Higher Reference Prices to Transform Norway Oil Investment

The investment outlook for oil and gas operations on the Norwegian Continental Shelf may be transformed by a rise in companies' oil price assumptions, government analysts said Thursday.

"Many oil companies have increased their reference price for investments - normally at $18 a barrel, and now they are $22-$24/bbl," a source at the Norwegian Statistics Bureau told Dow Jones Newswires Thursday.

"Now many investment projects are more profitable and that is major reason we expect more investments past 2005," he said.

Industry and government experts have been forecasting a significant fall in investment on the NCS after 2006, when most of the heavy capital flows into the giant Ormen Lange, Snoehvit and Kristin fields will be over, and no new major discoveries on the NCS.

But based on information provided by all the companies operating on the NCS, their price assumptions are up, and more new projects and tail-end production projects may change that widely-held perspective.

While nearly all analysts agree that the NCS is maturing - with production peaking in 2006-07 - the Norwegian Petroleum Directorate estimates almost 40% of the country's oil and 52% of its gas remains to be discovered or booked as reserves.

Although the NPD said it was still gathering information from companies about their investment plans, Director General Gunnar Berge said recently the high price should increase companies investment programs.

Statoil ASA (STO) - 76% owned by the Norwegian government, but independently managed - last week said it had raised its price assumption from $18/bbl to $22/bbl.

But, the source said, Statoil wasn't alone and most companies operating on the shelf reported increases in their price assumptions, several as high as $24/bbl.

"In the forward market, you can buy oil for $30/bbl five to 10 years out," the analyst said.

Companies are also reporting to the Norwegian Statistics Bureau that the reference price adjustment has lifted many previously unprofitable tail-end production projects into the profitable arena. "Investment could be increased relatively rapidly because of that," the analyst said.

Also last week, Norsk Hydro ASA (NHY) - the second largest operator on the NCS behind Statoil - announced it had plans to increase its potential recoverable reserves by almost 1.5 billion bbl - at its largest Norwegian project, the Oseberg field with field development.

"The forecasts for 2004, 2005 and 2006 will be increased from the previous quarter's report," the source said, declining to say by how much.

The Norwegian Statistics Bureau is expected to post its new forecasts later this month.

The comments follow a different report published by the Norwegian Statistics Bureau Thursday saying investment in Norway's oil and gas activities for 2005 are seen hitting a record 78.6 billion Norwegian kroner ($1=NOK6.85048), 35% higher than the previous quarter's forecast.

But, it added, "Field development projects on Kristin, Snoehvit and Ormen Lange, including infrastructure, are heavy contributors to the high investment level."

For 2004, investment is forecast up 10% on the year to NOK74 billion, also due to the three projects.

Exploration activity in 2004 is estimated at NOK4.5 billion, roughly the same as 2003.

In particular, field development estimates have increased by NOK4.1 billion to NOK14.9 billion "due to new projects and adjusted budgets."

Statoil - majority interest holder and operator for both the Barents Sea liquid natural gas Snoehvit and the Kristin gas field - upped its Snoehvit costs estimates for the second time in June, following a separate cost increase at its Kristin development.

Other major operators on the NCS include ExxonMobil Corp. (XOM), ConocoPhillips (COP), BP PLC (BP) and Royal Dutch/Shell (RD).