessary to open the areas to maintain production and activity. "The timeline is left up to the government, but as an industry we obviously hope to get permission for exploration," StatoilHydro spokesman Geir Gjervan said.

"The number of exploration targets is declining in the next few years. So to maintain the same level of exploration activity we need to have new acreage," he said.

Marathon's Norway managing director Kristin Faerovik said her company is also supporting the OLF's efforts. "We think the industry is mature enough to take that responsibility, but of course it's very important to win the trust of the people (in those areas)," she said.

A recent survey by Visendi for online financial newspaper showed that 40.7% of north-Norway respondents think oil exploration should be allowed, while 35.5% want it banned. Of those questioned 23.9% were undecided, demonstrating the oil industry still has work to do to persuade politicians to open the areas.

Environmental and fisheries organizations, including the Norwegian arm of The World Wildlife Fund and Bellona are staunchly against opening up for oil activity. They say the fish and bird life in the area would be damaged by oil activity.

Bellona is calling for a permanent moratorium on oil activity in the sea off Lofoten. "Both the natural resources in the area, the fisheries and the landscape and nature are too precious to take any risk with petroleum activity in the area," said deputy director Marius Holm.

"We also believe petroleum activity in general will need to be reduced to limit consumption of fossil fuels and limit climate change. Norway is very rich and well developed and if we can't afford to leave any oil in the ground, then who can?" Holm said.

Lofoten is the spawning ground of one of the largest remaining cod stocks in the world, supporting a large fishery of 400,000 metric tons annually, according to the WWF.

But while the region depends on income from fishing and tourism, OLF argues it would get an economic boost from the trickle-down effects of oil developments.

A report by Konkraft for OLF showed that extending petroleum access could boost investment in Norway by NOK200 billion-250 billion between 2022 and 2040.

On the other hand, leaving the acreage closed would hasten the future decline in capital spending, leading to an investment decline to just 20% of today's level after 2030 based on a long-term oil price of $60-100 a barrel, the report said.

OLF estimates that NOK127 billion will be invested in the oil and gas industry in Norway in 2009, down from an earlier figure from October of NOK137 billion, although it remains at historically high levels. The petroleum sector contributes around a third to the government's revenues.

Norway's oil and gas industry is facing the challenge of lower oil prices and high oil services costs, which are squeezing margins. A number of companies have said they have delayed or temporarily canceled developments because they aren't economic in the current climate.

The composition of the industry is also undergoing a massive change as major oil companies consolidate portfolios, European utilities like Centrica Plc (CNA.LN) and Poland's PGNIG (PGN.WA) move in to secure upstream needs, and smaller players struggle with low oil prices, prompting a wave of mergers.

Amid these additional challenges, Vold stressed: "You can't really isolate any of these things from the need to get new acreage in the coming year. If we don't get new acreage that's a big problem. All the challenges for the next years lie in that issue."  

Copyright (c) 2009 Dow Jones & Company, Inc.

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