Tuesday 13 December 2016

Norway’s oil and gas industry is set to endure at least two more years of cost-cutting pain with a dramatic drop in investments over the past few years expected to flatten out at below Nkr130 billion ($15.5 billion) towards the end of the decade.

The forecast, issued by industry body Norwegian Oil & Gas (Norog) in its annual business trends report, represents a significant drop on projected investments of Nkr154 billion this year and an all-time high of Nkr215 billion in 2014.

The investment level is expected to fall to Nkr143 billion next year and Nkr131 billion in 2018, then rebound to Nkr137 billlion in 2019 - mainly due to investments on the giant Johan Sverdrup field - before falling further to Nkr127 billion and Nkr126 billion in 2020 and 2021, respectively.

Although last year’s report predicted that 2017 would be a turning point for renewed investment growth, “a lower level of costs and less optimistic price expectations mean the present view is that capital spending will level off over the next few years”, the report stated.

However, Norog managing director Karl Eirik Schjott-Pedersen claimed the industry is heading “towards better times” in presenting the report on Monday, as oil company cutbacks make more field projects viable at lower oil prices, despite a generally flat trend in investments post-2018.

“The significant work by oil companies in reducing costs in recent years has resulted in a lower level of investment required to trigger new projects,” he said, adding “cost-cutting has proven effective”.

The Norog chief argued that investment levels post-2018 will still be at a “historic high” compared with 2010 when a costs spiral was fuelling expenditure on field development, exploration and pipeline transport.

According to the report, “the ongoing restructuring and efficiency improvements make the industry much better equipped to face the future and tolerate an oil price at today’s level” of around $50 a barrel.

It revealed that operators have achieved cost cuts of as much as 40% over the past two years to make greenfield projects commercially viable after a drop of around 50% in oil prices from an earlier peak of $115 a barrel.

This is mainly due to more effective drilling and simplification of field concepts, as well as lower contractor prices due to keen competition amid a market slump.

Investment estimates on Statoil’s Utgard, Oda, Trestakk, Snilehorn, Snorre Expansion, Johan Sverdrup phase 2 and Johan Castberg, Dea’s Dvalin and Centrica’s Oda have fallen collectively from about Nkr270 billion to Nkr150 billion, according to the document.

A total of five field development plans have been submitted to the Oslo authorities so far this year, all of them involving relatively low-cost subsea tiebacks to existing facilities.

Norog’s investment forecast, which sources data from Econ Consulting, is predicated on a break-even oil price of $50 a barrel as a basis for investment decisions.

However, it also sees an alternative scenario in which the oil price rises to $70 – fuelled by a supply shortfall due to recent field investment cuts - that would likely bring other field projects into view, including Lundin Petroleum’s Luno 2 and Total’s Garantiana.

Such a price scenario would see investment climb higher to around Nkr140 billion after 2018, Norog stated.

Schjott-Pedersen explained that a lower investment level towards the end of the decade did not necessarily equate to fewer field projects as a 40% cost reduction meant more schemes could be realised for the same investment figure.

“When investments flatten out at a high level, this will trigger more projects than would have previously been the case as the break-even level has been reduced,” he said.

“A flattening out of investments will also create stability for the industry after such an extreme fall in investments.”

However, he sees it as unlikely that the industry will return to peak investment levels of 2014 and believes a stable regulatory and tax regime, as well as access to fresh exploration acreage to offset decline from mature fields, will be vital to stimulate investment levels in future.

He reiterated the industry’s call for an impact assessment study of the prospective area off the Lofoten islands, which is believed to harbour rich resources that could be relatively easily tapped using standard infrastructure, with a view to acreage licensing in the region.

Nordea Markets senior oil analyst Thina Saltvedt stated that she agreed with Norog’s investment forecast.

However, she questioned the apparent failure of the figures to factor into the equation new technology such as robotics and digitalisation that potentially could affect future energy demand from areas such as marine and air transport, and thus future investment levels.

Norog’s chief economist Bjorn Harald Martinsen believes the oil price has now bottomed out and that the crude market will return to a supply-demand balance as early as next year, aided by a combined output cut of around 1.76 million barrels agreed between Opec and non-Opec members, including Russia, at the weekend.