White Paper) to the Storting 28 (2010–2011) Report Meld

Meld. St. (white paper) to the Storting 28 (2010–2011) Report Meld. St. 28 (2010–2011) Report to the Storting (white paper)

Published by: Norwegian Ministry of Petroleum and Energy An industry for the future – Norway´s petroleum activities Internet address: www.government.no

Cover photo: Scanpix

Printed by: 07 Aurskog AS 10/2011

ER J¯M KE IL T M

2 4 9 1 7 3 Trykksak Meld. St. 28 (2010–2011) Report to the Storting (white paper)

An industry for the future – Norway’s petroleum activities

Translation from the Norwegian. For information only. Contents

1 Objective and summary ...... 5 3.2.1 Development in the gas market .... 47 1.1 Objective ...... 5 3.2.2 European gas demand ...... 48 1.2 International framework ...... 7 3.2.3 Gas supply in Europe ...... 49 1.3 An industry for the future ...... 7 3.2.4 Gas prices ...... 50 1.4 Measures ...... 10 3.3 Summary ...... 50 1.4.1 Recovering proven resources ...... 10 1.4.2 Find more in open areas ...... 11 4 Recovery of proven resources .. 52 1.4.3 Management of unopened areas .. 11 4.1 Potential and technology to  1.4.4 Employment, spin-off effects and recover more ...... 53 research ...... 12 4.1.1 Potential from higher recovery  1.4.5 Opportunities in the north ...... 13 rate ...... 53 1.4.6 Revenues to the state ...... 14 4.1.2 Solutions that could improve the 1.4.7 The external environment,  recovery rate ...... 55 emergency preparedness and  4.2 Measures – the legal framework .. 58 safety ...... 15 4.2.1 Voting rules ...... 58 4.2.2 Predictable extension of license  2 The Norwegian Shelf in  period for production licenses ...... 59 change ...... 16 4.2.3 Follow-up of late-phase fields ...... 61 2.1 The resource base ...... 17 4.3 Measures – cost level and  2.2 Activity level ...... 20 profitability ...... 61 2.2.1 Production ...... 20 4.3.1 Drilling and wells ...... 61 2.2.2 Exploration activity ...... 21 4.3.2 Coordination ...... 63 2.2.3 Investment and employment ...... 22 4.3.3 Cost/benefit analyses in the  2.2.4 Revenues to the State ...... 23 event of new regulations/stricter 2.3 Discharges to sea and emissions  practice ...... 64 to air ...... 24 4.3.4 Joint effort to reduce operating  2.4 Cost level and profitability ...... 25 costs ...... 64 2.5 Diversity of players ...... 27 4.4 Measures – player composition  2.5.1 The exploration phase ...... 28 and competition situation ...... 65 2.5.2 The development phase ...... 29 4.4.1 Petoro and SDFI ...... 65 2.5.3 The operations phase ...... 30 4.4.2 Tax treatment of exploration  2.5.4 The supply industry ...... 33 costs ...... 66 2.6 Opportunities in the various parts  4.5 Measures – technology  of the continental shelf ...... 34 development ...... 66 2.6.1 The southern part of the  4.6 Infrastructure – use and further North Sea ...... 34 development ...... 67 2.6.2 The central part of the  4.6.1 The Norwegian gas transport  North Sea ...... 36 system – organisation and  2.6.3 The northern part of the  regulation ...... 67 North Sea ...... 37 4.6.2 Third-party use of facilities ...... 71 2.6.4 The Norwegian Sea ...... 38 4.7 Development of discoveries ...... 72 2.6.5 The Barents Sea ...... 40 4.7.1 Discoveries approaching  a development decision ...... 72 3 Oil and gas prices support 4.7.2 Other discoveries ...... 73 profitable activity ...... 42 4.7.3 Profitability for small discoveries  3.1 The oil market ...... 42 – standardisation ...... 74 3.1.1 Development trends ...... 42 4.7.4 Naming petroleum deposits ...... 75 3.1.2 Demand ...... 43 4.7.5 Ownership and taxation of  3.1.3 Supply ...... 44 facilities ...... 76 3.1.4 Oil price ...... 46 4.7.6 Development of discoveries  3.2 Gas markets ...... 47 results in spin-off effects ...... 76 5 Discovering more in opened  7.6 Disposal ...... 133 areas ...... 79 5.1 Undiscovered resources in  8 Employment, spin-off effects  opened areas ...... 80 and research ...... 134 5.2 Exploration activity within 8.1 Shelf and shore ...... 135 comprehensive marine  8.2 The petroleum activity employs  management ...... 81 many people ...... 137 5.2.1 Integrated management plans  8.2.1 The supply industry location ...... 138 and exploration policy ...... 81 8.3 Development of the industry ...... 139 5.2.2 Coordination with the fishery  8.3.1 Industrial experience and culture .. 139 industry ...... 83 8.3.2 Expertise ...... 140 5.3 Exploration policy ...... 85 8.3.3 Regional development ...... 142 5.3.1 Mature areas – APA ...... 86 8.4 Great possibilities in the north ..... 143 5.3.2 Frontier areas – numbered  8.4.1 Spin-off effects from  rounds ...... 90 developments ...... 144 5.4 New and different types of  8.4.2 Future developments ...... 145 companies ...... 93 8.4.3 Analysis of spin-off effects in the  5.4.1 Requirements for companies and region ...... 146 prequalification ...... 93 8.4.4 Challenges associated with  5.4.2 New players contribute to more increased spin-off effects ...... 147 exploration ...... 95 8.5 International success for the  5.5 Exploration is profitable ...... 97 industry ...... 150 8.5.1 INTSOK ...... 151 6 Management of unopened  8.5.2 Northern Russia – a new  areas ...... 98 opportunity for Norwegian  6.1 Timely opening of new area ...... 99 business and industry ...... 152 6.2 Area overview ...... 99 8.6 Industrial use of gas in Norway – 6.3 Opening history ...... 99 framework and possibilities ...... 152 6.4 The unopened areas ...... 101 8.6.1 Natural gas liquids (NGLs) ...... 153 6.4.1 Sea areas near Jan Mayen ...... 101 8.6.2 Dry gas ...... 154 6.4.2 The Norwegian Sea ...... 105 8.6.3 Assessments ...... 154 6.4.3 Barents Sea South ...... 108 8.7 Technology, research and  6.4.4 The Barents Sea North and Arctic expertise ...... 155 Ocean ...... 110 8.7.1 Priorities within research and 6.4.5 The North Sea and Skagerrak ...... 112 development ...... 157 6.4.6 Elements in an opening process .. 112 8.7.2 Incentives and financing of  research and development ...... 159 7 The external environment, 8.7.3 Organisation of the public  preparedness and safety ...... 114 petroleum research ...... 160 7.1 Comprehensive and modern  8.7.4 Expertise and recruitment of  regulation ...... 115 labour ...... 161 7.2 Operational discharges to sea ...... 116 7.2.1 Policy instruments designed to  9 State revenues ...... 163 reduce regular discharges to sea . 118 9.1 EITI ...... 164 7.3 Emissions to air ...... 119 9.2 The petroleum tax system ...... 164 7.3.1 Policy instruments for reducing 9.3 Fees ...... 165 emissions to air ...... 121 9.4 Dividend from Statoil ASA ...... 165 7.3.2 Climate Cure 2020 ...... 123 9.5 The State’s Direct Financial  7.3.3 Power from shore ...... 124 Interest ...... 166 7.4 Acute discharges to sea ...... 129 9.5.1 SDFI interests in the licensing  7.4.1 Risk of acute discharges of oil ...... 129 rounds ...... 169 7.4.2 Policy instruments and measures  9.5.2 The Ministry’s assessment ...... 169 to reduce the risk of acute  discharges ...... 130 Sources ...... 171 7.5 Safety on the Norwegian Shelf ..... 132 An industry for the future – Norway’s petroleum activities Meld. St. 28 (2010–2011) Report to the Storting (white paper)

Recommendation of 24 June 2011 by the Ministry of Petroleum and Energy, approved in the Counsil of State the same day. (White paper from the Stoltenberg II Government)

1 Objective and summary

1.1 Objective Shelf, etc., the Storting (Norwegian Parliament) endorsed what later became known as “the Ten Norway’s petroleum resources belong to the Nor- Oil Commandments”. These “oil commandments” wegian people, and they must be managed in a point out that petroleum policy must be compre- way that benefits the entire Norwegian society. hensive and that national management and con- This has been the foundation for the management trol are important to ensure that management of of our petroleum resources for the past 50 years. the resources benefits the entire Norwegian soci- The licensing legislation dating back to 1909 deals ety. A few years later in White Paper No. 25 (1973 with regulation of hydropower, but it has also – 1974), Petroleum activity and its position in the been relevant for the petroleum activities. The leg- Norwegian society, the Bratteli Government set islation stipulated the right of reversion (to the the objective that the petroleum resources should State), emphasised that the Norwegian people are be used to develop a “qualitatively better society”. the owners of the water resources, and that eco- The development of Norwegian petroleum exper- nomic rent should fall to the greater community. tise, both in a management and a commercial con- These same principles have been followed in the text, were important secondary goals which led to administration of the petroleum resources. the establishment of the Norwegian Petroleum About 50 years have passed since the possible Directorate (NPD) and Statoil. Together with the existence of petroleum deposits on the Norwe- development of Norsk Hydro and Saga Petro- gian Shelf became a topic of discussion. In 1963, leum, this made a significant contribution to build- Norway declared dominion over the continental ing a Norwegian industrial environment around shelf, giving the Norwegian state the right to the petroleum industry. Shipyards, shipping com- explore for and exploit subsea petroleum depos- panies, seismic companies, engineering firms, its. Two years later, Norway, the United Kingdom research and development communities were key and Denmark agreed to apply the “median line components in this effort. Sound competition and principle” to establish the maritime boundaries. In diversity at all levels of the value chain have been its consideration of White Paper No. 76 (1970 – important preconditions for good exploitation of 1971), Exploration for and exploitation of subsea resources on the Norwegian Shelf. The Govern- natural resources on the Norwegian Continental ment will continue to facilitate this development. 6 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

250 Unopened areas Opened areas 4 Discoveries Resources in fields 200 3,5

150 2,5

2 Mill. Scm o.e. 100 Mill. barrels o.e. per day Mill. 1,5

1 50

0,5

0 0 2010 2015 2020 2025 2030 2035 2040

Figure 1.1 Production scenario with a broad commitment on the Norwegian Continental Shelf. Source: Ministry of Petroleum and Energy and Norwegian Petroleum Directorate.

Our management of the petroleum resources comprehensive and based on knowledge and has been a success. The objective of achieving a facts. Management of the resources must take qualitatively better society is a good description of place within a prudent framework as regards some of the results of our petroleum activity. health, safety and the environment. The role of Today, the petroleum activity is Norway’s largest petroleum producer must be combined with an industry measured in value creation, state reve- ambition to lead the field in environmental and cli- nues and export value. The petroleum industry mate policy. Petroleum activity carries a risk of currently employs approx. 43,000 people, while major accidents. A necessary precondition for more than 200,000 jobs can be directly or indi- long-term development of the petroleum rectly linked to demand from the petroleum sec- resources is that the industry manages this risk tor. Since the 1970s, the substantial revenues from prudently. Continuous improvement in the fields the activity have helped build the Norwegian wel- of health, safety and environment must be pur- fare society. The excess funds are managed in the sued and reinforced. Government Pension Fund – Global; whose mar- The main features of our petroleum policy ket value has now surpassed NOK 3000 billion. remain firm. It is important that we continue to According to the fiscal policy guidelines, the size build on our successful management of the of the Fund indicates annual revenues to the fiscal resources. The main challenges we face in achiev- budget of more than NOK 120 billion. ing this goal are improved recovery from fields, The primary objective of the petroleum policy development of discoveries and proving undiscov- is to facilitate profitable production of oil and gas ered resources. In order to achieve this, it is in a long-term perspective. The petroleum important that we make adjustments in our use of resources should also contribute to improving the policy instruments when this is indicated by quality of life in Norway in the years to come. To developments in the industry and/or the resource achieve this objective, our management must be base. The interplay between state, oil companies, 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 7 An industry for the future – Norway’s petroleum activities supply industry and the research sector is an production of renewable energy, energy effi- important part of Norwegian petroleum manage- ciency, replacing coal with gas and capture and ment. storage of CO2 are some of the most important Offshore petroleum activity, the demand it measures that could lead to lower CO2 emissions. generates on the mainland and the state revenues Norway is, and has always been, a stable and pre- it currently supplies are of great significance for dictable supplier of oil and gas. In today’s world, the Norwegian economy. It is important to keep this is a competitive advantage. Gas can unite the the overall picture in mind when discussing indi- European objectives of secure energy supply and vidual issues and specific cases within the indus- reduced emissions of greenhouse gases. If gas try. Names are important symbols. This is also the replaces coal in production of electricity in case for petroleum deposits. The names of many Europe, this measure alone will suffice to fulfil the fields in Norway are taken from Norse mythology, region’s CO2 objectives for 2020. Gas also pos- with strong roots and steeped in national tradition. sesses certain qualities in power generation that This is a tradition that should be continued. How- facilitate the phase-in of renewable power genera- ever, the strongest names from Norse mythology tion, and can therefore contribute to further CO2 are already in use, which means that we should reductions. Gas-fired power plants function well also consider new types of names. The names together with e.g. wind or solar power, as gas given to larger fields in new areas should reflect power can be produced quickly and efficiently the industry’s importance, both for specific during calm or overcast days. The Government regions and for the nation as a whole. The Minis- therefore will to intensify its work to ensure that try therefore plans to make adjustments in the the advantages of natural gas as compared with naming of petroleum deposits, to ensure that they use of coal are taken into consideration when set- fit into a national context and history. ting the framework for Europe’s energy structure. The ultimate goal of the Norwegian Govern- ment’s climate policy is to contribute to curtailing 1.2 International framework the human-induced temperature increase to a maximum of two degrees, as compared with the The prospects for both oil and gas markets in the pre-industrial level. A comprehensive change in years to come form the foundation for profitable the global energy system is required in order to production of Norway’s petroleum resources, reduce emissions so that the two-degree goal can assuming that we maintain control over cost be achieved. developments. The Government wants to combine Norway’s Reliable access to energy is a key factor in the role as a major energy producer with the ambition development of the world economy, and is closely of being a world leader in environmental and cli- connected to national prosperity and develop- mate policy, through continuing to exploit the ment. Energy consumption allows us to free-up petroleum resources while simultaneously pursu- labour from low-productive manual work. Large ing efforts to streamline the activity on the conti- parts of the world’s population consume very little nental shelf. The activity on our continental shelf energy. 1.5 billion people are without access to should also be best-in-class when it comes to electricity. Improved access to modern forms of energy-efficient production of oil and gas. The pol- energy is needed in order to lift these people out icy instruments applied in the sector facilitate of poverty. The time currently spent gathering implementation of measures and development of fuel can be used for other purposes. Light will new and more efficient solutions. facilitate better education. More resources can be used to produce, obtain and prepare food. The Government intends to work to achieve efficient 1.3 An industry for the future and highly functional oil and gas markets, and to expand the energy dialogue between producer The oil and gas activity is in a different phase than nations and consumer nations. was the case ten years ago. Production of oil has Fossil energy sources account for about 80 per declined, while gas production has increased. The cent of the world’s energy supply, and are the cost level is substantially higher. Technological main cause of greenhouse gas emissions and development has continued. The opened areas human-induced global warming. Wide-ranging have become more mature, producing fields are changes in energy consumption are necessary if aging, and exploration activity has shown a defi- we are to avoid harmful climate change. Increased nite increase. Considerably more upstream com- 8 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Box 1.1 The 10 Oil Commandments The 10 Oil Commandments are Chapters in a 5. That flaring of exploitable gas on the Norwe- declaration of principles underpinning Norwe- gian Continental Shelf must only be allowed gian oil policy, submitted by the Standing Com- in limited test periods. mittee on Industry in a Storting White Paper 6. That petroleum from the Norwegian Conti- dated 14 June 1971. These principles have sub- nental Shelf must, as a main rule, be landed in sequently been dubbed the 10 Oil Command- Norway, with the exception of special cases ments, and represented a clarification of what in which socio-political considerations war- was needed to make sure that the oil activities rant a different solution. would “benefit the entire nation”: 7. That the State involves itself at all reasonable 1. That national supervision and control of all levels, contributes to coordinating Norwe- activity on the Norwegian Continental Shelf gian interests within the Norwegian petro- must be ensured. leum industry, and to developing an inte- 2. That the petroleum discoveries must be grated Norwegian oil community with both exploited in a manner designed to ensure national and international objectives. maximum independence for Norway in 8. That a state-owned oil company be estab- terms of reliance on others for supply of lished to safeguard the State’s commercial crude oil. interests, and to pursue expedient coopera- 3. That new business activity must be devel- tion with domestic and foreign oil stakehold- oped, based on petroleum. ers. 4. That the development of an oil industry must 9. That an activity plan must be adopted for the take place with necessary consideration for area north of the 62nd parallel which satisfies existing commercial activity, as well as pro- the unique socio-political factors associated tection of nature and the environment. with that part of the country. 10. That Norwegian petroleum discoveries could present new tasks to Norway’s foreign policy.

panies are involved in the activities, and the player deliberate and simultaneous commitment scenario has widened. Expectations regarding throughout this value chain. The potential produc- future oil and gas prices are optimistic. tion scenario illustrated in Figure 1.1 are higher A key precondition for further developing the than the authorities’ expectations with a continua- petroleum resources is that we have a resource tion of current policies. This is because the sce- base to exploit. During the past 40 years, we have narios embrace additional possibilities that lie in extracted around 40 per cent of the expected fields, discoveries and exploration. The estimate recoverable resources. We have produced a larger falls well within the NPD’s range of uncertainty percentage of oil than of gas. Sixty per cent of our for estimated remaining recoverable resources on resources remain in the subsurface. In addition the Norwegian Shelf. come parts of the previously disputed area to the A steady activity level must be maintained in west of the delimitation line in the Barents Sea order to achieve the goal of long-term manage- and the areas around the island of Jan Mayen. The ment and value creation from the petroleum Government places great emphasis on the upside resources. Welfare and employment will follow potential when considering exploration of our the activity. This can best be facilitated through a least-mapped areas. parallel and active commitment in three areas: A practical way of categorising the remaining – Increase recovery from existing fields and resources is listed below, cf. Figure 1.1: development of commercial discoveries. – resources in fields – Continue active exploration of opened acreage, – resources in discoveries both in mature and frontier areas. – unproven resources in opened areas – Implement the opening processes for Jan – unproven resources in unopened areas Mayen and the part of the previously disputed area to the west of the delimitation line in the We can maintain production from the sector at a Barents Sea South, which can provide a basis very high level for decades to come, through a for new economic activity in Northern Norway. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 9 An industry for the future – Norway’s petroleum activities

100 %

80 % Undiscovered in unopened areas

60 % Undiscovered in opened areas

40 % Improved recovery from fields and resources in discoveries

20 %

0 % 2020 2030 2040

Figure 1.2 Share of production from various categories. Source: Norwegian Petroleum Directorate.

New solutions and measures on existing fields will ted a new plan for further development of the yield value creation, welfare and employment in area. Another NOK 65 billion will be invested in the short and medium term. New discoveries in the fields in this region, under this plan alone. mature areas will also contribute in the short and This will enable another 40 years of oil production medium term perspective. New discoveries in less from this very important part of the Norwegian mature areas will contribute to achieving our Shelf. Another example is the new oil discovery in goals in the medium-term perspective. Relatively the Barents Sea – Skrugard. Based on current speaking, it takes a long time from an area is knowledge, this discovery will set the stage for opened until activity in the area starts to make an further development activity in the north, also actual contribution. after Goliat starts producing. The discovery These differences in the time perspectives for marks the opening of a new oil province that can when the various measures will have an impact on yield additional resource growth. value creation, welfare and employment mean that The Norwegian coastal and maritime areas are we must initiate parallel processes in all areas in important to a number of commercial activities, order to facilitate an activity level that is as stable such as the petroleum activities, fisheries, ship- as possible. This White Paper presents a plan ping and tourism. Increased activity and more designed to facilitate such a development. users demand good coordination so that different The petroleum industry is an industry for the industries can co-exist. A number of measures future. The plan for long-term management and have been implemented to ensure the best possi- value creation from the petroleum resources pre- ble coordination between the petroleum activity sented in this White Paper will facilitate the exist- and the fisheries, and good interaction must ence of the petroleum industry as a key activity in remain in focus in the years to come. Therefore, Norway for decades to come. The Government’s the Government will continue to work to promote petroleum policy is therefore based on a genera- good coordination between the fisheries and the tional perspective. petroleum industry by restricting exploration and A good example of this is the development of drilling activity based on knowledge obtained Ekofisk – the first field ever developed on the Nor- through comprehensive management plans. The wegian Shelf, which has been producing for 40 resources and expertise of the fishery industry years. In the spring of 2011, the licensees submit- will also be applied in oil spill preparedness. 10 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

– Intensify the follow-up of late phase fields. 1.4 Measures Require new production plans for late phase fields, where this is deemed appropriate. Con- 1.4.1 Recovering proven resources sider the need for additional reinforcement of Contributing to high value creation from fields the regulations to ensure adequate focus on and discoveries is an important task for both the increasing recovery and good resource man- Ministry and the NPD. Substantial parts of the agement. available resources are devoted to this long-term – Approve applications for further extension of work. Many more fields in production, aging license periods for a production license with fields and infrastructure, cost developments, a the same ownership structure if the application wider player scenario and the large number of substantiates better exploitation of the smaller discoveries made since 2000 have led to a resources, unless special factors indicate other- change in these challenges. wise. For some licenses, special factors such as In 2010, the Ministry appointed a panel of low state involvement and/or significant experts to study measures that could contribute remaining reserves may indicate that the SDFI to increased resource exploitation from existing percentage should be increased, or that other fields. A number of the panel’s suggestions relate terms should be renegotiated in connection to aspects dealing with the relationships between with an extension of the production license. the players in the industry. The Ministry has – Place greater emphasis on majority shares assigned the task of evaluating these proposals to when determining voting rules when new pro- the industry itself, through KonKraft, and this duction licenses are awarded. work is well underway. This White Paper dis- – Work to achieve a better flow of vessels cusses the proposals made by the panel in relation involved in the petroleum activities in the to the authorities’ framework conditions. North Atlantic, including appointing an expert The Government will implement the following group to illuminate and identify obstacles that measures to increase recovery from proven lead to restrictions in the rig capacity on the resources: Norwegian Shelf, and propose measures that – In connection with processing of new develop- can improve the flow of vessels involved in drill- ments: ing activities on the Norwegian Shelf. The – Introduce a practice whereby plans for expert group must assume a safety level at development and operation (PDOs) are least equivalent to the current level. Encourage submitted earlier in projects with more the licensees on the Norwegian Shelf to estab- rapid progress. lish rig cooperation schemes, where rigs are – Ensure that installation of fixed rigs is con- contracted on a long-term basis. sidered by the licensees in connection with – Together with key players on the Norwegian relevant new developments. Shelf, work to achieve greater efforts towards – Contribute to coordination of developments piloting new technology. Consider establish- and fields when this is the best solution ment of a research centre in the field of from a resource management point of view. improved recovery, based on an open competi- – Require evaluation of power from shore as tion. an energy solution for new fields and in connection with major modifications of existing Through more than 40 years of activity on the con- fields, including an evaluation of relevant tinental shelf, a number of facilities have been lifetime. Follow up to ensure that operators established and many pipelines have been laid for of new field developments in the petroleum transport of gas and oil. Regulating the use of this sector apply for connection to the grid in infrastructure is an important part of good cases where power from shore is a relevant resource management. An important considera- alternative. Statnett will facilitate future tion is to ensure that the maximum profit from a power consumption, e.g. major and specific development is extracted on the fields themselves increases in power consumption in the – and that it does not fall to the infrastructure own- petroleum sector, if this is profitable from a ers. To achieve this objective, the Government socio-economic perspective. will: – Amend the Petroleum Regulations so that – Regulate access to and tariffs in the gas trans- licensees cannot lease production facilities port system to ensure equal access to the sys- from associated companies. tem for any party with gas transport needs. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 11 An industry for the future – Norway’s petroleum activities

– Establish an expert panel to resolve disputes in mature and frontier areas so as to curb the decline individual cases where there is disagreement in petroleum production. The following frame- concerning access to the transport system. work will be established for exploration policy in – Strengthen the existing Gassled user forum to the years to come: ensure that the users’ viewpoints are heard as – In areas with an established management plan, regards how the system is developed and oper- apply the environmental and fishery conditions ated. from the relevant management plan to new pro- – Amend the regulation relating to third party duction licenses. No additional environmental use of facilities with the objective of more effi- or fishery requirements will be stipulated for cient use of resources and that maximum profit petroleum activities in the area. is extracted on the new fields. – Within the framework of the management plans, use professional petroleum assessments Measures to contribute to spin-off effects are as a basis for determining which areas will be described in Chapter 1.4.5. part of the APA area, and which areas are announced through the numbered licensing rounds. 1.4.2 Find more in open areas – Carry out the APA scheme as an annual licens- The objective of our exploration policy is to make ing round for all mature areas on the Norwe- the new discoveries necessary to ensure a steady gian Shelf to contribute to maintaining activity level of activity, the highest possible value crea- and production. tion and state revenues over the medium and – Carry out numbered licensing rounds on the long-term perspective. This can best be achieved Norwegian Shelf, usually every other year, as a through an efficient and timely exploration of the contribution to maintaining activity and pro- Norwegian Shelf. Areas of the Norwegian Shelf duction. opened for petroleum activity include large parts – Introduce a public consultation process in con- of the North Sea, the Norwegian Sea and the nection with APA rounds. For areas with man- southern part of the Barents Sea. Significant vol- agement plans, only input relating to significant umes of undiscovered resources are still expected new information after adoption of the relevant in the opened areas, which can provide a basis for management plan will be solicited. activity for many years to come. Activity has – Carry out a public consultation process in con- already been underway for many years in large nection with announcement of acreage in num- Chapters of the Norwegian Shelf. These areas are bered licensing rounds. For areas with man- characterised by known geology and well-devel- agement plans, only input relating to significant oped infrastructure, and are referred to as mature new information after adoption of the relevant areas. management plan will be solicited. Other parts of the shelf are characterised by – Publish the work programs from and including less knowledge about the geology, greater techni- the 21st licensing round and in APA licenses to cal challenges and a lack of infrastructure. Such ensure transparency in the petroleum activities areas are called frontier areas. Two equally sta- and equal treatment in the licensing rounds. tused licensing round processes have been estab- – Facilitate the establishment of competent new lished to achieve expedient exploration of both companies on the Norwegian Shelf, including mature and frontier areas: the awards in prede- actively seeking out interesting oil companies fined areas (APA) for mature areas and the num- to inform them about business opportunities bered licensing rounds for frontier areas. on the Norwegian Shelf. To ensure efficient exploration and develop- – Prevent fallow licenses by following up the ment of discoveries, changes were made in the activity in mature areas and using the area fee petroleum policy ten years ago to bring in players to achieve good area management. with strong focus on the more mature areas of the Norwegian Shelf. Today’s player scenario is well- balanced, and consists of companies that focus on 1.4.3 Management of unopened areas new, large and more financially risky projects Over the past 40 years, the Norwegian Continen- alongside companies that focus on smaller pro- tal Shelf has been mapped in a step-by-step explo- jects with lower economic risk. ration process. This means that we currently pos- The Government wants to maintain explora- sess the best knowledge about the geology in the tion activity and will award production licenses in opened areas, but also that the opportunity of 12 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities making major new discoveries is greatest in the less-explored Chapters of the Norwegian Shelf. 1.4.4 Employment, spin-off effects and The last time a new area was opened for petro- research leum activity was in 1994. The last major discov- An important pillar of Norwegian petroleum pol- ery on the Norwegian Shelf so far, Ormen Lange, icy is to exploit the petroleum industry’s expertise was made in this area in 1997. in order to achieve the highest possible value cre- In the numbered licensing rounds conducted ation and ensure a qualitatively better society. The today, all of the acreage has been available for resource input on the Norwegian Shelf is nomination by interested companies in several extremely high, and this will likely continue in the rounds. The most attractive parts of this area are, next few years. The activity level in the petroleum in part, already thoroughly explored. Opening activity over time depends on how much of the new areas is necessary in order to make signifi- remaining resources are exploited. A commitment cant new discoveries and to maintain significant to existing fields, to new, profitable field develop- petroleum production, value creation, investment, ments and exploration will provide a basis for a employment and state revenues in the years after high and stable activity level in the future as well. 2020. Therefore, the Government will: In a time perspective beyond 2020, access to new – Conduct an opening process in the sea area exploration acreage will be essential to maintain- around Jan Mayen, including environmental ing the activity level. and resource mapping, acquisition of seismic New discoveries provide a basis for new devel- data and shallow drilling. Safeguard Norwe- opments and associated spin-off effects. The gian interests in the cooperation area with Ice- greatest potential for making major new discover- land. ies is in the sea areas outside Northern Norway. – Carry out knowledge acquisition regarding the Through expanded activity in opened areas and effects of petroleum activity in the unopened through mapping and opening of new acreage, we parts of Nordland IV, V, VI, VII and Troms II. will facilitate new activity and spin-off effects in The knowledge acquired will be used in a the north. The Snøhvit, Goliat and Skarv develop- potential impact assessment for the petroleum ments illustrate that the petroleum activities pro- activity, and used as a basis for the next revi- vide significant value creation and employment, sion of the management plan. Enhance knowl- both locally and regionally. edge about the petroleum resources in the Through profitable exploitation of the unopened parts of Nordland IV and V through resource potential on the Norwegian Shelf, the oil seismic surveys and other geological data and gas industry will also lay the foundation for acquisitions under the direction of the Norwe- considerable activity in the mainland economy for gian Petroleum Directorate and in dialogue decades to come, with associated jobs and positive with the fishery industry and fishery authori- spin-off effects in large parts of the country. ties. Release data sets with relevant seismic Exploiting the resource potential will contribute to data from Nordland VI, VII and Troms II for research activity and building expertise. Research sale. and development are important for achieving – When the agreement with Russia on maritime improved resource recovery, and for ensuring the boundaries and cooperation in the Barents Sea industry’s international competitiveness. The and the Arctic Ocean enters into effect, initiate industry is, and must be, a driving force in an impact assessment under the Petroleum Act research and development. The authorities play with a view towards awarding production an important role as facilitator, and public funds licenses and data acquisition in the previously are needed in certain key areas where the indus- disputed area west of the delimitation line in try’s efforts fall short. the Barents Sea South. In order to maintain an effective petroleum – Facilitate new petroleum activity in the area industry in Norway over time, the Government from 35 – 50 km from the baseline along the will facilitate profitable production of oil and gas in coast from Troms II to the border with Russia a long-term perspective. The Government will and in Eggakanten by including these areas in also: future licensing rounds. – Work to reinforce the oil and gas industry’s – Consider the future need for new knowledge international market access, and to ensure that about petroleum resources in Skagerrak. the industry can compete on equal terms with its competitors. Together with INTSOK, contribute to Norwegian-based enterprises win- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 13 An industry for the future – Norway’s petroleum activities

ning assignments and contracts, also outside areas have figured prominently in the most recent the Norwegian Shelf. numbered licensing rounds. – Conduct an active dialogue with Russia on Business and industry in Northern Norway energy issues. Facilitate partnerships between must have the opportunity to participate as com- Russian and Norwegian companies, including petitive suppliers to the petroleum activity in the through INTSOK and Innovation Norway. region. Although the starting point for Northern Stimulate increased cooperation with Russia as Norwegian petroleum activity is quite different a result of the agreement on maritime bounda- from the situation in the North Sea 40 years ago, ries and cooperation in the Barents Sea and the the same fundamental drivers for development Arctic Sea. are in place. – Facilitate increased industrial application of The Government will facilitate additional new gas in Norway, including contributing to an discoveries off the coast of Northern Norway by industrial arena as a meeting place for indus- pursuing an active licensing policy. The Govern- trial players and oil companies. ment will include the area from 35 – 50 km from – Ensure good terms for petroleum research. the baseline along the coast from Troms II to the – Prioritise research in improved recovery Russian border and Eggakanten in future licens- from existing fields on the Norwegian ing rounds. Furthermore, the Government will Shelf, including considering establishment initiate impact assessments and data acquisition in of a research centre for improved recovery. the previously disputed area west of the delimita- – Consider establishing a research centre to tion line in the Barents Sea South when the agree- address challenges faced by the petroleum ment with Russia takes effect. The Government industry in arctic regions. will carry out acquisition of knowledge in the – Continue the work to qualify and test new northeastern Norwegian Sea. technology. One of the Government’s objectives is for the – Contribute to strengthen recruiting to science development of new discoveries to create the and technology subjects in schools and higher greatest possible values for society, which can education to ensure access to qualified labour also form the basis for profitable local and for the petroleum sector. regional spin-off effects. This applies to discoveries on the entire shelf. The key precondition for achieving spin-off effects is further development 1.4.5 Opportunities in the north of profitable activity. When developing discover- The High North is the Government’s most impor- ies, identifying socio-economically sound develop- tant strategic commitment area in foreign policy. ment and operations solutions is important. Expe- The Government wants to contribute to positive rience from developments such as Skarv, Ormen development in the northernmost areas. The Lange, Snøhvit and Goliat shows that major new prime objective of the Government’s policy is to developments yield significant local and regional ensure peace and stability in the region. Another spin-off effects, regardless of development solu- objective is to ensure sustainable and environmen- tion. The dialogue and interaction between local tally responsible exploitation of resources for the and regional authorities and business and indus- future. As part of this effort, the Ministry will con- try are important when drawing up plans for sider establishing a research centre addressing development and operation. The guidelines for the challenges the petroleum industry faces in preparing development plans (PDO/PIO guide) arctic areas. state the authorities’ expectations for develop- The Government wants, and intends to facili- ments in terms of local and regional spin-off tate, a situation where profitable offshore activity effects. also provides spin-off effects on the mainland. The The Government will pursue the following pol- Ministry will gradually increase capacity at the icy in connection with new developments: NPD’s office in Harstad from the current situation – Ensure that new discoveries create maximum in May 2011. This will take place in step with the values for the society, and facilitate positive general growth in the industry. New discoveries local and regional spin-off effects. provide the basis for new developments and asso- – Ensure early contact between operator and ciated possible spin-off effects. The sea areas out- local/regional business and industry, and rele- side Northern Norway are the most interesting in vant authorities. terms of making large new discoveries. These – Set demands requiring study of socio-economic factors in connection with plans for 14 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

development and operation, including regional and local spin-off effects. 1.4.6 Revenues to the state – Facilitate qualification of relevant local/ The resources on the Norwegian Shelf belong to regional suppliers in the development and the greater community and are a significant con- operations phase. tribution in financing the welfare society. The – Facilitate establishment of tender processes in additional profit in the industry is the main reason connection with new developments that allow that the State takes a significant percentage of the participation by companies in the region where income from the petroleum activities on the Nor- the development will take place. wegian Shelf through taxes, fees and the SDFI – Ensure an efficient base and operations struc- scheme. ture, which also contributes to local and Petoro manages the SDFI interests on behalf regional business and expertise development. of the Norwegian state. As part of the State’s joint – Operators of new independent developments ownership strategy, Statoil ASA handles market- must conduct an analysis of regional and local ing of the State’s petroleum together with the spin-off effects of the development within two company’s own resources. The Ministry has years after the field comes on stream. defined the following main tasks for Petoro:

Figure 1.3 Oceanic Vega, representing a new generation of Norwegian-built seismic vessels. Source: Eidesvik. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 15 An industry for the future – Norway’s petroleum activities

– Safeguarding the State’s direct participating exploration, development and operation and up to interest in those partnerships where the State cessation of a field. As a result, the Norwegian participates at any given time. Shelf is a world leader when it comes to safe- – Monitoring Statoil’s marketing of the petro- guarding these considerations in offshore petroleum produced from the State’s direct partici- leum activity. The Government will further pating interests, in line with Statoil’s marketing develop stringent requirements for safety and pro- instructions. tection of the external environment, also for late- – Financial management, including keeping phase fields. accounts, for the State’s direct financial inter- The responsibility for managing the petroleum ests. sector is shared between several ministries and directorates. The Ministry of Labour is responsi- The Government will pursue the following policy ble for health, working environment and safety. for the State’s Direct Financial Interest: These factors will be assessed in more detail in an – Ensure maximum value creation through effi- upcoming Storting white paper on working envi- cient management of the SDFI portfolio. ronment, working conditions and safety in Norwe- – Reinforce Petoro’s expertise in the follow-up of gian working life. The Ministry of Fisheries and mature fields. Coastal Affairs is responsible for the State’s pre- – Retain participating interests in new produc- paredness for acute pollution, and for coordinat- tion licenses awarded. ing private, municipal and State players in a national preparedness system. The Ministry of the Environment and the Norwegian Climate and 1.4.7 The external environment, emergency Pollution Agency are responsible for regulating preparedness and safety emissions to air and discharges to sea through Since the very beginning, considerations for other emission/discharge permits, as well as for stipu- industries and safeguarding the external environ- lating requirements for emergency preparedness ment have formed an integral part in the manage- against acute pollution in the petroleum activities. ment of the petroleum activities. Over a period of In an upcoming White Paper on Norwegian cli- 40 years, an extensive policy instrument scheme mate policy, the Ministry of the Environment will has been developed to safeguard the interests of present a broad review of the status and objectives other industries and the external environment of this policy. The main focus of this Petroleum throughout all phases of the activities – from the White Paper is on the Ministry of Petroleum and opening of new areas, via the award of licenses, Energy’s area of responsibility. 16 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

2 The Norwegian Shelf in change

The petroleum sector is Norway’s largest indus- linked to economic rent from the petroleum try, measured in value creation, revenues to the deposits. State and export value. The industry currently Oil and gas are non-renewable resources. contributes about one-fifth of the total value crea- After 40 years of production, the Norwegian Shelf tion and one-fourth of the State’s revenues. Half of still has a significant resource potential. The Norway’s export value consists of oil and gas. The remaining resources form the basis for vigorous petroleum industry currently employs about activity on the Norwegian Shelf for decades to 43 000 people, while more than 200 000 jobs are come. directly or indirectly linked to the activities on the The petroleum resources are owned by the shelf. State, which means that a large portion of the rev- Since the beginning almost 50 years ago, the enues from the activities must go to the greater oil and gas industry has created values totalling community. The State’s net cash flow from the around NOK 9000 billion, expressed in current petroleum activities is transferred to the Govern- worth. No other Norwegian industry or sector ment Pension Fund – Global. At the end of 2010, can compare with the petroleum activities when it the market value of the fund was about NOK 3000 comes to value creation, revenues to the State or billion. export value. Value creation in the oil and gas Some projects in the oil and gas industry are industry is 2.5 times that of land-based industry, of formidable size, with Snøhvit, Ormen Lange and about 15 times the total value creation in the and Langeled being some recent examples. The primary industries, cf. Figure 2.1. A large part of scope of investments in the further development the value creation in the petroleum industry is of the Ekofisk area alone, approved by the Stort- ing (Parliament) in the spring of 2011, is NOK 65

Petroleum industry

Service industry

Health and social services

Manufacturing

Wholesale and retail trade

Construction

Public administration and defence

Financial services

Transport and communication

Primary Industry

Foreign shipping

0 100 200 300 400 500 600

Figure 2.1 Value creation for selected sectors in 2010, in billion NOK. The value creation in the petroleum sector is very high because the resources that are proven and produced are of high value, also called economic rent. Source: National accounts, Statistics Norway. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 17 An industry for the future – Norway’s petroleum activities billion. This type of project receives great attention and somewhat overshadows the many smaller projects on the Norwegian Shelf. Even these smaller and less well-known development projects on the shelf are large in a Norwegian industrial context. Very few industrial projects on the mainland can compare to the offshore projects as regards value creation, State revenues or export value. Marulk and Gaupe are examples of such smaller developments. Today, the oil and gas activities are in a different phase than was the case ten years ago. During the last ten years, exploration activity has increased, the opened areas on the shelf have Figure 2.2 Development of the statistical matured and producing fields have become older. expected value of recoverable resources, status as Both cost levels and oil prices have shown signifi- of 31 December 2000 and 31 December 2010. Oil cant increases. The player scenario is much does not include condensate and NGL. broader. Source: Norwegian Petroleum Directorate. Parts of the shelf constitute well-established petroleum provinces, including large parts of the North Sea, parts of the Norwegian Sea as well as the area near Snøhvit in the Barents Sea. We have several fields in the North Sea and parts of the 2.1 The resource base Norwegian Sea that have produced for quite some time, and they still have considerable remaining There is no way to accurately predict exactly how resources. Substantial undiscovered resources much oil and gas can be produced from the Nor- are also expected in the areas near these fields. wegian Continental Shelf. Considerable uncer- Proper cost control and greater focus on new drill- tainty is associated with factors such as geology, ing methods, new drilling technology and new reservoir conditions, technology and knowledge production solutions can allow recovery of a development, costs and commodity prices. larger percentage of the resource base, thus curb- The Norwegian Petroleum Directorate’s ing the decline in oil production from the old resource accounts provide an overview of the fields and extending their lifetime. expected total recoverable petroleum resources, It terms of petroleum deposits, other parts of including undiscovered resources. The resource the shelf are less-explored, or not explored at all. accounts are based on data reported by the oper- Recent years’ exploration in less mature areas has ating companies, as well as the Directorate’s own not lived up to our expectations. The discovery of data. Skrugard in the Barents Sea is a recent exception. The resource accounts include all areas on the New exploration areas are needed in order to con- Norwegian Continental Shelf, with the exception tribute to maintaining production and value crea- of areas where the available data is not good tion on the Norwegian Shelf after 2020. The Min- enough. This applies to that part of the previously istry has initiated an opening process for the disputed area that lies west of the delimitation line waters around the island of Jan Mayen, and will with Russia and the continental shelf around Jan also initiate an opening process for the southern Mayen. Other areas that are not currently open part of the previously disputed area west of the for petroleum activities are included in the delimitation line in the Barents Sea. This will lay resource accounts. the foundation for access to new exploration The resource base and the assessments of the areas. The Ministry will also conduct acquisition resource base change over time. Resources are of knowledge in the northeastern Norwegian Sea. matured through several phases, finally ending in The potential on the Norwegian Shelf is still production. New knowledge about geology and significant, particularly if we are able to extract reservoir conditions changes the assessment of more of the resources in place by implementing the resource base. The current picture of the measures that can yield improved recovery from resource base is considerable different than the existing fields, develop discoveries and prove picture we had just ten years ago, cf. Figure 2.2. more of the undiscovered resources. 18 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Total 7 313 mill. standard cubic metres oil equivalents 100 %

Undiscovered 2 570 35 %

Resources in discoveries 650 9 %

Resources in fields 970 13 %

Reserves 3 123 43 %

Figure 2.3 Total remaining petroleum resources (liquid and gas) distributed by resource categories (left). The figure on the right shows the uncertainty associated with remaining volumes. Source: Norwegian Petroleum Directorate.

