• Project investments have risen almost 50% from initial plan
  • Eni, partner Statoil embark on at least 15 years of production

Goliat, the first oil field to start output in Norway’s Arctic waters, has been a giant headache for Eni SpA.

Production, which finally began late Saturday, has been delayed by more than two years and investments have escalated to about 47 billion kroner ($5.6 billion), almost 50 percent more than the initial plan. The field, holding about 180 million barrels of recoverable oil, is also starting at a bad time, with crude prices at about $40 a barrel after the worst market slump in a generation.

A company spokesman, who declined to be identified by name according to company policy, said the start of production is an important milestone for the company and for Norway.

Goliat is only the second field in operation in the cold and remote waters of the Barents Sea after the Snoehvit natural gas deposit. Eni decided to invest in the project in 2009 amid the fallout from the financial crisis, but expenses quickly escalated as crude prices recovered. The construction of the floating production facility, the biggest and most advanced of its kind, was delayed several times, most recently because of problems with its electrical system.

‘Expensive’ Project

“If they had known back then that it would be this expensive, they wouldn’t have gone ahead with it,” said Erik Holm Reiso, a partner at Oslo-based consultant Rystad Energy AS.

Eni needs oil prices to average $95 to $100 a barrel over the production period of 15 years for the project to make a profit, according to Rystad. That calculation includes capital expenditure, operational costs and a 10 percent return to account for the cost of capital.

Rome-based Eni said its own calculations show a break-even price on Goliat of less than $50. A spokesman for the company declined to elaborate on the details of its estimate or comment on Rystad’s figure.

Even if Eni fails to recoup its investments and costs in the field, with expected maximum production of 100,000 barrels of oil a day at maximum capacity, it will still generate cash flow, Rystad said. Eni’s spokesman couldn’t specify when the company expects the field to reach its maximum level target.

“When you’ve gotten this far, it would be unreasonable not to go through with the project,” said Rystad’s Reiso. “The capital expenditure has now been sunk, and the decision to stop the project now would only be made if they believed oil will stay below $30.”

The project remains a breakthrough for oil production in the Barents Sea, a little-exploited area that Norway is counting on to sustain output as mature fields in the North Sea are depleted. The Nordic country’s flow of crude has dropped by half since 2000.

Statoil has managed to cut estimated development costs by as much as 50 percent at another oil project in the Barents Sea, Johan Castberg, giving a boost to prospects in the area. Norway aims to award licenses this year in another part of the sea that borders Russian waters. The government has received applications from 26 companies for those licenses; Eni wasn’t among them.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE