Oil Producer Pleas Snubbed by Norway as Offshore Costs Surge

Oil and gas companies can expect little help from Norway on tackling surging costs as the government of western Europe’s biggest crude producer tones down plans for measures that producers hope will boost earnings.

“I don’t really expect us to present a package of measures,” Petroleum and Energy Minister Tord Lien said in a May 7 interview in Oslo. Cost increases challenging offshore projects are “partly due to the fact that we’re not smart enough in the way we work. The responsibility for that lies first and foremost with the operators and suppliers.”

Lien, a member of junior coalition partner the Progress Party, said in December his administration could by the end of the year present measures, including tax incentives, aimed at cutting costs that have doubled during the past 10 years.

Expenses have jumped amid increasing complexity, higher raw-materials costs and rising demand. Coupled with stagnating energy prices, they’ve led companies such as Statoil ASA, the state-controlled operator of more than 70 percent of Norway’s production, to cut spending plans.

Investments by oil companies in Norway are expected to fall after peaking at 214 billion kroner ($36.5 billion) next year, according to the Norwegian Petroleum Directorate. Meanwhile, oil and gas production has fallen 20 percent during the past decade as aging North Sea fields are depleted.

Project Uncertainty

Statoil last year delayed its Johan Castberg oil project in the Arctic Barents Sea, citing costs and a tax increase by Norway’s previous government, shelving $15 billion of investments that included a new oil terminal at North Cape. The Stavanger-based company is also reviewing a plan to raise recovery at the North Sea’s Snorre field, and has scrapped building a gas-export pipeline at its Kristin field.

Royal Dutch Shell Plc, Europe’s biggest oil company, last month shelved a gas-compression project at Ormen Lange, the Norwegian Sea field that supplies about 20 percent of the U.K.’s requirements.

The Norwegian Oil and Gas Association, a lobby group representing companies including Statoil, Shell, Exxon Mobil Corp. and ConocoPhillips, has said last year’s tax increase, combined with transition rules decided by the new government, are jeopardizing drilling projects valued at 80 billion kroner.

The increase by the previous, Labor-led administration reduced the part of investments that can be deducted from oil income while keeping the top tax rate at 78 percent. It will be especially detrimental to increased-recovery projects and marginal new developments, oil and gas companies have said.

Statoil Disappointment

The oil lobby was “both surprised and disappointed” that its criticism wasn’t taken into account in the transition rules, said Erling Kvadsheim, manager for licensing policy at the Norwegian Oil and Gas Association. “It’s clearly a move by authorities that conflicts with the intentions they’ve had to stimulate good resource management, increase recovery and keep costs in check.”

While Norway’s Conservative-led government hasn’t ruled out fiscal changes after it completes a study into the impact of the tax increase, the “overall picture is that petroleum taxation in Norway works well,” Lien said.

Companies such as Statoil have also asked offshore workers to show moderation in this year’s wage talks to help boost Norway’s competitiveness. Two of three unions broke off negotiations with employers early today, raising the risk of a new strike two years after the longest oil-worker walkout disrupted output.

Potential Savings

The Norwegian government sees great cost-cutting potential in the industry’s efforts to standardize development solutions like offshore platforms, Lien said.

“I want to leave this to operators and suppliers as much as possible,” he said. “There’s no point for a Progress Party minister to get involved in things that the private sector can solve on its own.”

The industry is prepared to do its part, the lobby’s Kvadsheim said. “At the same time, it’s clear that authorities can also play a role when it comes to the cost level, for example when it comes to shaping regulations in a way that doesn’t make operations more expensive.”

Statoil and partners Eni SpA and Petoro AS will probably end up developing the Castberg oil deposits regardless of cost and tax challenges, Lien said. The government still hopes the companies will opt for an onshore terminal and infrastructure able to handle volumes from future discoveries in the area even though Statoil deemed a recent exploration campaign to boost Castberg’s resource base as disappointing, he said.

Government Warning

Both Prime Minister Erna Solberg and Lien have warned oil companies against delaying time-critical projects to boost recovery rates at fields in operation, such as Statoil’s plan to build a platform at Snorre to boost recovery by 300 million barrels of crude. Norway needs to attract more companies able to compete with Statoil, Lien has said.

“We need to maintain the ambition of creating the conditions for more diversity among the players that have the financial and technological capacity to develop the really big projects on the Norwegian shelf,” the minister said.

The government will next month present a white paper on state ownership in companies. While it has signaled it could reduce its 67 percent stake in Statoil, it currently has no plans to do so, Lien said.

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