Norway’s upstream sector continued to feel the pain of low oil prices in 2016, but looks poised to make a recovery in 2017, new research from global natural resources consultancy Wood Mackenzie shows.
Driving the recovery will be a step-change in exploration, large final investment decisions (FIDs), and record mergers and acquisitions (M&A).
Last year, investment in the Norwegian upstream sector fell to a 10-year low, exploration was disappointing and large FIDs continued to be deferred. But there were rays of light. Companies were able to significantly cut costs, production remained high and M&A activity rose.
Neivan Boroujerdi, Norway analyst at Wood Mackenzie, said: “While we have not witnessed a full recovery, at least the sector is up and out of bed. Against the backdrop of a rising oil price, this recovery is set to continue into 2017.”
Norway’s explorers will be at the forefront of the recovery, with Wood Mackenzie expecting volumes discovered in 2017 to be at their highest since 2010.
“There will be an increase in the number of wells and - more importantly - a clear shift towards high-impact activity as companies go elephant hunting again. Norwegian wells will be watched globally,” Boroujerdi said.
“Of the 35 exploration wells we expect to be drilled offshore Norway this year, over a third will be in the Arctic Barents Sea, including the first in the formerly disputed area, bordering Russia. A major discovery would open a new oil and gas province in Norway,” he said.
As contractor rates bottom out, investment will stabilize to around US$14 billion. Wood Mackenzie expects there will be at least three FIDs – Snorre Expansion, Njord Future and Snilehorn.
“While this is less than the five we saw in 2016, there is a clear case of quality over quantity and Norway will continue to stand out globally,” Boroujerdi said. “All five FIDs in 2016 were subsea tie-backs, but 2017 marks a clear step-change in scale. Statoil’s Snorre Expansion, Njord Future and Snilehorn combined will recover reserves of around 400 MMbbl and bring investment of $6 billion.”
However, all eyes are on a potential fourth FID – the Arctic Johan Castberg field, also operated by Statoil. Mr Boroujerdi said: “Statoil has managed to cut costs by 45% on the delayed 540 MMbbl project and is targeting FID by the end of the year. However, given the scale and complexity of the project, we think it could slip into 2018.”
The corporate landscape, long dominated by the majors, is now shifting towards more Norwegian-focused independents. And as the Majors continue with divestment programmes, 2017 is shaping up to be a record year for M&A.
“A key theme will be the divestment of operated assets, which will allow Majors to streamline their business and meet lofty divestment targets,” Mr Boroujerdi said. “We could also see a continuation of the creative corporate equity deals we saw in 2016, which allowed cash-conscious buyers to acquire high quality assets.
Large European based-independents are expected to lead the charge of buyers, but we also expect private equity to step up. Having sat largely idle outside North America, Siccar Point’s acquisition of OMV’s UK subsidiary marked a change in sentiment which will open the floodgates for more private equity-backed vehicles to enter the fray.”
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