The estimate for undiscovered resources, particu- existing projects (reserves) as well as new meas- larly gas, was reduced in 2011. ures on the fields (resources in fields). At the At the end of 2010, the total recoverable same time, achieving annual production ambitions resources are estimated at between 10 and 16 bil- is proving challenging on a number of fields. How lion scm of oil equivalents (o.e.)1, with 13 billion scm o.e. as the expected value. A total of 5.5 bil- Liquid 1500 lion scm o.e. has been produced, which means Gas that about 40 per cent of the expected recoverable resources have been produced to date. 1000 There is great uncertainty associated with Scm o.e.

500 520

these estimates. If we use the figures in the lower Mill. 425 or upper parts of this range of uncertainty, we have so far produced about 50 and 30 per cent 0 respectively, of the total recoverable resources. The Barents Sea This does not take into account the resources in that part of the previously disputed area that lies to the west of the delimitation line with Russia, or 1500 in the waters around Jan Mayen. The basis for future activity lies in fields, dis- 1000 coveries and undiscovered resources. The Nor- Scm o.e. wegian Petroleum Directorate’s estimates show 500 Mill. 455 that proven resources so far are almost as large as 325 what has already been produced. Most of the 0 proven resources are found in existing fields, but The Norwegian Sea some are also linked to discoveries that have not yet been developed. 1500 Of the expected remaining recoverable resources, about 55 per cent are in existing fields, 1000 o.e. 35 per cent have not yet been proven, and 10 per Scm Scm

565 500 cent are in discoveries that have not been devel- Mill. oped, cf. Figure 2.3. 280

Today’s approved plans indicate that more 0 than half of the original oil on the Norwegian The North Sea Shelf will be left in the ground after fields are shut Figure 2.4 Undiscovered resources distributed down. The potential entailed by additional recov- by area. The number in each column shows the ery from current fields is thus quite large. This is expected recoverable volume, while the uncer- linked both to extracting resources planned in tainty in the estimate is shown by the diagonal line. 1 Oil equivalents (o.e.) are used to summarise volumes of oil gas, NGL and condensate. Source: Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 19 An industry for the future – Norway’s petroleum activities

Box 2.1 Consultation In its declaration, the Norwegian Government stated its intention to review petroleum policy in a dedicated white paper. On 30 November 2009, then Minister of Petroleum and Energy Terje Riis-Johansen signalled the start of the work on the white paper at a consultation council meeting in Stavanger and a visit to Bergen Group Rosenberg. The council in Stavanger was the first in a series of twelve such meetings held throughout the country; in Stavanger, Kristiansund, Gren- land, Arendal, Sandnessjøen, Harstad, Kongs- berg, Sogn og Fjordane, Bergen, Hammerfest, Trondheim and Oslo. The purpose of the councils was to obtain input for the white paper. At these events, the cabinet minister, other political leaders and government officials met with repre- sentatives of the supply industry, oil companies, employees in the oil industry, local and regional politicians and organisations. Important topics raised at the councils included future prospects for the Barents Sea, the need for new solutions on the Norwegian Shelf, improved recovery, the importance of research and development, spin- off effects and development of petroleum clusters. An attempt has been made to include the input from these events in this White Paper. Figure 2.5 Consultations. Source: Ministry of Petroleum and Energy. to realise the potential in these fields is an impor- edge about the subsurface. Exploration drilling is tant topic in this White Paper. necessary in order to clarify both the potential for At the beginning of 2011, there were 100 unde- petroleum deposits in an area, and in order to veloped discoveries on the Norwegian Shelf. make new discoveries. These discoveries are quite diverse in size, from The Barents Sea contains large areas with lit- very small discoveries to larger discoveries con- tle data and no exploration wells, thus making the taining up to 40 million scm o.e. Analyses show uncertainly particularly high. Based on current that even it takes time, profitable discoveries are knowledge, it is estimated with 90 per cent cer- being developed. Important reasons for this tainty that there are between 175 and 2460 million include uncertain profitability (particularly related scm o.e. of undiscovered recoverable oil equiva- to the resource base and costs), technical chal- lents in the Barents Sea. lenges and insufficient marketing opportunities The knowledge base in the Norwegian Sea for gas. More than half of the resources in these varies from good to limited. Resource estimates discoveries are gas. for the Norwegian Sea indicate with 90 per cent About a third of the expected remaining recov- certainty that the area contains between 260 and erable resources are not yet proven. The esti- 1580 million scm o.e. of undiscovered recoverable mates for undiscovered resources are based on oil equivalents. analysis of play models. These models are defined The best knowledge base on the Norwegian on the basis of geological knowledge. The esti- Shelf is in the North Sea, where many wells have mates are associated with great uncertainty, par- been drilled and the geology well-known. There- ticularly in areas where there is limited knowl- fore, less uncertainty is linked to the estimates of 20 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

300 5 Ormen Lange Gas Åsgard og Snøhvit 250 Oil (inkl. NGL and condensate) Troll 4

200

3 Draugen 150

2 Mill. Scm o.e. 100

Gullfaks Mill. barrels o.e. per day

Statfjord 1 50

Ekofisk 0 0 1970 1975 1980 1985 1990 1995 2000 2005 2010

Figure 2.6 Production development on the Norwegian Shelf. Source: Norwegian Petroleum Directorate. undiscovered resources in the North Sea. Even tion more than doubled during this period. The though the area is well-explored and many major last part of the 1990s was characterised by flatten- discoveries have been made, the North Sea still ing oil production, along with sharp growth in gas has considerable potential. The resource esti- exports. Oil production peaked in 2001, while total mates for the North Sea indicate with 90 per cent production was at its highest level in 2004, cf. Fig- certainty that between 470 and 1305 million o.e. of ure 2.6. undiscovered recoverable oil equivalents is still Oil production has declined since 2001 and the present. gradual drop in oil production is expected to continue, cf. Figure 2.7. By increasing our commitment to more production from existing fields and 2.2 Activity level development of existing and new discoveries, we can limit this decline in the short and intermedi- 2.2.1 Production ate perspective. In a long-term perspective, the Since the petroleum activities in Norway started nearly 50 years ago, the industry has experienced 200 economic fluctuations and shifting oil prices. Forecast 3,0 While there have been downward business cycles, Historical production the sector has largely been characterised by 150 2,5 growth and increasing production. 2,0 100 The first acquisition of seismic data started in 1,5 Mill. barrels per day 1962 and the first exploration well was drilled in Mill. Scm 1,0 50 1966. The discovery of Ekofisk in 1969 proved the 0,5 existence of very significant oil deposits on the 0 0,0 Norwegian Shelf. A number of large, commercial 2000 2005 2010 2015 discoveries were made through the 1970s, thus establishing the foundation for the Norwegian Figure 2.7 Oil production from the Norwegian petroleum industry. Many large discoveries were Shelf. also made in the 1980s, while a number of discov- Source: Ministry of Petroleum and Energy and Norwegian eries made in the 1970s were developed. Produc- Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 21 An industry for the future – Norway’s petroleum activities number and size of new discoveries is crucial for the production level. Gas production is expected to peak around 2020, cf. Figure 2.8. At that time, annual gas production is estimated at between 105 and 130 billion scm o.e. The production level after 2020 will Sales gas, bill. scm bill. Sales gas, largely be determined by the new discoveries made in the years to come.

2.2.2 Exploration activity Figure 2.8 Gas production from the Norwegian Shelf. A number of large discoveries were made on the Norwegian Shelf up to the mid-1980s. Ormen Source: Ministry of Petroleum and Energy and Norwegian Lange, discovered in 1997, is the last major discov- Petroleum Directorate. ery made. This is reflected in resource growth over time, cf. Figure 2.9. As it is common for the through 21 numbered licensing rounds, with companies to first explore the areas that are licenses awarded in the 21st round in the spring of expected to be most prospective, the largest dis- 2011. coveries are usually proven in the early stages Exploration of less mature areas in the Norwe- after an area is opened. Rapid development fol- gian Sea in recent years has not lived up to expec- lowed by levelling off is a normal development tations. However, the Skrugard discovery has cre- trend for resource growth in petroleum provinces. ated new optimism in frontier areas in the Barents The numbered licensing rounds are designed Sea. The discovery opens up a new oil province with a view towards areas where there is limited that could provide additional resource growth. geological knowledge, and where stepwise explo- The Norwegian Petroleum Directorate’s analyses ration is expedient. The first licensing round was show that there are good chances of making dis- carried out in 1965. Area has been awarded coveries in frontier areas both in the Norwegian

12 000

10 000 Goliat Ormen Lange

8 000

Snøhvit

6 000 Troll Øst Mill. Scm o.e.

4 000 Troll Vest, Oseberg, Snorre

Gullfaks

2 000 Statfjord, Sleipner

Ekofisk 0 1967 1972 1977 1982 1987 1992 1997 2002 2007

Figure 2.9 Resource growth over time. Source: Norwegian Petroleum Directorate. 22 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Sea and in the Barents Sea. There has been a increase in the number of production licenses broad interest in recent licensing rounds. awarded. The number of exploration wells has For mature areas, where the level of knowl- risen sharply and a number of discoveries have edge is more extensive, stepwise exploration is been made. The activity has been profitable and less important. Therefore, changes were made in the net present value of proven resources in the Norwegian exploration policy to facilitate period 2000–2010 is estimated at around NOK 700 increased exploration activity in mature areas. billion. This illustrates that the changes made in These changes were made along three main lines: exploration policy in the 2000s were successful, increasing access to acreage in mature areas, even though resource growth has been relatively facilitating more efficient exploration of areas in low in a historical perspective, cf. Figure 2.9. part through stricter work commitments, as well No new area has been opened on the Norwe- as bringing in new companies. gian Shelf since 1994. There is a need to open new The system for awards of licenses in pre- areas soon to contribute to maintaining produc- defined areas (APA) was an important measure tion on the Norwegian Shelf after 2020. Therefore, introduced in 2003. The APA system is based on the Government has decided to initiate an open- experience gained through the numbered licensing process for the waters around Jan Mayen and ing rounds. The main difference is that fixed, pre- the part of the previously disputed area to the defined exploration areas were established in west of the delimitation line in the Barents Sea mature parts of the shelf. These areas are sub- South. jected to an annual licensing round, thus laying the foundation for improved predictability and profitability in mature areas. In 2005, adjustments 2.2.3 Investment and employment were made in the tax system which secured com- There has been a sharp increase in the investment panies in and outside tax position equal tax treat- level on the Norwegian Shelf in recent years, cf. ment with regards to exploration costs. This has Figure 2.10. The petroleum sector is responsible contributed to ease financing of exploration activ- for about one-fourth of the total investments in ity for new companies. Norway. The growth in investments can be attrib- The measures that were implemented have uted both to the high activity level as well as to yielded results. Interest in mature acreage has significant cost growth. Investments linked to been high, and there has been a substantial modifications and maintenance on fields in opera-

200 000

150 000

100 000 Mill. 2011 NOK Mill. 2011 50 000

0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Investments Operating costs

Figure 2.10 Historical investments and operating costs from 1971 to 2010 and forecast to 2015. Source: Ministry of Petroleum and Energy and Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 23 An industry for the future – Norway’s petroleum activities

tion account for an increasing percentage of the 140 3500 total investments. 120 3000 Cost growth slowed in 2009, with the global 100 2500 financial crisis, declining commodity prices and thus postponement of projects, all being impor- 80 2000 60 1500

tant factors. Today, we again see signs of a rising Bill. NOK Bill. NOK cost level. This is cause for concern. Cost growth 40 1000 in the petroleum industry can have consequences 20 500 for resource utilisation both from today’s fields 0 0 and discoveries, as well as for proving resources 1996 1999 2002 2005 2008 that have not yet been discovered. Market value Government Pension Fund Global (r.axis) The petroleum activities create jobs through- Structural non-oil budget deficit (l.axis) out the country through oil companies, the supply Figure 2.11 Structural, non-oil budget deficit1 and industry, research and education institutions and market value of the Government Pension Fund – other related activity. Employment in companies Global over time. whose production mainly targets goods and ser- 1 Structural, non-oil budget deficit is a measure for oil reve- vices for the petroleum industry is around nues spent on the state budget. The State’s revenues are 2 43,000 . According to a report issued by Statistics divided between ordinary tax, special tax, production fees, Norway3, around 8 per cent of Norwegian area fees and environmental fees, cash flow from the State’s employment, or more than 200,000 jobs, are Direct Financial Interest and dividend from Statoil. Source: Ministry of Finance. directly or indirectly linked to demand from the petroleum industry. Today, employment in the petroleum sector is spread throughout the country, but the main part 4 000 600 of the activity is found in south-western Norway. 3 500 500 The activity on land has largely followed the off- 3 000 shore activity. The activity level on the continental 2 500 400 2 000 300 shelf is crucial to ensuring employment in the 1 500 200 petroleum industry in the years to come. Through 1 000 NOK/barrel o.e. NOK/Scm o.e. a broad commitment to exploiting the entire 500 100 resource base, including measures to improve 0 0 recovery rates on fields and facilitating new dis- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* Oil Gas coveries through effective exploration and licensing policies, we can achieve a high level of Figure 2.12 Average sales prices for oil and gas employment for decades to come. New regions of produced on the Norwegian Shelf. In current NOK. the country, such as Northern Norway, can experience renewed growth stimulus as a result of Source: Statistics Norway. such a broad commitment. Many employees in the petroleum activities coveries made today require less cost-intensive work in the supply industry. This industry started and more standardised solutions in order to growing along with the many deliveries of goods achieve profitability. Furthermore, new solutions and services to the shelf activities. Today, the sec- are needed in order to ensure that more of the tor is composed of a great number of specialised resources in existing fields are profitable. The companies with great variation as regards geo- supply industry plays an important role in achiev- graphical location, company size and type of deliv- ing this. eries. The oil and gas sector has always relied on a competent and innovative supply industry. Tomor- row’s development solutions and technology will 2.2.4 Revenues to the State be different than what we have today. One notable Revenues from the petroleum sector account for development trend is that many of the smaller dis- about one-fourth of the State’s total income. The cash flow from the petroleum activities is transferred in its entirety to the Government Pension 2 Statistics Norway report 55/2010. Fund - Global. According to the fiscal policy guide- 3 Economic analysis 3/2010; Demand from the petroleum activities. Impact on production and employment in Nor- line, the use of oil revenues over time shall be way; Statistics Norway. equivalent to the real return on the Government 24 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Pension Fund – Global. The guideline thus entails tally friendly petroleum production. Norway’s a gradual increase in use of oil revenues up to a leading position can among other be attributed to level that can be sustained over a long-term per- strong government regulation over many years. spective. The Government Pension Fund – Global Waste products are generated in connection is invested in financial assets outside Norway. The with the petroleum activity, such as drilled rock guideline and the management of the Govern- mass (cuttings) and formation water (produced ment Pension Fund – Global is discussed in more water). These discharges are subject to permits detail in the annual national budgets and in from the authorities. In 19974 a zero discharge tar- reports to the Storting (Parliament) about the get was established for the petroleum activities. Government Pension Fund. Figure 2.11 shows the The main rule is that no environmentally harmful use of oil revenues and the market value of the substances may be released, neither added chemi- Government Pension Fund - Global. cals nor naturally occurring chemical substances The basis of income from petroleum produc- that could harm the environment. In 2009, radio- tion is undergoing significant change. Since 2001, active substances were also included in the zero oil production on the Norwegian Shelf has been discharge targets. The zero discharge targets is gradually reduced, while gas production has considered to be achieved for environmentally increased. The year 2010 marked the first time hazardous chemical additives5. that more gas was sold than oil. Production and transport of oil and gas are Prices achieved for oil have historically been energy-intensive activities. Natural gas covers higher than for gas, cf. Figure 2.12. The combina- most of the sector’s energy needs, while an esti- tion of reduced oil production, increased gas pro- mated 5 TWh per year is met through electricity duction and lower relative sales value for gas will from land to terminals and fields. Emissions to air impact cash flow from the petroleum activity. from the petroleum sector largely consist of Income from the sector will fall more sharply than exhaust gas from the combustion of gas in tur- total production would indicate. Increased oil pro- bines, burning gas via flares and diesel consump- duction will lessen this effect over the short and tion. medium-term, while exploration and discoveries Disposal solutions are required for associated in new areas on the shelf can help maintain signifi- gas on the Norwegian Shelf. Flaring is only cant revenues, also over the long term. allowed for safety reasons. The petroleum sector is subject to strict regulations as regards emissions to air. The sector was subjected to CO2 regu- 2.3 Discharges to sea and emissions to air 4 Storting White Paper No. 58 (1996–1997), Environmental policy for sustainable development. The Norwegian petroleum sector is among the 5 Storting White Paper No. 26 (2006–2007), The Govern- best in the world when it comes to environmen- ment’s environmental policy and the environmental state of the realm.

50 2500

40 2000

30 1500

20 1000

10 Tonnes red chemicals 500 Tonnes black chemicals

0 0 1998 2000 2002 2004 2006 2008 2010 1998 2000 2002 2004 2006 2008 2010

Figure 2.13 Development in discharges of black and red chemicals1. 1 Added production chemicals are divided into categories (yellow, green, red and black) depending on the potential hazard they pose to the environment. Chemicals in the green category are naturally occurring substances and do not entail damage or disadvantages for the marine environment. Chemicals in the yellow category are normally not defined as environmentally hazardous, while chemicals in the red and black categories may have serious environmental impacts. Source: Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 25 An industry for the future – Norway’s petroleum activities

lations at an early stage through introduction of called low-NOx burners on certain fields. Emis- the CO2 tax in 1991. Since 2008, the sector has sions of nmVOC have been reduced from 222,000 also been part of the emission quota system for to 37,000 tonnes in the same period. This has been greenhouse gases, in addition to paying the CO2 achieved by developing and applying recovery tax. Rigorous policy instruments have triggered technology in connection with loading and storing both inexpensive and relatively costly measures oil. which have contributed to significant emission reductions. These regulations are one of the main reasons that the Norwegian Shelf is regarded as 2.4 Cost level and profitability one of the world’s cleanest petroleum provinces. Cost-effective policy instruments are important to The petroleum industry has experienced signifi- ensure a sensible balance between resource utili- cant growth in costs over the last decade. This sation, value creation and consideration for the growth has been even greater in Norway than in environment. other comparable countries. High oil prices CO2 emissions from the Norwegian Shelf have accompanied by all-time high investments and increased from 10.8 to 12.6 million tonnes from capacity utilisation in the supply chain have been 2000 to 2010, cf. Figure 2.14. As overall production key drivers of this development. is lower in 2010 than in 2000, CO2 emissions per The International Energy Agency (IEA) has produced unit have increased. This is due to a recorded a doubling of the international cost level number of factors. Firstly, petroleum production is during the period 2000–2008, cf. Figure 2.15. declining on late-phase fields while the energy Accelerated cost growth was particularly evident need on these fields remains fairly stabile. Sec- after 2004, with an annual growth approaching 15 ondly, Norwegian petroleum production has per cent. Analyses conducted by the consultant become more gas-intensive and gas transport agency IHS CERA show a doubling of develop- over long distances is energy-intensive. ment costs in the period from 2004–2008. The Emissions of NOx have been reduced from price of factor inputs such as rigs, steel, labour 52,300 to 49,900 tonnes from 2000 to 2010. This and equipment are important explanatory varia- has been achieved in part through the use of so- bles. IHS CERA also points to a marked increase

CO NO 16 2 60 x 14 50 x 2 12 40 10 8 30 6 Mill. tonnes CO 20 4

Thousand tonnes NO 10 2 0 0 1997 2000 2003 2006 2009 1997 2000 2003 2006 2009

nmVOC 300

250

200

150

100

50 Thousand tonnes nmVOC 0 1997 2000 2003 2006 2009

Figure 2.14 Development in emissions of CO2, NOx and nmVOC. Source: Norwegian Petroleum Directorate. 26 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

20 % 220 Cost growth Index (r. axis) 15 % 190

10 % 160

5 % 130 Index 2000=100

Yearly cost growth 0 % 100

-5 % 70

-10 % 40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*

Figure 2.15 Global development in capital costs associated with exploration and development 2000– 2010. Source: IEA/WEO2010. in operating costs in the 2004–2008 period, as a show a clear trend of higher development costs on consequence of higher prices of factor inputs such the Norwegian Shelf since 2005, cf. Figure 2.16. as labour, energy and various consumables. While the breakeven price for new field develop- Costs are an important component when the ments in 2004 was around NOK 100 per barrel companies assess whether new projects are profit- o.e., comparable prices in 2009 were more than able and can be carried out. Therefore, the long- NOK 300 per barrel o.e.. This represents a tripling term development of oil and gas prices necessary of costs over a five-year period. There was a weak to make new developments profitable (the breake- positive trend in the breakeven price for submit- ven price) may be used as a measure for cost ted development plans from 2009 to 2010. development. The breakeven prices in submitted The consultant firm Econ Pöyry has estab- plans for development and operation (PDOs) lished a cost index for field development projects on the Norwegian Shelf which confirms this picture. Estimates for the period 2004–2008 show an 300 average increase of 15 per cent per year. This 250 trend continued through 2009, wherein the cost of

200 completing a selected group of projects was 12.5 per cent higher than the previous year. Econ 150 Pöyry points to the rig rates as an important 100 driver in this cost development, with a near tri- 6 50 pling of rig rates in the period 2004–2008 . It is

- presumed that this trend was largely caused by Breakeven price, indexed 2005=100 2004 2005 2006 2007 2008 2009 2010 factors in the rig market. On assignment from the Ministry, the consult- Figure 2.16 Volume-weighted breakeven prices ant firm Wood Mackenzie compared costs on the for submitted plans for development and opera- Norwegian Shelf with other relevant petroleum tion in the period 2004–2010. provinces for the exploration, field development Source: Ministry of Petroleum and Energy / Norwegian Petro- leum Directorate. 6 OLF’s Business Trend Report 2011 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 27 An industry for the future – Norway’s petroleum activities

140 metres are about 85 percent higher than on the UK UK Shelf and 35 per cent higher than on the Bra- Norway 120 zilian Shelf. Hiring of rigs and associated personnel, field evaluation and other administration are 100 the most important explanations for the cost differences. 80 According to the IEA, the financial crisis and Cost index UK=100 sharp drop in oil prices caused global investments 60 in the petroleum industry to fall by 15 per cent in Development costs Operating costs 2009. Upstream costs declined by 9 per cent over the course of the year. The situation in the first Figure 2.17 Development costs and operating half of 2011 is different. Estimates provided by costs for fixed platforms and FPSOs in Norway and consultant firms, oil companies and the authori- 1 the United Kingdom . Includes projects under ties all indicate that the industry is facing another development or fields that started production period of record-breaking investments and activity after 2000. level. Given the current cost level on the Norwe- 1 Two fields in the selection were developed using semi-sub- gian Shelf, it is important that the players in the mersible production facilities. FPSO (Floating production, industry work together to achieve cost savings. storage and offloading) is a type of multi-purpose facility. Cost control is essential if we are to exploit the Source: Wood Mackenzie. potential on the Norwegian Shelf. Marginal projects and late-phase projects on fields are threat- and operations. The study confirms a higher cost ened by high costs. The industry has imple- level in Norway than in comparable countries. mented many good initiatives to keep cost devel- When comparing the Norwegian and the UK opment under control. However, stronger meas- shelves, Wood Mackenzie found that both devel- ures are needed if we are to realise the significant opment costs and operating costs are more than remaining resource potential on the Norwegian 20 per cent higher in Norway than in the United Shelf. Smarter and more efficient organisation, Kingdom, cf. Figure 2.17. The difference is in part while also complying with the current regulatory due to activity associated with production drilling, framework, can yield considerable cost savings including the cost of hiring rigs and drilling equip- within all types of petroleum activities, and ment. Higher prices for subsea services and pro- thereby create significant added value both for the cess facilities also contribute to more expensive Norwegian society and for the players them- developments on the Norwegian Shelf. Taxes selves. The authorities must also contribute to (CO2 and NOx) also contribute to higher operat- cost control and the Government is implementing ing costs. Costs associated with transport of oil several measures. See Chapter 4 for a review of and gas have not been part of the study. these measures. Norway also emerges as a high-cost country when it comes to exploration activity, cf. Figure 2.18. The cost of drilling exploration wells on the 2.5 Diversity of players Norwegian Shelf in waters shallower than 400 The paramount goal of the petroleum activity is to facilitate profitable exploitation of the oil and gas 200 resources. A diversity of players and appropriate UK competition in all aspects are important contribu- Norway 150 Brazil tions towards achieving this goal, and the Govern- ment will facilitate this. 100 Up until 2000, the player scenario on the Nor- wegian Continental Shelf was dominated by Sta- 50 toil, Norsk Hydro and the major international oil Cost per well UK=100 companies. This player scenario also reflected the 0 technically and financially demanding tasks the industry faced in Norway in the first decades. Figure 2.18 Exploration cost per well in water This picture has undergone substantial change depths less than 400 metres. 2000–2009. over the last 10–15 years. Towards the end of the Source: Wood Mackenzie. 1990s, the price of oil was around USD 10 per bar- 28 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

rel and the sector was characterised by consolida- 60 tion. There were major mergers on the international stage, including companies such as Conoco 50 and Phillips; BP, Amoco and Arco; Total, Fina and 40 ELF; Chevron and Texaco; Exxon and Mobil. In 30

Norway, the mergers included Hydro and Saga, 20 while Shell took over Enterprise. This consolidation had a direct impact on the 10 player scenario on the continental shelf. The inter- Number of operators and partners 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 national companies became fewer in number and Operators est. before year 20000 Partners est. before 2000 even larger in size. This happened at the same Operators est. after year 2000 Partners est. after 2000 time that the Norwegian Shelf, particularly the North Sea, had become a well-established petro- Figure 2.19 Number of operating companies and leum province with different opportunities and licensees divided between companies established challenges than previously. These were business before and after 2000. opportunities that many of the existing players on Source: Norwegian Petroleum Directorate. the continental shelf were not necessarily interested in pursuing. tor plans and carries out the activity in a prudent The Norwegian authorities therefore imple- manner, and to contribute to choosing the best mented a number of measures to enhance value solutions throughout the entire lifetime of the creation from mature areas. A key measure was to field. They must help the operator to do a good job allow other companies to become licensees. Small by challenging all key choices made in the pro- and medium-sized oil and gas companies, along duction license. with foreign downstream companies, was estab- The operator is subject to stricter require- lished on the continental shelf, as did a number of ments than the other licensees. An operator must new Norwegian companies, cf. Figure 2.19. be capable of safeguarding all phases of the petro- The fact that the player scenario changes leum activity. It may take longer to mature operat- along with the development on the shelf is posi- ing companies than other licensees. The addition tive. The Ministry wants to ensure that the player of more competent companies with operator ambi- scenario reflects the challenges faced by the sec- tions is a desired development. tor on the Norwegian Shelf, both in mature and The development of player diversity on the less mature areas. Norwegian Shelf varies in the different phases of The presence of all the major international oil the activity. Licensee groups are put together companies is unique to the Norwegian Shelf. when new licenses are awarded. The current own- These companies have extensive petroleum expe- ership reflects historical awards as well as any rience and unique expertise. They do business subsequent transactions involving ownership around the globe, and their main focus is often on interests. exploring for and developing major projects, along with further developing their key fields and discoveries. Access to new areas on the Norwegian 2.5.1 The exploration phase Shelf with the opportunity of making major dis- It is particularly important to have diversity in the coveries will be important in ensuring that it exploration phase, in order to secure sufficient remains attractive for these companies to partici- variation in geological assessments. There have pate on the Norwegian Shelf over time. been several examples where companies have Competition and cooperation between compa- made discoveries in relinquished area. This tells nies with different expertise, different experience us that while one company may not believe a par- and different assessments of exploration, develop- ticular area is interesting, another company may ment and operation are important if we are to real- see a business opportunity there. A diverse supply ise the greatest possible values from the oil and of geological assessments is necessary in order to gas resources. This is why the activity on the con- prove as much of the resources on the shelf as tinental shelf is organised under production possible. Diversity is particularly important in licenses where several licensees work together. mature areas where phase-in of additional The licensees who are not the operator have a resources and small discoveries can be time-criti- statutory responsibility to ensure that the opera- cal. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 29 An industry for the future – Norway’s petroleum activities

80 New companies 2.5.2 The development phase 70 Small and medium-sized companies 60 The oil and gas industry has long lead times. For Large companies 50 a company that relies on organic growth, it can Large Norwegian companies 40 take years from award of an area until commercial SDFIS 30 discoveries are made and production starts. This 20 situation is the same for both operating companies

Number of license awards 10 and partners. An alternative strategy for compa- 0 nies that want to build a portfolio faster, including 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 possible operatorship, is to take over ownership interests in existing discoveries or fields. Substan- Figure 2.20 Award of ownership interests in pro- tial – and different – resources are required to duction licenses, number distributed by company develop a discovery into a producing field than type 2000–20111, 2. are required for merely being active in explora- 1 No award in 2005. tion. It may take quite a long time before a newly- 2 New companies since 2000 (4Sea Energy, Aker Exploration, Bayerngas Norge, BG Norge, Bridge Energy, Centrica, established company can take the step forward to Concedo, Dana, Det Norske, Discover, DONG, Edison, the production phase. The strategy of many of the Endeavour, Faroe, GDF SUEZ, Genesis, Lotos, Lundin, new companies is to sell their ownership interest Mærsk, Marathon, Nexen, Noreco, North Energy, PGNIG, Premier, Repsol, Rocksource, E.ON Ruhrgas, Sagex, Ska- in production licenses when discoveries are made gen 44, Skeie, Spring, Talisman, VNG, Wintershall, Agora to companies that possess greater expertise in Oil & Gas). Small and medium-sized companies (AEDC, development and operation, and have greater Hess Norge, Idemitsu, OMV, Petro-Canada, RWE-DEA, Svenska Petroleum), Large, international companies (BP, financial strength. These are among the main rea- Chevron, ConocoPhillips, Eni, ExxonMobil, Shell, Total), sons why the Norwegian Shelf currently has Large, Norwegian companies (Petoro, Statoil). fewer companies in the development phase than Source: Norwegian Petroleum Directorate. in the exploration phase. The trend in the development phase is towards more companies and greater diversity. Since the new millennium, a number of new We are now seeing the results of the restructuring companies have been awarded production of exploration policy carried out around the new licenses on the Norwegian Continental Shelf. The millennium. Today we have a great diversity of new companies have been active applicants and companies with projects undergoing development have received many licenses, cf. Figure 2.20. or in the late planning stages, cf. Figure 2.22. These companies have been particularly active in Operatorship of new, independent developments the awards of mature areas on the shelf. Through is divided among eight different operating compa- license awards and transactions, these new play- nies. The largest development projects often ers currently possess more than 55 per cent of the demand the most from the operating company. available license area, cf. Figure 2.21. These com- Statoil operates the most satellite developments, panies have received many licenses in the mature which is a natural result of the fact that Statoil is areas of the shelf. the operator of many of the major fields currently The large companies still play a key role in the in operation. There are also gains to be extracted numbered licensing rounds. The major estab- in the development and operations phases by lished companies are important when it comes to operating both satellite and host field. Five of the exploring for and developing new discoveries in operators of fields under development or in the mature areas and in deep water. If we are to planning phase are newly established companies ensure that these highly skilled companies main- on the shelf since 2000. Six of the 14 companies tain an active presence over time, we must have that have projects under development or in the an active exploration policy in areas where there late planning stages are currently field operators is a potential of making major discoveries. Open- today, while eight are new field operators in Nor- ing of new exploration areas is important in this way. respect. The development in the player scenario shows that different types of companies emphasise different areas, and that the companies complement each other in a manner which allows us to ensure exploration of both mature and frontier areas. 30 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

STATOIL PETORO NORECO DET NORSKE LUNDIN BG GROUP Numbered licensing rounds: WINTERSHALL 14 768 km2 SPRING Awards in predefined areas (APA): CONPHIL 9 537 km2 ESSO ROCKSOURCE RWE-DEA RUHRGAS IDEMITSU TOTAL BAYERN TALISMAN GDF SUEZ SHELL DANA ENI PETROCAN Numbered licensing rounds CHEVRON FAROE Awards in predefined areas (APA) NORTH ENERGY OMV DONG CENTRICA FRONT VNG EDISON PGNIG AMERADA MARATHON PREMIER SVENSKA MÆRSK SKAGEN LOTOS CONCEDO REPSOL NEXEN HOLDING SKEIE 4SEA BP BRIDGE SAGEX AGORA ALTINEX ENTERPRISE AEDC

0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 9 000 10 000 11 000

km2

Figure 2.21 Licensed area as of 1 May 2011, awarded after 2000. Source: Norwegian Petroleum Directorate.

tor and contribute their expertise to ensure opti- 2.5.3 The operations phase mal development and production of the fields, and The operator has a special responsibility for devel- to ensure that the activities are carried out in a oping the individual field. At the same time, the prudent manner. The fact that the partners other licensees have a special duty, e.g. under the actively contribute in the licensee groups is an statutory supervisory duty, to follow up the opera- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 31 An industry for the future – Norway’s petroleum activities

and Eni each own more than one per cent, and 15 Tie-in together they own 20 per cent of the gas reserves. Stand-alone The remaining gas reserves are owned by a group 10 comprising more than 20 companies which together own a total of five per cent. 5 Statoil is currently the largest operator of producing fields on the Norwegian Shelf, cf. Figure 0

Number of fields and discoveries 2.24. This is a consequence of the fact that the BP BP BG Eni Total Total Shell Det Hess

all company was awarded a number of operatorships Statoil norske DONG Lundin Maersk Wintersh Talisman Talisman Marathon in the early years of the petroleum activity, including many of the major fields on the shelf. At the Figure 2.22 Operatorship of discoveries under same time, Statoil has worked diligently to development or in the late planning stages as of explore adjacent areas and to mature resources. 2010. This has contributed to many new field develop- Source: Norwegian Petroleum Directorate. ments in recent years, particularly as regards satellite fields. important part of the contract they have entered Statoil is a key player in the operations phase, into through the production license. although the number of operatorships alone does Ownership of the reserves on the shelf is dis- not provide the complete picture. There is a sub- tributed across a broad range of companies, cf. stantial difference between operating a small sub- Figure 2.23. As regards oil, Statoil and SDFI sea tie-in and, e.g. a large field with many facilities, account for about one-half of the ownership, with such as Ekofisk. Relatively speaking, ConocoPhil- 30 per cent and 21 per cent, respectively. They are lips has few field operatorships, but is the leading followed by the major international oil companies company when it comes to developing the south- Total, ExxonMobil, ConocoPhillips, Eni and BP, ern part of the North Sea through its role in the each of which own somewhere between four and Ekofisk area. Various operating companies have ten per cent. Overall, this group owns more than a key tasks in different areas of the shelf. As men- third of the oil reserves. The last group comprises tioned, ConocoPhillips is the leading company in about 30 different companies which together hold the south, while BP and Talisman also hold opera- 13 per cent of the oil reserves. torships in the area. Marathon, Statoil and Exxon- Ownership of the gas reserves is somewhat Mobil operate fields in the central part of the more concentrated, but follows the same general North Sea, while Statoil plays a dominant role in pattern as for the oil resources. SDFI represents the northern part of the North Sea. Shell has 40 per cent of the ownership of gas reserves, important operatorships on Ormen Lange and while Statoil owns 35 per cent. A group of major Draugen in the Norwegian Sea. Statoil operates international oil companies comprising Shell, many fields in the Norwegian Sea, while Eni and Total, ExxonMobil, ConocoPhillips, GDF Suez

Oil, incl. NGL and condensate Gas

13 % 5 % 21 %

20 % SDFI 40 % Statoil Large, international companies 36 % Others 30 % 35 %

Figure 2.23 Ownership of the petroleum reserves divided by liquid and gas as of 31 December 2010. Source: Norwegian Petroleum Directorate. 32 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Tie-in 2000 Tie-in 2005 Tie-in 2010

30 Stand-alone 2000 Stand-alone 2005 Stand-alone 2010

0 Statoil BP ConocoPhillips ExxonMobil Talisman Shell Total Marathon GDF SUEZ

Figure 2.24 Operatorship of fields in operation as of 1 January 2000, 2005 and 2010. Mergers have been taken into account, e.g. the fields operated by Hydro in 2000 and 2005 are shown in the figure as Statoil. Source: Norwegian Petroleum Directorate.

BP also operate fields in the area. In the Barents A large operator is well-served by maintaining Sea, Statoil is the operator for Snøhvit, while Eni is competitive supply communities, which helps the operator for Goliat. ensure good, reasonable and secure deliveries The Norwegian Shelf depends on ensuring over the longer term. The supply industry also that large, competent companies also see attrac- benefits from competition. Today, the Norwegian tive business opportunities within the petroleum supply industry is among the best in the world. It activities here. These companies have the finan- has developed this position in part by succeeding cial strength to explore relatively unknown areas, in tough competition both in Norway and interna- to develop new technology and to initiate and tionally. implement large and demanding developments. The merger of Statoil and Hydro’s petroleum This is necessary if we are to realise the potential division meant that two strong groups were gath- on the Norwegian Shelf. ered in a single company. In its work on the report Companies with strong operator and owner- “Structural changes in the petroleum activities” in ship interests in field clusters are responsible for, 2009, the Ministry laid the foundation for monitor- and benefit from, triggering economies of scale. ing the consequences of the merger on the struc- Cost-efficient operation and development is a pre- ture of the Norwegian petroleum industry, includ- condition for realising the potential in mature ing how it would affect diversity among oil compa- parts of the Norwegian Shelf. Most of the projects nies, suppliers and research communities. in mature areas are small and must be tied in to Conducting this type of analysis is methodi- existing infrastructure. Rapid project progress cally demanding; and particularly demanding for and standardised development solutions will often an industry and a sector that has undergone be needed to ensure profitability in such projects. major changes that are not related to the event A joint operator of multiple fields facing the one wishes to measure the effect of. To be rele- same challenges can make it easier to realise pro- vant, such an analysis must be able to isolate the jects that require cooperation across several pro- effects of factors such as the financial crisis, struc- duction licenses. A large operator also streamlines tural changes in the industry and fluctuations in transfer of experience between fields. Such a oil and gas prices. The Ministry will consider structure is also a good way to make sure that les- whether it would be appropriate to conduct a new sons learned on one field also benefit other fields. review of the effects of the merger. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 33 An industry for the future – Norway’s petroleum activities

The Ministry has no basis for saying that a for shipowners and companies that acquire and consolidation of operatorships, such as the interpret geological data. Field development merger between Statoil and Hydro, has contrib- includes engineering, construction of platforms uted to undermining performance of the opera- and facilities, as well as installation work. Opera- tor’s role on the affected fields. However, these tions include activities such as drilling and well two companies both possessed unique depth, services as well as operations and maintenance scope and expertise concerning the Norwegian tasks, and sometimes also major modifications. Shelf, which both companies actively used to chal- A consolidation has taken place in the supply lenge each other. These two groups are now industry within field development. Several com- joined in a single company. Therefore, in certain peting environments in Norway are important to partnerships, the merger has created a gap which ensure that companies located in Norway can suc- the other licensees must fill. There is great diver- ceed in the competition for such assignments. sity among the licensees on the shelf. The fact With the acquisition of Kværner, Aker Solutions that different companies make independent ASA became the largest Norwegian main contrac- assessments and challenge the operator in the tor for turnkey field development contracts. It has respective production license is positive for been decided that large parts of Aker Solutions resource exploitation. Ownership in fields reflects ASA’s field development activity shall be split off the companies’ financial exposure, and through as a separate listed company, Kværner ASA, from the partnership, all licensees must contribute to the summer of 2011. Aibel can also carry out rela- good resource management, including good field tively large development projects, and has a well- operations. The Ministry has a clear expectation developed supply chain for implementing such that licensees must make active contributions in development projects. There are also other suppli- their respective licenses, and intends to reinforce ers with the capacity to be main contractors, but its efforts to ensure that this role is fulfilled. these companies normally pursue smaller or Today’s structure for operating fields, with a medium-sized projects, or enter into an alliance number of licensees who are to contribute to chal- with others. Examples of such field development lenge and drive the operator forward, combined suppliers include Bergen Group, Grenland Group, with areas that have the same operator for several Apply Group, Reinertsen, Fabricom and Nymo. key fields, has many good qualities. This applies The operations and maintenance market is both to generating and implementing good ideas, central in the production phase. Here the oil com- as well as to extracting the benefits of cooperation panies need a wide variety of deliveries, and here and economies of scale between different fields. too, the main contractors are important players. With a growing number of fields in production and many fields in a mature phase with declining 2.5.4 The supply industry production, this has become a large market. Sev- From its modest beginning about 40 years ago, eral suppliers have achieved a direct customer Norway has succeeded in developing a competi- relationship with the oil companies through tive petroleum-related supply industry. Today, this smaller and more specialised framework agree- is a huge industry. Companies deliver advanced ments. The operations and maintenance segment technological products and services to domestic has the most supplier companies, as well as the and international markets. The industry consists highest rate of new establishments. of a significant number of large, medium-sized The level under the main contractors is often and small companies located in all of the nation’s referred to as the system suppliers. These compa- counties. The supply industry is very dynamic. nies deliver major components that require engi- The individual companies position themselves neering and integration of various components. through internal reorganisations, mergers and Examples of system suppliers include FMC Tech- acquisitions. The supply industry has always had nologies, Aker Subsea Production Systems and a substantial element of foreign ownership. GE Oil&Gas, which are world leaders in delivery The oil and gas value chain can be roughly of subsea production systems. Other system sup- divided between exploration, development, opera- pliers include Kongsberg Maritime (control sys- tions/modifications and removal. There are mar- tems), Bjørge (system solutions for valves) and ket segments in each of these categories where Dresser Rand (generator and compressor pack- the Norwegian supply industry occupies good ages). These companies often purchase individual positions. For example, exploration includes seis- components from subcontractors and assemble mic surveys and drilling, which is a huge market the components in “product packages” or sys- 34 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities tems. These deliveries include more than a physi- 2.6 Opportunities in the various parts cal product; they also often include multiple ser- of the continental shelf vice components, such as training in the use of equipment, installation and testing. The overall picture of the Norwegian Shelf is The major suppliers benefit from internal sub- more complex than ever. Opportunities and chal- deliveries, but also make use of tailor-made deliv- lenges vary between the areas on the continental eries from external sub-suppliers. Several hun- shelf. This Chapter provides a review of some dred companies can be part of a supply chain. For development trends, challenges and opportunities example, FMC Kongsberg and National Oil Well for the various parts of the Norwegian Shelf. Varco have more than 1000 sub-suppliers. A prominent feature of the supply industry is that the supply chains have become more interna- 2.6.1 The southern part of the North Sea tional. In many cases, both fabrication and engi- Current production and future opportunities in neering are performed outside Norway in order the southern part of the North Sea are linked to to exploit the individual companies’ special exper- the chalk reservoirs in the area. A common fea- tise, increase own capacity and reduce costs. This ture here is that it takes a long time to produce the places new demands on project management and oil and gas. Ekofisk came on stream in 1971 as the handling of commercial risk. first field on the Norwegian Continental Shelf, and still has a long remaining lifetime. The area is a mature petroleum province with limited undiscovered resources. There is little likelihood of mak-

Figure 2.25 Fields and discoveries in the southern part of the North Sea. The size of the circle indicates the total remaining resource volume. Source: Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 35 An industry for the future – Norway’s petroleum activities

Figure 2.26 Fields and discoveries in the central part of the North Sea. The size of the circle indicates the total remaining resource volume. Source: Norwegian Petroleum Directorate. ing major discoveries that could trigger new infra- next 40 years. Plans for extensive further develop- structure in the area. ment of Eldfisk and Ekofisk Sør have recently The majority of today’s production comes from been approved, which will lead to major invest- the Ekofisk, Eldfisk, Tor, Valhall and Hod chalk ments in the area in the next few years. fields. Together, these fields will contain very sig- Realising all these possibilities will take time. nificant remaining oil volumes after production One of the restrictions for development of the ceases, according to current plans. There are a area is gas treatment capacity. For some of these number of shut down chalk fields in the area with projects, it is most expedient to defer development low recovery rates. There are also discoveries until capacity becomes available in the existing that have not yet been developed. This means that infrastructure, rather than investing in new capac- there are substantial remaining proven resources ity. Ekofisk is a hub for the petroleum activity in in the area which constitute a potential for contin- the area, and many fields are tied in to the infra- ued production and value creation for decades to structure on Ekofisk for further transport in the come. Investments are being made in new facili- Norpipe system. ties both on Valhall and Ekofisk. This will enable Valhall receives its power supply from land. operation and production from the area for the The cable to the field from Lista has limited capac- 36 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities ity other than the needs on Valhall and Hod. Fur- Alvheim and Grane are among the largest oil ther electrification of the area has been studied on producers on the Norwegian Shelf, and they are a number of occasions, most recently in Climate expected to continue to produce for many years. Cure 2020 and in connection with the further Alvheim is produced using water injection. The development of Ekofisk and Eldfisk. fields are also potential tie-in hubs for new discov- The large chalk fields are currently produced eries in the area. Vilje and Volund, which produce with water injection, in order to maintain pressure to Alvheim, are examples. and force the oil out. There is a limit to how much In spite of declining production, Sleipner can of the oil can be extracted using this method. maintain good capacity utilisation and achieve Therefore, implementation of other methods is extended lifetime as a consequence of discoveries being considered in the later phases of the fields’ in the area being tied in to the field. This will also lifetimes. Use of these methods on one or more of help achieve better exploitation of the Kårstø facil- the large chalk fields could lead to extended oper- ities. Development of fields and discoveries such ation, and thus more value creation and employ- as Gudrun, Sigrun and Dagny are good examples ment in the area. CO2 injection is one method that of this. Sleipner is also an important hub for the could be relevant over the longer term. However, Norwegian gas transport system, as both the UK there are reservoir-related, technical, regulatory market and the Continental market can be and cost challenges associated with these meth- reached from here. Sleipner also has facilities ods. An additional problem as regards CO2 injec- designed to reduce the CO2 content of the gas. tion is obtaining enough of the gas out on the For nearly 15 years, the CO2 extracted from the field. Sleipner wellstream has been stored under the There has been a strong focus on the Ula field seabed, yielding important experience and knowl- on improving recovery using alternating water edge about such subsurface storage. and gas injection (WAG). This has proven suc- Several discoveries have been made in the cessful. Several satellite fields have been tied in to Heimdal area, although they are too small to Ula, bringing gas to the field for injection. The release independent developments. The gas in the field needs even more gas to realise its potential discoveries must either be tied in to an oil devel- for improved recovery. Such injection is also opment in the area, or as a subsea solution to being considered on the Gyda field. As a conse- Heimdal or to fields on the UK shelf for further quence, the field will need access to more gas processing. The costs associated with maintaining than it currently has. process activity on Heimdal are relatively high. The overall potential for improved oil recovery Gassco is considering solutions for the facility that in the southern part of the North Sea is substan- can result in lower operating costs. tial. While the greatest potential is found in the The area is characterised by varied geology, large fields, there are also interesting volumes in with discoveries in many different types of petro- smaller fields, with Yme being one such example. leum reservoirs. The Utsira High is another inter- Yme was shut down in 2001 after producing for six esting area in the central part of the North Sea, years, due to low oil prices and production prob- with mainly oil being discovered here. Explora- lems. There was still recoverable oil left in the tion activity has taken place since 1967 and the field, which in 2006 led the new field owners to geology is well-known. Like the southern part of decide to redevelop the field. Yme will be the first the North Sea, the likelihood of making very large shut down field on the Norwegian Shelf that is renew discoveries in the Central North Sea is con- opened. sidered to be small. Although the Utsira High is considered to be a mature area, new types of reservoirs have been discovered here in the last five 2.6.2 The central part of the North Sea years. A total of 32 exploration and appraisal wells The central part of the North Sea (between 58 and have been drilled in the area, where exploration 60 degrees latitude) has a long history of petro- activity remains at a high level. Plans are in place leum activity. Balder, which was proven in 1967, to drill about 20 exploration and appraisal wells was the first oil discovery on the Norwegian Con- over the next four years. Interesting discoveries tinental Shelf, although it took 30 years before the have been made, including Luno, Draupne and field was developed. The first development in the Avaldsnes. area was the Frigg gas field which produced for nearly 30 years before it was shut down in 2004. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 37 An industry for the future – Norway’s petroleum activities

Figure 2.27 Fields and discoveries in the northern part of the North Sea. The size of the circle indicates the total remaining resource volume. Source: Norwegian Petroleum Directorate.

both in fields and discoveries. Many late-phase 2.6.3 The northern part of the North Sea fields combined with aging infrastructure, high- Oil and gas have been produced in the northern light the importance of making decisions early part of the North Sea (between 60 – 62 degrees enough to extract the considerable resource latitude) since the late 1970s. There are significant potential in the area. At the same time, it is impor- remaining reserves and resources in the area, tant that the preconditions of prudent operations 38 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities and safe lifetime extension form the basis for such activity. 2.6.4 The Norwegian Sea The northern part of the North Sea consists of The Norwegian Sea was opened for exploration two main areas: Tampen and Oseberg/Troll. Oil activity in 1980. The first field to commence pro- and gas from the fields in the northern North Sea duction in the area was Draugen in 1993. Draugen are transported in part by ship and in part is the only facility resting on the seabed in the through pipelines to land facilities in Norway and area. A number of floating installations have since the United Kingdom. Statfjord is now a late-phase been established, including Åsgard and Norne. field with production of remaining gas being Several smaller fields around existing infrastruc- exported to the UK. Troll has a very important ture have been put into production in recent function for gas supply from the Norwegian Conti- years. nental Shelf, and will remain the main source of Today, Haltenbanken and Ormen Lange are Norwegian gas exports in the future. Oil produc- mature areas with considerable oil and gas pro- tion is falling in the Oseberg area, although the duction, along with well-developed infrastructure. fields here will continue to produce for many There are also areas in the Norwegian Sea that years. The last development, Gjøa with its satel- have not yet been developed or even opened up lites, will help maintain production in the area. for exploration activity. Oil production from the Maintaining sufficient flexibility is important major fields in the area is declining. The gas in order to safeguard maximum value creation in export capacity from Haltenbanken, through the new discoveries. By considering multiple fields Åsgard transport system (ÅTS), is fully utilised and areas together, one can coordinate solutions for several decades into the future. This could so that costs per produced unit are as low as possi- affect the timing for phase-in of new discoveries ble. Coordination across fields and production on Haltenbanken. The timing for production of licenses can yield considerable rewards. There is gas that up to now has been used as pressure sup- a need to renew and streamline the extensive port for oil production will affect how long the cur- infrastructure to facilitate resource utilisation and rent capacity is fully utilised. Gas injection has value creation in a long-term perspective. The been used for the Åsgard fields, and will continue work being done on the «Snorre 2040» project is to be a key factor in maintaining reservoir pres- important for further development of the Tampen sure and oil production. area. Use of existing/new facilities, future oil It has been proven that the Norwegian Sea export solutions, flexible gas export/import solu- contains a lot of gas. Produced gas from the fields tions, efficient energy solutions and safe lifetime is transported in the ÅTS pipeline to Kårstø in extension are important topics in this work. Rogaland, and in Haltenpipe to Tjeldbergodden in A challenge faced by several fields in the area Møre og Romsdal. The gas from Ormen Lange is the ratio between gas extraction and oil produc- runs in a pipeline to Nyhamna, and from there on tion. This is particularly important in the Troll- to the United Kingdom. The CO2 content of the Oseberg area where more wells are needed. To gas produced from several of these fields is rela- achieve this, the area’s general challenges related tively high, which is also the case for several of to depressurisation in the reservoir must be the discoveries in the area. Gas from these fields resolved in a sound manner, and good solutions is therefore blended with other gas with lower must be developed to handle the overpressure in CO2 content to achieve compliance with gas qual- the Shetland formation, which complicates the ity requirements. This blending takes place from completion of new wells on the Gullfaks field. fields both in the Norwegian Sea and from fields Ongoing and planned drilling rig upgrade pro- located further south. This creates interdepend- jects, including on Snorre, Gullfaks and Oseberg, ence between the fields in the Norwegian Sea, are necessary measures. Another issue in the and affects how the individual fields are produced. area is injection of gas to recover more oil. This is Two fields are being developed: Marulk, already applied on several fields and studies indi- which will be tied in to Norne, and Skarv, which is cate that gas injection could be a good solution for being developed with its own process facility. even more fields, including fields that do not have Work is underway on a further development of their own gas. Ormen Lange. The Vøring area in the Norwegian Sea is currently an area without infrastructure. Several gas discoveries have been made in the area. The planned development of Luva could create a foundation for further exploration activity 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 39 An industry for the future – Norway’s petroleum activities

Figure 2.28 Fields and discoveries in the Norwegian Sea. The size of the circle indicates total remaining resource volume. Source: Norwegian Petroleum Directorate. 40 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Figure 2.29 Fields and discoveries in the Barents Sea. The size of the circle indicates the total remaining resource volume. Source: Norwegian Petroleum Directorate. and new developments in the area. The operator’s The Goliat oil field was proven in 2000 and plan calls for gas from the discoveries to be trans- development and operation was approved by the ported to Nyhamna where the gas from Ormen authorities in 2009. The plan calls for reinjecting Lange is already processed. the gas from Goliat, but gas export solutions are also being studied. Based on Goliat’s gas evacuation needs, Gassco has initiated an area study with 2.6.5 The Barents Sea the objective of mapping future needs and gas The Barents Sea is currently the least explored transport alternatives from the area. The study part of the Norwegian Continental Shelf. will cover both gas export by pipeline and ship, as Together with the deep-water areas in the Norwe- well as domestic use of gas from the area. gian Sea, the Barents Sea is considered to be the In the spring of 2011, Statoil made a significant area with the greatest probability of making large oil discovery on the Skrugard prospect in the Bar- new discoveries. Eleven exploration wells are ents Sea. This discovery is a breakthrough in this planned in the Barents Sea in 2011. unexplored area, and an important exploration The first exploration well in the Norwegian event for the Norwegian Shelf and the Barents sector of the Barents Sea was drilled in 1980, and Sea. The discovery is located about 100 kilome- Askeladd, the first gas discovery, was made the tres north of the Snøhvit field, and the resource following year. Snøhvit started production in 2007 estimate is so positive that it could release a new and is produced via the LNG facility at Melkøya. independent development. This discovery opens This development includes the Snøhvit, Albatross up new opportunities for further activity in the and Askeladd gas discoveries. Barents Sea. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 41 An industry for the future – Norway’s petroleum activities

Box 2.2 The land facilities

The Kollsnes facility has been constructed Kårstø – larger gas volumes are needed by 2020 with six independent gas processing lines which The gas processing facility at Kårstø is a central enable stepwise downscaling when it becomes facility for processing gas volumes from the necessary to reduce the processing capacity at North Sea and the Norwegian Sea. Estimates the facility. for the gas processing plant at Kårstø show a significantly reduced supply of gas feed from 2020. These forecasts are based on the gas pro- Nyhamna – needs new access to natural gas from the ducers’ reported capacity needs at the facility. Norwegian Sea The Kårstø facility is densely integrated, The Ormen Lange field delivers natural gas to with dependencies that entail that any reduction Nyhamna, and about 70 million Sm³ of dry gas is of capacity will force the newest parts of the processed per day. This gas is mainly exported facility to close first. This means that mainte- to the UK. With failing decisions to develop nance and other work to ensure the robustness ongoing maturing fields in the Norwegian Sea of the oldest parts of the plant will still be (such as Luva and Linnorm) with tie-in to needed when the plant’s capacity is adjusted Nyhamna, capacity exploitation will experience downward. As the petrochemical industry in the a significant drop around 2020. The gas process- Grenland area uses ethane from Kårstø as one ing facility was built for the Ormen Lange field, of its most important raw materials, the future of and will be forced to close if new fields are not this industry will be linked to the future feed sit- tied in to Nyhamna during the field’s lifetime. uation at Kårstø.

Tjeldbergodden – Heidrun’s gas injection needs are Kollsnes – will maintain two-thirds capacity important utilisation until 2030 Tjeldbergodden receives gas from the Heidrun Natural gas from the Troll, Kvitebjørn, Visund field via Haltenpipe. The gas volumes in Halten- and Fram fields will be delivered to the gas pro- pipe go exclusively to industrial use at Tjeldber- cessing facility at Kollsnes. Nearly 40 per cent of godden. Today, Tjeldbergodden utilises less all Norwegian gas exports run through this than one-third of the available gas capacity in facility, which has a total capacity of 143 million Haltenpipe, but there are several other fields Sm³ dry gas to Europe per day. Gas from Kolls- that could potentially deliver gas via this pipe- nes is also an important blending gas due to its line, given reasonable facilitation. Heidrun can low CO2 content. The feed gas supply to Kolls- deliver gas to Tjeldbergodden for quite a long nes will be reduced as we move towards 2020. time, but the need for gas injection on the field Capacity utilisation of about two-thirds can be could limit gas extraction, and thus also poten- maintained until 2030, even if new discoveries tial gas transport to Tjeldbergodden. are not tied in to the gas processing plant. 42 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

3 Oil and gas prices support profitable activity

Oil and gas prices are key elements in the effort people out of poverty. The time currently spent to achieve our petroleum policy goals. The sales gathering fuel can be used for other purposes. value of oil and gas forms the foundation and The time, energy and resources can instead be determines the level of value creation and state devoted to producing, obtaining and preparing revenues from the industry. This Chapter provides food. Light will facilitate better education. a review of the outlook for the oil and gas markets. The world will need more energy in the future. Economic growth and improved standards of liv- 3.1 The oil market ing, population growth and increased urbanisation, along with energy and environmental policy, 3.1.1 Development trends will drive the development in energy consump- Oil market developments are affected by a num- tion. This growth will be particularly significant in ber of different factors: economic growth, energy emerging economies and in developing countries and environmental policy, geopolitical factors and where energy consumption per capita is low and developments in the Middle East, technological energy poverty is extensive. development, changes in consumer behavior, etc. Not only does the world need more energy, it The market is in constant development, and the needs cleaner energy. Fossil energy sources cur- factors driving this development may change over rently make up 80 per cent of total energy access time. Some development trends can be noted if we and will continue to supply most of the energy look at the oil market over the last five years: need for decades to come. In many countries, the transition in energy supply from carbon-intensive coal to cleaner gas can yield substantial green- High, rising and fluctuating oil prices house gas reductions. The world faces a sobering The average price during the last five-year period challenge in obtaining both more and cleaner is 70 USD per barrel, while the price in the 1990s energy. Development in energy consumption will was less than 20 USD per barrel, cf. Figure 3.1. be affected by many factors, including both global While prices have generally been higher, abnor- and regional climate policy. mally large fluctuations have also occurred. Dur- Energy security will also be an important ing this period, the price of oil has varied from 30 objective in energy policy, in addition to more and to 140 USD per barrel. cleaner energy. Producer and consumer nations share a common interest in reliable energy supply. Efficient and well-functioning oil and gas markets, 80 along with good energy dialogues between producer and consumer nations, are important factors in achieving this objective. 60 Reliable access to energy is a key factor in the development of the world economy, and is closely 40

connected to national prosperity and develop- USD per barrel ment. Access to energy can free up labour cur- 20 rently used on low-productive manual labour, resulting in increased production, higher wages 0 and less physically demanding work situations. 1990-94 1995-99 2000-04 2005-09 Large parts of the world’s population consume very little energy. 1.5 billion people are without Figure 3.1 Oil price, 5-year average. access to electricity. Improved access to modern Source: PIRA. forms of energy is needed in order to lift these 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 43 An industry for the future – Norway’s petroleum activities

OPEC has played an important role in price trends 100 Ever since it was established 50 years ago, OPEC 75 has attempted to influence the price of oil. From the year 2000, OPEC sought to maintain the price within a price band of 22–28 USD per year, but 50 abandoned this effort in 2005. OPEC has not had Mill. barrels per day an official price target since that time, but in prac- 25 tice has tried to maintain an oil price of 70–90 USD per barrel. 0 1970 1975 1980 1985 1990 1995 2000 2005 2010

Importance of financial markets Figure 3.2 Historical oil consumption. The financial markets have become more impor- Source: PIRA. tant for price formation. Trading in futures and other financial instruments has grown considerably in recent years, both on the regulated commodity exchanges and in the OTC1 markets. To an increasing degree, we see capital being placed 3.1.2 Demand in oil for purely financial investment purposes. Oil has been one of the most important commodi- This development has impacted price formation in ties in the world economy for a very long time. the market. Oil is priced in US dollars in the inter- Demand for oil has grown steadily in recent dec- national market. We note that the price of oil is ades, driven in particular by higher global produc- more strongly correlated with the dollar exchange tion, population growth, increased transport activ- rate and share indices, and that financial market ity and urbanisation. trends have a greater impact on short-term devel- Periods of declining demand have also been opment in crude oil prices than was the case pre- experienced, such as in the early 1980s when the viously. real price of crude oil skyrocketed over a short period of time. The financial crisis in 2008–2009 caused a sharp drop in the demand for oil, while Growth outside OECD demand grew again in 2010. The growth in demand has come exclusively from Consumption of oil will most likely continue to developing countries and emerging economies, grow, both over the short and longer terms. with China being particularly important in this Growth in oil use could be particularly evident in respect. emerging economies and in the transport sector. There is a need for oil in China, India and other emerging economies where oil consumption per Higher production costs capita is a mere fraction of the consumption in the The cost of producing oil has risen sharply, nearly doubling over the last five years. The financial cri- 70 sis in 2008 contributed to a temporary drop in 60 USA costs, with the rising trend resuming in 2010. The 50 cost increase is related in part to the fact that 40 remaining resources are gradually becoming Japan 30 technologically more difficult to recover. How- Barrel o.e. Western-Europa ever, the higher costs are also linked to the high 20 FSU 10 Latin-America level of activity in the international petroleum China India industry and rising prices for input factors in the 0 oil and gas activity. 01020304050 GDP in 1000 USD per capita

Figure 3.3 Oil consumption and gross domestic product per capita. 1 OTC – over the counter, direct trade between two parties outside the exchange/marketplace. Source: PIRA. 44 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

40 Growth in consumption will vary widely, depending on use. The transport sector is the OECD Non-OECD 30 most important element for the oil market. More than half of all oil consumption takes place in this 20 sector, and oil accounts for nearly all the energy used there. There is reason to expect that most of 10 the energy consumption in the transport sector Mill. barrels per day will still be from oil-based fuels for quite a long 0 time. Other oil consumption includes stationary

-10 applications such as power generation, the petro- 2000-10 2000-15 2000-20 2000-25 chemical industry and oil for heating purposes, cf. Figure 3.5. Figure 3.4 Cumulative growth in oil demand At the same time, other energy sources such (basis year 2000). as biofuels and electricity may gain greater accept- Source: PIRA. ance in the transport sector, driven by energy security, climate and environmental considerations. Both the EU and the US have targets for OECD countries cf. Figure 3.3. Both total value greater use of biofuels, primarily in road transport creation and per capita income are growing rap- which accounts for most of the energy consumed idly in these countries. In addition to higher in the transport sector. There are also expecta- energy consumption, higher income levels are tions for increased use of electricity in the trans- often accompanied by a transition from traditional port sector through the development of more effi- energy forms such as biomass to «modern» cient batteries in automobiles and plug-in hybrid energy forms such as electricity and oil products. cars. Replacing the automobile fleet will take time, Oil consumption may have already peaked in which will in turn affect the timing for when new the traditional OECD area. Current consumption technologies can result in reduced oil consump- is about ten per cent lower than five years ago. tion. This is due in part to the economic downturn in Demand for oil may increase by as much as 2008–2009. In the years to come, oil consumption one million barrels per day annually, reaching 100 will most likely be further curtailed as a conse- million barrels per day in 2020, cf. Figure 3.5. quence of measures initiated to reduce CO emis- 2 Large, new oil resources must be developed; not sions and promote renewable fuels. This is partic- just to meet the expected growth in demand, but ularly the case e.g. in the US and in the EU coun- also to replace declining production from existing tries. fields. According to IEA estimates, production Analyses from sources such as the IEA and from fields that are currently on stream could fall the consultant firm PIRA indicate that all growth by nearly three-quarters over the next 25 years. in oil demand over the next 10–20 years will come This is equivalent to an annual production loss of 2 from developing countries and emerging econo- million barrels per day, or nearly Norway’s entire mies cf. Figure 3.4. oil production.

120 Transport Stationary use 3.1.3 Supply 100 Whether or not global oil resources are sufficient 80 to meet the increased need for oil in the future has been a recurring question. Estimates of the 60 world’s oil resources are uncertain, and it is 40

Mill. barrels per day impossible to accurately predict the size of the oil resources, or how much of these resources can 20 actually be produced, based on technical and eco- 0 nomic factors. This will also depend on factors 2010 2015 2020 2025 such as oil price development, as higher prices will mean that more resources will be economi- Figure 3.5 Demand trends distributed by area of cally interesting. application. A pessimistic resource assessment points out Source: PIRA. that, for more than 30 years, oil consumption has 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 45 An industry for the future – Norway’s petroleum activities

60 300 2000 Discoveries Production 50 250 OPEC Non-OPEC Average size of discoveries (r. axis) 1500 40 200

30 150 1000 Mill. barrels Bill. barrels 20 100 Bill. barrels per year 500 10 50

0 0 0 1960-1969 1970-1979 1980-1989 1990-1999 2000-2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 3.6 Oil discoveries and oil production. Figure 3.8 Proven global oil reserves. Source: IEA, WEO 2010. Source: BP. been greater than the growth in reserves through needed to achieve this. Many of the producers exploration, cf. Figure 3.6. However, this could outside OPEC are in decline, such as Norway, partly be due to the fact that there has been little Mexico and the United Kingdom. As regards the exploration in parts of the world, for a number of two largest producers, Russia and the US, produc- different reasons. This is true, for example, in the tion is expected to remain stable or increase Middle East, in spite of the fact that the region slightly in the years to come. Significant produc- holds a significant potential for new discoveries. tion growth could occur in Brazil where a number Remaining reserves have grown, in spite of of major oil discoveries have been made in recent the fact that oil consumption has been greater years. Canada could also significantly increase than the volume of resources proven through production, if it continues to develop its oil sand exploration. This is due to more efficient produc- resources. Estimates indicate that production out- tion methods resulting in higher recovery rates. side OPEC could rise in the years to come, but not Remaining proven reserves are estimated at nearly as much as the expected growth in nearly 1500 billion barrels, which is more than all demand. of the oil that has been produced to date. With the This means that the OPEC countries will have current withdrawal rate, the oil will last for more to meet most of the growth in demand. It is than 40 years. The world’s total recoverable oil assumed that two-thirds of the world’s oil volumes could be more than 6000 billion barrels, resources are found in OPEC member countries. according to estimates from sources such as the These countries currently represent about 40 per IEA. cent of the oil production, and the resource base A more pressing question than the size of in these countries could support considerable pro- world oil resources is whether the oil producers duction increases above the current level. How- will be able to increase production in step with the ever, ample access to resources is no guarantee growth in demand, and what oil price level will be for stable production growth. Several of the resource countries in OPEC have been, or are cur-

120 rently, politically unstable. Historically, the Middle OPEC Non-OPEC East has been characterised by frequent wars and conflicts, leading to periods of unstable or declin-

80 ing oil production and thus affecting these countries’ ability to build up new production capacity. Budget restrictions can also affect the countries’ 40 opportunity to develop new capacity, as capital for Mill. barrels per day investments in oil production must compete with the countries’ other needs. The extensive unrest 0 in the region this year has lead to a halt in oil 2010 2015 2020 2025 exports from Libya and a sharp rise in oil prices. Iraq is an example of an OPEC country with Figure 3.7 Future development in oil supply significant unexploited oil resources. The country Source: PIRA. has now entered into agreements with the interna- 46 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities tional oil industry that could result in rapidly 140 growing production in the years to come. How- ever, political instability and lack of security in the 120 country could mean that such a development can- 100 not be fully realised. 80

60 Historical USD per barrel 3.1.4 Oil price 40 IHS CERA 20 The price of oil is the single most important factor PIRA for Norway’s petroleum activity. The price of oil 0 has exhibited considerable historical variation 2000 2005 2010 2015 2020 2025 from year to year, and issuing accurate price development forecasts has proven to be difficult. Figure 3.10 Oil price development, historical and In 2010, the spot price for oil was in the range future (fixed dollar). of 70–90 USD per barrel (Brent Blend), which is a Source: IHS CERA, PIRA. relatively high level in a historical perspective. Prices have risen steadily in 2011 to more than 120 USD per barrel, on the background of unrest Over time, we do not expect that the price of oil and diminished oil deliveries from Northern will be lower than the costs associated with devel- Africa and the Middle East. The development in oping new oil fields, or increasing recovery from this region now represents a considerable ele- existing fields. Costs have risen substantially over ment of uncertainty for the oil market. A normali- the last ten years. It is not reasonable to expect sation of the situation could lead to a drop in oil that costs will fall much over the longer term. prices, while there is also the chance that the Marginal oil production is occurring in increas- unrest could spread, which could lead to even ingly deeper water and at a greater distance from higher prices. the markets, which contributes to higher costs. There are many factors in the market that Nor is there reason to believe that the costs asso- could contribute to maintaining high oil prices in ciated with unconventional oil, such as oil sand, the years to come: will be much lower than the current level. – Increasing demand from China, India and The cost level, as illustrated in Figure 3.9, indi- other emerging countries cates that an oil price of 60–80 USD per barrel is – Weak growth in oil production from non-OPEC necessary in many areas in order to ensure that is countries it profitable to utilise the resource base. Produc- – Higher market share for the OPEC countries tion costs in many OPEC countries, such as Saudi – OPECs market regulation Arabia, are much lower. However, there is no rea- – Geopolitical factors, risk and instability in son to believe that these countries will be inter- major resource countries ested in or capable of increasing their capacity so – High production costs in many important pro- rapidly that it will not be necessary to develop new duction areas resources in high-cost areas outside the Middle East. The OPEC countries will also have an inter- Heavy oil (Venezuela) est in working against the oil price becoming so West-Africa (Angola, Nigeria) high that it undermines the long-term position of Oil sands (Canada) oil in the energy markets. By keeping spare pro- Norway duction capacity, OPEC has a means of preventing Gulf of Mexico (US) Brazil an excessively high oil price. Russia There are some differences of opinion Libya between various analyst environments when it Saudi Arabia comes to oil price trends in the years to come, cf.

0 25 50 75 100 Figure 3.10. For example, PIRA assumes a gradu- USD per barrel ally increasing real price for oil up to about 125 USD per barrel in 2025, equivalent to a nominal Figure 3.9 Production costs for oil. market price of about 175 USD per barrel. IHS CERA, on the other hand, assumes a real price for Source: IHS CERA. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 47 An industry for the future – Norway’s petroleum activities oil of between 100 and 110 USD per barrel up to world’s total energy demand. The most important 2020, with a declining trend from 2015. markets for gas are North America, Europe, Cen- The Ministry is of the opinion that an oil price tral Asia and Asia. Gas demand is expected to development approximately at the level of these experience strong growth in the years to come, cf. estimates is possible over the next 10–20 years. At Figure 3.11. In Asia, for example, gas demand is this level, oil prices can make it profitable to pro- expected to grow by 225 per cent toward 2035. duce large parts of the Norwegian petroleum Economic growth and population growth are the resources, assuming that we can control costs. most important drivers of this development. High oil and energy prices are also important for development of renewable energy generation and to promote energy efficiency. Globalisation A key development trend in the last decade is the globalisation of the gas market through increased 3.2 Gas markets access to gas transported by ship (LNG – Lique- fied Natural Gas). This increased flexibility in gas There is considerable global growth in renewable transport has allowed gas to reach new markets. energy generation from sources such as wind, The number of countries importing LNG has tri- solar and biomass. However, these sources are pled over the last ten years. Most of the increase growing from a low level, and they are still in gas production based on ship transport has expected to account for just a small percentage of come from Qatar. Based on market outlook at the world energy sources for many years to come. It is turn of the century, the country undertook an important that we turn world consumption of fos- extensive investment program with a view sil energy carriers towards the most climate- towards supplying the US and European markets friendly sources. Coal is the most carbon-intensive with gas. energy source, and many countries could achieve significant cuts in their CO2 emissions by replacing coal and oil with gas. Unconventional production Another factor that characterised the gas market was the growth in production of unconventional 3.2.1 Development in the gas market gas in the US. This production has grown exten- Natural gas, coal and oil are the world’s most sively since the mid-1990s, in part as a conse- important sources of energy. In 2008, demand for quence of reduced production costs and suffi- gas accounted for more than 20 per cent of the ciently high gas prices.

Asia

Middle East

Central Asia

South America

North America

Europe

Africa

0 100 200 300 400 500 600 700 Bill. scm

Figure 3.11 Expected growth in demand 2008–2035 (billion scm). Source: IEA. 48 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Economic downturn 700 At the end of the previous decade, an international 600 economic downturn lead to reduced demand for 500 Demand gas, both as an input factor in industry and as a 400 consequence of lower energy consumption. Own production 300 Reduced demand combined with increased supply, both in the US and gas in the form of LNG, Bill. Scm per year 200 lead to an imbalance in global gas supply. 100

Increased gas transport flexibility means that con- 0 ditions in an individual regional market are more 2008 2015 2020 2025 2030 2035 greatly affected than previously by incidents in other regional markets. The consequences of Figure 3.12 EU gas demand and own production. these factors included a drop in spot prices for Source: IEA. gas, also in Europe. In 2010, demand for gas had nearly returned to the same level as before the economic setback More than 95 per cent of Norwegian gas is in 2008. This demand was driven by cold weather, sold in the European market, which means that but also by strong underlying growth in gas development in European energy consumption is demand, which is expected to continue in 2011. very important for Norway. The EU’s energy pol- Very strong demand for gas is expected from icy mainly balances three considerations: the envi- China and India in the next few years due to ronment, security of supply and competitive strong economic growth and a substantial need energy prices. In 2008, the EU adopted principal for energy in general. goals for climate policy, referred to as EU 20–20– The possibilities posed by unconventional gas 20. These targets entail the following achieve- production have significantly increased world gas ments towards 2020: a 20 per cent reduction in reserves and the growth in LNG supply has made CO2 emissions, increase renewable energy gas available to new markets. Overall, this has sources to 20 per cent and implement energy effi- reinforced the position of gas as a reliable energy ciency measures to help achieve a 20 per cent source. reduction in energy demand. During the course of 2010, most EU countries launched plans for achieving these goals. Implementation of these 3.2.2 European gas demand plans will have a significant bearing on the future The EU countries consume about 500 billion scm role of gas in the European energy picture. gas per year, or about five times the Norwegian Energy from renewable sources will help facil- production. During the period from 2000 – 2008, itate the EU countries’ efforts to reduce green- average annual demand growth in the EU coun- house gas emissions and their need to import tries was two per cent. The economic downturn in energy. Power generation solutions based on wind 2008 and 2009 caused demand for gas to fall by and solar are considered to be the two alternatives about six per cent. Gas demand is expected to with the greatest potential for growth in renewa- recover to the 2008 level in the course of the next ble energy. Due to the expected and natural varia- few years. tions in wind and sunshine, and since the pro- Gas is used in households, in business and duced power cannot be stored, these renewable industry, the public sector and the power sector. energy sources must be supported by considera- In the household sector, gas is used for heating ble back-up power generation capacity to replace and cooking, while it is primarily used for heating deliveries when the wind doesn’t blow or the sun in the commercial sector. In the industrial sector, doesn’t shine. This back-up capacity is mainly gas is used for heating, in industrial processes and expected to come from gas or coal in the short as a raw material in the petrochemical industry. A and medium perspective. number of factors affect demand for gas, with the Demand for gas in the EU is expected to grow, single most important factors being economic while the EU countries’ own production of gas will growth, the price of gas relative to other energy decline, cf. Figure 3.12. This means that the EU sources, technological development and energy will need to increase imports of natural gas in the policy. decades to come. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 49 An industry for the future – Norway’s petroleum activities

0,8 350 CO 2 Fuel costs 300

0,6 Variable operating costs 250 Fixed operating costs

Investments 200 0,4 150 Euro per MWh

100 0,2 Tonnes CO 2 per MWh electricity 50

0 0 Gas Imported Gas Nuclear Imported Onshore Offshore Solar CSP Solar PV coal power coal wind wind

Figure 3.13 CO2 emissions for gas and coal-based power generation (left), long-term marginal cost for power generation in Europe (right)1.

1 Assumptions: Gas price: 7.8 $/mmbtu, Brent: 84 $/bbl, coal CIF ARA: 78 $/tonne, coal/lignite: 2 €/GJ, CO2: 28 €/tonne, USD/ EUR=1.44. Source: CERA.

