Panel: Norway Oil Rig Operations Unnecessarily Expensive

Panel: Norway Oil Rig Operations Unnecessarily Expensive

OSLO - A panel of Norwegian oil and gas experts said Thursday that the costs of offshore drilling are too high and called for changes in safety rules and workers' conditions to save up to 1 trillion Norwegian kroner ($167.5 billion) and allow greater volumes of oil and gas to be produced.

The panel's recommendations come as Norway grapples with falling output of oil and gas, both of which are mainstays of its economy. Total petroleum production in Norway fell 4% in 2010 and 5% in 2011, so making new discoveries and increasing recovery from existing fields is vital.

"The production on the Norwegian continental shelf is in a heavy fall, and we have serious trouble with the cost curve on the shelf," the panel's leader, Eivind Reiten, told Dow Jones Newswires. He warned of a, "grave danger," that vast resources may remain in the ground forever, at a loss to society, because of, "unnecessarily expensive," production.

Offshore workers' unions warned that safety must not be sacrificed to reduce costs.

Offshore activity is at an all-time high in Norway, with record investments in oil and gas, according to the Norwegian Petroleum Directorate. Licensees are planning to spend NOK96.3 billion on the drilling of production and exploration wells in 2013, according to Norway's statistics agency.

Yet much of the extra investment is absorbed by higher costs. "We see that the cost to drill a production well has doubled [from 2000 to 2010], and this seems to be continuing," said Mr. Reiten, a former energy minister.

Drilling wells is the most expensive part of petroleum extraction, so making cost savings in this area is essential, said Norway's Minister of Petroleum and Energy, Ola Borten Moe.

Rig operations are 40% more expensive on the Norwegian Continental Shelf than on the neighboring U.K. shelf, the panel said in a report. This is mainly due to personnel costs that are $50,000 to $75,000 more per day on a Norwegian rig than in the U.K., it said.

The panel suggested that some of Norway's regulations were unnecessary, such as its safety guidelines on lighting and noise levels. It proposed that rules more in line with those in the U.K. would make it easier to move rigs between the countries without expensive modification.

"Norwegian rules make it very costly to move a rig from the U.K. to Norway," said Bjorn Are Nesgaard, External Affairs Director at the Norwegian unit of Total SA. In some cases, up to $100 million may be spent on modifying a rig for use in Norway. "It should be possible to harmonize the practice of the rules," he said.

A 30% cut in rig costs would save the Norwegian oil and gas sector NOK500 billion "over time," the panel estimated. In addition, cheaper rigs could lead to greater production of higher-cost marginal oil discoveries, whose value is estimated at between NOK50 billion and NOK500 billion, the panel said.

The panel also called for workers to spend more time offshore, which prompted concerns about their safety from union representatives.

"The death risk is four times higher in the U.K. sector than on the Norwegian shelf," said second deputy leader at the Norwegian offshore union Safe, Roy Erling Furre . "A harmonization between Norway and the U.K. worries me, especially in the wake of Deepwater Horizon."

Mr. Furre said that the panel's proposals were, "a serious threat," to Norway's health, environment and safety rules.

He also opposed the panel's calls to change offshore workers' current rotation system, in which they spend two weeks offshore followed by four weeks off. "The current two-four rotation system works well," he said.

The report will now be discussed at a public hearing.

Energy companies Royal Dutch Shell PLC, Centrica PLC, A.P. Moller-Maersk and Statoil ASA were on the panel, along with the Petroleum Directorate and the Petroleum Safety Authority. The only union representative in the panel withdrew during its work because he could not accept the proposed changes in workers' conditions and health and safety rules.


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