Surging Offshore Costs Risks Leaving Oil in Ground, Norway Says

Norway is concerned capacity limitations will further boost costs, delay field development and risk leaving oil in the ground as western Europe’s biggest producer struggles to extract more from aging deposits.

Companies will drill about 50 exploration wells offshore Norway this year, up from 42 in 2012, the Norwegian Petroleum Directorate said today. A lack of rigs led the industry to miss the NPD’s drilling target in 2012 and exploration success in recent years has strained capacity in Norwegian yards, director Bente Nyland said.

“That could lead to galloping costs,” Nyland said today in an interview in Stavanger, on the western coast of Norway. Delays in field developments “could easily come when there’s capacity limitations” in the next two years, she said.

Recent discoveries such as the Johan Sverdrup field in the North Sea, which may be the biggest in Norway in almost 40 years, has rekindled interest in exploration off the Nordic country where the NPD today forecast crude production would fall for a 13th consecutive year in 2013.

Investments in the oil industry will reach a record 192 billion kroner ($35 billion) in 2013 and continue rising to 225 billion kroner in 2017, the NPD’s forecast.

Labor Costs

Rig rates are 90 percent higher in Norway than in the neighbouring U.K. waters, a government-appointed commission found in August. Norway needs to lower labor costs and simplify rules in order to avoid leaving resources in the ground, according to the report.

The constraints may lead companies to favor new developments at the expense of mature fields where deposits risk being lost, Nyland said.

“We will be watching closely,” she said. Companies are “very keen to start producing from the big discoveries, that’s what’s driving the industry. It’s probably more exciting to work on this, because it costs a lot to work on mature fields.”

Norway’s oil minister Ola Borten Moe has said that the government won’t accept companies neglecting mature fields, possibly resorting to regulatory means.

Norway’s oil production will rise in 2014 for first time since 2000, the NPD said today. While delays and maintenance work will continue to hamper output, it will be compensated by production from new fields such as Goliat, Nyland said.

The oil industry has also reacted to low rig capacity and high costs, with Statoil ASA (STL) ordering tailor-made rigs that won’t need to be upgraded for work in Norway, Nyland said. Statoil, which operates about 80 percent of oil and gas production in Norway, plans for some of these rigs to be owned by field partners.

To contact the reporter on this story: Mikael Holter in Oslo at mholter2@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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