Most of the growth in gas demand is expected the industrial sector. Some of the demand for gas to come in the power sector. This is due to a com- in Europe is expected to disappear permanently as bination of increased demand for electricity, a consequence of industry shutdowns. replacement of old power generation capacity to be phased out and a need for back-up capacity in connection with renewable power generation. 3.2.3 Gas supply in Europe The average age of European coal power The remaining conventional recoverable gas plants indicates that a significant number of these reserves within the EU2 are estimated at 2 500 bil- must be upgraded or replaced in the near future. lion scm. The EU countries’ own production of A comparison of power generation based on coal gas currently covers about 40 per cent of their and gas reveals a number of advantages for gas. consumption, but this number is falling as the CO2 emissions from a gas power plant are as resource base is mature. much as 70 per cent lower than from the same Production of unconventional gas in the US size existing coal power plant. If gas replaces coal has also increased substantially in recent years. in electricity generation in Europe, this measure Unconventional gas resources also exist in alone would be enough to meet Europe’s CO2 tar- Europe, but the volume is uncertain. Moreover, gets for 2020. The investments associated with developing these gas resources poses significant building a new gas power plant are lower than for challenges, such as high costs compared with a coal power plant. Gas power plants also provide conventional gas, access to area, conditions more flexible production and take less time to imposed for such recovery and public acceptance. build. Replacing old coal power plants with gas An industrial framework must also be built to ena- power plants, in addition to the need for back-up ble such production. Most market players do not capacity for renewable power generation, can expect to see commercial development of uncon- form the basis for considerable growth in Euro- ventional gas in Europe until 2020. pean gas demand in the decades to come. 60 per cent of the European consumption is Energy efficiency measures can lead to lower imported from various sources. In a historical per- growth in gas demand from households as well as spective, the EU has imported gas via pipelines business and industry. The economic downturn has also entailed structural changes for parts of 2 BP, Statistical Review of World Energy 2010 50 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities from three sources: Russia, Algeria and Norway. pipelines and receiving terminals for LNG There has been a strong increase in LNG imports increase Europe’s opportunities for importing since 2000, which has lead to new gas suppliers gas, while also diversifying gas supply. entering the European market. In 2010, LNG accounted for 30 per cent of the total gas imports to Europe. The actual level of LNG imports in the 3.2.4 Gas prices years to come will depend on the supply balance In contrast to the oil market where the price of oil in the Asian and US gas markets, as well as the is determined in a global perspective, different level of gas prices in these markets, relative to regional gas markets have different ways of pric- Europe. Strong demand for gas outside the Euro- ing gas. The US gas price is determined by the pean market will limit the supply of gas in Europe. supply and demand balance for gas in the region, There are significant gas reserves close to the while the Asian gas price is mainly set in contracts European market. Development of new gas fields linking the gas price with other energy sources, and associated infrastructure is capital-intensive. typically oil. Decisions on new gas development projects are The European gas market is characterised by contingent on long-term expectations of suffi- two different pricing systems. The United King- ciently high gas prices. dom has a spot market for gas where price forma- Increased gas import to Europe is possible tion is based on the supply and demand balance using existing pipelines and LNG terminals, with for gas, while on the Continent, the majority of the new infrastructure projects adding to this poten- gas is still sold under long-term contracts related tial. The «Nord Stream» gas pipeline from Russia to oil products. to Germany is scheduled for completion in 2011– As a consequence of recent years’ changes in 2012, with an annual capacity of 55 billion scm. A the gas market and the strong development in the new pipeline from Algeria to Spain («Medgas»), price of oil, spot prices for gas have, in certain with an annual capacity of about 8 billion scm, was periods, diverged significantly from the price level completed in 2010. Other projects being pursued in oil-related contracts. Because the demand for by various players include a new pipeline from gas is starting to recover after the crisis and due Algeria to Italy via Sardinia («Galsi»), a pipeline to continued growth in global gas demand, spot from Russia to Europe through the Black Sea, prices for gas are expected to rise in the next few Bulgaria and Serbia («South Stream») and a pipe- years. line from Iran and Azerbaijan to Europe through Turkey («Nabucco»). Recent years have also brought an increase in 3.3 Summary receiving capacity for LNG in Europe, particularly in the United Kingdom where capacity has The world will need more energy in the future. increased to about 45 billion scm. There are a Economic growth and improved standards of liv- number of ongoing and planned projects that will ing, along with population growth, increased further enhance this capacity. New gas transport urbanisation and energy and environmental poli-

Box 3.1 Unconventional gas Gas resources traditionally believed to be too tion of unconventional gas represented about 45 complex or too expensive to produce are often per cent of total gas production in the US in called “unconventional” gas resources. The 2009. three most common types of such unconven- The size of these unconventional gas tional gas resources are gas in tight sands, coal- resources is uncertain. The IEA (WEO 2009) bed methane (CBM) and shale gas. These types indicates that remaining recoverable resources of gas resources are found around the globe, of unconventional gas are approximately as although production has so far been limited to large as conventional resources. With the cur- just a few countries. North America is currently rent level of gas demand, this is equivalent to the leading producer region. potential future supplies for 130 years for con- Technological development has helped ventional gas, and about the same for unconven- increase the production of unconventional gas, tional gas. while simultaneously reducing costs. Produc- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 51 An industry for the future – Norway’s petroleum activities cies, will drive development in energy consump- The gas market is changing. There is ample tion. This growth will be particularly high in the supply of gas and prices have come under pres- emerging economies and in developing countries sure in recent years, but demand is expected to where energy consumption per capita is low and increase and contribute to an improved gas mar- energy poverty is extensive. ket balance over time. With growing globalisation Not only does the world need more energy, it of the gas markets, gas will also gradually reach needs cleaner energy. Fossil energy sources cur- new countries and new markets. Climate policy rently make up 80 per cent of total energy access could also provide an additional stimulus for gas and will continue to supply most of the energy demand, as gas to replace coal is an effective need for decades to come. In many countries, the measure in reducing CO2 emissions. transition in energy supply from carbon-intensive Gas production in the EU countries is declin- coal to cleaner gas can yield substantial green- ing, and they will need to increase gas imports in house gas reductions. The world faces a sobering the years to come. Norwegian gas will help meet challenge in obtaining both more and cleaner the European gas demand, and will be an attrac- energy. Development in energy consumption will tive and valued energy source for many decades be affected by many factors, including both global to come. This means there will be a basis for prof- and regional climate policy. itable exploration, development and production of Energy security will also be an important the gas resources on the Norwegian Continental objective in energy policy, in addition to more and Shelf. cleaner energy. Producer and consumer nations share a common interest in reliable energy supply. The growing need for more and cleaner The Government will: energy, for oil and gas, along with an emphasis on • Work to promote efficient and well-functioning energy security, all point to good prospects for oil and gas markets. Norway’s export of oil and gas. Norway has • Through dialogue with the authorities in other always been, and will remain, a stable and predict- countries and participation in international able supplier of oil and gas. This is a competitive forums, work to ensure that the advantages of advantage for Norway as an energy supplier. natural gas over the use of coal are taken into Rising demand, higher oil production costs consideration when setting the framework for and OPEC’s market regulation also point to long- Europe’s energy structure. term oil prices remaining high, seen in a historical • Work to expand and enhance the energy dia- perspective. Most price forecasts suggest that the logue between producers and consumers, in price of oil will remain high enough to ensure part through the framework provided by the profitable exploration, development and produc- IEA and the International Energy Forum tion of the remaining oil resources on the Norwe- (IEF). gian Shelf, if costs are kept under control. 52 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

4 Recovery of proven resources

A significant part of expected production over the For discoveries that are not developed, the next ten years will come from proven fields and goal is to find development solutions that achieve discoveries. Sound utilisation of resources in the best resource management and create the fields and discoveries is very important for the most value for society. Many current discoveries activity level and the State’s income in a short and are small, need to utilise existing infrastructure medium-term perspective. Several fields on the and be developed quickly in order to be profitable. Norwegian Shelf have produced for a long time. It is important to carry out active preventive main- Measures to improve recovery on these fields are tenance on existing infrastructure, as well as for urgent. Measures must be carried out quickly, modifications connecting new and old infrastruc- before the operation of established infrastructure ture to be carried out in a prudent manner. becomes unprofitable or technically unsuitable. The goal for exploitation of producing fields is Many measures could be described as time criti- to create the greatest possible value for society. cal. Decisions need to be made quickly. This is achieved through evaluating and imple-

250 Unopened areas Opened areas 4 Discoveries Resources in fields 200 3,5

150 2,5

2 Mill. Scm o.e. Mill. 100 Mill. barrelso.e. perday 1,5

1 50

0,5

0 0 2010 2015 2020 2025 2030 2035 2040

Figure 4.1 Possible production course on the Norwegian Shelf. Volumes from existing fields are highlighted. Production from approved measures is shown below the dashed line. Production that can be realised through planned measures, as well as increased efforts in improved recovery, is shown above the same line. Source: Ministry of Petroleum and Energy and Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 53 An industry for the future – Norway’s petroleum activities menting measures that can improve recovery measures to improve recovery from existing while also controlling costs. Phase-in of third- fields on the Norwegian Continental Shelf. The party resources to existing fields could contribute Committee submitted its report in September to prolonging the profitable production period, 2010 and it was then submitted for public consul- while also being an efficient development solution tation. The Ministry received a considerable for minor discoveries. Some of the fields on the amount of input during the consultation round. Norwegian Shelf have been producing for dec- The problems addressed by the Committee, and ades, and are currently in a phase where parts of the main suggestions emphasised, are addressed the facilities must be replaced or supplemented. in this Chapter. For example, investments are being made in new facilities both on Ekofisk and Eldfisk this year, and new compression capacity for gas is being consid- 4.1.1 Potential from higher recovery rate ered on Troll and Åsgard. The development on Ekofisk is a good example of the potential for improved recovery. When the field came on stream in 1971, the plan was to pro- 4.1 Potential and technology to duce 17 per cent of the resources in the field. recover more Today, the plan is to produce more than 50 per cent of the resources in place. The improved Recovering more entails measures that contribute recovery rate constitutes several hundred million to maintain production in and around existing scm o.e. of oil. The challenge is that, based on cur- fields. Phase-in of new fields can also contribute to rent plans, nearly half of the oil originally in the extended lifetimes for existing fields. Thus, meas- field will remain in the reservoirs. ures to improve recovery also encompass meas- Fields on the Norwegian Continental Shelf ures that support rapid development of small dis- have, on average, increased their oil reserves by a coveries. factor of 1.68 from the original development plan In February 2010, the Ministry appointed an expert committee1 with the mandate to assess 1 Also called the Åm Committee

3,5

2,5

2 Average 1,68

1,5

0,5

0 Ula Tor Urd Hod Vilje Varg Fram Njord Gyda Jotun Volve Glitne Gimle Brage Vigdis Norne Troll II Tordis Grane Sygna Embla Balder Eldfisk Morvin Valhall Snorre Visund Volund Ekofisk Tambar Heidrun Alvheim Gullfaks Statfjord Oseberg Draugen Veslefrikk Murchison Gullfaks Sør Statfjord Øst Oseberg Øst Oseberg Sør Statfjord Nord

Figure 4.2 Oil reserve increase compared with estimates in the original PDO. Source: Norwegian Petroleum Directorate. 54 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

20 Recovery rate, in percentages

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 <15 mill Scm oil 15-50 mill Scm oil >50 mill Scm oil All fields

Figure 4.3 Development of expected recovery rate on the Norwegian Shelf. Source: Norwegian Petroleum Directorate. and up to 2010, cf. Figure 4.2. There are many rea- rate and increased reserves because more oil sons for this. Recovery has been better than (from new parts of the reservoir) is depleted. expected and measures have been implemented The current adopted plans provide an average which have contributed to an improved recovery expected recovery rate of 46 per cent for oil and 70 per cent for gas on the Norwegian Shelf. In

600 Remaining resources at planned cessation according to approved plans

Remaining oil reserves

400 Produced oil end 2010

200 olje 3 0 Ula Tor Urd Hod Vilje Troll Frøy Yme Varg Fram Edda Njord Gyda Mime Jotun Volve Mill. Sm Blane Gimle Glitne Goliat Brage Vigdis Norne Grane Tordis Embla Sygna Enoch Balder Eldfisk Morvin Snorre Valhall Visund Volund Ekofisk Tambar Heidrun Alvheim Gullfaks Statfjord Oseberg Draugen Vega Sør Veslefrikk -200 Murchison Tambar Øst Gullfaks Sør Statfjord Øst Oseberg Øst Oseberg Sør Statfjord Nord Ringhorne Øst

-400

-600

Figure 4.4 Distribution of produced oil, remaining oil reserves and resources. Source: Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 55 An industry for the future – Norway’s petroleum activities comparison, the global oil recovery rate is about they will potentially be produced, are crucial as 22 per cent. The recovery rate varies from field to regards the size of values that can be realised field, and depends on factors such as reservoir from this potential. properties, recovery strategy and technology development. The recovery rate also correlates to the size of the field, cf. Figure 4.3. It is easier to 4.1.2 Solutions that could improve the achieve high recovery in major fields because, for recovery rate instance, they normally have fixed platforms with Technology development has contributed to high drilling rigs which can carry out well work recovery rates from many fields, cf. Figure 4.5. throughout their lifetime. Water injection has been important on the Norwe- According to the current plans, and with the gian Shelf since the 1980s and was, for instance, existing technology, about 30 billion barrels of oil crucial in improving the recovery rate on Ekofisk. will remain when Norwegian fields are shut down. Gas injection has taken place since the 1970s, and Improvement of the recovery rate thus has a sig- is currently used by about 20 fields. In the 1990s, nificant upside, for example, a one per cent recovery of oil from very thin oil zones was made increase of the recovery rate for fields that are possible by horizontal drilling on Troll. Several currently operating will increase oil production by other technology breakthroughs, e.g. within 3D approximately 570 million barrels of oil. The gross and 4D seismic3, have also been crucial in improv- sales income from such an oil volume is approxi- ing recovery. mately NOK 325 billion2. The cost of producing The remaining oil can be divided into two cate- the resources, as well as when the resources are gories: mobile and immobile oil. Oil which is produced, will determine the size of the values for mobile with the applicable recovery method on a this potential. field can be recovered using multiple wells and The remaining oil resources in the fields are more, long-term use of water and/or gas injection. considerable, cf. Figure 4.4. The resources are The recovery rate from many fields can be already proven, infrastructure exists and many increased relatively quickly using these meas- wells are already in place. However, recovery of ures. significant parts of these resources is technically Oil which cannot currently be squeezed out of challenging and costly. In order to recover some the pores in the reservoirs using injection of water of this oil, multiple decisions need to be made by or gas, as currently done on the fields, is called the licensee groups over the next several years. immobile oil. This applies to large volumes of oil. When fields are shut down, it could impact the Production of this oil requires considerable effort, possibility for third-party use of infrastructure in for example in the form of injection of miscible the relevant area. Use of existing infrastructure gas and/or CO2 or chemicals added to the injec- can be crucial for the profitability of new and exist- tion water. ing discoveries. This means that the window of Various technologies that could contribute to opportunity for exploration and development of improved recovery can be grouped in the follow- discoveries in mature areas is limited. It is there- ing manner: fore important to facilitate development of time- – Drilling and well critical resources and discoveries near existing – Injection techniques infrastructure. – Reservoir mapping The expert group for improved recovery has a – Integrated operations vision that about 2.5 billion scm o.e., (or about – Subsea solutions 15.7 billion barrels) of oil can be produced from fields on the Norwegian Shelf, beyond the current plans. They believe that exploitation of this poten- Drilling and well tial requires a high oil price and use of both exist- The oil companies carry out a number of meas- ing and new technology. Furthermore, the Com- ures to improve the recovery rate on their fields. mittee suggested measures must be implemented Most projects currently carried out are within the on both producing and future fields. The gross drilling and well discipline. Drilling new develop- sales income from such a resource volume is ment wells and maintenance of existing wells is a nearly NOK 9000 billion. The costs associated precondition for future production. How many, with recovering the resources, as well as when 3 4D seismic is 3D seismic taken in the same place several 2 Oil price assumption: NOK 570 per barrel. times. Time is considered the fourth dimension. 56 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Figure 4.5 Recovery solutions over time for Norwegian fields. Source: Expert committee for improved recovery. and where, wells are drilled form the basis for existing wells to be drilled are examples of chal- which possibilities will be available for further lenges that must be resolved. reserve growth and measures to improve the The number of new production and injection recovery rate. The least demanding oil resources wells has declined since the record year 2000. On are the first to be recovered from a field. On sev- many fields, the licensees have not been able to eral fields these resources have already been carry out the planned drilling programs in recent recovered. It could therefore be challenging to years. Over time, a considerable lag has built up, recover the remaining resources. Complex pres- and some of the planned wells cannot be com- sure conditions and unclear barrier conditions in pleted without updating the drilling equipment.

IOR/optimisation of production: Immobil olje More wells EOR methods: More advanced wells and well control Miscible gas/WAG More water and gas injection Low salinity flooding Better use of data, IO, 4D seismic etc. Surfactants CO injection Extended lifetime Mobil olje 2 Different EOR methods

Figure 4.6 Mobile and immobile oil and recovery methods. Source: Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 57 An industry for the future – Norway’s petroleum activities

This has also contributed to many fields not reach- manner. The various injection techniques must be ing their production goals in recent years. In the seen in connection with each other. future, the number and quality of wells drilled will also be crucial for what production is achieved. Wells can be drilled and maintained both from Reservoir mapping mobile and fixed facilities. Drilling from fixed rigs Seismic surveys are an important prerequisite for is particularly important to realise the resources recovering oil and gas deposits. The development in the large oil fields. has progressed from 2D seismic to 3D and 4D seismic. This has been important both to optimise production and to increase the likelihood of dis- Injection techniques coveries. The technology development has been More oil can be produced using known injection headed by Norwegian and international seismic techniques and through development of new companies and in close cooperation with the oil injection methods. On the Norwegian Shelf, water companies on the Norwegian Shelf. and gas injection has been used on many fields. 3D and 4D seismic contribute to a better Currently, more than 30 fields on the Norwegian understanding of the reservoir and reservoir fluid Shelf utilise water injection and more than 20 streams. Multiple wells are important as a data fields utilise gas injection in some form or another. basis. Together, this contributes to better reser- To date, gas injection is considered to have con- voir models, which can lead to more accurate drill- tributed up to 300 million scm of extra oil and con- ing and optimal production. densate on the Norwegian Shelf. This is nearly as Statoil has estimated that the use of 4D seis- much as has been produced from Gullfaks or Ose- mic on the Gullfaks field alone has provided value berg up to now. By following the companies’ cur- creation equalling about NOK 6 billion. The value rent adopted plans for gas injection, this could creation from 4D seismic over the last ten years provide 60–100 million scm of oil that would not has been estimated at more than NOK 22 billion. otherwise have been produced. Further development of existing technologies has great potential. In addition, there is a considerable potential for Integrated operations improved recovery of the immobile oil in particu- Integrated operations involve using information lar, using more advanced recovery methods, such technology to change work processes to achieve as: better decisions. Technology allows for equip- – Injecting water with added chemicals ment and processes to be remote-controlled. – Injecting water with a tailored salt content Functions and personnel can therefore also be – Water-alternating gas injection (WAG) / Foam- moved onshore. This could improve recovery on assisted water-alternating gas injection fields through more energy efficient operations (SAWAG) and better decisions. In 2007, the Norwegian Oil – Injection of CO2 gas Industry Association (OLF) estimated the – Gas injection with miscible conditions resource potential from integrated operations at about 1.9 billion barrels. A study carried out by the Norwegian Petroleum Directorate (NPD) in 2005, indicated additional oil Subsea solutions recovery with CO2 in the order of 3–7 percentage points from certain fields. The NPD estimated the The development solutions on the Norwegian technical potential from 20 fields that could use Continental Shelf have progressed from mainly CO2, to 150–300 million scm of oil. There are sev- fixed platforms to more use of subsea solutions. eral challenges associated with this. In addition, The seabed solutions have contributed to making the fields must have access to sufficient amounts more discoveries (more) profitable. This particu- of CO2. larly applies to minor discoveries and discoveries In order to use these methods, a long-term in deep water. Currently, one-third of production perspective must be used for decisions as regards on the Norwegian Shelf comes from subsea wells, costs, technology, expected oil prices and willing- and this percentage is rising. ness to take risks. A precondition for all methods Fields developed with seabed wells generally is that the consideration for health, safety and the have a lower recovery rate than fields with well- external environment is safeguarded in a good heads that are above the sea surface (dry well- heads). This is e.g. due to higher maintenance 58 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Box 4.1 Gas in tight reservoir formations on Linnorm Linnorm is a Shell-operated gas discovery in the tions. More than half of the gas volumes in the Norwegian Sea which was proven in 2005. It is Linnorm reservoirs are in so-called tight forma- challenging to find profitable methods to pro- tions where the recoverable gas volumes from duce the gas in Linnorm. The discovery has conventional production methods are too small complicated geology with six stacked reser- to be profitable. Such reservoirs are often voirs. There are high pressures and high tem- defined as “non-reservoir” and are thus peratures here, a mixture of tight and conven- excluded from volume calculations and develop- tional reservoir formations, a wellstream that ment plans. becomes very corrosive, and which easily forms Up to the present, production from most wax and hydrates. This requires several innova- tight gas reservoirs has taken place on land, tive solutions that challenge the limits for what where drilling costs are relatively low and many has been possible or has been carried out so far. wells can be drilled. Thus the possibility for a In the event of a potential development of Lin- good learning curve and optimisation of the norm, a considerable amount of new technology technical solutions also increases. The oil indus- will be developed, which could become very val- try is now moving technology from recovery of uable for developments of other gas discoveries gas and oil from tight reservoirs onshore to off- in tight formations. shore, and the first attempts have been made in The plan is to develop Linnorm with up to the North Sea in the Dutch sector from installa- eight wells, a pipeline to the processing facility on tions resting on the seabed. The next step will a host platform and tie-in to a new pipeline which involve doing this at greater water depths, in is planned to run to the existing gas processing higher pressure and temperature areas, as well facility for Ormen Lange at Nyhamna. A coordi- as recovery from floating platforms and/or sub- nated development could be relevant with Luva, sea installations. Offshore wells are significantly which is located 300 kilometres north of Linnorm. more costly, and will require other solutions. The operator is working with the Norwegian Tight gas can increase the potential for pro- supply industry to find the limits of what is tech- duction in Norway; however, this will likely take nically possible with the current technology and place with considerably higher development and to push the limits where needed to achieve a production costs than from fields with conven- development solution. This includes production tional reservoir types, i.e. a form of improved technology for recovering gas from tight forma- recovery of gas.

costs. It is therefore challenging to prolong production and improve recovery cost-efficiently 4.2.1 Voting rules through more wells and interventions from sea- According to the expert committee, the current bed fields. Access to less costly vessels and meth- voting rules may make it difficult to make deci- ods to implement well operations are therefore sions in the partnership as small owner groups important to improve recovery from fields with could stop profitable development projects pro- subsea wells. posed by the majority owners. For mature fields, the voting rules could also hinder improved recovery by companies focusing on production in the 4.2 Measures – the legal framework late phase not achieving an operations model that is necessary for this type of production, even Petroleum activity on the Norwegian Continental though they have a high ownership interest in the Shelf is regulated through an extensive legal partnership. The committee therefore suggests framework based on cooperation between authori- that the voting rules are changed so the majority ties and licensees. Within this framework, the fol- principle can be applied to all production licenses. lowing is an assessment of measures in connec- Petroleum activities must be carried out in tion with voting rules, policy for extending pro- accordance with a production license, which gives duction licenses and following up mature fields. the oil companies (licensees) an exclusive right to explore and produce petroleum in the area included in the license. A condition for awarding a 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 59 An industry for the future – Norway’s petroleum activities production license is that the licensees must come majority. The size of ownership interests reflects to an agreement. By signing the agreement, the the financial realities in the production license. licensees form a partnership. This agreement is In the future, the voting rules will also mostly formulated by the Ministry, and contains e.g. a be based on a combination of majority in the num- voting rule for the partnership’s decisions pursu- ber of licensees and ownership interests. How- ant to the production license. The voting rules are ever, the Ministry will to a larger degree empha- stipulated by the Ministry. All subsequent sise interest majorities when stipulating new vot- changes are contingent upon the Ministry’s ing rules. In licenses with many small ownership approval. interests you can, for instance, choose to design a The voting rules form the basis for most deci- voting rule which stipulates that they cannot sions made within each partnership. They thus block decisions that participants with more than play an important role for resource management two-thirds of the ownership interest want to make. on the Norwegian Continental Shelf. Since the start With new awards, the Ministry will also be able to of the petroleum activities on the Norwegian Shelf, stipulate a voting rule based on a principle of pure Norwegian authorities have wanted a diverse selec- interest majority if this is considered reasonable tion of qualified companies to contribute expertise based on the composition of the partnership and to the work in a production license. Broad-based the consideration for making it as easy to form a technical input will increase the level of expertise quorum as possible. in the production license and will contribute to the In the event of changes to the number of licen- other licensees assessing the operator and check- sees or changes to licensees’ ownership interests ing the operator’s work. In order to give the compa- in existing production licenses, the partnership, nies an incentive to participate in the technical pursuant to the joint operating agreement, must work, the voting rules have been designed so that propose new voting rules. The new voting rule is all companies in each partnership, including the contingent upon the Ministry’s approval. If no pro- companies with small ownership interests, will posals are made, the Ministry can determine new have an actual possibility to influence decisions that voting rules for the partnership. The new voting are made. The voting rules on the Norwegian Shelf rules must be designed so that each party’s voting have therefore been designed differently from the power is impacted as little as possible. voting rules in the company legislation, where If special reasons so indicate, the Ministry can more decisions require a joint owner majority of extend a production license beyond the license the votes cast (straight majority), but some deci- period determined upon the award. The Ministry sions require a larger majority. will stipulate the conditions of such a special Since the mid-80s, the principle for designing extension. In the future, the Ministry will in such the voting rules has been that decisions are made instances assess the voting rule in the relevant by a combination of a number of licensees (a license, and potentially set requirements for a new majority) and their ownership interests (a major- voting rule if there is a need to change the exist- ity). In a production license with three licensees ing voting rule. A new voting rule will to a greater the normal voting rule will thus be determined degree be based on a principle of interest majority. such that decisions are made if at least two of the licensees, which jointly represent at least 50 per cent of the ownership interest, have voted for a The Government will: proposal. Similarly, decisions in production licen- • To a greater degree emphasise interest major- sees with four licensees are made when at least ity when determining voting rules for awarding three licensees that normally jointly represent at new production licenses. least 50 per cent of the ownership interest have voted for a proposal. In some instances, the Ministry has seen that 4.2.2 Predictable extension of license period licensees with small ownership interests in a pro- for production licenses duction license can have too much influence com- The expert committee proposes that the authori- pared with licensees with considerable ownership ties must clarify the question of a new extension of interests. The desire to ensure that licensees with the license period at an early point in time, when small ownership interests have influence – and the need arises. The assessment regarding a new thus an interest in contributing expertise – should extension should be made on the basis of therefore, in certain instances, be balanced some- achieved results and long-term plans to increase what better vis-à-vis the significance of interest the field’s value creation. 60 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Investments in projects for improved recovery For some fields with significant remaining on the fields require the licensees to have a long- resources at the end of the license period and/or term perspective. A production license is first with low State participation, it could be appropri- awarded for an initial period. During this period, ate to use the opportunity to increase the State the licensees must explore the awarded area. Fol- ownership interest with a new extension of the lowing the expiry of this period, the licensees production license. Ekofisk and Troll are exam- have a right to require an extension of the license ples of two fields where new extensions of the period, as long as the mandatory work obligation license period were contingent upon an increased is fulfilled. This period is nearing the end for many SDFI interest. fields on the Norwegian Shelf. In its application to extend a production Investment decisions made on fields that are license, the licensee group must provide a reason currently nearing the end of the license period for why the license period is a limitation as will also have financial effects in the years follow- regards good resource management in the field, ing the license period. The Ministry may extend and thus also a hindrance to the highest possible the license period beyond the originally deter- value creation. mined period, if the licensees apply for this – so- According to the Petroleum Act, the licensees called new extension. Since it could be relevant may apply for a new extension at any time during for several licensees to apply for such a new exten- the license period, when they themselves believe sion of the license period, the Ministry believes it the need arises. It is up to the Ministry to make a is important to determine a predictable policy to decision on such a new extension, and the condi- prevent under-investment in such fields. tions for the activity in the license can in such A limited license period could result in the cases be changed, adapted or continued along the licensees under-investing in e.g., improved oil lines of the plans that are submitted. recovery, exploration, technology development In certain cases, the Ministry could make a and environmental technology towards the end of new extension contingent upon, e.g., that a new or the duration of the license. This is because, in changed plan for development and operation is their investment decisions, licensees will not give submitted by a certain deadline. If the stipulated full consideration to the value of activity that takes condition(s) is not met, the original license period place after the expiry of the license period. This will still apply. will then lead to socio-economically unfortunate The Ministry sees that there could be good decisions, and the squandering of resources. The reasons for the licensees needing, at a certain result will be reduced value creation and lower stage, a degree of security that a project that will State income, both due to lower returns on a increase the field’s value creation can actually be potential State ownership interest and through implemented. There can be many directions and lower tax revenues from the licensees. decisions that need to be made well before a final This effect can be met with a new extension of plan for the further operation of a field can be sub- the production licenses to the same licensee mitted to the authorities. However, the Ministry group, and on the same conditions. With a new still presumes that the regulations already contain extension, the State will also be able to change the the instruments needed to determine a new exten- conditions – for example by reserving the right to sion. (increased) State participation in the license. This will, by itself, move in the direction of increasing the percentage of value creation from the field The Government will: which falls to the State. The Ministry still • Approve applications for new extensions of the assumes, however, that the value of an increased license period for a production license with the State ownership interest in licenses that are in a same ownership structure if the application late phase normally will not offset the loss of State substantiates improved utilisation of reserves, income that could result from lower value creation unless special conditions call for something due to uncertainty about whether a new extension else. For some licenses, special factors such as will be granted, and in such case, on what condi- low State ownership interest and/or significant tions. This is due to the State’s strong exposure in remaining reserves, could require the SDFI the activity through the tax system and direct interest to be increased, or other conditions to ownership. be renegotiated when extending the production license. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 61 An industry for the future – Norway’s petroleum activities

companies. The Ministry will, based on these 4.2.3 Follow-up of late-phase fields assessments, further consider the need for addi- The expert committee sees a need to formalise tional enhancement of the regulations to ensure the production licenses’ work with measures for sufficient attention to improved recovery and improved recovery. The committee has suggested good resource management. that the licensees submit a simplified, revised development plan, when 80 per cent of the planned volume is produced, at the latest. The The Government will: argument is that such a measure will advance the • Intensify the follow-up of fields in the late improved recovery work to a greater extent in the phase. companies’ governing bodies. This will promote • Require new plans for recovery in late phase greater discipline in the companies’ work. At the fields, where this is considered suitable. same time, the Ministry will to a greater degree • Assess the need for further enhancement of be involved in the companies’ work to achieve a the regulations to ensure sufficient attention to higher recovery rate. The committee states that improved recovery and sound resource man- such a process will not entail significant additional agement. work for the companies as the necessary information is currently already reported to the authorities. 4.3 Measures – cost level and Currently, the authorities have an impact on profitability the companies’ plans for a field through the processing of development plans. This process is an The costs on the Norwegian Shelf have increased important tool for the authorities to ensure good significantly in recent years and are higher than in resource management on the fields. Approval of other petroleum provinces, cf. Chapter 2.4. The production schedules takes place when approving high cost level has a direct effect on the profitabil- the development plan and through annual produc- ity of measures for improved recovery and influ- tion licenses. The authorities can also, at their dis- ences the lifetime of existing fields. The cost level cretion, after the development plan and produc- development is paramount for the possibility of tion schedule have been approved, require the achieving improved recovery. licensees to carry out assessments of the The challenges associated with costs are dis- resource utilisation in a field. This could become cussed by the expert committee and concern is relevant, for instance if new information about the expressed that a high cost level could impede reservoir calls for a different recovery strategy. If investment decisions regarding improved recov- necessary, the Ministry can, pursuant to applica- ery. The committee acknowledges that a cost ble statutes and regulations, require the licensees reduction on the Norwegian Shelf is completely to prepare a report on field-related factors, includ- necessary to reach the potential within improved ing alternative production and injection schemes recovery. Furthermore, the committee empha- and the total recovery rate for various production sises that this requires joint efforts from authori- schedules. ties and the industry. Through the authorities’ general follow-up work as regards resource management, fields requiring special follow-up from the authorities 4.3.1 Drilling and wells may emerge. In addition to this follow-up, the The expert committee proposes several measures authorities carry out an annual review of all fields to alleviate a pressured rig market on the Norwe- on the shelf with the objective of identifying fields gian Shelf. To ensure sufficient drilling capacity, which require special attention. the committee suggests that long-term drilling The Ministry is concerned with ensuring suffi- and intervention contracts are used to a greater cient attention to sound resource management extent, so capacity will increase quickly enough from the licensees. This could be particularly on mature fields. The committee believes that the important for fields in the tail phase. The Ministry rig fleet must be improved by establishing inter- agrees with the expert committee that it is impor- national standards and requirements with joint tant to elevate the work on improved recovery interpretation and application. The committee into the licensees’ governing bodies and further- believes that it should be investigated whether it more, that this must not be done in a manner is possible to take the initiative for such standardi- which entails unnecessary additional work for the sation through the EU or EEA. This could reduce 62 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Shelf. No changes have been carried out in the 17 % HSE Regulations during this period that could

Drilling costs have contributed to this development. The increase in rig rates is primarily considered to be Excisting 11 % caused by other factors in the rig market. 47 % facilities The number of new production and injection New subsea wells has declined since the year 2000. The com- facilities panies have not been able to carry out their New platforms planned drilling programs in recent years. The consequence is that a significant lag has built up 25 % in the drilling activity. Well maintenance – which is important for achieving established production Figure 4.7 Distribution of investments in discov- plans, is also delayed because it takes longer to eries and fields in 2010. drill than expected, and few platforms can drill Source: Ministry of Petroleum and Energy / Norwegian Petro- and carry out well maintenance simultaneously. It leum Directorate. is important that the companies consider the possibility for using alternative methods for monitor- the rig rates, which make up a significant part of ing and maintenance of wells (well intervention) drilling costs on the Norwegian Shelf. According which do not require use of the fixed drilling to the committee, the rig costs for development equipment. For intervention in seabed wells, des- and operations amounted to more than NOK 15 ignated well intervention vessels have been built. billion in 2009. The Ministry considers it important that more Drilling new development wells and mainte- such vessels are built as it will free mobile drilling nance of existing wells is a prerequisite for future facilities for drilling development wells. production. The number of wells and the condi- During the autumn of 2010, a total of 930 tion of the wells form the basis for possibilities for planned production and injection wells were reserve growth and measures to improve the reported for the period 2011-2020. Of these, about recovery rate from fields. In the short term, drill- 310 will be drilled from fixed facilities. Drilling ing and wells are crucial in order to recover as using the drilling facilities on the fixed installa- much as possible of the remaining oil in existing tions is particularly important in realising the fields. At the same time, it has become more chal- resources in the major oil fields. This is because lenging and time-demanding to drill and complete most major oil fields are equipped with dedicated new wells from the fields. The reasons for this are drilling rigs. Several of the fixed drilling rigs complex, but are both due to factors relating to require upgrades and maintenance for the suffi- the condition of existing wells to be drilled from cient number of wells to be drilled. When upgrad- and other factors in the subsurface, for example ing and during maintenance of existing drilling pressure changes. facilities, it is important that the need for future Drilling wells is the largest cost component in wells is considered, both as regards challenges petroleum activities, cf. Figure 4.7. Drilling costs and number. In this connection, alternative drill- make up a large part of the costs in improved ing methods and new drilling technology must be recovery measures, development and exploration. considered, and necessary equipment must be There is a great value potential in identifying and installed in order to meet the challenges that are implementing cost-reducing measures associated expected as the fields mature. with drilling on the Norwegian Shelf. The Norwegian Petroleum Directorate, oil Increased rig rates are an important cause of companies, consulting companies and other play- the considerable growth in cost levels on the Nor- ers point out that sufficient rig capacity will be a wegian Shelf in recent years. Econ Pöyry esti- challenge on the Norwegian Shelf in the future. mates that the cost level on the Norwegian Shelf Many players point out that it is demanding to has nearly tripled from 2004-2008. Even though bring mobile rigs onto the Norwegian Shelf. Cur- the rig rates have declined somewhat after the rently, about 30 mobile rigs operate on the Norwe- peak towards the end of 2008, the level at the end gian Shelf. In 2-3 years, many of the contracts will of 2010 was still high. A comparison with the UK expire. Whether the rigs will then remain on the shelf carried out by Wood Mackenzie shows that shelf remains unknown. A tight rig market, partic- the drilling cost per recoverable barrel is still ularly after 2004, has led to several highly specific more than 15 per cent higher on the Norwegian rigs being brought to the Norwegian Shelf. Of 21 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 63 An industry for the future – Norway’s petroleum activities semi-submersible rigs on the Norwegian Shelf, gian Shelf is a measure that could contribute to seven are equipped for drilling at water depths this. The authorities will appoint an expert group over 1000 metres. These are often not particularly in order to highlight and identify potential finan- suited for existing fields. cial, industrial, regulatory or other obstacles to By increasing drilling capacity, costs can be increasing rig capacity on the Norwegian Shelf reduced and the activity level can increase. Gains and reducing costs. Through a comprehensive will be achieved directly through reduced rig approach, the expert group will propose measures rates and cheaper wells. At the same time, that could improve the flow of vessels involved in increased drilling capacity will mean more wells, drilling on the Norwegian Shelf. A safety level and thus improved resource utilisation. The lack equal to or higher than the current level will be of the correct type rig could lead to fewer wells used as a basis by the expert group. being drilled and/or that the drilling costs In connection with developing fields, develop- become unnecessarily high. This is particularly ment and production with a fixed rig will be an relevant for fields with long lifetimes and a signifi- alternative to hiring a mobile facility at moderate cant need for wells. sea depths. Choosing a drilling solution depends The Ministry believes there is a need for more on many factors. The number of wells and well measures to improve the access to rigs and to interventions used as a basis has great signifi- limit the costs of drilling so the potential for cance. The geographical placement of the well as improved recovery is realised. The exploration regards the production facility is another impor- profitability will also increase through such meas- tant Chapter, which is associated with the size and ures. This is a task which requires measures complexity of the reservoir. The cost picture also mostly from the industry, but the authorities must differs. Installation of fixed rigs requires consider- also contribute. able investments, while for mobile facilities the The Ministry agrees with the committee that entire cost is continuous rig rent. It is important the capacity and efficiency of drilling activities will that these alternatives are considered by the licen- increase if the licensees to a greater extent agree sees. to enter into contracts with more rigs on a more long-term basis. Within improved recovery, the potential for long-term contracts is particularly The Government will: great. Players with wide portfolios of operating • Appoint an expert group to highlight and iden- fields are especially suited for entering into such tify obstacles that limit the rig capacity on the contracts. The Ministry therefore encourages Norwegian Shelf and propose measures that such licensees to establish rig cooperation could improve the flow of vessels involved in schemes, where rigs are contracted by several drilling on the Norwegian Shelf. players on a long-term basis. The Ministry • Encourage the licensees on the Norwegian expects the industry to ensure access to sufficient Shelf to establish rig cooperation schemes, vessels so the desired drilling can take place on where rigs are contracted on a long-term basis. the Norwegian Continental Shelf. • Ensure installation of fixed rigs is considered The Ministry believes that the Norwegian by the licensees in connection with relevant, Shelf needs high rig capacity in order to realise new developments. the great potential in the existing fields. The future need for drilling on the fields is great. There should therefore be a basis for placing rigs 4.3.2 Coordination adapted to Norwegian regulations on key fields The expert committee proposes that the authori- that are adapted to the needs of these fields. The ties, in cooperation with the petroleum industry, Ministry expects that the owners of the major should carry out a thorough evaluation of the fields will carry out such organisation. Many addi- rewards associated with better coordination of tional resources are time-critical and drilling must fields on the Norwegian Shelf. The evaluation take place soon so as not to lose significant should emphasise the effect of coordination on resources. profitability, including operating costs and the The Ministry agrees with the expert commit- recovery rate on existing and surrounding fields. tee that it is desirable to increase the rig capacity The analysis will form the basis for possible meas- on the Norwegian Shelf and to reduce costs. ures for better coordination on the Norwegian Improved flow of vessels involved in petroleum Continental Shelf. activities in the North-Atlantic onto the Norwe- 64 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

