Oil and gas production on the Norwegian shelf is high. The adjustment process has been extensive, but the cost reductions implemented by the industry will lay the foundation for profitable activity for many years to come, the Norwegian Petroleum Directorate (NPD) said.
Oil production increased for the third consecutive year in 2016, and gas production was at the same level as the previous year, which was a record year for production. The high level is in part due to good regularity on the fields, and the fact that various efficiency measures have led to substantial reductions in operating and exploration costs.
“The foundation has been laid for increased profitability in both existing and new projects. This is essential in order to maintain a high activity level for upcoming years,” says NPD Director General Bente Nyland.
Nyland believes that cost reductions of 30%-50% in development projects should mean that companies will view more projects as being profitable.
“We must prevent the focus on short-term profits from coming at the expense of long-term value creation for society,” she says.
Investments on the Norwegian shelf in 2016 amounted to NOK 135 billion (US$15.8 billion), about NOK 50 billion less than the peak years 2013 and 2014. Nyland predicts that the current year and next year will also be challenging for the industry, but investments are then expected to increase again. A number of new development projects are undergoing evaluation, and an extensive portfolio of new field developments will be continued and developed over the next few years.
Five plans for development and operation (PDO) were submitted in 2016, with a total investment value of NOK 23 billion ($2.7 billion). Seven development projects with a total value of NOK 233 billion ($27 billion) are currently ongoing.
After several years of high exploration activity, 36 exploration wells were drilled in 2016, 20 fewer than the preceding year. Eighteen discoveries were made, one more than in 2015. Exploration activity was highest in the North Sea, where a total of 14 discoveries were made. Two discoveries were made in both in the Norwegian Sea and the Barents Sea.
“Many of the discoveries are small, but most are located near existing infrastructure. This means that they can quickly become profitable developments if they are tied in to operational fields and facilities,” says Nyland.
According to the Nyland, there is a great deal of uncertainty associated with exploration activity going forward. This depends on new discoveries being followed up, and presumes that the industry will be awarded new acreage for exploration.
“It is very important to maintain exploration activity at a high level in order to maintain stable production in the future,” she says.
Despite the decline in the number of exploration wells, the number of applications and awards in the most recent licensing rounds demonstrates that the interest in the Norwegian shelf is still high. Fifty-six production licenses were awarded in APA 2015, while 10 were awarded in the 23rd licensing round. All awards in the 23rd round are located in the Barents Sea, and three are located in the recently opened area in the southeastern Barents Sea. The first exploration well in this area will be drilled as early as this year.
The probability of making new big discoveries is also highest in this area, Nyland says.
“New surveys also indicate significant opportunities in areas that are not open for petroleum activities,” she says.
There is little doubt that 2017 will be yet another demanding year for the industry. Although investments are still falling, the decline is slowing. Investments are expected to rise gradually following a minor drop from 2017 to 2018. The drop in investments is partially due to lower activity, but is also a consequence of the reduced cost level. The start-up of a number of new projects, both on fields currently in operation as well as new field developments, is expected to contribute to greater investments starting in 2019.
Operating and exploration costs will also be further reduced from 2016 to 2017, followed by levelling out and a gradual increase.
Many new development projects are under evaluation. In addition to projects on operating fields, the Johan Sverdrup phase II is included. There is also a considerable portfolio of new field developments for which a decision is expected over the next few years. Examples here include Johan Castberg, Snilehorn, Pil, Snefrid North and Skarfjell. The total investment projection for new development projects for which PDO submission is expected in 2017 and 2018 is NOK 175 billion. Overall, this contributes to a moderate increase in investments starting from 2018.
In addition to a reduction in the number of major projects, considerable reductions in the cost level for ongoing and new projects are also an important cause of declining investments leading up to 2018. A good example here is the drilling of development wells. In spite of a considerable drop in investments in new development wells, there has been no decline in the number of new development wells compared to the level in 2013 and 2014. The important causes of this are changes in well design and various efficiency measures that have yielded quicker drilling and completion of wells, as well as the effects of lower supplier prices. This has resulted in lower costs per well.
In 2016, 36 exploration wells were spudded with overall exploration costs of about NOK 22 billion. The reduction in exploration costs from 2015 to 2016 was about 35%. From 2016 to 2017, exploration costs are projected to decline further by about 15%, followed by a gradual increase.
The reduction in exploration costs is a consequence of the reduction in the number of exploration wells. A lower cost level also contributes to a reduced cost projection. On average, the cost of an exploration well declined by about 30% from 2014 to 2016.
At the end of 2016, 80 fields were in production. Together, ordinary operating costs and maintenance of facilities account for a majority of the operating costs.
From 2013/2014, there has been a substantial decline in operating costs, in spite of new fields coming on stream and, in isolation, contributing toward increasing overall costs. The decline is mainly due to a substantial reduction in operating costs for fields in operation.
The most recent prognosis from the NPD shows a substantially higher production level than that shown in the Shelf in 2015. During the period from 2017 to 2030, it is now estimated that production will be 5% higher than the estimate shown last year.
Production development in recent years shows that the fields, through efficiency measures, particularly within drilling of wells and regularity on the facilities, produce more than previously presumed. Now additional development wells have been included in the prognosis, and we have also premised higher gas sales during the period than previously. The NPD also presumes that several projects will start production earlier, as a result of cost reductions.
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