The View From the Top

Published Aug 16, 2004
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Thorhild Widvey, the newly appointed Norwegian Minister of Petroleum and Energy, has hit the ground running. Fortunately for us, she found a little time in her hectic schedule to meet with us.

The View From the Top-Body-2

Ormen Lange is the last big find. How long can we continue to claim, with any credibility, that there still are large new fields waiting to be found on the Norwegian Continental Shelf?
It is correct that last year’s exploration on the Norwegian Continental Shelf hasn’t been very successful. However, this is not unique to the NCS. We see the same situation in other oil provinces around the world.

The situation is also a bit more subtle. According to the Norwegian Petroleum Directorate, resource estimates to be found on the NCS still remain at 3,400 mill Sm3 o.e., about the same amount we have produced so far. Much of these resources are found in undeveloped areas – in the Barents sea and in parts of the Norwegian Sea. So the possibility of future large finds are absolutely there.

In order to locate new large finds, quite an extensive amount of exploration must be carried out. The responsibility to do this is clearly on the hands of the industry itself. The authorities can contribute by allowing for more effective exploration.

For our part, the government has taken the challenge seriously. We have done our outmost to give the industry access to more prospective areas in the last year. The 18th lisence round that was completed this summer was the second largest that has been awarded in immature areas of the NCS. Now we must await the results of the exploration, but it is my hope that new discoveries in undeveloped areas will provide growth for new activities.

What will be the consequences if there are no new, large finds?
In the White Paper (St. meld. nr. 38, 2001-2002), the government introduced the long-term development scenario for future production of all economically extractable resources on the NCS. In the government’s recent White Paper concerning petroleum activities (nr. 38, 2003-2004) we explore this scenario even further and indicate what undiscovered resources mean for the achieving the long-term development scenario. If there are no new large finds, we will not achieve the long-term development scenario. Prognoses for investments and production in the years to come are also covered in the long-term development scenario, and these show that unless new finds are made, the activity on the NCS will gradually be reduced in the years to come. If we do not reach the long-term development scenario, then great value will be lost, and the consequences can be more dramatic. This vision is also shared by the oil industry.

Do you foresee an oil price scenario that will lead to a reduction of the petroleum oil tax?
We have just completed a broad discussion concerning our petroleum tax system. The government’s assessment of the petroleum tax system was presented in the Revised National Budget for 2004. The Parliament majority has agreed to this and those changes the government suggested.

In 1998 oil prices were around 10 USD/barrel. Do you think we will see such prices again? History shows that it is very difficult to predict the oil price development and that unexpected events can have a great impact on the price of oil. However, oil prices similar to those we had in 1998 seem very unlikely. On the other hand, it is hard to predict what the future will bring.

The petroleum tax system has built in features that make it robust in case of a price fall. However, the high cost level would be more problematic if such a situation should arise.

What would be the consequences of a new period with lower prices?
Consequences for the oil industry of a new period with low oil prices, I think, would be the same as we experienced in 1998/99, when exploration activities were heavily reduced and there was a large reduction in the number of new fields being developed. Fewer projects were profitable, and the consequences for that activity level on the NCS were big. Our experience was that it took a short time with low oil prices before the oil companies reduced the exploration activities and development of new fields.

Several local politicians have expressed a desire for oil-related jobs locally. This is the opposite of what the industry itself wants, based on, among other things, Norsok committee recommendations. Do you envision other, more useful, methods to establish more oil-related employment in the districts?
I have strong beliefs that ensuring viable frame conditions will provide healthy and growing industry development in the districts. However, there is no doubt that the petroleum activities are important for employment in the districts. According to a study by the Centre for Value Creation at The Norwegian School of Management (BI), there are established supplier companies in all the regions of the country and in 135 of the country’s 434 counties (The study is based on figures from 2000). The BI study further shows that petroleum-industry employees live in most of the counties in Norway. According to the employment office (Aetat) in August 2003, close to 77 thousand people were employed in petroleum activities.

Today we face a mature shelf with different challenges than we had only a few years ago. Everyone agrees that the cost level on the NCS is too high, and fewer large field developments make it very challenging to maintain the number of petroleum-related jobs on shore. This is a reality we are forced to adjust to.

The government’s goal is that petroleum activities should be governed based on a complete and long-term prospective, and at the same time increased activity offshore should reflect and provide positive ripple effects for the nearby areas onshore. An example of this is the development of the Snøhvit field outside the coast of Finnmark.

I have a great understanding that politicians, both in the counties around the country and in the Parliament, want to secure employment for those parts of the country in which they work or represent. In my job as Minister of Petroleum and Energy, it will be an important challenge to find a good balance between cost-reducing activities – in respect to enhancing the most effective possible activity on the NCS – and the context of local jobs in the districts.