There is extensive experience on the Norwe- ities are subject to strict requirements and instru- gian Shelf with developing discoveries jointly, ments for both emissions to air and discharges to when this is most profitable. This type of solution sea and for emergency preparedness for acute is most manageable when the relevant discoveries spills. have the same ownership. This could either be the The considerations for health, safety and the case from the start or could be achieved through external environment are important for all activity unitisation. on the shelf. The stringent requirements for the The Norwegian Petroleum Directorate has an safety level and safeguarding the external envi- important task in looking at development of new ronment must be further developed. The safety discoveries in an area context. Similarly, Gassco regulations are an important reason why the Nor- plays a part in looking at gas evacuation from new wegian Shelf currently has facilities with high discoveries in a shelf perspective. When there technical integrity and has had a positive develop- could be advantages associated with a coordi- ment as regards safety. The Norwegian Shelf will nated development of multiple discoveries, initia- continue to be a leader within safety. The exten- tives are made vis-à-vis the owners of the relevant sive regulations established are a main reason for discoveries to also evaluate the consequences of the activity having low emissions to air and dis- such a solution. Coordination could trigger major charges to sea compared with most other petro- operational advantages that could provide both leum-producing countries. financial rewards and other benefits, such as mak- In order to ensure a good basis for making ing measures like power from shore more realis- decisions, e.g. in connection with regulatory tic. amendments, the Instructions for Official Studies and Reports have been established. According to the Instructions for Official Studies and Reports, The Government will: measures must be impact-assessed and the conse- • Contribute to developments and fields being quences must be quantified as far as possible. coordinated when this is the best solution as This applies for the petroleum sector in the same regards resource management. manner as for all other sectors. The overall effect of the factors included must be addressed. The consequences must be considered in relation to 4.3.3 Cost/benefit analyses in the event of all overall or general considerations that could be new regulations/stricter practice of significance when assessing whether the meas- The expert committee has suggested that the ure should be implemented. Affected authorities authorities to a larger degree should highlight should be included in the decision process before costs and benefits associated with changes in a decision is made. requirements and how they are put into practice The Ministry is concerned with good goal man- for HSE and environmental measures, by estab- agement in the sector, and is therefore concerned lishing a transparent methodology along the lines with ensuring that sound processes, pursuant to of the Ministry of Finance’s guidelines for cost the Instructions for Official Studies and Reports, and benefit analyses. In this way, it will be easier are implemented. It is important that cost/benefit to achieve a more comprehensive approach. The analyses are used. These are important issues that committee further suggests that, for late phase the Ministry will continue to work on. fields, the authorities must be cautious in stipulating new, costly and extensive requirements for HSE and the external environment, as this short- The Government will: ens a field’s lifetime and results in loss of values. • Further develop stringent requirements for the The Norwegian petroleum activities have safety level and safeguarding the external envi- shown good results both as regards safety and ronment on the Norwegian Shelf, also for fields safeguarding the external environment. This is a in the late phase. result of targeted efforts over many years. As regards safety, functional risk-based regulations have been developed which emphasise preven- 4.3.4 Joint effort to reduce operating costs tion, safety and continuous improvement. National The cost level within Norwegian petroleum activi- and international authority cooperation emphasis- ties has grown significantly in recent years, and ing experience exchange and learning from acci- has reached such a high level that it could dents has also been an important factor. The activ- threaten the long-term development of the indus- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 65 An industry for the future – Norway’s petroleum activities try if the oil and gas price falls back to historic lev- 4.4 Measures – player composition and els. Many profitable business opportunities could competition situation be lost if we do not achieve better cost control. The cost development experienced in recent The player scenario on the shelf has changed con- years has a very complicated background and siderably over the last 15 years. This is partially encompasses both international and domestic fac- the result of active policies from the authorities to tors. bring in more and different players on the shelf, The expert committee directs several propos- and partially an effect of consolidation in the als to the industry. This includes a proposal for industry. The development is described in more joint efforts to reduce operating costs on the Nor- detail in Chapter 2.6 of the report. wegian Shelf. Many of the other proposals directed at the industry also focus on reducing costs, including the need for standardising pro- 4.4.1 Petoro and SDFI cesses, solutions and adjustments in the contract The player composition and competitive situation regime. Controlling the cost level is mainly the is also a topic in the expert committee’s report. industry’s responsibility. There are many different The majority of the committee suggests that issues associated with market conditions, organi- Petoro should be strengthened through changes sation of the activity and other factors that contrib- in the company’s current financing scheme. Fur- ute to an unfavourable cost development. thermore, the committee believes that the author- The industry has established the KonKraft ities and licensees should to a greater extent agency, where they cooperate on factors that are carry out portfolio adaptations so that decisions crucial to the further development of the Norwe- that are crucial for improved recovery and value gian Shelf. Trade unions, suppliers and oil compa- creation are more likely to be made, and also that nies participate in the agency. An important part the authorities must facilitate increased activity in of the work in KonKraft involves directing focus to the field transaction market. the oil and gas industry’s possibilities and chal- On behalf of the State, Petoro is the adminis- lenges. trator of the State’s direct financial involvement in Improved recovery is an area in which the the petroleum activities (SDFI). As a licensee, Ministry believes that KonKraft can make a posi- Petoro plays an important role as a licensee in the tive contribution. Through its participants and fields where the State has direct ownership. composition, KonKraft is well-positioned to estab- The large mature fields make up the core of lish appropriate follow-up of the various areas SDFI’s value creation. In 2009 and 2010, the com- where the industry is challenged by the expert pany has increased its efforts to contribute to committee to improve recovery. The Ministry has improved recovery from the mature fields. The therefore requested that KonKraft prepare a pro- Ministry finds it very important that this work be posal for processing/follow-up of the various pro- continued. An amplified effort from Petoro will posals the expert committee has presented, as also contribute to more measures for improved well as considering if, and potentially how, joint recovery being identified and implemented. efforts to reduce operating costs on the Norwe- Implementation of measures for improved recov- gian Continental Shelf can be organised. In total, ery will have great significance as regards value KonKraft’s assignment encompasses 16 different for the State’s ownership interests. The financial proposals from the expert committee. This work lifetimes of the facilities are challenged through is already underway in KonKraft. uncertainty in reserve bases and increasing costs. It is therefore important that the correct decisions are made at the right time to ensure maximum The Government will: recovery and the best possible utilisation of exist- • Follow-up KonKraft’s work on following up the ing infrastructure. The issues faced by the part- expert committee’s measures directed at the nerships are complex, which requires Petoro to industry. carry out considerable work for the contributions to be relevant. Petoro has pointed out certain fields which they will follow-up in particular. This is discussed in more detail in Chapter 9. The Ministry is concerned with providing Petoro with sufficient resources so the company can contribute increased value creation to the 66 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

State. The Ministry furthermore believes that the shield the average rate of return from special tax, State’s budgeting system ensures a unified and an extra investment-related deduction is provided comprehensive assessment of the State’s (so-called uplift) in the calculation basis for special expenses for different purposes. The financing of tax. There is fiscal consolidation between differ- Petoro should, along the lines of other purposes in ent fields. Companies that are not in a tax position the State budget, be subject to this important prin- can carry forward deficits and uplift with interest. ciple. The State budget system is not an obstacle In the event of cessation, these elements can be for strengthening Petoro for the future through transferred. increased allocations or by varying the allocations From the 2005 income year, a change was from year to year as needed. implemented in the tax treatment of exploration The Ministry believes that a well-functioning costs for companies that are not in a tax position. second-hand market for field interests will contrib- The scheme is based on the companies, instead of ute to ensuring that companies which see the carrying forward deficits with interest, can greatest value creation potential in a field become demand reimbursement of the tax value of explo- owners. The company that sees the greatest ration costs in connection with the tax assess- potential in a field will be willing to pay the most ment. This means that companies in and outside for an interest in the field. A functioning second- tax positions are treated equally as regards explo- hand market is therefore positive and desirable ration costs. The scheme makes it easier for com- from a resource management perspective. panies that are not in tax position to finance explo- Along with the tax and fee system, SDFI will ration activity. secure the State a high percentage of value crea- The Ministry believes that a reimbursement tion on the Norwegian Shelf. SDFI is not an scheme for the tax value of exploration costs has instrument for facilitating increased activity in the been very important, especially to stimulate second-hand market. Certain adjustments in the timely exploration in mature areas. The equal tax SDFI portfolio could become relevant, e.g. to pro- treatment of players in and outside tax positions mote cost-effective coordinated solutions for as regards exploration costs is a policy the Minis- fields. try wishes to continue.

The Government will: 4.5 Measures – technology • Strengthen Petoro’s expertise for following up development mature fields. The expert committee has proposed several measures within technology areas such as drilling and 4.4.2 Tax treatment of exploration costs wells, advanced injection methods, subsea solu- The expert committee notes that the increase in tions and reservoir mapping. The committee e.g. new companies focusing on exploration may have recommends that the companies should to a resulted in a weakened focus on operating fields/ greater extent test advanced recovery methods improved recovery. They suggest a review of the such as injection of surfactants5, low-saline water scheme whereby companies can apply for reim- and CO2. These technologies are particularly bursement of the tax value of exploration costs, to important to recover the significant amount of examine the effect it has had on operating fields. immobile oil, and can contribute significantly to The petroleum taxation system is built on the improved recovery on the Norwegian Shelf. Many rules for normal company taxation. It is designed of the methods have shown a great potential for to have a neutral effect on the companies’ deci- improved oil recovery from onshore fields in the sions regarding development and operation. This US and China, for example, but have not been means that decisions that are profitable for the widely used offshore. Several promising technolo- companies before tax must also be profitable after gies have also been developed through laboratory tax. Due to the extraordinary profitability in the studies and simulations, but they remain to be recovery activities, the activity has also been subject to an additional special tax. The ordinary tax 4 rate is, as on land, 28 per cent. The special tax rate Including exploration costs, expenses for research and development, financing, operation and removal. is 50 per cent. In the basis for ordinary tax and 5 A surfactant is a substance which is added to a reservoir to 4 special tax, depreciation and all relevant costs are reduce the interface tension between oil and water. Deter- deducted from the taxable income. In order to gents also contain surfactants. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 67 An industry for the future – Norway’s petroleum activities

tested at a larger scale on the fields. CO2 for of new technology testing across the licenses will improved recovery will, in the long-term, be sig- be even more important than before. Through nificant for resource utilisation on the Norwegian FORCE, the Norwegian Petroleum Directorate Shelf. It will therefore be natural to see CO2 stor- has taken an initiative to facilitate such coopera- age from Norwegian sources in connection with tion. The agency currently consists of 35 oil and possible future use of the gas as a recovery meas- gas companies that are willing to explore the pos- ure. sibilities for sharing costs and results in connec- The committee recommends, for instance, that tion with field pilots. Through FORCE, the Minis- the authorities should establish a forum for coop- try will continue to bring forth more pilots and, erating on pilot projects with participation from along with key players on the Norwegian Shelf, the most important players and decision-makers work for increased efforts regarding testing new on the shelf. The committee also recommends technology on the Norwegian Shelf. strengthening DEMO2000. In the submissions to As there are considerable volumes of oil that the recovery committee’s report, there is general are difficult to recover with conventional technol- agreement on the need for more pilot testing and ogy, advanced technology that can retrieve these technology development on the Norwegian Shelf. resources must be prioritised and advanced. New technology and new solutions will be nec- There will therefore be a special need to propose essary in many cases to mature new profitable pilot tests within advanced injection methods to reserves and to realise the great potential from recover more of the difficult oil. These issues are improved recovery on the Norwegian Shelf. The discussed in more detail in Chapter 8.7. State, as resource owner, has an important role to play as an initiator and facilitator to ensure that all possibilities for improved recovery and increased The Government will: value creation are considered before the fields are • Work for increased efforts on testing new tech- shut down. Through SDFI and the tax system, the nology together with key players on the Nor- State assumes considerable risks, costs and value wegian Shelf. creation from improved recovery measures. • Consider establishing a research centre within Since the fields and infrastructure have limited improved recovery. lifetimes, it is crucial that pilot testing starts quickly. Reports from the companies to the Nor- wegian Petroleum Directorate indicate that a sig- 4.6 Infrastructure – use and further nificant number of pilots have been delayed or will development not be carried out. There could be several reasons for the downgrade of pilots. For example, the com- This Chapter addresses two elements of the infra- panies seem to prioritise ordinary operations over structure on the continental shelf. The first Chap- pilot testing, which often entails higher technical ter addresses use and further development of the and financial risk. Furthermore, the current gas transport system. The other element development projects are smaller than before, and addressed here is the regulations associated with are not as financially equipped to carry out devel- conditions for using others’ facilities. opment and testing of new technology. State co-financing of pilots could contribute to acceleration and realisation of several socio-eco- 4.6.1 The Norwegian gas transport system – nomically profitable projects. There is often a organisation and regulation transfer value from a pilot on one field to other The Norwegian gas transport system consists of a fields. The owners of individual fields will not take network of pipelines with a total length of about this into account when deciding whether or not to 8000 km, six landing points in four countries (the carry out a pilot. Significant resources are at stake UK, Germany, Belgium and France), as well as for the State as resource owner. If the market is four Norwegian onshore gas treatment facilities unable to bring about sufficient new technology or (Kårstø, Kollsnes, Nyhamna and Melkøya). Gas pilots, the authorities should implement various export in the form of liquefied natural gas (LNG) measures. on ships from Melkøya enables Norwegian dry The Ministry agrees with the committee that gas to reach markets outside Europe. To date, more production licenses/companies should more than NOK 260 billion has been invested in jointly plan pilots. With more small players and the network, calculated at current value. discoveries on the Norwegian Shelf, coordination 68 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

The transport capacity in the Norwegian gas gas companies and qualified users have a right to transport system depends on a number of factors, access on non-discriminating, objective and trans- such as pressure and temperature. The total avail- parent conditions. These users have access to able capacity for Norwegian export of dry gas capacity in the system based on their need for gas through pipelines is about 370 million scm per transport. Gassco is responsible for capacity allo- day. This amounts to 120 billion scm per year. In cations and for ensuring that transport rights are addition, LNG amounting to more than 10 million transferred between users as needs change. scm per day is exported from Melkøya. An addi- The returns from the gas transport infrastruc- tional 9 million scm is used per day in this country ture are regulated by the authorities. This ensures for power and heating, for methanol production at the earnings are extracted on the fields and not in Tjeldbergodden or transported to the Grane or the transport system. Tariffs in newer pipelines Tyrihans fields as injection gas to increase oil pro- are stipulated so the owners can expect real duction. Gas is also used for injection on other returns of about seven per cent before tax on the fields on the Norwegian Shelf to increase oil pro- total capital, with a possibility of minor additional duction. income to stimulate increased utilisation and cost- The operator of the gas transport system, effective operations. The tariffs provide the own- Gassco, prepares a transport plan every year ers with reasonable returns while also preventing which analyses the total need for gas transport up additional profits from being taken out in pipelines to 15 years into the future. Future production is and treatment facilities. uncertain. Unlike previous years, last year’s trans- The Ministry determines the main principles port plan represented a clear change in that new for access to the transport system and stipulates discoveries are not replacing reduced production tariffs for its utilisation. In 2008, the Ministry initi- from existing fields, even when prognoses from ated an extensive review of the access regime. So- all discoveries on the shelf are included. Part of called interruptible capacity will be introduced. the reason for this is that the resource estimates The current rules giving pipeline owners priority in certain discoveries and fields have been when reserving available capacity will be revoked. reduced. This will ensure more efficient utilisation of the The infrastructure for gas transportation from gas transport system and equal treatment of all the Norwegian Shelf has been gradually further companies that produce natural gas on the Nor- developed in connection with development of new wegian Shelf. The Ministry will establish an fields. These have been fields with significant expert board to independently resolve disputes in amounts of gas which have warranted major individual cases where there is disagreement investments in dedicated transport solutions. regarding access to the gas transport system. Building pipelines is a costly endeavour, and The majority of the gas transport system on investments in the transport system provide con- the Norwegian Shelf is owned by the Gassled siderable scale advantages. The gas transport sys- partnership. The Gassled owners have tradition- tem can be characterised as a natural monopoly ally been companies that produce gas on the Nor- with major basic investments. There is need for wegian Shelf. As an operator, Gassco carries out regulated access and tariffs in the system to activities on behalf of the partnership at the partic- ensure equal access to the system for everyone ipants’ cost and risk. Thus, Gassco has no earn- with gas transport needs. ings. Companies wishing to transport gas pay The gas infrastructure is utilised by multiple transport tariffs designed to cover the direct costs users and organised in an integrated manner with of operating the transport system, as well as pro- a joint ownership structure through Gassled. The vide the owners with reasonable returns on the operating responsibility for the gas pipelines and transport system investments. transport-related gas treatment facilities lies with The authorities’ goal is for third-party use of Gassco, a limited company wholly-owned by the gas pipelines and associated facilities to take place State. This organisation results in efficient use of based on tariffs and conditions stipulated by the the gas transport system and reduces operating Ministry and laid down in the tariff regulations. In costs. The goal is efficient utilisation of the gas instances where third-party use of gas pipelines transport capacity, as well as ensuring easy access and associated facilities that are not already to available capacity for the users and at the tariffs included in the tariff regulations is considered, stipulated by the authorities. the Ministry will include these facilities in the reg- The gas transport system is neutral for all play- ulations. The issue of operator responsibility for ers with a need to transport natural gas. Natural 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 69 An industry for the future – Norway’s petroleum activities the relevant facility will also be considered in such The users pay for the operation of the trans- cases. port system through tariffs. The users also make Gassled includes all rich and dry gas infra- a significant contribution to further development structure currently in use, as well as so-called of the transport system through participation in third-party use, i.e. where plans include transport various investment groups. There has been a of gas in the infrastructure by a party other than need to strengthen the users’ opportunities for the owner. The system accommodates incorpora- voicing their views on how the system should be tion of new pipelines and transport-related facili- operated and developed. The Ministry has there- ties in Gassled from the time third-party use fore asked Gassco to strengthen the existing user becomes relevant, and new facilities can thus forum in the system. The forum will provide rec- become a part of the central upstream gas trans- ommendations to Gassco in matters related to port system. Joint ownership of the entire trans- technical operation, use and further development port system ensures the gas is transported as effi- of the system. The user forum will also endorse ciently as possible, thus providing maximum the part of Gassco’s budget which deals with oper- value creation. This is due, in part, to the fact that ations and further development. The forum does it allows to avoid conflicts of interest as regards not have a mandate to make decisions. which pipeline the gas will be transported Through introduction of regulated tariffs, through. third party access and establishment of an independent operator, the owners’ influence over the

Box 4.2 New gas infrastructure in the Norwegian Sea Due to the responsibility for comprehensive fur- form the primary basis, but other possible gas ther development of the gas transport system, volumes in the Norwegian Sea have been con- Gassco has the authority to finance studies on sidered. new infrastructure until the relevant concept is The main topic of the studies has been to defined and found feasible. Then Gassco must research a new pipeline for Nyhamna, as well as promote the project to find companies willing to consider how to increase the capacity in invest in further realisation of the project. The Langeled and Nyhamna. Furthermore, possibili- final investment decision is made at a later time ties for a pipeline connection between existing during the process. infrastructure around Åsgard transport and a The rich gas pipeline from Åsgard to Kårstø new pipeline for Nyhamna have been consid- (Åsgard transport) will for a period in the future ered. Gassco has also researched landing to be a bottleneck for gas transport out of the Nor- Nordland and LNG transport, but these alterna- wegian Sea. So far, new discoveries have not tives have been rejected due to high costs. been made in the Norwegian Sea of a size which There are several challenges associated with would justify a new, larger infrastructure devel- a gas evacuation solution from the Norwegian opment consisting of a landing pipeline, gas Sea. In addition to technological challenges treatment facility and export pipeline. However, associated with e.g. deep water, wave height, multiple discoveries in the Norwegian Sea could high temperatures and pressure in the reser- require transport solutions as early as 2016- voirs, there are significant distances between 2017, depending on a development decision. the gas discoveries. Some of the discoveries also Åsgard transport does not have the capacity to have a higher CO2 content than the prevailing transport new gas until after 2021. If these dis- specification requirements for the gas recipi- coveries are to be developed according to the ents. This means that the CO2-rich gas must be licensees’ plans, existing infrastructure must be mixed with more CO2-poor gas and/or dedi- used, or new infrastructure must be developed. cated technical solutions to separate CO2 must Gassco has worked on studies regarding be established. increased transport capacity for new volumes Several companies with shut-in gas volumes out of the Norwegian Sea. These studies have in the Norwegian Sea have reported an interest been carried out in close cooperation with Sta- in financing further studies of gas transport toil and Shell, who are the operators of Luva and capacity out of the Norwegian Sea. Linnorm, respectively. These two discoveries 70 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities transport system has been reduced. This has led It is therefore advantageous for the development to a reduced interest in participation in Gassled on of the gas transport system to have a regular activ- the part of some of the traditional owners. Exxon- ity level on the shelf, continuously adding Mobil recently sold out of Gassled. Several other resources both from improved recovery, develop- owners have started sales processes. The comment of new discoveries and new resources from pany which ExxonMobil sold its share to, Njord the exploration activity. Infrastructure AS, represents a new type of owner There are two characteristics of the Norwe- in Gassled because this company is primarily gian Shelf that will impact the development of the entering the owner side for financial reasons. The gas infrastructure in the future. Development of Ministry has consented to this transfer, but has new areas located north of existing pipeline grids stipulated requirements as regards certain will require new gas infrastructure, while produc- aspects of the buyer’s financing and organisation. tion from existing gas fields is also declining. It is important to the Ministry to have a diversified The trend towards smaller discoveries will ownership in Gassled in the years to come, e.g. to make it more challenging to justify strengthening distribute the financial responsibility among more and further development of existing infrastruc- participants. ture. It could also be necessary to consider phase- Licensees must have the necessary qualifica- out of the infrastructure unless new major discov- tions to carry out their tasks in a responsible man- eries are made within a reasonable time. When ner. Which specific qualifications are necessary dismantling and phasing out parts of the gas infra- depends on what type of tasks will be carried out. structure have started, this will make a potential Different qualifications are required for owners in need for transport capacity for subsequent discov- a transport system such as Gassled than for own- eries more expensive. It could be challenging to ers in production licenses. The fact that Gassled reinstate pipelines and process facilities that have has a competent and independent operator not been operating for a period of time due to lack (Gassco), that the activity regulates returns, that of competence, deficient maintenance and techni- new infrastructure can be developed and financed cally-outdated equipment. outside Gassled and that there is open, non-dis- A comprehensive further development of the criminatory access to the system, all contribute to gas infrastructure is an important tool to ensure define the role and tasks of an owner in Gassled. efficient resource management on the Norwegian This framework will be reflected when determin- Shelf. Various forms of market failure could lead ing the necessary qualifications and financial to a disparity between the companies’ view on effi- capacity for an owner of the system. cient infrastructure development and the authori- Considerable investments have been made in ties’ view. Sources of market failure could include the gas infrastructure on the Norwegian Shelf. coordination problems between the different part- Significant gas volumes are needed for new gas nerships and the licensees or different strategic infrastructure to be realised. Given the large interests. investments required to build new gas infrastruc- As the shelf matures and fields being devel- ture and the relatively low transportation costs in oped become smaller, coordinating infrastructure existing systems, the oil and gas companies will projects across production licenses will become have incentives to use existing gas infrastructure increasingly important. The authorities have when considering different transport alternatives therefore emphasised playing an active role in the for new gas. In the event of full capacity utilisation development of gas infrastructure on the Norwe- in transport and/or gas treatment facilities, the gian Shelf. Gassco is a key player in this effort. companies will face the choice of delaying gas The company possesses extensive knowledge evacuation until capacity becomes available in the about gas transport and unique familiarity with existing infrastructure, injecting gas in reservoirs the system the company is operating. This, in which could contribute to improving oil recovery, combination with Gassco’s position as an inde- or building new gas infrastructure. The most pendent player without ownership in production important elements in such an analysis are: licenses or transport systems, makes the com- 1. When capacity will become available in the pany suited to coordinate interests across produc- existing infrastructure tion licenses and thus safeguard overall shelf con- 2. Costs of new gas infrastructure siderations. Since its start in 2001, Gassco has had 3. How the gas evacuation solution impacts oil a regulatory responsibility to further develop the production gas transport system on the Norwegian Shelf. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 71 An industry for the future – Norway’s petroleum activities

This responsibility has been clarified further through regulatory amendments. 4.6.2 Third-party use of facilities The Ministry receives sufficient information A more mature continental shelf sets strict regarding new infrastructure projects early on. requirements for efficient use of infrastructure as The Ministry is then able to ensure that the stud- regards resource management. It is the authori- ies deemed necessary by the authorities are car- ties’ responsibility to facilitate predictable and rea- ried out. This ensures the best possible basis for sonable conditions for use of facilities by others, making decisions when the authorities process as well as contributing to efficient negotiations. plans for installation and operation of new infra- The Ministry laid down the Regulations relating structure projects. Gassco’s assessments will be to use of facilities by others (TPA Regulations) in one of several important contributions to the 2005. Based on the consideration for good authorities’ comprehensive assessment of a sub- resource management, the purpose of the regula- mitted plan for installation and operation. The tions is to ensure good incentives for exploration, decision to apply for permission for installation new field development and improved recovery and operation, and choice of the development through efficient negotiation processes and appro- solution to be included in such an application, priate profit sharing in connection with use of must still be made by the licensees. existing facilities. The introduction of the regula- In the years to come, further development of tions has contributed to easier realisation of time- infrastructure will consist of smaller, but still rela- critical resources near planned and existing infra- tively extensive projects, such as removing bottle- structure. necks in the gas transport system and making it This will be achieved through providing a more robust. In addition, the infrastructure must clear framework for the negotiation process and be able to receive gas with a different composition the design of tariffs and conditions in agreements than before, for instance, with higher H2S and relating to the use of facilities by others. With CO2 content. smaller developments, use of existing facilities Gassco will contribute to a comprehensive fur- will often be a prerequisite in order to achieve ther development of Norwegian gas infrastruc- acceptable profitability. In this phase, it is very ture. In instances where larger developments are important that the infrastructure owners allow considered, it is therefore important to have an third-party use of available capacity. area perspective so that smaller discoveries are Both for licensees in the field with established also included in the assessments. A further devel- infrastructure (owner field) and the licensees in opment of the gas infrastructure must also take the field that wants to use existing infrastructure place in a manner which serves the existing gas (user field), tariffs and conditions for use will be infrastructure. very important for whether such third-party use is Norwegian gas activities make up an impor- actually realised. Mainly, the parties themselves tant part of the petroleum sector and generate will determine the commercial conditions for such considerable value for the Norwegian society. It is use through negotiations. The regulations imple- important that the infrastructure operation is cost- ment the principle that earnings from recovery effective, as this could contribute to ensuring that must mainly be taken out on the user field. Other new discoveries are attractive. tariffs and conditions related to the use of facilities by others must be at a reasonable level and calculated with a basis in the services offered. The The Government will: owner field is entitled to reasonable earnings for • Regulate access to and tariffs in the gas trans- such use, also taking into account the risk it port system and ensure equal access for every- assumes as a result of the third-party use. one with gas transport needs. In the current regulations, the companies have • Establish an expert board to resolve disputes a duty to report vis-à-vis the Ministry, which will in individual cases where there is disagree- contribute to efficient negotiation processes. The ment regarding access to the gas transport sys- Ministry will consider which amendments need to tem. be made to the regulations to ensure that the duty • Strengthen the existing Gassled user forum to of disclosure assumed by the companies functions ensure that the users’ views on how the system as intended. is operated and developed are voiced. With a basis in the agreements signed after the TPA regulations entered into force and the Ministry’s experiences with the regulations up to 72 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities now, the Ministry intends to make amendments to For discoveries that have not been developed, the regulations. A key topic will be whether the the goal is to find development solutions that pro- regulations result in the best possible balance vide the best resource management and create between the consideration for efficient resource the most value for society, while also safeguarding utilisation and the goal that as much of the earn- environmental and safety considerations. Many of ings as possible must be taken out through recov- the current discoveries are small, and thus need ery in fields, not through ownership of existing to utilise existing infrastructure and be developed infrastructure. quickly in order to be profitable, cf. Figure 4.9. Most development candidates can be developed with a subsea template tied in to existing infra- The Government will: structure. • Amend the Regulations relating to use of facilities by others (TPA Regulations) with the goal of more efficient resource utilisation, and that 4.7.1 Discoveries approaching a the maximum amount of earnings are taken development decision out in the new fields. Estimates indicate record-high development activity on the Norwegian Shelf in 2011. Beyond the projects where development has already been 4.7 Development of discoveries approved, decisions regarding several projects connected to existing fields are expected, as well At the end of 2010, 100 discoveries on the Norwe- as a number of new developments. gian Shelf were not developed. The overall Ekofisk Sør and Eldfisk II are the largest pro- resource estimate for these was 700 million scm jects connected to existing fields that were pro- o.e., which amounts to about 15 per cent of the cessed by the authorities in 2011. The compres- remaining proven resources. sion projects on Åsgard and Troll are also large projects underway on existing fields. In total,

250 Unopened areas Opened areas 4 Discoveries Resources in fields 200 3,5

150 2,5

2 Mill. scm o.e. 100 Mill. barrels o.e. per day 1,5

1 50

0,5

0 0 2010 2015 2020 2025 2030 2035 2040

Figure 4.8 Possible production course on the Norwegian Shelf. Source: Ministry of Petroleum and Energy and Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 73 An industry for the future – Norway’s petroleum activities

400

< 5 mill Scm o.e 350 5-10 mill Scm o.e 10-50 mill Scm o.e 300

250

200 Mill. Scm o.e.

150

100

0 1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010

Figure 4.9 Size of discoveries and discovery year for non-developed discoveries. Source: Norwegian Petroleum Directorate. investments of more than NOK 80 billion are the fields will entail considerable deliveries from planned in these projects. the Norwegian supply industry. Hild, Luno, Draupne, Bream and Skuld are all new, major projects which the companies are working to propose in 2011. All of these projects 4.7.2 Other discoveries have an investment scope exceeding NOK 10 bil- As part of its follow-up of activity on the shelf, the lion, and will be submitted to the Storting (Norwe- Norwegian Petroleum Directorate annually maps gian Parliament). Development of the Valemon factors that delay the progress of developing dis- and Knarr fields has also been subject to authority coveries. The follow-up shows that socio-economi- processing in 2011. The total investments in these cally profitable discoveries are developed, but that projects have been estimated at more than NOK the process takes time because the development 105 billion. solution must await access to processing and Hyme, Visund Sør, Stjerne and Vigdis Nordøst transport infrastructure, commercial agreements are the working names for projects with estimated and maturing of the resource base. investments of less than NOK 10 billion that have There are several causes for why discoveries been proposed thus far in 2011. In total, the invest- have not yet been developed. According to ments associated with these projects have been reports received by the Norwegian Petroleum estimated at about NOK 20 billion. Directorate, a lack of infrastructure capacity or The overall investments over time associated gas solution is the reason behind about one-third with projects that are expected to be proposed in of the stalled projects. Uncertainty as regards the 2011, have been estimated at more than NOK 200 resource base and reservoir conditions is the billion. The reserve growth due to the new fields reported reason for halting more than another amounts to about 200 million scm o.e. The inde- third of such projects. pendent developments will be hubs that will make Small discoveries can either be developed profitable development of nearby minor fields pos- through phase-in to existing fields or through a sible. The small fields tied in to existing fields will coordinated development of multiple discoveries. contribute to extended lifetimes and improved In the North Sea, there are many cases where recovery from the parent fields. Development of phase-in to established infrastructure and utilisa- 74 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities tion of available capacity in late phase fields, must Important factors when developing small dis- compete with establishment of new and independ- coveries include: ent field centres. Such centres can be realised – Efficient phase-in of new discoveries as capac- through a coordinated development of multiple ity becomes available. deposits. These challenges may also apply to the – Rapid development and lower costs. Norwegian Sea and Barents Sea. The concept – Good coordination across different licensee solution will be considered based on e.g. the dis- groups. covery potential in the area and costs associated – Improving the efficiency of operation and coor- with lifetime extension on existing facilities that dination of activities to achieve lower costs on are relevant for tie-in. the large, mature fields. The review confirms the impression from pre- An increased need to carry out early investments vious studies that profitable discoveries are devel- could be a consequence of rapid, standardised oped, but this may take time as a profitable devel- development solutions. Furthermore, it could opment solution must wait for access to process- become more challenging to establish sufficient ing and/or transport infrastructure, or the flexibility as regards potential subsequent meas- resource base must mature. At the same time, ures to improve the recovery rate from the fields, many small discoveries are made which are not and to have a facility that can develop a possible profitable with the work processes and cost level upside potential in the relevant area. For many of established on the continental shelf. Standardisa- these discoveries, a simplified process will be tion and quicker project implementation could based on drilling only one well before develop- contribute to making more discoveries profitable. ment is determined. The resource potential will then often be less clarified than for previously completed developments. Coordination with other 4.7.3 Profitability for small discoveries – minor discoveries in an area could also be an issue standardisation in areas where this potential has not been well- Profitable development of more small discoveries researched. will require a different approach than the develop- Simplified developments with standardised, ment solutions and work methods that have domi- well-documented solutions could be a good way of nated the industry up to this point. Not least, a securing profitable production of more marginal review of work processes and decision processes resources. This must be carried out in a manner in the industry will be important. which adheres to applicable safety and environ- Both a larger degree of standardisation of mental requirements. The alternative to such a development solutions and effective coordination new approach could be that the resources remain of developments can contribute positively to prof- in the ground because they are not profitable with itability. This applies both to coordinated develop- traditional solutions and work processes. ment of discoveries across ownership, as well as The current authority practice also facilitates coordination through use of existing infrastruc- rapid project implementation and standardised ture. Standardised development solutions seem to solutions. Development projects with an invest- be most relevant for discoveries where the plan ment framework less than NOK 10 billion will not calls for development with subsea solutions, normally require processing by the Storting. This where production with few wells is planned, and means that the official processing of the projects where the upside potential for resources is can be carried out in eight to ten weeks from assumed to be limited. Gas discoveries are consid- when the Ministry receives a development plan ered to represent fewer challenges than minor oil until approval is granted. This assumes the impact discoveries, which could involve issues as regards assessment obligation has been clarified before depletion strategy, number and placement of the plan is submitted to the Ministry. The impact wells, in addition to the need for gas or water assessment obligation could be fulfilled through injection. previous impact assessments and/or a regional Developments with an independent facility will impact assessment. always have greater flexibility as regards produc- The Ministry will determine whether the tion forms, depletion strategy and phase-in of new impact assessment obligation is considered ful- resources. Therefore, it must be considered in filled. Establishing that the impact assessment each case whether the resources are of such a duty is fulfilled through previous impact assess- scope and nature that they facilitate simple or ments takes place by the operator submitting an standardised developments. application for this to the Ministry. In most cases, 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 75 An industry for the future – Norway’s petroleum activities the Ministry will often consult with other minis- of the development will then better correspond tries, usually the Ministry of Fisheries and Coastal with the licensees’ decision process. This will Affairs and the Ministry of the Environment, facilitate obtaining necessary clarifications associ- before a decision is made. All projects must be ated with the projects at a suitable time. The need sufficiently impact-assessed in order for the to enter into contracts before the development is impact assessment duty to be considered fulfilled. approved will be reduced. In 2010, the Ministry updated the PDO/PIO With earlier submission of the development guidelines6 in cooperation with the Ministry of plan, there will be greater uncertainty associated Labour. The objective of the guidelines is to e.g. with resources and costs. As long as the decision show how the authorities’ need for documentation basis is good enough for the licensees to make may be adapted to the size and complexity of the their investment decisions, this will normally be projects. Small, simple projects require simpler good enough to prepare a development plan. The documentation than large, complicated projects. disadvantage of such a model could be that a Another important factor addressed by the new development plan might more often be withdrawn guidelines is the necessity of good contact with after being submitted. The disadvantages of this the authorities before important directions are are considered to be limited. made in the projects, i.e. in reasonable time before the plans are submitted to the authorities. Such early contact will, for instance, help determine The Government will: whether the projects are suited for fast-track • Introduce a practice of earlier submittal of development. By involving the authorities at an plans for development and operation (PDOs) in early stage, the need for processing time is fast-track developments. reduced when the plans are submitted to the authorities for approval, and the risk of choosing development solutions that are not acceptable to 4.7.4 Naming petroleum deposits the authorities is also reduced. Names are important symbols. The names given With the current pattern for the licensees’ to new fields in new areas should reflect the preparation of and decisions regarding plans for importance of the activity to regions and to the development and operation, fast-track develop- country as a whole. Many fields have names taken ments will often require entering into important from Norse mythology. This practice has provided contracts before authority approval is granted. many good field names with deep Norwegian This is because some of the equipment has a long roots. delivery period, or because purchasing early Naming petroleum deposits, in this case fields, results in lower costs. The Petroleum Act and the is regulated through the Regulations relating to current authority practice provide a possibility for the Act relating to petroleum activities and the this. A precondition for allowing companies to Resource Management Regulations, respectively. enter into contracts early is that it does not impede The Regulations relating to the Act relating to the authorities’ ability to exert influence on devel- petroleum activities stipulate that naming petro- opment solutions. Applications for early contract leum deposits, fixed facilities and wells, as well as awards are therefore subjected to thorough scru- using proper names when naming fields, must be tiny. Important elements of such processing will approved by the Norwegian Petroleum Directo- include whether standardised equipment will be rate (NPD) and that the NPD can stipulate further used which can alternatively be used in other pro- provisions to supplement this Chapter. The jects, whether the solution provides good coordi- Resource Management Regulations stipulate: nation across licensee groups and whether suitable environmental solutions are chosen. «The licensee shall, no later than the time of sub- For small developments where the conditions mission of the Plan for Development and Opera- are otherwise suited for rapid project progress, it tion (PDO) or an application for exemption in could also be appropriate to submit the develop- respect of such plan, forward to the Norwegian ment plan to the Ministry at an earlier time than Petroleum Directorate an application for consent with the current practice. The official processing to naming of the field. The field name shall be applicable as from the time when the Plan for Development and Operation has been approved or 6 Guidelines for plans for development and operation of a petroleum deposit and plans for installation and operation when the Ministry has decided not to require such of facilities (PIO). plan to be submitted for approval.» 76 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

A final decision regarding the name is stipulated the price paid by the licensees to rent the facility by the Norwegian Petroleum Directorate. will be very significant to the overall tax payment On behalf of the licensees, the operator applies from the field. for approval of a field name to the NPD. Emphasis If the parties that own and hire the production has been placed on the new field name being com- facility are completely independent of the relevant patible with other field names in the same area. licensees, the licensees have a significant interest For example, a small field, with the working name in keeping the hiring costs as low as possible. Pi, was named Gaupe (lynx) in June 2007, because Every NOK spent “over-paying” for rent, will the same area contained fields with names such as mean lower profit, both before and after tax, for Rev (fox) and Varg (wolf). Before approval, the the licensees. NPD submits the proposed name to the Norwe- If companies that own and hire production gian Language Council for comment. facilities are taxed outside the petroleum taxation The Ministry intends to implement an adjust- system, while the licensees also have financial ment as regards naming petroleum deposits. The interests in the production facility, there is a risk current practice will be continued for small, new of tax-motivated decisions. This could entail unfa- fields developed using existing facilities. Such vourable decisions for the State as resource fields must be named in accordance with the owner. This is because the rent income from the established name practices in the relevant area. facility will be subject to a lower tax rate than the Larger, independent developments, however, marginal rate in the petroleum taxation regime. have a greater symbolic effect than smaller satel- The licensees’ rent expenses will, however, be a lite fields. This is particularly the case in new/ deduction in the basis for petroleum tax. If the frontier areas such as the Barents Sea. It is impor- licensees have financial exposure in the produc- tant that the chosen name reflects the significance tion facility, they will no longer have the same of the project and activity for such developments. financial incentives to establish low rental prices. The names from Norse mythology with the Maintaining high rental prices will be a great strongest symbolic effect have already been used. advantage for them. The tax aspects of this are Discoveries that represent a significant leap or handled by the tax authorities when processing great progress for the industry, the region or the licensees’ tax assessment. country, must have names reflecting this. A good This could result in challenges for the name must capture the context. The Ministry will resource authorities as it could also impact which therefore review the current system to ensure development solution is chosen. The possibilities that it contributes to field names for major, inde- for tax optimisation through renting a facility pendent developments with a national context and could lead to a socio-economic loss if the develop- historical significance. ment solution is influenced. The resource authorities are concerned with regulating the activity so that socio-economic losses are avoided. On this The Government will: basis, the Government will amend the petroleum • Review the current naming system to ensure regulations so the licensees cannot rent produc- that it contributes to major, independent devel- tion facilities from companies/players where they opments receiving field names that have a already have a financial interest. national context and historical significance.

