Norway’s Surging Oil Costs Sap National Goal to Boost Extraction

Norway’s goal of recovering more oil and gas from its aging and marginal reserves is being undermined as rising costs and taxes weigh on investment by the industry.

Offshore exploration, development and production costs have expanded by an average of about 10 percent a year over the past decade, according to Oslo-based consultant Rystad Energy.

The expenses, and a tax rise this year, will mean reserves are left in the ground as companies become more selective, said David Hendicott, who manages operations at ConocoPhillips (COP)Ekofisk, Norway’s second-biggest oilfield. The company and its partners are investing about 85 billion kroner ($13.7 billion) to prolong operations at Ekofisk and neighboring Eldfisk by 40 years, according to the energy and petroleum ministry.

“Cost increases and/or tax increases will inevitably reduce the attractiveness of future investments,” Hendicott said in an interview last month in Stavanger on the western coast. “For marginal projects, increased costs or taxes could result in projects or wells not being progressed.”

Norway, which uses oil and gas revenue to plug budget gaps and add to its $806 billion sovereign wealth fund, is pushing operators to raise recovery rates from about 46 percent now. A level of 60 percent would add 16 billion barrels of oil, said a government-commissioned report in 2010, or about $1.8 trillion of gross income at current prices. Crude output slumped by more than half since peaking at 3.1 million barrels a day in 2000.

Investments Quadrupled

Statoil ASA (STL), the state-controlled company that is an operator for more than 70 percent of Norway’s oil and gas production, seeks to raise its recovery rate to 60 percent.

Offshore investment that has almost quadrupled since 2002 may peak next year at 224 billion kroner before declining, with spending on fields already in production falling the most, the Norwegian Oil and Gas Association said last month. Investments in producing fields are seen dropping by more than half by 2018 from 112 billion kroner this year, adjusted for inflation.

“Investments in mature fields to increase recovery are per definition a marginal thing, so it’s clear they will be especially impacted,” said Grethe Moen, chief executive officer of Petoro AS, manager of the state’s direct stakes in fields.

High costs also risk driving companies to shut down fields earlier, worsening a drop in output next decade projected by the Norwegian Petroleum Directorate, Moen said in an interview Dec. 4. The NPD sees a more than 15 percent rebound in oil and gas by 2021 from an 18-year low of 3.7 million barrels of oil equivalent a day this year, before falling again by more than 30 percent by 2030.

Greatest Concern

Rising costs globally are exacerbated in Norway by drilling fees that are as much as 45 percent higher than in neighboring U.K. waters, a report for the government showed last year.

“Perhaps the greatest concern are costs related to drilling,” Hendicott said. “That’s a cost driver that’s not present to quite the same extent in many other countries.”

The expenses, doubling between 2000 and 2010 in Norway, are higher mostly due to stricter rig requirements and higher wages, the 2012 report showed. This is an obstacle to production, it said, urging authorities, companies and unions to take action.

Total SA (FP), which gets more than 10 percent of its production from Norway, said its Atla gas-condensate field discovered in 2010 and producing from 2012, might not have been developed today. The deposit holds 11 million barrels of oil equivalent and was developed as a subsea tie-in to prior infrastructure.

Cheaper Ways

“Costs are going up, taxes are going up, there’s increasing uncertainty which way oil and in particular gas prices are going to go, and there’s issues of capacity in the supplier industry,” Martin Tiffen, Total’s managing director for Norway, told a conference in Stavanger last month. Total seeks to alter its labor rotation to help cut costs, he said.

Statoil has delayed its Johan Castberg project in the Barents Sea as it sought cheaper ways to produce resources of as much as 600 million barrels of oil. RWE Dea AG is seeking an exemption from new tax rules to ensure its Zidane field in the Norwegian Sea remains profitable.

While Centrica Plc (CNA) is involved in projects that need growth in spending to almost 450 million euros in 2017, it doesn’t see all of them happening. “There’s more caution,” said Dag Omre, senior Norway vice president, in an interview last month.

Norway’s previous Labor-led government in May unexpectedly decided to limit the deductible part of companies’ petroleum income at the same time as keeping a top tax rate of 78 percent.

While the Conservative-led government, which took office in October, is looking at regulatory measures to reduce industry costs, these won’t be presented before late next year, Tord Lien, the petroleum and energy minister, said on Dec. 4.

Measures also won’t include changes to labor accords, which are negotiated by employers and workers, Kaare Fostervold, state secretary at the petroleum and energy ministry, said in an e-mailed reply to questions. While the government said it would study changes in the tax system to stimulate greater recovery, it won’t reverse the previous administration’s tax increase.

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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