The View From the Top-Body

How important is the Norwegian supplier industry for the oil activity on the Norwegian Continental Shelf?
The Norwegian supplier industry is expected in 2004 to deliver goods and services of approximately NOK 40 billion within what is called direct investments, which means investments in new building and modifications of existing infrastructure and so forth. In 2009, comparable figures are expected to be about NOK 25 billion. This reduction in the investment level will result in fewer contracts for the supply industry. The technology development that the supply industry has supported has added to some of this reduction, because technology improvements have lead to more cost-effective development solutions.

On the other hand, operation and maintenance are expected to be on a more stable level over the next 10 years, at about NOK 30 to 35 billion in annual investments. This area will therefore continue to have a significant effect on the Norwegian economy, but will not be able to outweigh the loss of new investments. The Norwegian share, which is the share that goes back to Norwegian and Norwegianbased suppliers, for the operation and maintenance market is generally higher than for direct investments, because geographic proximity to the market is essential for maintaining operation and service functions.

Our goal is to maintain Norway as a competency centre for central parts of the industry, even in the phase where investments on the NCS are reducing. If the Norwegian-based supplier industry is not competitive, this will have a negative ripple effect for other industries that have companies in the petroleum sector among their customers.

Do you fear that a low activity level can threaten the supply industry?
The reduction in the level of investment is partly due to disappointing results from exploration activity in the last years and partly to the fact that technology developments have made it possible to lower investments in a given development today, compared to the situation only a few years back. The development solution for Ormen Lange is just one example of how we today have solutions that we earlier didn’t have access to. This alone is a major contribution to the reduction of the investment level on the NCS.

Technology development also allows development of smaller finds in the future and therefore counteracts the fall in the activity level. The ability to adjust and take advantage of these trends is the key to maintaining a strong petroleum industry in Norway. In the long term, it can not be expected that the Norwegian petroleum industry should be able to maintain its competitive force in all parts of the value chain.

A wide package of actions are necessary for reaching the long term development scenario. I feel that such a package must cover actions within area management, participation, cost reductions, effective regulations, research and development. These actions must have effect both on the short and long term. They must improve the situation for every part of the industry. The government’s recent White Paper recommended several actions for maintaining the activity level on the NCS. Amongst these are a more flexible and effective exploration policy, action for realising values that lay in mature fields, actions to reduce the cost level, more effective use of infrastructure, increased focus on research and development, actions to strengthen the petroleum cluster, as well as adjustment in the petroleum tax system. We must also not forget that there is clear interaction between the home market and the global market for petroleum-related goods and services. By internationalising activities, Norwegian businesses will gain new experience and knowledge from other petroleum provinces, which in turn will provide a foundation for innovation and more effective oil and gas production on the NCS. This will add to maintaining production from the NCS longer than otherwise would have been possible.

I want to stress the importance of supporting and strengthening the internationalisation of the Norwegian oil industry’s – including further development by Intsok and Petrad. In addition, it is also important to provide the industry with equal international market conditions.

What will oil prices be like when we come together at ONS in 2006?
We think there are reasons to believe that the oil prices will remain at a high level over the next few years. Growth in the demand for oil is expected, but this of course depends on the global economic growth.

Recently BP published calculations showing that the Norwegian Continental Shelf only has reserves to last for another 8 years of production. What thoughts do you have about such a scenario?
If the production rate is maintained on today’s level and no new projects are put in production, the oil reserves in Norway will last fewer than 10 years – 7.5 years to be exact. However, this is not a realistic scenario. First, the production from existing fields will not suddenly stop, but will gradually level off over time so that the reserves will last longer. Second, we have significant resources in addition to the reserves. Reserves are by definition volumes that can be expected to be produced from fields in production or from fields with approved development plans.

Therefore, the term Reserve does not include resources in new projects in existing fields, development of already existing finds or expected new finds that would give the oil production for decades and gas production for a very long time. It is this scenario that we, in the last White Paper, have called “the long-term development scenario”.

What actions should be taken to prevent the BP scenario?
The long-term development scenario assumes that the government and the industry have the capability to take the necessary actions to achieve profitable production of resources on the NCS. The main challenges are:

  • increased exploration of existing fields
  • increased exploration activities
  • reduceing the cost level on the NCS
  • further develop competency in the Norwegian petroleum cluster

Future production development depends on the amount we can manage to exploit from existing fields and that we make new finds. The NCS still has great potential. Therefore I feel comfortable that many new projects will be decided upon in the coming years. This, in combination with a gradual reduction of production in existing fields, will make Norway produce oil and gas for many years to come.

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