Commentary, 5/6 2009

Published Jun 5, 2009
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Cover 5/6 2009

A Sea of Possibility
In mid April, the international Commission on the Limits of the Continental Shelf made its final recommendations on the outer limits of the Norwegian continental shelf in the High North.

According to the recommendations, the part of the Norwegian continental shelf in the High North extending beyond the 200-mile zone covers areas now measures some 235,000 square kilometres. This means that a final assessment has been made as regards the part of the seabed where Norway is responsible for natural resource management.

“This is a precondition for future resource management, creates a firmer basis for investments and is an effective implementation in the High North of the legal order for the oceans set out in the Law of the Sea Convention,” said Norwegian Foreign Minister Jonas Gahr Støre.

Although much of this new offshore acreage lies in ultra deep waters, it does open doors for future possibilities – the potential to reinvigorate a mature oil and gas industry. As with the Barents Sea, these new areas will pose its own set of challenges, but given time and capital, innovative developments will prevail.

It’s not a surprise that currently the major barrier facing the industry is the challenge of financing.

It’s been a half year since the International Energy Agency (IEA) published its most recent annual World Energy Outlook, and a new report headed by Dr. Fatih Birol, Chief Economist of the IEA – “The Impact of the Financial and Economic Crisis on Global Energy Investment” – lays out how energy investment worldwide has plunged in the face of a tougher financing environment.

We can’t say that we haven’t been warned. When last year’s WEO was launched, Dr. Birol told us that this was a possible short-term outcome of the “credit crunch”.

Weakened demand for energy in light of the worst recession since the Second World War has meant a seemingly endless flow of capital spending cuts. The IEA estimates that global upstream oil and gas investment budgets for 2009 have already been cut by around 21% compared with 2008 – a reduction of almost $100 billion. The IEA analysis shows that though April, more than 20 planned large-scale upstream oil and gas projects were deferred indefinitely or cancelled, and an additional 35 projects were delayed by at least 18 months. This year is projected to be the time of the sharpest reduction in spending on exploration.

The IEA’s concern is also for the impact of greenhouse-gas emissions and how governments will choose to tackle this energy issue.

Of the USD 2.6 trillion in short-term stimulus packages cited by the IEA, about 5% of the total has been earmarked for the support of energy efficiency and clean energy – either via direct investment or fiscal incentives for low-carbon power technologies and the development and commercialisation of more energy-efficient end-use technologies.

The IEA sees these moves as a positive step in the right direction, with the potential of a three-pronged result: tackling climate change, enhancing energy security and combating the recession. But much more needs to be done to encourage an energy path consistent with limiting the projected rise in global temperatures. The stimulus packages so far announced are not enough.

Governments can print money and use it to stimulate growth, but it’s industry that ultimately produces value. And in our industry, long-term investment is one key factor in value production. Another factor is access to new areas with potential for development. Norway is fortune that some 235,000 square kilometres in new areas will provide opportunities for possible future development.

The IEA conclusions point out potentially grave effects on energy security and climate change, but oil prices have already begun to rise based on some economic good news and increasing demand. Hopefully, we’ll see a smooth ride up.

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