Norway Oil Companies Refocus Exploration Strategies

Dow Jones Newswires

STAVANGER, Nov 10, 2006 (Dow Jones Newswires)

Oil companies on the Norwegian continental shelf are rethinking and prioritizing exploration strategies to ensure future growth, despite the high prices for rigs, contractors and personnel spurred by high oil prices, industry figures say.

Traditionally, exploration costs rise and fall in line with oil prices, but companies are focusing on steadier exploration investment because resources are becoming scarcer.

"There are more problems with growth these days. Oil companies faced with the current difficulties in replacing their reserves have a longer-term commitment than they used to," said equity analyst Bjorn Inge Tonnnessen of DnB NOR.

"Companies will try to be aggressive on the exploration front, that's where organic return is coming from, that's the focus now," Tonnessen said.

Increasing exploration to protect companies' futures comes at a cost. Competition for contractors, personnel and rigs - for which typical rates have soared to $425,000 a day from $150,000 less than five years ago - has increased dramatically as companies race to produce as much oil and gas as possible to capitalize on USD60 a barrel oil prices.

Norway's biggest oil companies, Statoil (STL.OS) and Norsk Hydro have both highlighted the challenges they face in maintaining output, forecasted costs and growing their resource base as oil prices and the consequent hunger to capitalize on USD60/b oil shows no sign of a genuine abatement.

Statoil's third quarter exploration costs increased by 34% to NOK1.51 billion from NOK1.13 billion in the same period the previous year.

"Part of it was due to cost pressure increases, but most was activity increase," said Statoil's Ola Morten Aanestad. But he added: "Accessing new resources is more expensive. That's important when it comes to the growth of the company. How do you access new resources?"

Aanestad said Statoil has been "fairly good" at securing equipment and services to date and for the future in a fiercely competitive environment because of its position as an incumbent on the Norwegian continental shelf and the size of its rig fleet. "If you have a big fleet, you don't see the immediate effect of rising prices in the same way as if you're in and out of the market," he said. "We have long-term contracts with key suppliers, but of course the cost is affecting us too."

He said he does not expect the global shortage of rigs and personnel to impact Statoil's 2007 exploration targets. "No way. The lead time is much longer from exploration to production (than a year), but we're not immune to shortage or capital restraints in equipment."

Statoil's chief financial officer Eldar Saetre said recently that the company is reviewing the production cost pressures it is seeing in order to update its current forecasts. "What kind of measures can we take in addition to those we are already working on to control and prevent the costs increasing from outside factors," he said.

While the capital expenditure related to exploration costs differs from production-related operating costs, the increase in per barrel production costs indicates the higher prices across the upstream sector.

Norsk Hydro has also said it will have to cope with rising output costs in the quarters ahead, in tandem with battling lower than expected production levels.

Speaking at a third quarter results presentation, Hydro CFO John Ove Ottestad said: "We are in a heated environment...the oil service industry is in tight supply and rates are going up."

He added: "In a tight market, it's important to also see that everybody delivers according to contract."

Hydro awaits drilling results from several high impact wells, including the Changeleh prospect in Iran, which has almost completed drilling, the spudding of a final well in Libya, and a well in Denmark's North Sea.

While large established NCS companies appear better able to weather demand-driven increases exploration costs, not least through their international portfolios, smaller newcomer companies have fared less well. Anecdotal evidence suggests newcomers to the NCS face a tougher growth curve because asset-churn is low and access to equipment and personnel is even more restricted.

Managing director of Marathon Norway, Roger Wilson said: "In terms of transactions, there is limited acquisition potential." Human resources, and suppliers, are hard to come by, which means "project economics have been challenged by the new cost structure. We don't see that cost is going to soften, demand will continue to be greater than supply," Wilson said.

The financing of smaller companies means they would have to cut back exploration programs in line with oil prices. While prices remain high, smaller companies have created consortiums to improve access to rigs and contractors. Exploration firm Revus, a relative newcomer to the NCS plans an expansive exploration program of an expected 15 wells through to end 2008, aided by its access to the Bredford Dolphin drilling rig via a consortium.

Analysts ask whether sustained high oil prices could eventually encourage the kind of capital expenditure required to support steady exploration programs. "The longer oil sticks at around the $60/b mark, the more likely it is that oil companies will have to bite the bullet and plan for bigger capital expenditure going forward, said analyst Chris Weafer of Alfa Bank.

The higher risk associated with exploring mature areas in the North Sea, and parts of the Norwegian Sea, where the likelihood of big finds decreases even as investment in exploration rises, as well as increasingly limited access to international resources due to geopolitical restrictions could be mitigated by more investment in related services and technology.

But the risk is always that oil prices could turn down again. While some say prices are at the top of the cycle and will fall back because of increased supply and a calming of geopolitical tensions, others are less convinced saying demand will continue to outstrip supply.

Others still point to the signs that OPEC is becoming more commercially minded, with the potential to underpin a step-change in oil prices to the $60/b rather than $30/b level.

If that's the case, analyst Tonnessen said he thinks companies will have to be prepared to take much higher risks to succeed. "Always look for the biggest finds first, don't rule out any new geological place that could surprise, the Barents Sea, and further out in the Norwegian Sea," he said.

2007 is expected to be a very important year for oil prices, and the consequent impact on exploration investment, Weafer noted.

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