The Government will: 4.7.5 Ownership and taxation of facilities • Amend the petroleum regulations so licensees Most production facilities used in petroleum activ- cannot rent production facilities from affiliated ities are owned by the licensees on the fields so companies. that all income and fees are included in the licensees’ tax accounts according to the Petroleum Taxation Act. How these revenue streams are 4.7.6 Development of discoveries results in internally priced will thus not be of tax signifi- spin-off effects cance to the licensees. One of the Government’s goals is for development There are several examples of production facil- of new discoveries to create the greatest possible ities, such as a production ship, being owned and value for society and to result in local and regional hired by owner companies that operate outside spin-off effects. According to the EEA agreement, the petroleum taxation system. In such instances, Norway is part of the EU’s internal market, which 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 77 An industry for the future – Norway’s petroleum activities is founded on certain basic principles regarding works to strengthen the spin-off effects, different free movement of goods and services, free compe- interests must be balanced. It is important for the tition, prohibition against discrimination based on value of a project to largely fall to the community nationality, etc. The EEA agreement thus restricts in the form of taxes and fees. These contribute to a country’s ability to stipulate conditions for eco- financing our welfare. nomic activity based on national considerations. The authorities will be an active facilitator in The ESA has determined that Section 10-2 of the ensuring regional and local spin-off effects. Their Petroleum Act has not been designed in a manner work in connection with processing development in which it can be considered to comply with Nor- plans is designed to help identify good solutions. way’s commitments under the EEA agreement. When the authorities approve a plan for develop- This relates to provisions associated with the ment and operation, emphasis is placed on facili- organisation of licensees’ petroleum activity in tating participation by regional and local compa- Norway and base use. The Ministry therefore nies in the competition for assignments associated submitted a proposal, cf. Prop. 102 L (2010–2011), with the activity to be established. regarding certain amendments to the Act. The The guidelines for preparing development objective of the amendments is to ensure better plans (PDO/PIO guidelines) state which expecta- compliance between the wording of the Act and tions the authorities have for developments that Norway’s commitments under the EEA agree- could result in local and regional spin-off effects. ment. The text will also better reflect the practice It is assumed that the operator has extensive con- that has been established pursuant to the provi- tact with local and regional authorities when pre- sion. paring a major development case, and must, inso- The proposed amendments will not weaken far as possible, facilitate local and regional busi- the possibilities to create spin-off effects through ness development from the project. The Ministry further development of the Norwegian petroleum maintains a dialogue with the operator regarding activities. The central precondition to achieve how this should take place. This applies to all spin-off effects is further development of profita- independent developments of a certain size. ble activity. The framework and authority involve- The operator must analyse the local and ment in connection with the activity will ensure regional businesses’ competence and capacity as that the possibility for achieving favourable local regards the need for goods and services during and regional spin-off effects will be continued to the development and operations phase. The oper- the degree the activity forms a basis for it. ator will analyse various types of workforces in It is important to find socio-economically relation to its own needs, both during the develop- sound development and operation solutions when ment and operations phase, and will present meas- developing discoveries. Experiences from devel- ures to meet the workforce need. The expected opments such as Skarv, Ormen Lange, Snøhvit local, regional and central employment effect and Goliat show that new major developments must also be described. The operator should lead to significant local and regional spin-off research which measures to implement in order effects, independent of the development solution. to enhance expertise in the businesses, e.g. In most cases, a landing solution will provide through supplier networks and information more workplaces locally and regionally during the regarding work routines. The operator should operations phase than a purely offshore develop- also describe the possibilities for using local and ment. An important premise for achieving good regional workforces and indicate potential cooper- spin-off effects is that local and regional busi- ation possibilities with other players. The operator nesses exploit the commercial possibilities pro- will also assess the need for involvement from vided by a development in the nearby area. Many public authorities. small discoveries made now will be operated via The clarification of this practice in the guide- existing facilities and will not result in increased lines ensures that the operator, through its work staffing on the parent facility. However, such with the impact assessment, is made familiar with developments still entail a considerable potential the local and regional businesses and contacts for deliveries during the development and opera- local and regional authorities early on. This also tions phase. ensures that all involved parties receive good The dialogue and interaction between local information and an overview of the consequences and regional authorities and businesses are of a development. In most developments, we have important when preparing a plan for development seen that good contact early on between the oper- and operation. At the same time as the Ministry ator and regional players yields good results. 78 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

• Facilitate establishment of new tendering pro- The Government will: cesses for new developments that enable par- • Ensure that new discoveries create the great- ticipation by companies from the region where est possible value for society and facilitate pos- the development is located. itive local and regional spin-off effects. • Ensure an effective base and operations struc- • Ensure early contact between the operator and ture, which contributes to local and regional local/regional businesses and relevant author- business and competence development. ities. • Operators of new, independent developments • Stipulate requirements for societal factors to be must, no later than two years after the field researched in connection with plans for devel- starts producing, carry out an analysis of opment and operation, including regional and regional and local spin-off effects of the devel- local spin-off effects. opment. • Facilitate qualification of relevant local/ regional suppliers during the development and operations phase. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 79 An industry for the future – Norway’s petroleum activities

5 Discovering more in opened areas

The objective of Norwegian exploration policy is promising parts of the opened area have now to make new discoveries that are necessary to been mapped. ensure a stable activity level, the highest possible Activity has been underway on large parts of value creation and State income over the medium the Norwegian Shelf for many years. These areas and long term. This can best be achieved through contain familiar geology and well-developed infra- an efficient and timely exploration of the Norwe- structure, and the areas are deemed mature. Other gian Shelf. parts of the shelf are characterised by less knowl- The areas of the Norwegian Shelf that are edge of the geology, a greater degree of technical opened for petroleum activity include large parts challenges and a lack of infrastructure. These areas of the North Sea, the Norwegian Sea and the are called frontier areas. To achieve a suitable southern part of the Barents Sea. Significant exploration of both mature and frontier areas, two undiscovered resources are still expected in the equal licensing rounds have been established: unopened areas, which could provide a basis for awards in predefined areas (APA) for mature areas activity for years to come. New area has not been and numbered rounds for frontier areas. opened to the petroleum industry since 1994. As a petroleum province matures, the chal- What were initially considered to be the most lenges and opportunities change. To ensure effi-

250 Unopened areas

Opened areas 4 Discoveries Resources in fields 200 3,5

150 2,5

2 Mill. Scm o.e. 100 Mill. barrels o.e. per day per barrels o.e. Mill. 1,5

1 50

0,5

0 0 2010 2015 2020 2025 2030 2035 2040

Figure 5.1 Possible production course on the Norwegian Shelf. Source: Ministry of Petroleum and Energy and the Norwegian Petroleum Directorate. 80 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

12 000 80 Resource growth Exploration wells

70 10 000 Goliat Ormen Lange 60

8 000 50 Snøhvit

6 000 40 Troll Øst Exploration wells Mill. Scm o.e. 30 4 000 Troll Vest, Oseberg, Snorre

20 Gullfaks

2 000 Statfjord, Sleipner 10

Ekofisk 0 0 1967 1972 1977 1982 1987 1992 1997 2002 2007

Figure 5.2 Cumulative resource growth over time, and the number of exploration wells drilled per year. Source: Norwegian Petroleum Directorate. cient exploration and development of potential dis- 5.1 Undiscovered resources in opened coveries, changes were undertaken in the petro- areas leum policy ten years ago to attract players with a strong focus on the more mature areas of the Nor- Considerable volumes of recoverable resources wegian Shelf. The current player scenario is well- are still expected on the Norwegian Shelf. The balanced, and consists of companies that focus on Norwegian Petroleum Directorate’s estimate for new, larger and more risky projects and compa- the expected undiscovered resources is 2570 mil- nies that focus on smaller projects with lower risk. lion scm o.e. The estimate’s range of uncertainty The Government wants to maintain explora- is from 1020 scm o.e. to 4800 scm million o.e. The tion activity. The most important instrument for expected undiscovered resources are distributed achieving this is awarding area in licensing between the three marine areas with 33 per cent rounds. Extensive awards both in mature and expected in the North Sea, 30 per cent in the Nor- frontier areas are important in maintaining a high wegian Sea and 37 per cent in the Barents Sea. level of exploration activity. It is necessary to Average discovery size declines as petroleum maintain exploration activity so as to curb the provinces mature, and this is also true of the areas decline in petroleum production. The Govern- on the Norwegian Continental Shelf. During the ment will therefore continue a predictable award first 20 years, many particularly large discoveries policy in relation to numbered rounds and APA were made on the Norwegian Shelf, and many of rounds. these fields are still producing significant volumes. Since the mid-1980s, reserve growth has not been as large. With the exception of Ormen The Government will: Lange, the largest discoveries were proven during • Award production licenses in mature and fron- the period from 1969 to 1984. In the 1990s, discov- tier areas to curtail the decline in petroleum ery size and number of exploration wells production. decreased, cf. Figure 5.2. In the 2000s and since, the size of discoveries has been considerably smaller than the largest discoveries made until the mid-1980s, cf. Figures 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 81 An industry for the future – Norway’s petroleum activities

3500

3000

2500

2000 Mill. Scm o.e. Scm Mill. 1500

1000

500

0 1966-1970 1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 Figure 5.4 Undiscovered resources in mature >100 mill Scm o.e. 50-100 mill Scm o.e. 10 - 50 mill Scm o.e. 5 - 10 mill Scm o.e. < 5 mill Scm o.e. and frontier areas. Figure 5.3 Resource growth and discovery size, Source: Norwegian Petroleum Directorate. 1966–2010. Source: Norwegian Petroleum Directorate. sist of small discoveries in the North Sea. The majority of the North Sea is covered by the APA area and is thus defined as a mature area. The 5.2 and 5.3. This reflects the fact that the opened potential in frontier areas of the North Sea is areas have become more mature. At the same therefore limited. The largest potential in frontier time, the discovery rate has increased during this areas is found in the Barents Sea, followed by the period and some of the discoveries are still of con- Norwegian Sea. This is also reflected in the siderable size, providing good income for the recently completed 21st licensing round, where all State and the companies. Furthermore, many dis- awarded area is in the Norwegian Sea and the coveries are close to infrastructure, which makes Barents Sea. them less cost-intensive and quicker to develop. In the future, large parts of the production are expected to be from discoveries that are not yet 5.2 Exploration activity within proven. As of 2020, the importance of resources comprehensive marine that have yet to be found will gradually increase management and become dominant. Profitable discoveries are an essential precondition for maintaining the pro- 5.2.1 Integrated management plans and duction level. This assumes that we are able to exploration policy sustain the level of exploration in open areas. Norway’s ambitions have always been high as Large volumes and values are still present in regards environmentally friendly petroleum activi- mature areas. The Norwegian Petroleum Directo- ties. Joint regulations have been created within rate estimates that nearly half of the undiscovered health, safety and the environment, and they are resources will be found in mature areas, cf. Figure administered by, among others, the environmen- 5.4. Most of these resources are expected to con- tal, petroleum and safety authorities. So as to safe-

Box 5.1 Definition of mature and frontier areas There is considerable variation in the challenges developed or planned infrastructure. This associated with realising the potential for undis- results in a relatively high probability of discov- covered resources on the Norwegian Shelf. The eries, but at the same time, the probability of variation coincides with the degree of maturity making new, large discoveries is low. in the different areas. Mature and frontier petro- Frontier areas are characterised by little geo- leum areas were described in Storting White logical knowledge, significant technical chal- Paper No. 38 (2003–2004), The Petroleum Activ- lenges and lack of infrastructure. The uncer- ities. tainty associated with the exploration activity is Mature areas are characterised by familiar greater here, but new, large discoveries are still geology, smaller technical challenges and well- possible. 82 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities guard the external environment and maintain con- the petroleum activity. Seasonal restrictions for sideration for other industries, the relevant man- exploration drilling and acquisition of seismic data agement plans are used as a basis in stipulating are examples of such area-specific restrictions. environmental and fishery terms for both types of All areas that have been opened for petroleum licensing rounds. activity and not excluded from petroleum activity Storting White Paper No. 12 (2001–2002), in the management plans can be announced in Clean and rich seas, established that integrated numbered licensing rounds, or included in the management plans shall be prepared for Norwe- APA area. Within the framework of the manage- gian waters. The purpose of the management ment plans, an expert petroleum assessment plans is to facilitate value creation through sus- determines when new areas are added to the APA tainable utilisation of resources and ecosystem area. The consideration for sequential exploration services in the waters, while also maintaining the of frontier areas is important in the numbered ecosystems’ structure, function, productivity and rounds, while the need to prove and produce time- biological diversity. The management plans are a critical resources is important in the APA rounds. tool for both facilitating value creation, and main- In connection with the consideration of the man- taining the environmental values in these waters. agement plans for the Norwegian Sea and the Bar- The management plans shall contribute to a com- ents Sea-Lofoten, it was determined that, in con- prehensive and ecosystem-based management of nection with licensing rounds, the area-specific Norwegian waters. environmental and fishery requirements for The first management plan was presented in petroleum activity as laid down in the manage- 2006, and covered the Norwegian part of the Bar- ment plans, will be used as a basis. No additional ents Sea and the waters off Lofoten. This manage- environmental or fishery demands will be made. ment plan was updated and presented to the Stort- However, to clarify whether significant new ing in the spring of 2011. The management plan information has emerged between the revisions for the Norwegian Sea was presented to the Stort- and updates of the management plans, a public ing in the spring of 2009. The Government is cur- consultation process will be held in connection rently working on a management plan for the with APA rounds and announcement of blocks North Sea and Skagerrak. through the numbered licensing rounds. This The responsible agencies gather extensive consultation will only solicit input connected with knowledge concerning these waters in the work significant new information that may have to establish the comprehensive management emerged after the relevant management plan was plans. In addition, views on the technical basis are adopted. The Government will thus have a good gathered through involvement of interest groups technical basis for making comprehensive and in public consultations and conferences. Impact balanced decisions on the framework for the assessments of industry activities based on availa- petroleum industry, also in the period of time ble knowledge are used as a basis for assessments between updates of the management plans. This and decisions in the management plans. In con- will safeguard the consideration for good resource nection with updating the plans, new knowledge is management, along with considerations for gathered where gaps have been identified. The health, safety and the environment and coordina- management plans will be updated regularly, nor- tion with other industries. mally after 4–5 years. Considerable work is done by the authorities’ responsible agencies, as well as consultant and research environments, to main- The Government will: tain and further gather knowledge concerning the • In areas with established managements plans, sea. This is in agreement with the requirement for use the environmental and fishery require- knowledge-based management. The managements from the relevant management plan as a ment plans ensure both a sound foundation for basis. No further environmental or fishery responsible management, as well as predictability demands will be imposed for new production surrounding the framework and conditions for the licenses in the area. petroleum activities and other business activities. • Within the framework of the management The integrated management plans for the vari- plans, use expert petroleum evaluations as a ous marine areas states where petroleum activity basis for which areas are included in the APA may take place in the open area, and where the area and which areas are announced through activity is prohibited during specific time periods. numbered licensing rounds. Area-specific conditions can also be imposed on 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 83 An industry for the future – Norway’s petroleum activities

Ever since the 1980s, special environmental 5.2.2 Coordination with the fishery industry and fishery conditions have been stipulated in Norwegian maritime areas are rich in natural connection with announcement and award of new resources, and they play a very important role in areas on the Norwegian Shelf. These conditions Norway. The resources in the sea and under the entail that consideration must be given to the fish- seabed must be soundly managed in a way that eries and fishery resources, both in connection ensures value creation and welfare in a long-term with seismic data acquisition and with drilling. In perspective. Norway’s coastal and sea areas are the most vulnerable areas, time limitations have important for commercial activities such as the been set for acquisition of seismic data and drill- petroleum sector, fishing, shipping and tourism. ing of exploration wells. Prior to exploration drill- Increased activity and more users demand good ing and acquisition of seismic data, measures coordination so that different industries can co- must be implemented to inform affected inter- exist. ested parties. The fishery industry is important to Norway. The Norwegian Petroleum Directorate and Today, fish is the third most important export arti- the Directorate of Fisheries established a working cle after petroleum and metal. More than 10 000 group in the autumn of 2007 to consider issues people have fishing as their primary occupation, related to acquisition of seismic data and electro- and there are about 6 800 fishing vessels in Nor- magnetic surveys. In 2009, the Norwegian Petro- way. leum Directorate, the Directorate of Fisheries and Ever since the petroleum activities on the shelf the State Pollution Control Agency, now the Cli- started nearly 50 years ago, the authorities have mate and Pollution Agency, presented a report maintained that petroleum activities must be car- entitled “Report on startle response and other ried out side by side and in cooperation with other harmful effects from seismic sound waves – rec- industries, particularly the fisheries. This has laid ommendations concerning test activity”. With the foundation for value creation based on both oil regard to the startle response in fish, the report and gas resources, as well as the fishery did not reach a conclusion regarding the distance resources. The extensive system of impact assess- at which such a response occurs. The desire on ments in all phases of the petroleum activity is an the part of some for stipulation of a general mini- important element in achieving this. mum distance for the startle response was thus The Petroleum Act requires the authorities to not accommodated. This is mainly due to the fact carry out comprehensive impact assessments that there was relatively little research on the star- prior to opening an area. In this connection, evalu- tle response, and that the viewpoints of the com- ations are made of e.g. the environmental, finan- mercial interests were incompatible. In this con- cial and societal consequences for other indus- text, reference can be made to the fact that how tries, including the fisheries. The Petroleum Act and how far the sound waves travel in the sea at also requires impact assessments as a part of any given time depends on the hydrographic con- plans for development and operation, and as a part ditions, which vary throughout the year as well as of plans for disposal of facilities after production from area to area. ceases. In the wake of this work, a cooperative group The management plans are important in the has been established between the petroleum processes to ensure good coordination. Area-spe- authorities, the petroleum industry, fishery organ- cific conditions were established in connection isations/fishery authorities and the Climate and with the consideration of the management plans Pollution Agency. This work has resulted in a for the Norwegian Sea and for the Barents Sea – number of measures, with regulatory changes in Lofoten in order to protect environmental assets both the Resource Regulations as well as in the in particularly valuable areas. These conditions Petroleum Act and Petroleum Regulations. Meas- replaced the license-specific conditions in the Bar- ures have also been initiated regarding communi- ents Sea. In the Norwegian Sea, the area-specific cation, coordination and expertise. conditions from the management plan apply to The changes in the Resource Regulations new licenses. The conditions in the management include a requirement for courses for fishery plan can also be imposed on existing production experts regarding seismic data acquisition, with licenses, subject to application. License-specific clarification of the fishery expert’s role and requirements apply in the North Sea until a man- required expertise, along with requirements for agement plan is submitted. keeping and reporting of log books after end of voyage. The changes also encompass further 84 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities coordination of requirements relating to reporting activity, but no change was proven in the distribu- surveys and requirements for tracking equipment tion of other species. With regard to direct harm for seismic vessels. The Norwegian Petroleum to fish larvae, previous research has revealed that Directorate has established a web-based report- harm only occurs within the very immediate area, ing and announcement system for survey activity, maximum five metres around the sound source. including an option for interactive information On this basis, it was concluded that the seismic searches for information on reported surveys and surveys do not entail harm at the population level. announcement of surveys. A cooperation agree- In connection with the petroleum activity in ment has been signed between the Coast Guard, the north, the petroleum industry has taken the the Directorate of Fisheries and the Norwegian initiative for vessels in the fishing fleet to be quali- Petroleum Directorate, where the Coast Guard is fied and to secure expertise for operating oil spill the primary contact for the fishery expert. equipment. The Maritime Directorate has stipu- For a number of years, the Norwegian Oil lated new regulations making it easier to utilise Industry Association has carried out annual “fish fishing vessels and other suitable vessels in oil and seismic” seminars, a forum for exchanging spill preparedness. In connection with the Goliat experience and knowledge between the industry, development, the licensees and the Norwegian authorities and the fishery industry. Both the Nor- Clean Seas Association for Operating Companies wegian Petroleum Directorate and the Directorate (NOFO), in cooperation with the northern fisher- of Fisheries have been active participants in these men’s association (Fiskarlaget Nord) have drawn seminars. up a comprehensive emergency preparedness Several measures have been implemented to concept for use of fishing and other vessels in obtain more knowledge about the effect of seis- coastal oil spill response. The intention is to estab- mic surveys on the fisheries. While there is gen- lish a permanent emergency preparedness fleet eral agreement that seismic surveys have little consisting of 30-40 vessels for coastal response in direct harmful effect and do not harm fish at a Finnmark county. According to the companies population level, there is considerably more disa- and NOFO, the fleet will make up part of the per- greement as regards behavioural changes in fish manent oil spill preparedness for the Goliat field, in connection with acquisition of seismic data and but can also safeguard the preparedness needs of as regards introduction of a minimum distance other activity in the area. from fish. The cooperation between the two industries is In connection with the acquisition of seismic important in strengthening preparedness in data outside Lofoten/Vesterålen in the summer of coastal waters. Using the fishing fleet will enable 2009, a follow-up research project was conducted the oil companies to benefit from local maritime to obtain better documentation of how the sound expertise and increase emergency preparedness from seismic surveys affects certain species of capacity. At the same time, the initiative can yield fish that are subject to commercial fishing, and additional financial resources for the involved fish- thus potential catches for fishers. The cost frame ers, and spin-off effects for the local environment. for the project was NOK 25 million, and it is one of The knowledge and capacity that are built up will the largest projects ever carried out. The study also be useful for the Norwegian Coastal Adminis- was financed by the Norwegian Petroleum Direc- tration as regards oil spill preparedness consider- torate and conducted by the Institute of Marine ations associated with e.g. discharges from ship Research. traffic. The main conclusions from this study were The petroleum activity also entails significant that the seismic surveys had no proven harmful reinforcement of the general preparedness to effect on marine life, but that the sound affected respond to potential accidents. This provides fish behaviour, and that there was a change in security for all users of the sea. The emergency catches (increase or decrease) in the period dur- preparedness includes e.g. both land and sea heli- ing which seismic data acquisition took place. Net copters, as well as upgrading of the fishing fleet catches of Greenland halibut and haddock were with towing capabilities. Establishment of petro- reduced, but grew in the period after the acquisi- leum activities can result in better general prepar- tion activity. The fish exhibited increased swim- edness and greater security than would have been ming activity, which can be symptomatic of a the case without the activity. This enhanced pre- stress reaction. However, the fish showed no clear paredness could be very important in connection changes in food intake. Lower density of pollock with various types of accidents at sea and along was measured during the seismic acquisition the coast that are not related to the petroleum 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 85 An industry for the future – Norway’s petroleum activities activity. One specific example is when an search Table 5.1 Number of awards in APA rounds and and rescue (SAR) helicopter from the Heidrun the North Sea Awards (NSA). platform contributed in the rescue work when a chemical tanker collided with a fishing boat off NSA 1999 14 APA 2003 19 the coast of Fræna municipality in Møre og Roms- NSA 2000 5 APA 2004 28 dal county in October 2007. NSA 2001 10 APA 2005 45 Although the authorities have implemented a number of measures to ensure the best possible NSA 2002 11 APA 2006 58 interaction between the petroleum activity and the APA 2007 52 fisheries, both through regulatory change, APA 2008 34 improved communication and enhanced expertise, it will continue to be important in the future APA 2009 38 to focus on work and processes that can promote APA 2010 49 cooperation between the fishery and petroleum industries. Research work has brought considerable new knowledge, and constitutes important ther development of the numbered licensing work that we must continue to build on. The round system that facilitates timely exploration objective is to find balanced solutions that pro- through annual awards, and predictable area mote long-term, sustainable management of our through the predefined areas. Predictable addi- ocean-based resources, and ensure good cooperation of acreage to mature areas, and which compa- tion in the years to come. nies can apply for, are important for the efficiency of the APA system. The companies do extensive geological work in these areas when they know The Government will: that they are available in an annual round of • Promote good cooperation between the fishery awards. This predictability is a key feature of the and petroleum industries by placing restric- APA system. tions on exploration and drilling activity based A variety of companies contributes to stronger on knowledge from the work on comprehen- competition for acreage, and ensures that new sive management plans. ideas emerge and are tested. The increased diver- • Utilise the fishery industry’s resources and sity among the licensees on the shelf has contrib- expertise in oil spill preparedness. uted to good exploration results in mature areas in recent years. The Office of the Auditor General has carried 5.3 Exploration policy out an administrative audit of administrative practices in connection with license awards1. They The purpose of the exploration activity is to con- reviewed the award process in APA 2007 and APA tribute to resource growth, and thus pave the way 2008, as well as in the 19th and 20th licensing for development and production of the undiscov- rounds. No significant deviations were identified ered resources. Exploration activity is designed to in relation to the Storting’s resolution and achieve this in an efficient manner. The award sys- assumptions. The survey reveals that: tem for new licenses and the player scenario are key elements in our exploration policy. «Overall, the survey shows that administrative It is important that interesting exploration practices in connection with the award of produc- acreage in mature areas is explored in a timely tion licenses in the petroleum sector consistently manner so that time-critical resources can be complies with all reasonable requirements based proven and produced. In frontier areas, it is impor- on general requirements for sound case process- tant that regular licensing rounds give access to ing and generally accepted public administration interesting area while safeguarding the considera- principles.» tion for socio-economic efficiency through stepwise exploration. 1 Office of the Auditor General’s administrative report 1 2010 The system of awards in predefined areas ”Office of the Auditor General’s survey of administrative (APA) is an important measure in achieving our practices in connection with award of production licenses exploration policy objectives. The system is a fur- in the petroleum sector” 86 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Figure 5.5 Expansion of the APA area since the APA scheme was established. Source: Norwegian Petroleum Directorate.

ble production from established fields within their 5.3.1 Mature areas – APA technical and economic lifetimes. How time-criti- The mature areas are characterised by familiar cal these resources actually are depends on the geology and well-developed infrastructure. The planned shutdown of nearby infrastructure. likelihood of making discoveries is often relatively Today, the mature areas include large parts of high, while at the same time there is less chance the North Sea, the eastern and southern parts of of making large discoveries. These areas often the Norwegian Sea and most of the Barents Sea include fields in the later stages of their lifetime, South. or fields that are shut down. Most new projects in mature areas are expected to be relatively small, often necessitating tie-in to existing fields to Exploration in mature areas ensure profitability. At the same time, phasing in Since their introduction in 2003, the APA rounds these discoveries can help extend the lifetimes of have contributed to a considerable number of new the fields they are tied in to. Central challenges for licenses on the Norwegian Shelf. A total of 324 the mature part of the shelf therefore include production licenses have been awarded since the achieving rapid project progress for many small APA system was established, cf. Table 5.1. This is discoveries, as well as achieving the highest possi- more than one-third of all production licenses 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 87 An industry for the future – Norway’s petroleum activities

Table 5.2 Wildcat wells, discoveries and proven resources in area awarded in the North Sea Awards and APA licensing rounds from 2000 to 2010.

Number of wildcat No. of Resources proven in Year wells completed discoveries million scm o.e. 2000 0 0 0 2001 1 0 0 2002 3 0 0 2003 0 0 0 2004 2 0 0 2005 0 0 0 2006 2 0 0 2007 9 6 31.2 2008 12 7 32.7 2009 23 9 45.3 2010 23 10 91.8

awarded since awards commenced in 1965. The infrastructure with available capacity. Infrastruc- North Sea Awards were the predecessor of the ture has a limited lifetime, which is why it is so APA scheme, and comprised selected mature important to prove and then produce the areas in the North Sea. Forty production licenses resources in the area before the existing infra- were awarded under this scheme from 2000-2003. structure is shut down. If this cannot be done, The awards are and have been necessary in order profitable resources could be left in the ground to curb production decline and maintain activity. because the discoveries are too small to justify In line with Storting White Paper No. 38 necessary infrastructure on their own. (2003–2004), The petroleum activities, the APA It often takes some time before we can see the area is gradually expanded as new areas mature. results of policy changes. The restructuring that Such a gradual expansion has been carried out has taken place since 2000 is beginning to yield since 2003, cf. Figure 5.5. The first APA round, results in the form of number of wildcat wells, dis- APA 2003, primarily included area in the North coveries and proven resources in licenses Sea and on Haltenbanken in the Norwegian Sea. awarded through the North Sea Awards and the The areas around Snøhvit in the Barents Sea were APA rounds. included starting with APA 2004. The APA area The exploration that has taken place as a con- has been expanded every year since the system sequence of licenses awarded in the North Sea was established, with the exception of 2009. Awards and the APA rounds has yielded results. A It is important that the awarded acreage is total of 32 discoveries have been made in this area explored quickly and efficiently to ensure maxi- over the last four years. Overall, the resources mum utilisation of existing infrastructure. This is from these discoveries make up more than 200 also important because it takes time from acreage million scm o.e. Several of the licensees linked to is awarded until production can start. The average the major discoveries are already planning devel- lead time on the Norwegian Shelf is 11 years from opments. Proposed plans for development of one discovery to production start-up. Small discover- of these discoveries, Knarr, have been submitted ies made near infrastructure can often be quickly for the authorities’ processing in 2011. phased in to existing infrastructure, assuming capacity is available. This could result in shorter than average lead time. Awards through the APA system Well-developed or planned infrastructure The APA licensing rounds are annual. As a gen- means lower investments for developing new dis- eral rule, the acreage that can be applied for is coveries. Even small discoveries can yield good announced in the first quarter of the year, with the profitability if they can be phased in to existing application deadline for the companies around 15 88 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

September. The award of new production licenses that ensure balanced consideration for the exter- normally takes place right after the new year. nal environment and the interests of various users The criteria for award of production licenses of the sea, including the petroleum activity. Before are published through the announcement. These expanding the APA area, the proposal is submit- criteria form the basis for which companies ted to other ministries to ensure that potential secure awards in the APA rounds. In these new and significant information emerges before awards, significant emphasis is attached to the an expansion decision is made. understanding of the geology that emerges in the The APA areas can be expanded as new areas application, and the technical expertise that the mature. Predictability regarding which areas can companies possess. Other award criteria include be applied for, along with a regular addition of new financial strength and experience with the individ- area, is important for the efficiency of the system, ual company. HSE requirements are published in and is a key characteristic of the scheme. The the announcement and are used as a basis when companies carry out extensive geological work in new production licenses are awarded. The Minis- these areas. It is therefore important that the try of Labour, represented by the Petroleum areas included in the scheme are not subse- Safety Authority Norway, undertakes an HSE quently withdrawn. assessment of the companies in connection with the applications. Each year, the Government considers whether Experience with the APA scheme the APA area should be expanded. The areas can The companies, particularly the new players on be expanded within the framework that lies in the the shelf, have shown great interest in the APA management plans for the relevant sea area, but scheme. The scheme has been criticised by envi- the area cannot be reduced. One possible excep- ronmental organisations and environmental agen- tion to this rule is the emergence of important cies. In light of this, and the fact that the scheme new information that is relevant for the decision in had been in effect for five years, the Government the management plan as to where petroleum activ- decided to evaluate the scheme in 2008. In ity can take place, after the relevant management November 2008, the Government requested input plan was adopted. It is highly unlikely that this will regarding experiences with the APA scheme. A ever actually occur, as knowledge about the petro- total of 67 submissions were received. A more leum activity and the sea environment is very well detailed description of the evaluation is available known. Potential new acreage will be included in to the public as an unprinted appendix to this the announcement of the next APA round. report.3 When expanding the predefined area, the The APA scheme has proven to be an impor- authorities propose acreage that is characterised tant scheme for efficient exploration of mature as mature from a technical petroleum perspective. areas. It has contributed to strengthen diversity Using the definition of mature petroleum areas and competition within exploration on the Norwe- and frontier petroleum areas as a point of depar- gian Shelf. The scheme contributes to predictabil- ture, the authorities have operationalised this into ity for the industry with regular awards through the following technical petroleum criteria, an annual cycle. At the same time, the scheme wherein one or more criteria must form the basis contributes to maintain exploration activity in for such a proposal: mature areas so resources are proven and pro- Area is close to infrastructure. This includes duced. In the future, the Ministry will continue to both existing and planned infrastructure. Poten- emphasise such assessments when expanding the tial resources in the areas are regarded as time- APA area. critical. Following a balanced assessment where con- Area with exploration history. This includes siderations for petroleum activity, HSE, the exter- area that has previously been awarded and relinquished, area with known plays or play models2 2 An exploration play or play model is a geographically and and area situated between awarded and relin- stratigraphically delimited area where a specific set of geological factors is present so that petroleum may be proven quished area. in producible quantities. Such geological factors are reser- Area that borders on existing predefined voir rock, trap, mature sourcerocks and migration paths, as areas, but that has not been applied for in num- well as a trap formed before migration of petroleum ceased. All discoveries and prospects within the same play are bered licensing rounds. characterised by the play model’s specific set of geological In the Norwegian Sea and the Norwegian part factors. of the Barents Sea there are management plans 3 www.regjeringen.no/oed 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 89 An industry for the future – Norway’s petroleum activities

nal environment and fisheries were weighed, the 25 000 Government has decided to maintain the APA scheme. It is very important for the management 20 000 of petroleum resources and has contributed to efficient licensing policies and good resource utili- 15 000 2 sation. The management plans safeguard the considerations for the environment and interaction km Area, 10 000 with other industries along with other regulations. The regulations and management plans are used 5 000 as a basis for petroleum activity in the APA area in 0 the same manner as for activity in areas awarded 1970 1975 1980 1985 1990 1995 2000 2005 2010 in numbered licensing rounds. The APA scheme will therefore be carried out Figure 5.6 Annual relinquished area. as an annual licensing round in all mature areas to Source: Norwegian Petroleum Directorate. contribute to maintain activity and production on the continental shelf. All areas opened for petroleum activity, and not exempted from petroleum • Continue to publish the work programs in APA activity in a management plan, can be included in licenses. the APA area. Within the framework of the management plans, a technical petroleum assessment Fallow areas is carried out when new areas are added to the APA area. From the resource owner’s perspective it is very For sea areas with an established management important that the resources are explored effi- plan, the Ministry will use the environmental and ciently and in a timely manner, and to prevent area fishery conditions from the relevant management from becoming fallow. plan as a basis in new production licenses. Until Production licenses can be in an initial period the management plan is updated, no further envi- or in the extension period. The Petroleum Act reg- ronmental and fishery requirements will be stipu- ulates the duration of these periods. The initial lated for petroleum activity in the area. period can last a maximum of ten years. The The Government will introduce public consul- extension period may last up to 50 years. Upon tations in connection with APA rounds. For areas application, the extension period may be extended with a management plan, input is only requested beyond this. regarding new, significant information that has Currently, strict license conditions and work come to light after the relevant management plan programs are stipulated to prevent fallow area. In was approved. addition, conditions are stipulated for activity Since the establishment of APA, the work pro- though the processing of development plans. grams have been made public. The authorities will Together, this prevents fallow area in newer continue this practice. awards. Therefore, fallow area is mostly a problem in older production licenses. In the early awards there was great uncertainty associated The Government will: with the resource basis and the framework was • Carry out the APA scheme as an annual licens- not as developed as it is today. Therefore, larger ing round for all mature area on the Norwegian exploration areas were awarded to companies Shelf to contribute to maintaining activity and than is the current practice. The companies have production. retained large areas during the extension period. • Within the framework of the management The objective of the area fee is to provide com- plans, use technical petroleum assessments as panies with incentives to explore and utilise poten- a basis for which areas are included in the APA tial resources in the awarded area in an efficient area. manner. If a company finds that the awarded area • Introduce public consultation in connection does not contain sufficiently interesting commer- with APA rounds. For areas with a manage- cial possibilities, the area fee will contribute to the ment plan, only input regarding new, signifi- area being transferred to others or returned to the cant information that has come to light after the State. In 2007, amendments to the Petroleum Reg- relevant management plan was approved is ulations’ provisions relating to area fees entered requested. into effect. The purpose of the amendment was to 90 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities strengthen the fee’s function as a policy instru- being developed several decades after the discov- ment in resource management. The main rule is ery was made, e.g. due to a challenging reservoir. that area fees shall not be paid in areas with pro- In other instances, there might be high CO2 con- duction and active exploration activity. Areas with- tent in the gas, which could make it difficult to out activity, however, will be subject to a higher phase-in the resources to existing infrastructure fee. quickly enough. The NPD has reviewed existing licenses on The NPD’s analysis shows that about two per the Norwegian Shelf to assess the exploration cent of all awarded area is fallow. The scope of fal- activity. Area included in a development plan is low area is therefore considered modest. The excluded in the evaluation. The following criteria scope is expected to be reduced further as a result define an area as fallow: of the area fee. Relinquished area has increased – Exploration drilling has not been carried out considerably in the last few years, cf. Figure 5.6. and the costs of geophysical or geological sur- This is most likely due to introducing a new area veys are lower than NOK 20 million from 1 Jan- fee in 2007. The authorities want to monitor this uary 2008 to 1 January 2010. development before other potential measures are – Activity has not been budgeted in the form of implemented. drilling exploration wells or geophysical or The Norwegian Oil Industry Association geological surveys in 2010 or 2011. (OLF) has issued a statement regarding the need – No significant relinquishment of area since the for facilitation for increased circulation of area summer of 2008. covered by licenses on the Norwegian Continen- – No new licensees since the summer of 2008. tal Shelf. OLF believes that there is no current – Nearby infrastructure has available capacity or need for further initiatives from the authorities to new capacity is planned. increase the rate of circulation of area covered by – It is expected that potential discoveries in the licenses on the Norwegian Continental Shelf. area will be of a size that could justify the costs of upgrading/developing new capacity. The Government will: Licenses with very little area where exploration is • Prevent idle licenses by following up activity in not realistic in practice, are excluded from the mature areas and using the area fee to achieve data basis. The same applies to the licenses where good area management. the authorities have granted exemptions from conditions in the licenses. In order for resources to be proven and pro- 5.3.2 Frontier areas – numbered rounds duced in a profitable manner, it must be possible The frontier areas are characterised by limited to transport petroleum out of the area. There knowledge about the geology, lack of infrastruc- must be available infrastructure which a discov- ture and often considerable technical challenges. ery can be phased in to if it is not large enough to The uncertainty associated with the resource warrant stand-alone development. In the Barents basis is greater than in mature areas. At the same Sea and Norwegian Sea, for example, major dis- time, it is still possible to make new, large discov- coveries are needed to justify a new development. eries. Technical problems can arise which delay In frontier areas, area is announced and development. Gudrun is a recent example of fields awarded through numbered licensing rounds. In

Table 5.3 Number of blocks announced, awarded and number of production licenses in the 17th – 21st licensing rounds. The number of blocks includes both whole and parts of blocks.

Number of Announced blocks Awarded blocks production licenses 17th round 32 18 6 18th round 95 46 16 19th round 64 33 13 20th round 79 63 21 21st round 946124 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 91 An industry for the future – Norway’s petroleum activities

Table 5.4 Wildcat wells, discoveries and proven resources in area awarded through numbered licensing rounds from 2000 to 20101.

Number of wildcat Number of Proven resources, Year wells completed discoveries million scm o.e. 2000 0 0 0 2001 4 2 4.3 2002 3 1 2.9 2003 3 3 15.3 2004 1 0 0 2005 5 4 52.8 2006 2 0 0 2007 9 2 5.2 2008 4 3 4.7 2009 4 2 30.9 2010 2 0 0

1 Resource growth from area awarded in numbered licensing rounds before 2000 is not published. There could therefore be a difference in the total reserve growth. the last ten years, numbered licensing rounds geology and technological challenges such as have normally taken place every other year. basalt layers and deep waters. There is no infra- The number of announced blocks in the most structure in large parts of these areas. This means recent numbered licensing rounds has been var- that relatively large resources must be proven, ied and reflects the interest from the industry, the individually or overall, in order to justify new infra- need for sequential exploration and expected pro- structure. There is greater financial risk associ- spectivity in the available areas. From the 17th to ated with exploring in frontier areas. This is often the 19th licensing rounds, the percentage of because the geological conditions are less known, awarded blocks compared with announced blocks in addition to lack of infrastructure and more tech- has been about 50 per cent. In the 20th licensing nologically demanding drilling operations. round, about 80 per cent of the announced blocks The exploration activity in frontier areas were awarded, while the percentage was some- awarded during the period 2000-2010 has varied, what lower in the 21st licensing round with 65 per cf. Table 5.4. Since 2004, eleven discoveries have cent. In total, 80 production licenses have been been made in production licenses awarded in awarded in the last five licensing rounds in fron- numbered licensing rounds after the year 2000. In tier areas on the Norwegian Shelf. total, about 116 million scm o.e. has been discov- The nomination process for the 21st licensing ered. round shows that there is still considerable inter- The large number of applications in the 20th est in the Norwegian Shelf. The Ministry received and 21st licensing rounds shows that there are nominations from 43 companies. 138 blocks were still great expectations for the Norwegian Shelf. nominated by two or more companies. 94 blocks Even though several dry wells have been drilled or parts of blocks were announced, 51 in the Bar- in frontier areas in recent years, there has also ents Sea and 43 in the Norwegian Sea. The Minis- been positive news. During the spring of 2011, Sta- try received applications from 37 companies. Dur- toil made the largest discovery (Skrugard, 7220/ ing the spring of 2011, 61 blocks in 24 new produc- 8-1) in the Barents Sea since the Goliat discovery tion licenses were awarded to 29 different compa- in 2000. The well was drilled about 110 kilometres nies. north of the Snøhvit field and preliminary From the 19th licensing round, the focus has resource estimates indicate that an independent mainly been on the western and northern parts of development could be realistic. Preliminary calcu- the Norwegian Sea and the southern part of the lations of the size of the discovery are between 25 Barents Sea. These are areas with less familiar and 40 million standard cubic metres of recovera- 92 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities ble oil and 2-7 billion standard cubic metres of place with the companies regarding license condi- recoverable gas. tions, and the round is completed by awarding new licenses. The management plans for the sea areas clar- Sequential exploration is still important ify where petroleum activity can take place in The Norwegian Continental Shelf has gradually open areas and determine potential area-specific been opened for petroleum activity. The strategy conditions for the petroleum activities. Time for licensing rounds in newly opened and frontier restrictions for exploration drilling and seismic areas has mainly adhered to the principle of acquisition within special areas are examples of sequential exploration. This entails that results of such conditions. Where a management plan has wells in certain blocks in an area should be availa- been established, the Ministry will use the envi- ble and evaluated before new blocks are ronmental and fishery conditions in the relevant announced in the same area. This approach management plan as a basis for new production ensures that large areas can be mapped with rela- licenses. Until a management plan is updated, no tively few exploration wells. In this manner, availa- further environmental and fishery requirements ble information is used for further exploration and will be stipulated for petroleum activity in the drilling of unnecessary, dry wells can be avoided. area. Sequential exploration contributes to a rational A public consultation before announcing num- mapping of areas with less familiar geology. The bered rounds was introduced in the 20th licensing strategy leads to only announcing and awarding round. During the consultations in the 20th and certain key blocks even though large areas are 21st licensing rounds, no significant new informa- opened. The policy has consisted of opening relation has emerged according to the Ministry that tively large areas and then announcing key blocks has not already been considered either in the in subsequent licensing rounds. The announced work with the management plans or which will be blocks are considered to be the most prospective addressed by the authorities’ expert agencies. and/or to have high information value. In the future, the Ministry will continue to carry out public consultations before announcing blocks in numbered licensing rounds. The man- Numbered licensing rounds agement plans include an extensive technical pro- Numbered licensing rounds are normally carried cess with expert input and involvement of interest out every other year. All areas opened for petro- groups in consultations and conferences, cf. Chap- leum activity, and not exempted from petroleum ter 5.2.1. For the sea areas included in a manage- activity in a management plan, can be included in ment plan, only input regarding new, significant a numbered round4. Within the framework of the information that has emerged after the relevant management plan, a technical petroleum assess- management plan was approved is requested. ment takes place when new areas are to be A number of smaller new players were appli- included in a numbered round. The numbered cants in the 20th and 21st licensing rounds. In this rounds start with a nomination process. The connection, a more extensive evaluation of finan- authorities invite the companies to nominate cial strength was carried out before the license blocks to be included in the licensing round. awards. The Ministry of Labour, through the Based on the companies’ nominations and own assessments, the Norwegian Petroleum Directo- rate recommends which blocks should be announced. Following an assessment of which blocks should be announced, the Ministry submits a proposal for consultation to relevant parties. After the submissions have been summarised and the Government has made an overall and general decision regarding the scope of the announcement, the relevant blocks are announced with an application deadline. The applications are then processed, negotiations take

4 Area included in the APA area will not be relevant for numbered rounds. Figure 5.7 Diversity could increase production. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 93 An industry for the future – Norway’s petroleum activities

Petroleum Safety Authority Norway, carries out The new companies that are active on the shelf an HSE assessment when awarding licenses. The mainly consist of medium-sized international com- HSE requirements are provided in the announce- panies (so-called independents), small Norwegian ment and are used as a basis when awarding new companies, smaller foreign companies and Euro- production licenses. pean gas and energy companies. This has resulted During numbered rounds, the work commit- in a greater diversity of companies and types of ments are characterised by being adapted to the companies than before. production license’s geological challenges. At the same time, the Ministry aims for the most efficient exploration of the areas possible, and wants 5.4.1 Requirements for companies and the work commitments to be strict with decision prequalification dates/milestones. The background for this is the New companies normally undergo a prequalifica- desire for efficient progress in the production tion process, which includes the stipulation of licenses and preventing fallow areas. From and requirements for companies that want to establish including the 21st licensing round, the Govern- themselves on the Norwegian Continental Shelf. ment has decided to make the work programs The requirements for a licensee are related to the public in numbered rounds as well, such as in the activity they wish to participate in. What qualifica- APA rounds. The work programs from previous tions are necessary depend on what type of tasks numbered rounds will not be made public without will be carried out. Qualifications for owners in a consent from the licensees. transport system such as Gassled, differ from the qualifications for owners in production licenses. This Chapter addresses participation in produc- The Government will: tion licenses. • Carry out numbered licensing rounds, usually The prequalification scheme5 was established every other year, on the Norwegian Shelf to to allow the companies to evaluate their suitability contribute to maintaining activity and produc- for participation on the Norwegian Continental tion. Shelf before they potentially devote resources to • Within the framework of the management considering concrete business opportunities. A plans, use technical petroleum assessments as prequalification does not entail that the company a basis for which areas the companies are can be considered qualified to actually carry out invited to nominate blocks in. activities, but provides an indication of the author- • Carry out public consultation when announc- ities’ preliminary assessment of the company. In ing area in numbered licensing rounds. For addition, the system is used if the authorities find areas with a management plan, only input it necessary to carry out a new review of compa- regarding new, significant information that has nies that are currently licensees with a low activity emerged after the relevant management plan level and that wish to increase activity, or compa- was approved is requested. nies that have been prequalified, but have not • Make the work programs public from and been active on the shelf for some time. including the 21st licensing round to ensure The paramount requirement for new players is openness in the petroleum activity and equal that they must contribute to value creation. This treatment during the licensing rounds. means that the company must be a genuine oil company. During the prequalification process, an assessment of the company is carried out by the 5.4 New and different types of Norwegian Petroleum Directorate and by the companies Ministry of Labour, through the Petroleum Safety Authority Norway, before the Ministry makes an One of the measures to increase exploration activ- overall assessment and determines whether a ity and value creation in petroleum activities was company is suited to be prequalified. to increase the number and diversity of licensees In order to be prequalified as a licensee, the and operators. In 2000, the shelf was opened so companies do not need to have equally good that more oil companies would have access. So expertise within all relevant disciplines, but must far, a considerable number of new companies have be able to contribute to creating value through entered the shelf. Many licenses have been awarded, and in recent years, many of the new 5 Reported in Storting White Paper No. 39 (1999-2000) Oil companies have made significant discoveries. and gas activities. 94 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Number of companies being prequalified Awards of license shares 20 80 70 16 60

12 50 40 8 30

Number of awards 20 4 10 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011

Licencee Operator SDFI Large Norwegian companies Large companies Small and medium-sized companies New companies

Area included in licenses Transactions of license shares 140 90

120 75 100 60 2 80 45 60 1000 km 30 40

20 Number of transactions 15

0 0 1990 1993 1996 1999 2002 2005 2008 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

SDFI Large Norwegian companies Large Norwegian companies Large companies Large companies Small and medium-sized companies Small and medium-sized companies New companies New companies

Exploration costs3 Proven resources 30 150

25 125

20 100 o.e.

15 75

Mill. Scm 50 Bill. 2010-NOK

5 25

0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Large Norwegian companies Large companies SDFI Large Norwegian companies Small and medium-sized companies New companies Large companies Small and medium-sized companies New companies

Figure 5.8 Players and exploration activity1. 1 New companies since 2000: 4Sea Energy, Aker Exploration, Bayerngas Norge, BG Norge, Bridge Energy, Centrica, Concedo, Dana, Det Norske, Discover, DONG, Edison, Endeavour, Faroe, GDF SUEZ, Genesis, Lotos, Lundin, Mærsk, Marathon, Nexen, Noreco, North Energy, PGNIG, Premier, Repsol, Rocksource, E.ON Ruhrgas, Sagex, Skagen 44, Skeie Energy, Spring, Talis- man, VNG, Wintershall, Agora Oil & Gas; small and medium-sized companies: AEDC, Hess Norge, Idemitsu, OMV, Petro- Canada, RWE-DEA, Svenska Petroleum; large, international companies: BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Shell and Total; large, Norwegian companies: Hydro and Statoil. 2 There were no awards in 2005. 3 SDFI is included in the group large Norwegian companies for the years 2000 and 2001. Source: Norwegian Petroleum Directorate. cutting-edge expertise. The companies must have applicable health, safety and environment require- a minimum level of expertise within all relevant ments. In addition, the companies must document disciplines in order to be able to analyse, under- their ability to handle the financial obligations stand and follow-up the operator’s activities in the they undertake as licensees. This entails, for production license. The licensees must also have instance, that the companies must have a solid sufficient own capacity and expertise to safeguard foundation of equity and that there is a reasonable 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 95 An industry for the future – Norway’s petroleum activities ratio of equity and debt. In connection with a pre- before license award or consent for transfer can qualification process it may become relevant to be granted. Several companies have been prequal- require the companies to submit a plan for activi- ified in recent years, cf. Figure 5.8. About 50 cur- ties with associated financial obligations and how rent companies have undergone the process and the companies will meet these obligations during many of these are now also operators. The record the first years of activity. year for introducing new players was 2006. It is Upon receiving a request for prequalification, positive that many companies are now active in the Ministry will assess the company as it appears the industry. when the company requests this. In certain cases, consideration may be given to prequalifying a company based on a binding plan for improve- 5.4.2 New players contribute to more ments and build-up of the organisation. In such exploration instances the companies must, within a given New companies that have arrived after 2000 have deadline, document that the required improve- gradually received a considerable number of ments are met before a final prequalification can awards in the licensing rounds. Particularly after take place. This scheme will only be relevant in 2003, the involvement of new companies has instances where the company largely satisfies increased. From 2007, the majority of the licenses expertise, capacity and financial requirements, have been awarded to new companies, cf. Figure but has certain areas where the company is 5.8. expected to be able to meet regulatory require- During the period 2000 to 2011, 241 produc- ments in the near future. As a main rule, this tion licenses have been awarded to new players. applies when the parent company has significant Sixty-seven per cent of these are operated by new expertise and resources, and can for a short companies. The new companies have been partic- period handle production licenses on the Norwe- ularly active in mature areas. From and including gian Shelf from another country. This primarily APA 2005, the new companies have been awarded applies to international oil companies with large, more ownership interests than the companies that competent organisations abroad that can provide were established before 2000. The picture is dif- assistance. For small companies without large, ferent in frontier areas, where the established competent organisations abroad, requirements for companies have taken a significant percentage of having sufficient organisation and expertise in the awards. There has also been a gradual Norway are stipulated before the company can be increase in the number of awards to new compa- prequalified. nies. In the 20th licensing round, the new compa- The operators have a central role on the Nor- nies received about half of the awarded interests, wegian Shelf. An operator must therefore have and this diversity has been maintained in the 21st sufficient resources and personnel in order to licensing round. manage and carry out the relevant operations and New players now possess about half of all activities in accordance with the applicable regula- areas covered by licenses, cf. Figure 5.8. The tions. In addition, the company must be able to majority of the new companies are operating pro- document an ability to safeguard financial require- duction licenses in the initial period. The new ments in connection with the obligations the companies have contributed to competition for player has in relation to its ownership interests in areas and have received a large percentage of the the relevant licenses. Operators normally have licenses in the last decade. Through the work significant interests in the licenses and have a con- commitments, an increased number of licenses siderable responsibility for carrying out the work results in increased exploration activity. New com- obligations, development and clean-up after opera- panies bring new ideas and new priorities. They tions cease, as well as in the event of accidents. thus contribute to areas being considered from There is therefore a significant difference different viewpoints and in different ways. They between being an ordinary licensee and being an not only assess new areas, but also areas previ- operator, as regards requirements placed on the ously relinquished by other companies. Previ- companies. ously awarded area could thus be the object of The requirements made during prequalifica- new assessments. Prospects and discoveries that tion will be the same as are made for license are not a main priority for the well-established awards or in connection with consent to a transfer. companies might be of interest to other players. If a company is not prequalified, the same assess- New companies are active in the second-hand ments must be made in a prequalification process license market. Since 2000, new companies have 96 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities been responsible for a considerable part of owner- From 2007, the investments in exploration ship interest purchases in active production from new companies increased significantly. In licenses, cf. Figure 5.8. The percentage of trans- 2007, these companies invested nearly NOK 6 bil- fers with new companies has increased from 2000 lion in exploration. In 2009, this increased to more to 2010. than NOK 9 billion. In the last three years, new An important aspect of having a second-hand companies have invested a total of nearly NOK 27 license market is to provide the companies with billion in exploration. In 2010, the new, small com- the possibility of balancing risk and having good panies were responsible for 40 per cent of the portfolio management. It is thus easier for compa- exploration investments. Statoil and the State nies to have their desired risk profile and the through SDFI, still make considerable invest- opportunity to build up a portfolio of exploration ments in exploration, and this has increased in activity outside the licensing rounds. recent years. The large, established companies Some companies’ strategy is to only explore, have had a relatively steady investment rate in which means that they must be able to sell discov- recent years. eries and let other companies be responsible for 373 exploration wells have been spudded dur- development and operation. Furthermore, there ing the period from 2000 through 2010. 97 of the are companies that do not possess the financial wells were drilled by new operators, 87 of these ability or do not have sufficient resources to were located in the North Sea and ten in the Nor- develop discoveries. A second-hand market pro- wegian Sea. During the same period, 141 discover- vides the possibility to sell out and leave the dis- ies were made, and 23 of these were made by new covery to players that want to develop and then operators. produce the resources. In addition, new compa- In 2010, new companies discovered about 60 nies will have the possibility of taking over area million scm o.e., which was the largest discovery which established companies are not working volume since the access regime was changed. with actively. In this way, the second-hand market During the period 2000 to 2010, these companies can contribute to ensure exploration activity in have contributed to an overall resource growth of older licenses as well. 190 million scm o.e. In comparison, Statoil and Assessing the efforts of new companies on the Petoro have contributed 233 million scm o.e. and shelf can be seen in light of investments made in the large international companies have contrib- exploration activities. The investments include uted 177 million scm o.e. Experience shows that it geological and geophysical work such as seismic takes an average of eleven years from when a dis- and drilling. The investment level in exploration covery is made until a producing field is devel- activity was relatively regular up to 2005, and then oped. This means that many of the new companies increased considerably, cf. Figure 5.8. have not yet been able to start producing their own discoveries. When the policy was changed in 2000 to open 1 200 for new companies, the authorities carried out a - 430 bill. present value development campaign vis-à-vis companies to inform them and operating costs 900 about the opportunities on the Norwegian Shelf. - 200 bill. present value exploration costs 600 30 Exploration drilling General exploration 70 Field evaluation Administration

Bill. 2010 NOK Exploration wells 60 300 25

50 20 0 40 Present value gross income Net present value Net present value, all 15 costs subtracted 30 Bill. NOK Exploration wells 10 20

Figure 5.9 Value creation from exploration, 5 10 2000–20101. 0 0 1 The assumptions that form the basis for the calculations are 1985 1990 1995 2000 2005 2010 a seven per cent discount rate and the MPE’s price forecasts, in addition to Statistics Norway’s historical export Figure 5.10 Exploration costs and number of prices. The NPD’s modelling tool has generated the future cash flow from the discoveries. exploration wells, 1985–2010. Source: Norwegian Petroleum Directorate. Source: Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 97 An industry for the future – Norway’s petroleum activities

Meetings were held with companies and Norwe- at just under NOK 430 billion. This emphasises gian authorities were in attendance at central that the proven discoveries during the period have meeting venues. In the subsequent period, many considerable value. new companies have been established in Norway. The present value of all costs associated with The major international companies estab- exploration on the Norwegian Shelf in the same lished in Norway are a crucial part of the diversity period is NOK 200 billion. This applies both to suc- and have played an important role on the Norwe- cessful exploration and exploration that has not gian Shelf. They will continue to do so. They pos- proven recoverable resources. If these historical sess unique expertise and knowledge about the costs are also included in the calculation, value cre- Norwegian Shelf, as well as substantial resources ation from exploration during the period 2000 – in the form of technology, personnel and capital. 2010 is about NOK 500 billion. This shows that the Recovery of oil and gas on the Norwegian Shelf exploration activity since 2000 has been profitable. still presents many challenges suitable for this Exploration has been profitable in all sea areas type of company. There are areas with deep on the shelf. The North Sea has been the most waters and basalt layers, areas requiring deep, profitable with a present value of about NOK 360 costly and complicated wells, and areas in the billion. north with challenges associated with polar night The exploration activity measured in the num- and tough climatic conditions. These areas often ber of exploration wells has increased considera- require expertise and experience on the part of bly in recent years. A record-high number of the companies, as well as considerable resources. exploration wells were spudded on the Norwegian Healthy competition and diversity in all parts Shelf in 2009, with 65 exploration wells, nearly of the value chain have been important for good four times more exploration wells than in 2004, resource utilisation on the Norwegian Shelf. The when the last petroleum white paper was submit- Government will continue to facilitate this, includ- ted, cf. Figure 5.10. ing actively seeking out interesting oil companies While the exploration activity has created sub- to inform them about the business opportunities stantial values in recent years, costs have also on the Norwegian Shelf. increased significantly. Exploration costs on the Norwegian Shelf have increased and it is more expensive to explore now than it used to be. The The Government will: total exploration costs in 2004 were about four bil- • Facilitate the establishment of new, competent lion fixed 2011-NOK. In 2010, the corresponding companies on the Norwegian Shelf, including costs were NOK 25 billion. The cost per explora- actively seeking out interesting oil companies tion well was NOK 260 million in 2004, and it was to inform them about the business opportuni- NOK 500 million in 2010. High costs reduce the ties on the Norwegian Shelf. values in the activity and can impact exploration activity. It is important that both the industry and 5.5 Exploration is profitable authorities focus on costs and implement measures to curb and potentially change the cost trend. Achieving the highest possible value creation is a It is possible to implement measures to ensure the paramount goal for the petroleum activities. The best possible resource utilisation while also limit- NPD has carried out a study of value creation ing costs. Even though many of the rigs on the from exploration activity during the period 2000- Norwegian Shelf have been adapted to tough con- 2010. The study shows that considerable value ditions in relatively deep waters, much of the drill- creation has taken place during the period. The ing activity in Norway takes place in relatively net present value of proven discoveries excluding shallow waters. This could indicate that the rig sit- exploration costs has been calculated at about uation on the Norwegian Shelf has led to several NOK 700 billion, cf. Figure 5.9. This is the differ- rigs carrying out operations for which they are ence between the present value of future sales over-specified. This could entail unnecessarily income for oil and gas and the present value of the high costs. Several companies have formed coop- future development and operations costs for the erative cartels to ensure better utilisation of rig discoveries. The present value of sales income for capacity. This will allow players to adapt their rig all discoveries has been calculated at about NOK use based on needs both as regards time and 1150 billion, while the present value of the devel- specifications. This topic is also addressed in opment and operations costs has been calculated Chapters 2.5 and 4.3. 98 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

6 Management of unopened areas

Experience shows that the largest discoveries are south-western parts of Nordland VI were opened. made in the early phases of exploration of a petro- The last large discovery on the Norwegian Shelf leum province. This is natural since the largest was Ormen Lange in 1997. The discovery was mapped structures are often drilled first. The made in the area opened in 1994. expectations of making new, large discoveries in In the numbered licensing rounds carried out the future are therefore greatest in the less- today, all area has been available for nominations explored parts of the Norwegian Shelf. from companies in several rounds. The most Over the last 40 years, the Norwegian Conti- attractive parts of these areas have, in part, been nental Shelf has been mapped through gradual well-studied. Opening new areas is necessary if exploration. This means that we currently possess we are to make important new discoveries and to the best knowledge about the geology in the maintain significant petroleum production, value opened areas, but also that the possibilities for creation, investment, employment and State making new, large discoveries are reduced in income after 2020. The Government has there- these areas. The last time new acreage was fore decided to initiate an opening process for opened for petroleum activity was in 1994 when the sea areas surrounding Jan Mayen and the the deepwater areas in the Norwegian Sea and part of the formerly disputed area that is located

250 Unopened areas Open areas 4 Discoveries Resources in fields 200 3,5

150 2,5

Mill. scm o.e. 100 Mill. barrels o.e. per day 1,5

1 50

0,5

0 0 2010 2015 2020 2025 2030 2035 2040

Figure 6.1 Possible production course on the Norwegian Shelf. Source: The Ministry of Petroleum and Energy and the Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 99 An industry for the future – Norway’s petroleum activities west of the delimitation line in the Barents Sea The areas on the shelf are different. The lead South. time from opening until production is shorter in areas close to shore and developed infrastructure, as compared with more remote areas. These are 6.1 Timely opening of new area important factors when determining petroleum policy. Half of the areas where we expect that petroleum might be found are now open. There are thus large unopened areas remaining on the Norwe- 6.2 Area overview gian Shelf. This means that there are possibilities for making significant discoveries in the future as The sum of all Norwegian marine areas amounts well. The expected undiscovered resources in to 2 140 000 km2. About half of the area is covered both opened and unopened areas have been esti- in sedimentary rocks that could contain petro- mated at 2 570 million scm o.e. by the Norwegian leum, cf. Figure 6.2 and Table 6.1. The North Sea, Petroleum Directorate (NPD). These numbers the Norwegian Sea and the Barents Sea South, include the areas with a data basis which makes it with certain exceptions, have been opened for possible to estimate undiscovered resources. The petroleum activity. The areas opened as of today resource estimates therefore do not include the amount to 523 800 km2. sea areas around Jan Mayen and the part of the Several of these areas have a potential for formerly disputed area in the Barents Sea located petroleum activity. There are considerable differ- west of the delimitation line. ences between areas as regards knowledge level, The unopened areas on the Norwegian Conti- distance to markets and existing activity, environ- nental Shelf are mainly located outside Northern mental assets and other user interests. The areas Norway. The process that has been initiated to thus have various degrees of maturity and differ- open new areas in the Barents Sea provides great ent challenges. possibilities for Finnmark county. Unopened areas for new petroleum activity To achieve continuous activity on the shelf, it include the sea areas near Jan Mayen, the north- is important that oil and gas policies are knowl- eastern Norwegian Sea (parts of Nordland IV and edge-based, comprehensive and provide for a V, Nordland VI and VII, Vestfjorden and Troms long-term management of the petroleum II), parts of Trøndelag I and II, Møre I, Skagerrak, resources. New exploration acreage is an impor- the part of the formerly disputed area in the Bar- tant prerequisite to maintain investment and the ents Sea located west of the delimitation line, as expertise in the industry, as well as maintaining well as a 35-km belt from the baseline along the production over time. This will in turn provide a coast from Troms II to the Russian border, the foundation for long-term value creation and State Barents Sea North /Arctic Ocean, the Ice edge, income. The main objective in Norwegian petro- the Polar front, the Bjørnøy fan and a 65-km belt leum policy is to facilitate profitable production of around Bjørnøya. oil and gas in a long-term perspective. Major discoveries and access to new prospective areas are important factors defining where 6.3 Opening history large companies will carry out exploration activity. Exploration is a complex activity, and if the exper- The Norwegian Continental Shelf has been tise moves away, it takes many years to rebuild it. opened in three major rounds, in 1965, 1988 and Continuous exploration activity is therefore an 1994. In addition, smaller areas were opened in important part of good resource management. several rounds after 1979, cf. Box 6.1 and Figures It takes a long time to start producing from 6.3 and 6.4. new areas. A new area must go through an open- In 1965, large parts of the North Sea were ing process, which entails an impact assessment, opened for petroleum activity. Discoveries in this before the Storting can decide whether to open area enabled development of the industry and still the area for petroleum activity. If the area is contribute to the main part of production and opened, history on the shelf shows that it will take State income. Petroleum activity was allowed 10-15 years following license awards until produc- north of 62 degrees latitude in 1979. In 1988, large tion. A decision to start an opening process today parts of the Barents Sea were opened, while the could result in production start-ups in 2025 or deepwater areas in the Norwegian Sea were later. opened in 1994. 100 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Figure 6.2 Opened and unopened areas on the Norwegian Shelf, estimated maximum spread of sedimentary rocks, for illustration purposes only. Source: Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 101 An industry for the future – Norway’s petroleum activities

Table 6.1 Area overview of the Norwegian Shelf

Area accounts Norwegian Shelf (km2) Total Norwegian sea areas 2 140 000 Areas with sedimentary rocks (could contain oil and gas) 1 312 000 Area open and available for petroleum activity 523 800 Individual sea area, areas with sedimentary rocks (km2) Unavailable area Area opened Exempted and available through for petroleum management activity plans Unopened Total North Sea 129 700 12 300 142 000 whereof Skagerrak1 2 500 12 300 14 800 Norwegian Sea2 204 100 28 600 56 300 289 000 whereof northeastern part3 17 600 41 600 59 200 Barents Sea South4 190 000 44 100 78 000 313 000 Barents Sea North5 469 000 469 000 Jan Mayen, surrounding sea areas 100 000 100 000 Total 523 800 72 700 715 600 1 312 000

1 Skagerrak was opened for petroleum activity along with the rest of the North Sea. Parts of the area were subsequently closed (see text). 2 Including Troms II. Vestfjorden is not included. 3 Northeastern part is unopened part of Nordland IV, V, VI, VII and Troms II. 4 Including Bjørnøy fan and the delimitation line with Russia in the Barents Sea South. 5 Including the delimitation line with Russia in the Barents Sea North and the Arctic Ocean.

Skagerrak was opened for petroleum activity the Storting. Since 1994, no new areas have been in 1965 along with the rest of the North Sea, how- opened for petroleum activity. ever, from the end of the 1970s, the area was not When an area has been opened for petroleum considered suitable for exploration activity. In activity, the authorities can announce areas and 1994, a decision was made to allow the drilling of a award production licenses. The scope of the limited number of exploration wells in the south- awards is determined independently of how large western part of Skagerrak, before potentially rais- the areas opened for petroleum activity are. An ing the question regarding further opening with effective way of identifying prospective exploration acreage is by opening large areas and gradually exploring the areas through sequential explo- 700 000 ration. Awards in frontier areas will therefore The Barents Sea 600 000 The Norwegian Sea often be limited to a smaller number of key The North Sea 500 000 blocks. This has been the main strategy for

2 400 000 exploring new areas on the Norwegian Continen-

300 000 Area, km tal Shelf.

200 000 100 000 6.4 The unopened areas 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 6.4.1 Sea areas near Jan Mayen Figure 6.3 Opening history on the Norwegian The island of Jan Mayen is located on the Mid- Shelf. Atlantic Ridge in the Norwegian Sea, north of Ice- Source: The Norwegian Petroleum Directorate. land. Jan Mayen is located 500 km east of Green- 102 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities land, 550 km northeast of Iceland and 900 km 1979, 1985 and 1988. The seismic data is collected from mainland Norway. in four data packages that have been made availa- The Jan Mayen Ridge encompasses a micro ble to the industry. In addition, seismic data has continent stretching from the Jan Mayen Island to been acquired by Iceland in 2001 and 2008. There the northern tip of Iceland. The geological devel- is a need for acquiring new seismic data to define opment of the area is connected to the formation prospects and clarify the resource potential in the of the northernmost part of the Atlantic Ocean. area. The Jan Mayen Island and the rocks below the There is a need to acquire new knowledge and island are entirely volcanic. carry out studies in the form of both geological and environmental mapping. The NPD will map the petroleum potential. The results from seismic Technical description acquisition and shallow drilling will strengthen The bedrock surrounding Jan Mayen is domi- the knowledge and increase understanding of the nated by lava rocks and young sedimentary rocks. area’s geology. Below these rocks, we expect to find older sedimentary rocks. Areas where sedimentary rocks could occur cover up to 100 000 km2 in total. The Possible use of Jan Mayen water depth in the largest part of this area varies The Jan Mayen nature reserve was established between 1000 and 2000 metres. during the autumn of 2010. The nature reserve The volume of petroleum resources in the sea encompasses most of the island and the territorial areas around Jan Mayen is uncertain, but the nec- waters, about 375 km2 of land area and 4315 km2 essary geological preconditions for the formation of marine area. The parts of the island where of petroleum could be in place in the same way as there is currently activity are not a part of the on East Greenland and in the Møre basin. The nature reserve. NPD has acquired about 5800 km of 2D seismic in

Box 6.1 Gradual exploration 1965: The first announcement on the Norwe- 1985: 68 blocks announced in the Norwegian gian Shelf. Announcement discussed in Storting Sea (16 blocks in Møre south, 41 blocks in Trøn- White Paper No. 22 (1965–1966). delag II, 16 blocks in Nordland III, 41 blocks on 1979: Petroleum activity was allowed north of Møre) 70 blocks announced in the Barents Sea the 62 degrees in restricted areas of the Norwe- (20 blocks in Troms II, 30 blocks in Bjørnøya gian Sea (six blocks) and the Barents Sea (20 south, 20 blocks in Finnmark west) Discussed in blocks on Tromsøflaket). Discussed in Storting Storting White Paper No. 80 (1983–1984). Open- White Paper No. 95 (1969–1970), Storting White ing proposed in Storting White Paper No. 79 Paper No. 30 (1973–1974), Storting White Paper (1984–1985). No. 81 (1974–1975). Considered in Storting 1986–1987: Strategic blocks in the Barents White Paper No. 91 (1975–1976) and Storting Sea discussed in Storting White Paper No. 79 White Paper No. 57 (1978–1979), announcement (1984–1985) and Storting White Paper No. 46 discussed in Storting White Paper No. 46 (1979– (1986–1987) 1980). 1988: The majority of the Barents Sea South is 1981: 12 blocks announced in the Norwegian opened for petroleum activity. Was submitted in Sea (Helgeland). Considered in Storting White Storting White Paper No. 79 (1984–1985). Open- Paper No. 57 (1978–1979), opened in Storting ing proposed in Storting White Paper No. 40 White Paper No. 67 (1980–1981), discussed in (1988–1989). Storting White Paper No. 58 (1982–1983). 1994: New deepwater areas are opened in the 1983: 13 blocks announced in the Norwegian western part of the Norwegian Sea, including Sea (Haltenbanken). 19 blocks announced in the the western part of Nordland VI. At the same Barents Sea (Trømsøflaket). Discussed in Stort- time, Skagerrak is closed for petroleum activity. ing White Paper No. 58 (1982–1983). Considered in Storting White Paper No. 26 1984: 30 blocks announced in the Norwegian (1993–1994). Sea (Haltenbanken). Discussed in Storting After 1994, no new areas have been opened for White Paper No. 80 (1983–1984). petroleum activity on the Norwegian Shelf. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 103 An industry for the future – Norway’s petroleum activities

Figure 6.4 Gradual opening of the Norwegian Shelf. Source: Norwegian Petroleum Directorate 104 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Assessment and conclusion The Jan Mayen Ridge is a new petroleum province. An opening process has started in the sea areas on the Norwegian side of Jan Mayen with the aim of awarding production licenses. This is the first time this marine area has been assessed as regards potential petroleum activity. The opening process consists of two main elements, a geological mapping and an impact assessment. The draft program for the impact assessment was submitted for public consultation on 14 December 2010. The deadline for comments on the draft program expired on 22 March 2011. Twenty-three submissions were received. Further activities in the assessment process will include: – Determining the program – Defining and planning field studies – Carrying out field studies – Analysing and reporting updated knowledge basis – Assessment of basis for petroleum activity, establishment of scenarios – Impact assessment – relevant issues associated with petroleum activity – Public consultation regarding the impact assessment – Presenting a White Paper for the Storting Figure 6.5 The Jan Mayen area Source: Norwegian Petroleum Directorate The course of the various activities will be determined during the process. The field work and seismic surveys, in particular, will be crucial as regards the timing of several other activities. The Potential petroleum activity in the marine Government has allocated NOK 10 million in 2011 areas near Jan Mayen, could entail a need to use for environmental mapping. Such mapping could Jan Mayen for certain activities, for example to include surveys at sea to increase understanding safeguard health, safety and the environmental of the seabed and mapping seabirds and fauna in concerns. Possible uses include establishing a the area. The ongoing impact assessment process base, preparedness storage, infrastructure such will clarify the details. It is important to as roads and buildings including a quay facility, strengthen the knowledge concerning geology in pier, heliport, petroleum treatment and storage the area by collecting new data. Seismic acquisi- facility and landfall for pipelines. tion and shallow drilling will be necessary in Potential petroleum activity is not envisaged order to assess the prospectivity and the future within the current nature reserve. At present, the possibilities for petroleum activity in the area. The necessary type and scope of activity is uncertain. NPD will carry out these activities starting in If weighty societal considerations require the 2011. framework for the use of Jan Mayen to be adjusted due to petroleum activity in the area, this can be accomplished by the King in Council mak- The Government will: ing the necessary changes to the preservation • Carry out an opening process in the sea area provisions. near Jan Mayen, comprising environmental and resource mapping, including seismic data acquisition and shallow drilling. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 105 An industry for the future – Norway’s petroleum activities

Table 6.2 Overview of unopened area in the Nor- ment stipulates that the delimitation line between wegian Sea the parties’ sectors of the continental shelf in the area between Iceland and Jan Mayen shall coin- Nordland IV 5 600 km2 cide with the delimitation line for the countries’ Nordland V 4 000 km2 economic zones. Furthermore, the agreement stipulates provisions regarding special coopera- Nordland VI 21 600 km2 tion in the event of future petroleum activity in a 2 Nordland VII 23 400 km more precisely defined area between Iceland and 2 Troms II 5 300 km2 Jan Mayen. This area covers a total of 45 470 km . Of this, 32 750 km2 is located on the Norwegian Trøndelag I 7 000 km2 side of the delimitation line and 12 720 km2 on the 2 Trøndelag II 2 000 km Icelandic side. Møre I 9 000 km2 In 2006, Icelandic authorities submitted a strategic impact assessment as preparation for petro- Nordland IV 5 600 km2 leum activity on the Icelandic shelf. In 2009, a 2 Nordland V 4 000 km licensing round was carried out in the Icelandic sea area. The licensing round did not result in awards. Iceland is working on a new licensing round, with the aim of awarding production licenses in 2012. There will be a continuous dialogue between Norwegian and Icelandic authorities in connection with the petroleum activity on the Icelandic side and implementation of the opening process for Norwegian marine areas near Jan Mayen. In the part of the cooperation area located north of the delimitation line (Norwegian Conti- nental Shelf), Iceland has been given access to participate with an interest of 25 per cent in connection with exploration and production of petroleum deposits. Iceland may make this decision once a decision is made to develop a new field. In the cooperation area south of the delimitation line (Icelandic continental shelf) Norway has been given access to participate in the petroleum activities with a corresponding interest, but only from and including the time a license award.

The Government will: • Continue the dialogue with Icelandic authorities to safeguard Norwegian interests in the cooperation area near Jan Mayen. Figure 6.6 The northeastern Norwegian Sea. Source: Norwegian Petroleum Directorate. 6.4.2 The Norwegian Sea An area northeast in the Norwegian Sea has not been opened for petroleum activity. This area includes acreage in Nordland IV, V, VI, VII and Delimitation of the continental shelf between Norway Troms II. In this White Paper, these areas are and Iceland called the northeastern Norwegian Sea. Farther On 22 October 1981, Norway and Iceland entered south along the coast there are also areas in Trøn- into an agreement regarding the continental shelf delag I and II, as well as near Møre where licens- in the area between Iceland and Jan Mayen (Stort- ing rounds will not be announced until the man- ing Proposition No. 61 (1981–1982)). The agree- agement plan for the Norwegian Sea is updated, 106 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities in 2014 at the latest. In total, this amounts to a con- land VII and Troms II have an overall expected siderable area, cf. Table 6.2. This Chapter also resource estimate on par with Nordland VI. addresses the part of Nordland VI that is opened, but where there will be no petroleum activity during this parliamentary term. Other areas in the Norwegian Sea The Møre coast was subject to several periods of uplift and erosion. This has resulted in the Technical petroleum description of the northeastern removal of thick sediment packages. The uplift Norwegian Sea and skewed position of the layers could have led The geology in the northeastern Norwegian Sea to hydrocarbon leaks. is varied and complex. The water depth is gener- The seismic data coverage on Møre is rela- ally less than 400 metres in this area. The conti- tively good. Several wildcat wells were drilled and nental slope to the west and north-west plunges to shallow drilling was carried out in the area before more than 2500 metres. In terms of petroleum it was exempted for petroleum activity. Hydrocar- geology, the area can be divided into a southern bons were not proven in these wells, but several province containing Nordland IV, Nordland V, small discoveries were made just south of the Nordland VI and southern Nordland VII, and a area. Storting White Paper No. 37 (2008-2009) northern province containing the northern part of Comprehensive management of the marine envi- Nordland VII and Troms II. ronment in the Norwegian Sea (management The seismic data basis in the northeastern plan) states that “Until the management plan is Norwegian Sea varies in both scope and quality. updated, in 2014 at the latest, licenses will not be From 2007-2009, the NPD carried out acquisition announced on the Møre banks. The Government of 2D seismic, 3D seismic and other data relating will then re-assess this issue”. to the subsurface in Nordland VII and Troms II. The seismic data coverage in Trøndelag I and 2D seismic has also been acquired in this area II is relatively good. A number of wildcat wells previously. In addition, several shallow drillings that are relevant for this area have been drilled on have taken place and a wildcat well has been the Trøndelag platform. In the unopened part of drilled. Several wildcat wells have been drilled just Trøndelag I, a scientific, shallow well has been outside the area. Based on new and previously col- drilled. The shallow boreholes outside the Trøn- lected data, the NPD has mapped the areas and delag and Nordland coast also provide useful calculated the resource potential. information concerning the rocks’ composition The main characteristics of the geology, and age. The most critical element for prospectiv- resource estimate and value assessment of vari- ity is whether mature source rocks exist. Several ous resource outcomes are described in separate dry wildcat wells have been drilled on the Trønde- reports from the NPD1. Nordland VI appears to lag platform west of the unopened area. However, be the most prospective area for petroleum the presence of oil and gas in the unopened area resources. At the same time, the mapping work cannot be precluded. shows that the unopened parts of Nordland V, Nordland VII and Troms II also have a petroleum potential. The mapping indicates that the neces- Assessment and conclusion sary geological preconditions for making a discov- Since 1984, various parts of the northeastern Nor- ery are present, and that the possibilities of mak- wegian Sea have been impact assessed, cf. Box ing discoveries are considered good. Based on 6.2. Parts of Nordland VI have been opened, but new mapping, prospect evaluation and exploration there will not be petroleum activity there during model analysis, the total expected undiscovered this Storting period. In addition, no new blocks resources are estimated at just over 200 million will be announced in the area in the period. The scm o.e. The range of uncertainty is estimated at other areas have not been opened. between 76-371 million scm o.e. The majority of No impact assessments pursuant to the Petro- the resources are expected in Nordland VI. Nord- leum Act will be carried out in Nordland VII and Troms II and unopened parts of Nordland IV, V 1 Petroleum resources in the sea areas outside Lofoten, Vest- and VI during this Storting period. The Ministry erålen and Senja (NPD, 2010), Geo-technical assessment of will carry out knowledge acquisition concerning petroleum resources outside Lofoten, Vesterålen and Senja (NPD, 2010), Financial assessment of undiscovered petro- the effects of petroleum activity in unopened parts leum resources in the sea areas outside Lofoten, Vesterålen of Nordland IV, V, VI, VII and Troms II. The and Senja (NPD, 2010). knowledge acquired must be suited for use in a 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 107 An industry for the future – Norway’s petroleum activities potential impact assessment regarding petroleum from Nordland VI, VII and Troms II which are to activity, and must be suited for use as a basis for be marketed for sale. the next update of the management plan. The Based on the NPD’s new mapping, Nordland work will start quickly. The knowledge acquisition VI appears to be the most prospective area for topics will e.g. include societal and industrial petroleum resources. Nordland VII and Troms II effects and spin-off effects, including effects on have a total expected resource estimate on par tourism and the fishery industry. The topics will with what is expected in Nordland VI. The be determined in cooperation with regional and resource estimate for oil is greater than for gas in local authorities, sector authorities and specialist Nordland VI and VII. The greatest probability of environments. gas is in Troms II. In unopened parts of Nordland IV and V there will also be a need for strengthening the knowledge regarding petroleum resources through The Government will: seismic surveys and other geological data acquisi- • Carry out knowledge acquisition regarding tion, headed by the NPD and in dialogue with the effects of petroleum activity in unopened parts fishing industry and fishery authorities. The NPD of Nordland IV, V, VI, VII and Troms II. The prepares data packages with relevant seismic knowledge being acquired must be suited for use in a potential impact assessment regarding

Box 6.2 Unopened parts of the Norwegian Sea – history 1984: Troms II was impact-assessed, the area Furthermore, that petroleum activity must not was not opened. be started in Nordland VII and Troms II in the 1989: The area was included in the assess- current Storting period, but that the question as ments carried out prior to the opening of the regards petroleum activity in these areas will be Barents Sea South. The area was not proposed considered in connection with a revision of the for opening. management plan. 1994: Nordland IV, V and VI were impact- 2009: When submitting Storting White Paper assessed and partially opened. Areas near the No. 37 (2008–2009) Comprehensive manage- coastline were not opened. An opportunity to ment of the marine environment in the Norwe- drill six exploration wells was granted in an area gian Sea (management plan), a decision was in the middle of Nordland VI. Nordland VII was made to not start an opening process in the not opened. northern part of the coastal zone. Furthermore, 1996: Two production licenses were awarded that this question should be considered in con- in Nordland VI. nection with the update of the management plan 2001: The second well in Nordland VI was for the Barents Sea – Lofoten. interrupted. A decision was made to carry out 2011: In Storting White Paper No. 10 (2010– an assessment of consequences from year- 2011) Updating the management plan for the round petroleum activity in the area Lofoten – marine environment in the Barents Sea and the Barentshavet (ULB) before any further petro- waters off Lofoten, the Government decided leum activity in these areas. that there should not be petroleum activity in 2003: ULB submitted. A decision was made to the opened parts of Nordland VI during this not open Nordland VI for any further petroleum Storting period, and furthermore, that an impact activity. Furthermore, that an assessment of fur- assessment should not be started according to ther activity should be made in connection with the Petroleum Act in Nordland VII and Troms II the comprehensive management plan for the and in unopened parts of Nordland IV, V and VI. Barents Sea. The Ministry of Petroleum and Energy will 2006: Storing White Paper No. 8 (2005–2006) carry out knowledge acquisition regarding Comprehensive management of the marine effects of petroleum activity in unopened parts environment in the Barents Sea and the waters of Nordland IV, V, VI, VII and Troms II. The off Lofoten (management plan) determines that knowledge being acquired must be suitable for petroleum activity must not be started in Nord- use in a potential impact assessment regarding land VI during the 2005-2009 Storting period. petroleum activity. 108 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

tal slope to the west by the Bjørnøy fan is more than 2000 metres deep.

Technical description Hydrocarbons have been proven to the east and west of the formerly disputed area. This provides hope that there could also be hydrocarbons in the part located west of the delimitation line. The data basis is too poor to provide a resource estimate for the area. In the early 1980s, an agreement was entered between Russia and Norway regarding a moratorium on further petroleum activity in the disputed area. Prior to the moratorium, the Nor- wegian side acquired certain seismic lines east of the sector line. These lines show that geological formations located west of the sector line continue into the area towards the centre line. On the Nor- wegian side, west of the agreement area, several minor discoveries have been made. On the Rus- sian side, east of the agreement area, very large gas discoveries have been made, including Sjtok- man and Kildinskoya. There are possibilities for petroleum resources in the new areas on the Nor- wegian side as well. There is a need for more data Figure 6.7 Barents Sea South. in the area to ensure good resource mapping and Source: Norwegian Petroleum Directorate. prospect definition. The NPD recommends acquiring 2D seismic first, potentially followed by aeromagnetic and gravimetric data2. petroleum activity and must also be suitable as The NPD does not have data for the area a basis for the next update of the management around Bjørnøya which makes it possible to estab- plan. lish a resource estimate for the area. The data • Strengthen the knowledge regarding petro- basis is limited by the Ice Edge and Polar Front, leum resources in unopened parts of Nordland and the petroleum potential in these areas is IV and V through seismic surveys and other therefore uncertain. The NPD believes that the geological data acquisition carried out by the western continental slope (Bjørnøy fan) has a lim- NPD and in dialogue with the fishing industry ited petroleum potential. and fishery authorities. The coastal zone from Troms II to the delimi- • Offer data packages with relevant seismic data tation line in the Barents Sea is considered to have from Nordland VI, VII and Troms II for sale. a limited petroleum potential.

6.4.3 Barents Sea South Assessment and conclusion The parts of the Barents Sea located south of The southern part of the Barents Sea is generally 74°30’ N which are not currently available for open for petroleum activity, with the first petroleum activity, are discussed in this Chapter. announcement made in 1979. Increasing interest This applies to the part of the formerly disputed in the area is apparent both through numbered area located west of the delimitation line, an area rounds and awards in pre-defined areas (APA). to the west that is also covered by sedimentary There are currently 53 active production licenses rocks called the Bjørnøy fan, a 65-km zone around in the Barents Sea, and 86 exploration wells have Bjørnøya, the areas by the Ice edge and Polar been drilled. So far, Snøhvit is producing and front and the coastal zone along Troms and Finn- Goliat has been approved for development. Skru- mark. The water depth in the Barents Sea South averages less than 400 metres, while the continen- 2 Gravimetric data shows the variation of the gravitational field (gravity) to reveal the composition of the subsurface. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 109 An industry for the future – Norway’s petroleum activities

Box 6.3 Delimitation line with Russia The maritime delimitation between Norway and The agreement regarding maritime delimita- Russia in the Barents Sea and the Arctic Ocean tion and cooperation entails that the disputed has been the object of negotiations for nearly 40 area of about 175 000 square kilometres will be years. The agreement between Norway and split into two approximately equal parts. The Russia regarding maritime delimitation and agreement also contains provisions regarding cooperation in the Barents Sea and Arctic Ocean cooperation between the parties should an oil or was signed in Murmansk on 15 September 2010. gas deposit extend across the delimitation line. During the winter of 2011, both countries’ If such transboundary petroleum deposits are national assemblies consented to ratification of discovered, the agreement contains detailed the agreement. Exchange of the ratification doc- rules and procedures with the aim of ensuring uments took place in Oslo on 7 June 2011. The prudent and cost-efficient management of the agreement will enter into force thirty days fol- petroleum resources. lowing the exchange of ratification documents.

gard is a new discovery that could form the basis ment in the Barents Sea and Lofoten, Storting for a new, independent development in the area. White Paper No. 10 (2010-2011), a decision was In order to further develop the area, it is impor- made for the Ministry to start an impact assess- tant to facilitate continuous activity. ment according to the Petroleum Act with the aim In connection with the update of the compre- of awarding production licenses in the formerly hensive management plan for the marine environ- disputed area west of the delimitation line in the ment in the Barents Sea – Lofoten, Storting White Barents Sea South. If the impact assessment pro- Paper No. 10 (2010–2011), adjustments were vides a basis for it, the Government will submit a made in the framework for petroleum activity in Storting White Paper which recommends opening the Barents Sea South. A decision was made to these areas for petroleum activity. The impact allow for petroleum activity in the area from 35-50 assessment will start when the agreement km from the coast from Troms II to the border between Norway and Russia regarding maritime with Russia; including Tromsøflaket. The same delimitation and cooperation in the Barents Sea applies to Eggakanten (the area from the edge of and Arctic Ocean enters into force. Tromsøflaket and north). For other areas, the framework was continued: In the areas by the Ice edge and Polar front, within a 65-km belt around The Government will: Bjørnøya and in a 35-km belt from the baseline • Start an impact assessment according to the along the coast from Troms II to the Russian bor- Petroleum Act with the aim of awarding pro- der, petroleum activity will not be started during duction licenses in the formerly disputed area this Storting period. west of the delimitation line in the Barents Sea The NPD considers the part of the formerly South when the agreement with Russia regard- disputed area located west of the delimitation line ing maritime delimitation and cooperation in with Russia interesting as regards petroleum the Barents Sea and Arctic Ocean has entered activity on the Norwegian Shelf. Hydrocarbons into force. have been proven to the east and west of the area. • When the agreement with Russia regarding This gives hope that there might also be hydrocar- maritime delimitation and cooperation in the bons in the part of the Barents Sea South located Barents Sea and Arctic Ocean enters into force, west of the delimitation line. The data basis in the start data acquisition in the formerly disputed area is very limited and it is therefore not possible area west of the delimitation line in the Barents to assess the resource potential. There is thus a Sea South. need for more data from the area. Initially 2D seis- • Facilitate new petroleum activity in the area mic and potentially aeromagnetic and gravimetric from 35–50 km from the coast from Troms II to data will be collected. the border with Russia and in Eggakanten by In connection with updating the comprehen- including these areas in future licensing sive management plan for the marine environ- rounds. 110 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Box 6.4 Determining the outer limit of the Norwegian Continental Shelf In its recommendation from April 2009, the UN’s the lines of their shelf proposals, the Icelandic Continental Shelf Commission granted approval and Faroese shelf areas will amount to about for Norway to determine the border for its conti- 60 000 km2 in total. The Norwegian Continental nental shelf outside 200 nautical miles in three Shelf in the Banana Hole will then be about areas: in the Nansen basin in the Arctic Ocean 190 000 km2. The majority of this area covers north of Svalbard, in the Loophole between Nor- deepwater areas of 3000-3500-metres. way and Russia in the Barents Sea and in the The deepwater areas in the Arctic Ocean and Banana Hole of the Northeast Atlantic, i.e. the in the Banana Hole that are now included in the area outside the 200-mile border between main- Norwegian Shelf outside 200 nautical miles, are land Norway and Jan Mayen and Greenland. not considered to be prospective areas for oil and The shelf area outside 200 nautical miles in gas. They could, however, contain other types of the Nansen basin is about 14 000 km2 and covers resources that are not yet known. The part of the deep sea areas with depths of about 4000 metres. formerly disputed area that is now located on the Based on joint interests between Norway and Norwegian side of the delimitation line, is how- Russia regarding the northern delimitation of the ever, part of the shallow shelf area in the Barents continental shelf, technical agencies in the two Sea, and thus a part of the prospective parts of countries cooperated on the mapping of the area. the Norwegian Continental Shelf. After the agreement regarding the delimita- For utilisation of the inanimate resources on tion line between Norway and Russia was in the continental shelf outside 200 nautical miles place, it is now clear that the Norwegian Shelf in from the baselines, a special rule relating to a the formerly disputed area will be about 88 000 duty for relinquishment of a production fee km2, of which about 8 600 km2 are located in the according to Article 82 of the Law of the Sea Barents Sea Loophole. The clarification has great Convention applies to the advantage of develop- significance for achieving an effective manage- ing countries and landlocked countries. A more ment of this part of the shelf in the future, and will detailed description of the obligations in Article make it easier for Norwegian authorities to coop- 82 is provided in Storting Proposition No. 37 erate with Russian authorities in the area. (1995-1996) relating to consent for ratification of The Norwegian Continental Shelf outside the Law of the Sea Convention. 200 nautical miles in the Banana Hole of the In the 21st licensing rounds, new blocks Northeast Atlantic can amount to up to 250 000 were announced in the Vøring plateau, of which km2. In the southern part of this area, however, four are located outside 200 nautical miles from Iceland and Denmark with the Faroe Islands are the baseline. This could actualise Norway’s duty aiming to document a continental shelf outside to relinquish a production fee according to Arti- 200 nautical miles. In September 2006, a negotia- cle 82 of the Law of the Sea Convention. The fee tion protocol was signed between Norway, Ice- obligation enters into force during the sixth pro- land and Denmark/the Faroe Islands regarding duction year at a production location, and will the approach for delimitation of the continental amount to one per cent of the value of the shelf and in the southern part of the Banana amount of production at a production location Hole. The protocol must be followed up with for- during the first year. Following the first year, the mal delimitation agreements when the Conti- rate is increased by one percentage point for nental Shelf Commission has issued its recom- every subsequent year until the twelfth year, mendation to Iceland and Denmark/the Faroe and will then remain at seven per cent for the Islands for this area. If Iceland and Denmark/ remainder of the production duration. The fee the Faroe Islands receive recommendations obligation lies with the Norwegian State, but can from the Continental Shelf Commission along also be transferred directly to the companies.

the maritime delimitation line with Russia to the 6.4.4 The Barents Sea North and Arctic east. To the south, the area stops at 74°30’ N. To Ocean the north, the area stretches north of Svalbard. The Barents Sea North encompasses the marine The area of the entire Norwegian part of the Bar- areas between the Norwegian Sea in the west and ents Sea North as well as the parts of the Arctic 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 111 An industry for the future – Norway’s petroleum activities

Figure 6.9 The North Sea. Figure 6.8 The Barents Sea North and the Arctic Source: Norwegian Petroleum Directorate. Ocean. Source: Norwegian Petroleum Directorate.

Ocean with sedimentary rocks, is roughly 489 100 Technical description 2 km . The area of the new part of the Barents Sea Researching the petroleum potential in unopened 2 North is 35 000 km . The water depth on the shelf areas of the Barents Sea has had a low priority for is generally less than 400 metres, while the conti- many years, but data acquisition has been carried nental slope to the west and north plunges down out by the NPD. The surveys show that there is a to more than 2500 metres. During winter, large large area where sedimentary rocks are present. parts of the sea area are covered in drift ice. The data basis in the Barents Sea North is old and Over the last 15 years, the scientific explora- has poor coverage. tion of the Arctic Ocean has grown significantly. Countries such as the US, Russia, Germany and Sweden are carrying out extensive, continuous Assessment and conclusion activity throughout the Arctic Ocean. The project Interest in the northern areas is increasing. The of mapping the shelf’s outer limit has made the Government has defined the northern areas as its NPD an interesting player to the international most important strategic priority area as regards research communities in the area. The reason foreign policy. Presence, activity and knowledge behind this is that the Norwegian authorities have form the foundation of the efforts. The goal is for had their own data and activity to reference. In Norway to be at the top internationally as regards this context, the NPD has had extensive coopera- developing knowledge about, for and in the north- tion with the State-owned Russian mapping insti- ern areas. Furthermore, the goal is for Norway to tutes. be at the forefront as a steward of the environment and natural resources in the northern areas. We currently possess limited knowledge regarding the Barents Sea North and the Arctic Ocean. 112 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

A key element in the northern strategy is carry- Several dry wells have been drilled just west of ing out projects to develop new knowledge. the area. The greatest potential in the area is located in the southern part. 6.4.5 The North Sea and Skagerrak Skagerrak is the name of the sea area between The Government will: Denmark, Sweden and Southern Norway. In this • Consider the future need for new knowledge description, Skagerrak is limited to the area regarding petroleum resources in Skagerrak. between the baseline and border with Denmark and Sweden, east of 7° E, cf. Figure 6.10. Skager- rak’s total area amounts to 14 800 km2, the 6.4.6 Elements in an opening process unopened part of Skagerrak is 12 300 km2. The The Government has chosen to establish a com- water depth in Skagerrak varies from 100 to about prehensive management plan as a tool for deci- 750 metres. sions associated with utilisation of the sea areas. The objective is to facilitate value creation and co- existence between the respective industries Technical description through sustainable use of resources and ecosys- In the northern part of the area, which has not tem services. As the same time, the structure, been opened, a limited amount of seismic data has function and productivity of the ecosystems must been acquired. This data is older and of poor qual- be maintained, and the natural diversity must be ity. There is a need to acquire new seismic data if a preserved. new geological mapping of the area is to be car- Before we can have petroleum activity in a sea ried out. A wildcat well has been drilled just west area, an opening process must be carried out. The of Skagerrak. No hydrocarbons or source rock Petroleum Act provides a legal basis for the were proven in the well, but good reservoir rocks resource management, including starting opening were discovered. processes. The Petroleum Act is administered by The NPD assumes the largest potential for oil the petroleum authorities. Only when an area is and gas deposits is located in the southern part of opened will production licenses be awarded Skagerrak. according to stipulated provisions and certain environmental and fishery considerations.

Assessment and conclusion In 1987, preparations for an impact assessment Elements in an opening process were started for all of Skagerrak. The impact Before an area can be opened for petroleum activ- assessment was submitted in Storting White ity, an opening process must be carried out. An Paper No. 26 (1993–1994). Based on this, the opening process has the objective of assessing the Storting decided to make a part of Skagerrak technical basis on which the Storting’s decision is available for exploration activity in 1994. This area based. Deciding whether or not to open an area is located north of the line 57°40’ N and east of line carried out by the Storting. 8°30’ E, was made available for exploration activ- An opening process consists of two main ele- ity, with special conditions. Permission to drill up ments. One element entails mapping the geology to four exploration wells can be granted in the and thus the resource potential in the area. The area, before potentially raising the question initial mapping of the geology could, for instance, regarding further opening with the Storting. The entail seismic data acquisition, drilling shallow other parts of Skagerrak have not been opened wells, electromagnetic surveys or aeromagnetic for petroleum activity. surveys. The surveys are normally carried out by In connection with the authorities’ considera- the NPD. tion of the question regarding exploration drilling The other part is an assessment of the indus- in Skagerrak, Swedish authorities established trial, environmental and other societal effects of contact and wanted additional assessments of pos- petroleum activity in the area. This includes the sible consequences for the Swedish west coast. possible risk of pollution, as well as the financial After an overall assessment of environmental and and social effects the petroleum activity might fishery considerations, as well as the activity level have. Such an evaluation is carried out through an in the sector, production licenses were not impact assessment under the direction of the Min- awarded in Skagerrak. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 113 An industry for the future – Norway’s petroleum activities

Box 6.5 Regarding opening processes in the Petroleum Act Section 3-1 of the Petroleum Act states the fol- before local public authorities, central trade and lowing regarding opening new areas: industry associations and other organisations which may be presumed to have a particular «Prior to the opening of new areas with a view to interest in the matter. Furthermore it shall be granting production licenses, an evaluation shall made known through public announcement be undertaken of the various interests involved which areas are planned to be opened for petro- in the relevant area. In this evaluation, an assess- leum activities, and the nature and extent of the ment shall be made of the impact of the petro- activities in question. Interested parties shall be leum activities on trade, industry and the envi- given a period of time of no less than 3 months to ronment, and of possible risks of pollution, as present their views. The Ministry decides on the well as the economic and social effects that may administrative procedure to be followed in each be a result of the petroleum activities. The ope- individual case.» ning of new areas is a matter which shall be put

istry of Petroleum and Energy. An impact assess- Topics of the impact assessment could ment is a crucial part of an opening process. include: In the first part of the impact assessment pro- – Factors as regards solutions, design and opera- cess, a draft study program is prepared. This con- tions tains a description of what will be assessed. The – Societal consequences draft study program must be submitted for public – Regular discharges to sea consultation. Based on the program proposal and – Physical intervention submissions, the Ministry then determines the – Consequences for other activities study program. – Incidents involving acute pollution After determining the study program, there will be a need to strengthen the knowledge The impact assessment and underlying reports regarding e.g. the environmental assets in the rel- are submitted for public consultation. evant area. Examples include mapping seabirds, The assessments, submissions and other rele- the seabed, pelagic species and the existing fauna. vant information that has emerged during the pro- The need for data acquisition will, however, cess form a basis for a report to the Storting. Pos- depend on the knowledge status within each disci- sible conditions for an opening are discussed in pline. the Storting White Paper. The Storting will make Based on the knowledge concerning environ- a decision regarding whether or not to open all or mental assets and other relevant social conditions, parts of the area in question, including any condi- as well as viewpoints regarding potential future tions. petroleum activity in the area, the actual impact assessment is carried out. 114 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

7 The external environment, preparedness and safety

From the very beginning, consideration for other of the water that accompanies petroleum pro- industries and safeguarding the external environ- duced from the reservoirs is reinjected. This ment has formed an integral part of how Norway allows us to avoid discharging oil drops and chem- manages its petroleum activities. Over the course ical residues that remain after the water is of 40 years, we have developed an extensive sys- cleaned. At the same time, this causes energy con- tem of policy instruments designed to safeguard sumption on the facility, when the water is forced considerations for other industries and the exter- back into the subsurface. nal environment in all phases of the activity – from The two largest acute spills to take place on opening of new areas, via license awards, explora- the continental shelf were the blowout on the tion, development and operation, through field Bravo platform in 1977 and an accident in connec- cessation. tion with oil loading on the Statfjord field in 2007. Emissions from the petroleum activity are No acute spills on the continental shelf have ever often divided into three different categories: oper- reached the coast. Every day, both the companies ational discharges to sea, operational emissions to and the authorities focus on diligent management air and acute discharges/emissions. Acute dis- of the risk associated with the activities to make charges/emissions are emissions or discharges sure that this will not happen in the future. Safety that are not planned, and would not be permitted standards on the Norwegian Shelf are high. under the Pollution Control Act. Operational dis- Forty-five years of petroleum activity on the charges to sea are mainly cleaned water that origi- Norwegian Shelf have proven that production of nates from the reservoirs (produced water) and oil and gas can be compatible with environmental drilled rock mass (drill cuttings) that originates considerations. However, there is still work to be from drilling activity. Emissions to air are largely done and the players must continue their efforts exhaust from energy production needed to oper- to find efficient new solutions that further reduce ate the facilities. In addition, some gas is com- emissions and discharges from the activity. Com- busted through flaring for safety reasons, as well prehensive assessments in connection with estab- as evaporation of light oil components in connection with storage and loading of crude oil. As a consequence of a number of policy instru- Norwegian Continental Shelf ments established through more than 40 years of 1,6 petroleum activity as well as strong focus on limit- International average ing emissions/discharges on the part of authori- 1,2 ties and companies, the Norwegian Shelf is among the best in the world when it comes to 0,8 emissions to air per produced unit, cf. Figure 7.1. A goal has been established of zero environ- 0,4 mentally hazardous and environmentally harmful discharges to sea (the zero discharge goal). This 0 CO NO nmVOC goal is regarded as having been achieved as 2 x regards environmentally hazardous chemical additives, while the goal for discharges of oil and Figure 7.1 Emissions to air on the Norwegian naturally occurring environmentally hazardous Shelf compared with international average for substances in produced water has not been other petroleum-producing countries for the year achieved to the same degree. In 2007, 90 per cent 2008. Unit in 100 kg per scm o.e. for CO2 and in kg of the chemical substances discharged consisted per scm o.e. for other components. of substances that are not considered to pose a Source: OLF and EnvironmentWeb. danger to the marine environment. Today, some 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 115 An industry for the future – Norway’s petroleum activities lishing new targets and cost-efficient use of policy cost first. The principle of cost-effectiveness is instruments to achieve these targets are impor- also a fundamental element in Norwegian climate tant, and we have proven that it is possible to bal- policy. The polluter must pay, and the environ- ance various environmental considerations. mental and climate goals shall be achieved The administrative responsibility for the petro- through the use of cost-effective policy instru- leum sector is divided among several ministries ments. The petroleum industry in Norway has and directorates. The Ministry of Petroleum and paid a CO2 tax since 1991, and has also been part Energy and the Norwegian Petroleum Directorate of the emission quota system since 2008. are responsible for ensuring sound and prudent A general framework is established through management of the oil and gas resources. The the management plans to balance commercial Ministry of Labour and the Petroleum Safety interests with safeguarding the external environ- Authority Norway are responsible for health, ment. Extensive technical assessments underpin working environment and safety. In an upcoming the decisions regarding terms and conditions for Storting white paper on working environment, new petroleum activity in the management plan working conditions and safety in Norwegian areas. These area-based conditions are stipulated working life, the Ministry of Labour will present a particularly on the basis of balanced consideration broader, updated review of the state of HSE in the between the petroleum and fishery industries, as petroleum activities. The Ministry of Fisheries well as the environment. and Coastal Affairs, represented by the Norwe- An opening process must be carried out gian Coastal Administration, is responsible for the before an area can be opened for petroleum activ- State’s preparedness against acute pollution, and ity. The purpose of an opening process is to study for coordinating private, municipal and State play- the technical basis on which the Storting (Norwe- ers in a national emergency preparedness system. gian Parliament) will base a potential decision to The Ministry of the Environment and the Climate open an area. An opening process includes map- and Pollution Agency are responsible for regulat- ping the resource base for petroleum. An evalua- ing emissions to air and discharges to sea through tion shall also be made of the commercial and discharge permits, as well as for stipulating pre- environmental effects of potential petroleum activ- paredness requirements for acute pollution in the ity, the potential hazard of pollution, along with petroleum activities. In an upcoming Storting the economic and social effects that may result white paper on Norwegian climate policy, the Min- from the petroleum activity. This is accomplished istry of the Environment will present a broad- by means of an impact assessment. based review of the status and objectives of our As regards acquisition of seismic data, notifica- climate policies. tion of this activity must be provided to the authorities five weeks before the activity commences. Furthermore, restrictions apply to seismic data 7.1 Comprehensive and modern acquisition in the most vulnerable areas through regulation the management plans. Such restrictions can include time restrictions for such activity e.g. dur- The petroleum activities are subject to strict ing spawning migration or spawning. This will requirements for safeguarding the external envi- contribute to preventing acquisition of seismic ronment. A thorough and comprehensive system data when the natural resources can be particu- has been established consisting of e.g. manage- larly vulnerable. There are also requirements for a ment plans, impact assessments, emission/dis- fishery expert to be on board the vessel during charge permits and financial policy instruments. acquisition of seismic data. The fishery expert To ensure the best possible follow-up, the health, shall function as a connection between the petro- safety, environment and working environment leum and fishery industries, so that both indus- authorities have worked together to develop inte- tries can carry out their work in the best possible grated comprehensive regulations for health, manner. safety and the environment. Strict requirements are stipulated for explora- Cost-effective use of policy instruments is a tion drilling. An exploration drilling permit must fundamental principle for management of the be obtained from the Norwegian Petroleum petroleum resources in Norway. This entails con- Directorate for each well to be drilled. These per- ducting cost-benefit assessments of measures that mits presume that permission for activity under reduce emissions to air and discharges to sea, and the Pollution Control Act and consent to conduct implementation of the measures with the lowest exploration drilling are secured from the Climate 116 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities and Pollution Agency and the Petroleum Safety are supported through the DEMO2000 and Authority Norway, respectively. The management PETROMAKS research programs. A total of NOK plans also stipulate restrictions on exploration 235 million has been allocated to support such drilling in particularly vulnerable areas, e.g. as environmental projects in the program period. regards spawning. Environmental regulation thus takes place at As part of a development plan (PDO/PIO) for all stages of the activity; from assessment of individual fields, the operator must, among other whether the area should be opened, through things, study the consequences on nature and the exploration, when considering how a field should environment if the discovery in question is devel- be developed, through specific permits associated oped. The study should describe potential climate with operation of the field, through annual amend- and environmental effects of expected emissions/ ments of these permits and up to cessation of pro- discharges, as well as potential limitation meas- duction and disposal of the facilities. This ensures ures to reduce the emissions/discharges. Both a comprehensive and solid system, where all rele- the study program and the actual impact assess- vant authorities are involved. Updates of management must be submitted for consultation to ment plans and new impact assessments with affected stakeholders. The purpose of this is to updated knowledge shall contribute to ensuring ensure a broad-based, open process. that decisions can be based on the best and most Since 1996, power from shore has been consid- up-to-date factual basis possible. Consultation ered in connection with all new or revised devel- rounds and submissions provide an opportunity opment plans. This has contributed to several for all relevant players to be heard, while the NOx fields deciding to meet their energy needs with and CO2 taxes, along with the quota obligation for power from shore. Today, nearly 40 per cent of CO2, give the companies financial incentives to Norwegian gas production is carried out with safeguard environmental considerations in daily power from shore. Large new power supplies to operations. In addition, the authorities can make the petroleum sector have consequences for the administrative decisions in connection with e.g. power grid and reliability of supply on land and on approval of development plans. the facilities. This must all be seen in context. In the operations phase, emissions and discharges are regulated via permits under the Pollu- 7.2 Operational discharges to sea tion Control Act, in addition to the continuous economic incentives the companies have to reduce Regular discharges to sea are permissible dis- emissions via the CO2 tax, quota obligation for charges regulated through discharge permits. CO2 and NOx tax or payments to the Industry’s The discharges can include drill cuttings and pro- NOx fund, in which the companies take active duced water containing residues of added chemi- part. The companies must apply to the Climate cals, oil, heavy metals and other naturally occur- and Pollution Agency and the Norwegian Radia- ring substances from the bedrock, including radi- tion Protection Authority for permits under the oactive substances. Chemicals are added in drill- Pollution Control Act for emissions to air and dis- ing and well operations and in connection with charges to sea, and to the Ministry of Petroleum production of oil and gas. The added chemicals and Energy for flaring permits. are divided into categories – green, yellow, red The authorities play a central role in connec- and black - depending on the properties of the tion with shutting down fields or facilities. The substances. licensees must submit a cessation plan two – five Chemicals in the green category are sub- years before a license under the Petroleum Act stances that are not considered to entail harm or expires or is relinquished, or when the use of a drawbacks for the marine environment. Chemi- facility finally ceases. A disposal resolution is cals in the yellow category are normally not made after this plan has been considered by the defined as environmentally hazardous, while relevant authorities. This ensures responsible chemicals in the red and black categories are shut down and disposal of the individual facility in defined as being hazardous to the environment. terms of safety, environment and resource consid- Chemicals in the red and black categories are sub- erations. ject to strict control, and discharge is only allowed Research and development are important to when warranted by significant safety or technical achieve more environmentally friendly production reasons. on the Norwegian Shelf. A number of projects The total volume of chemicals used in 2009 related to discharges to sea and emissions to air was 480 000 tonnes. Of this, 174 000 tonnes were 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 117 An industry for the future – Norway’s petroleum activities

50 2500

40 2000

30 1500

20 1000 Tonnes red chemicals

Tonnes black chemicals 10 500

0 0 1998 2000 2002 2004 2006 2008 2010 1998 2000 2002 2004 2006 2008 2010

Figure 7.2 Discharges of added chemicals from Norwegian petroleum activities, distributed between red and black categories. Source: Norwegian Petroleum Directorate.

discharged, 99.9 per cent of which were in the nating from drilling operations with water-based green or yellow categories. The remaining vol- drilling fluid (green category) will normally be umes were injected, re-used or handled as waste. permitted, while drill cuttings originating from With regard to the environmental toxins on the drilling operations with other drilling fluids (oil- authorities’ prioritisation list, the petroleum activi- based or synthetic) will normally be injected sub- ties contribute up to four per cent of the national ject to a permit from the Climate and Pollution discharges. Agency, or transported to land for treatment and After the goal of zero discharges of oil and disposal. environmentally hazardous substances was intro- If discharge of drill cuttings is allowed, the cut- duced in 1997, discharges of chemicals in the tings will spread out over the seabed in the imme- black category have been reduced from 34 tonnes diate vicinity of the discharge point. The thickness in 1998 to scarcely 1 tonne in 2010, cf. Figure 7.2. of the layer will depend on the size of the dis- Discharges of chemicals in the red category have charged particles, current velocity in the water been reduced from 2440 tonnes to 16 tonnes in masses and the depth at which the discharge the same period. More than 99 per cent of all envi- occurs. This is the accumulation of cuttings and ronmentally hazardous chemicals have been mud in so-called cuttings piles, and it is assumed removed during the last ten years. About 80 per that vulnerable organisms such as corals and cent of the total chemical discharges occur in con- sponges are sensitive to this accumulation. nection with drilling and well operations. In connection with production of oil and gas, This confirms that the work done by operators water from the reservoir will follow the well- and the authorities to reduce discharges of envi- stream. This water contains residues of added ronmentally hazardous chemicals on the Norwe- chemicals, oil and other naturally occurring sub- gian Shelf has yielded results, and that the zero stances, such as heavy metals and radioactive sub- discharge target for these chemicals is considered stances. The water is either returned to the reser- to be achieved. The efforts to reduce discharges voir and deposited in a suitable formation, or continue, e.g. through examining the possibilities cleaned and then discharged to the sea. Although of injecting produced water and drill cuttings, the produced water is cleaned before it is dis- while the substitution work in relation to added charged, it will still contain small residues of oil chemicals also continues. and dissolved substances. As a consequence of The drilled rock mass that comes out of the new cleaning technology and a greater percentage borehole when drilling for petroleum is called drill of water that must be injected, both discharges cuttings. Drill cuttings have adhering residues of and the concentration of oil in water have been the drilling fluid used during drilling. Whether or reduced in recent years, cf. Figure 7.3. not drill cuttings can be discharged to sea often The volume of produced water is closely depends on the type of drilling fluid used in the linked to the activity level on the shelf, and to how drilling operation. Discharge of drill cuttings origi- 118 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

4000 40 7.2.1 Policy instruments designed to reduce Discharges of oil Concentration of oil regular discharges to sea

3000 30 The zero discharge goal for oil and environmentally hazardous substances to sea from the petroleum activities was established in Storting White 2000 20

Tonnes Paper No. 58 (1996–1997), Environment policy for mg per litre sustainable development, and is detailed and clari- 1000 10 fied in a number of subsequent white papers. The main rule is no discharges of environmentally haz- 0 0 ardous substances, neither chemical additives nor 1997 1999 2001 2003 2005 2007 2009 naturally occurring substances. It has been stated that the zero discharge objective will be reached Figure 7.3 Discharges of oil. within an acceptable framework as regards the environment, safety and economy. In 2005, the Cli- Source: Norwegian Petroleum Directorate. mate and Pollution Agency declared that the zero discharge goal was achieved for added environmentally hazardous chemicals. Box 7.1 Mussels measure Since 2005, the goal of no discharges of envi- discharges ronmentally hazardous added chemicals (black To ensure prudent oil activities on the shelf, and red categories)1 has been regarded as being accidental polluting spills must be measured fulfilled. There will continue to be some discharges efficiently and accurately, and the information of environmentally hazardous substances to sea in must quickly be sent to the right people. The the years to come, due to safety and technical con- company Biota Guard has started using a bio- siderations. Radioactive substances were also logical ”metering tool” to track potential dis- included in the zero discharge objective in 2009. charges from platforms, in addition to physical Norwegian regulations carry out interna- and chemical sensors. This “metering tool” is tional requirements through the OSPAR Conven- mussels. Biota Guard’s system is based on tion for the protection of the marine environment measuring the health of individual mussels. If of the northeast Atlantic (the OSPAR Conven- the shellfish are exposed to harmful sub- tion). Pursuant to this convention, the oil content stances or if they experience physical stress of discharges must be as low as possible and no due to other threats, the shells close to vary- more than 30 mg per litre. Under OSPAR, the ing degrees. This can be recorded and meas- chemicals are also characterised according to ured, and can provide an immediate indication their inherent properties. of potential spills. The project receives sup- Produced water is normally discharged at a port from the PETROMAKS program under point that is relatively high in the water column, the direction of the Research Council of Nor- and the most toxic of the water-soluble fractions way. will rapidly be diluted with seawater. Short-term (acute) effects of regular operational discharges of produced water and drill cuttings are regarded long the wells have produced. The percentage of as being insignificant, as these will generally be of water in the wellstream increases the further a a local and temporary nature, with no conse- field has progressed in its tail production phase. In order to reduce discharges to sea, support is 1 Chemicals are divided into categories (yellow, green, red also provided for a number of projects relating to and black) depending on potential hazard to the environment. As a point of departure, use and discharge is not per- produced water, handling acute discharges to sea mitted for chemicals in the black category, which include and monitoring and detection of spills. e.g. the environmental toxins on the prioritisation lists of The concentration of oil in the produced water the environmental authorities and OSPAR. Chemicals in the red category are hazardous to the environment and discharged to sea in 2009 was about 11 mg per must be prioritized for replacement with less environmen- litre. This is well below the maximum level of 30 tally-hazardous alternatives (substitution). Substances in mg per litre, stipulated in national regulations the green category are not considered to have a significant impact on the environment and are listed on OSPAR’s PLO- based on resolutions in the OSPAR Convention NOR list. Substances in the yellow category include sub- for the protection of the marine environment of stances that do not fall under any of the other categories the northeast Atlantic. (cf. Section 63 of the Activities Regulations). 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 119 An industry for the future – Norway’s petroleum activities quences at the population level. There is more fluid/cuttings from drilling operations. This policy uncertainty surrounding potential long-term was adjusted in Storting White Paper No. 10 effects. Based on current knowledge and monitor- (2010–2011), Updating of the management plan ing, no consequences have been proven at a popu- for the marine environment in the Barents Sea lation level, however, research in this area is con- and the waters off Lofoten. In the future, regular tinuing. discharges to sea from the petroleum activities in As a measure to reduce discharges of pro- this management plan area will be regulated in duced water, water is injected on several fields the same manner as petroleum activities on the without being used for pressure support. This other parts of the Norwegian Continental Shelf. solution will entail higher energy consumption and increased emissions of greenhouse gases. This will often be expensive and technically chal- 7.3 Emissions to air lenging on older fields. New policy instruments designed to reduce discharges of produced water In 2009, the petroleum sector was responsible for to sea from the petroleum sector must therefore 27 per cent of the Norwegian emissions of green- be viewed in an overall perspective. The dis- house gases. This is because the sector is quite charges to sea must be seen in context with other large in Norway, the activity carried out is energy- factors such as emissions to air, generation of intensive and fossil fuel is not used to any great waste, safety and costs. The authorities’ assess- extent for stationary combustion on the mainland. ment is that no general injection requirement This is due to extensive use of electricity for heat- should be issued. ing and generation of electricity that is dominated The volume of polluting substances in pro- by hydropower. The greenhouse gas emissions duced water will vary from field to field, as is also largely consist of exhaust from combustion of gas the case for the costs of reinjecting this water. On in turbines, flaring of gas and combustion of die- some fields, the costs will be relatively low, e.g. sel. These exhaust gases contain substances because the field already uses water for pressure including CO2. support, and the produced water can be used in The sector is also responsible for significant the pressure support system. On other fields, the contributions to other types of emissions. Among quantities of produced water will be relatively the other environmentally harmful substances small, while the costs of reinjecting the water can released are volatile organic compounds other be extremely high. than methane (nmVOC), methane (CH4), nitro- A case-by-case evaluation which takes into gen oxides (NOx) and sulphur dioxide (SO2). CO2 consideration both benefit to the environment and and CH4 are greenhouse gases, while NOx and possible other upsides compared with the costs of SO2 contribute to acidification. NmVOC reacts such a solution is a well-established practice in with NOx in the air to form ozone which can e.g. Norwegian resource and environmental manage- cause diminished plant growth. Exposure to ment. The Climate and Pollution Agency’s zero nmVOC can also be hazardous to health, and can discharge report from 2010 concludes in part that entail a working environment problem. Emissions no general requirement for injection of produced to air from the petroleum activities on the Norwe- water should be introduced on the Norwegian gian Shelf are considerably lower than the interna- Shelf. However, transparent socio-economic cost/ tional average for oil-producing countries. benefit analyses, which also include comprehen- It is difficult to estimate the future develop- sive environmental assessments of measures to ment in an industry. A number of factors influence prevent discharge of produced water, should be greenhouse gas emissions. Projections are there- carried out for new developments. No new factors fore based on a number of technical assumptions have emerged that would indicate that the conclu- for calculation purposes. The uncertainty in the sions from the report cannot be applied over the prognoses is also easily illustrated by comparing entire shelf. previous projections with actual emissions. The Stricter requirements were set for discharges emissions from the petroleum sector up to 2010 to sea in the Barents Sea than for the rest of the have, for example, been lower than estimates indi- shelf. The requirement was introduced in 2003 cated in the spring of 20072. However, the latest and entailed that petroleum activities in the area emission projections indicate an upward adjust- were to be carried out with zero discharges to sea during normal operations, represented by zero 2 Projections included in the background information for discharges to sea of produced water and drilling Storting White Paper No. 34 (2006–2007). 120 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Box 7.2 Greenhouse gases, NOx and nmVOC emissions on the Norwegian Shelf In 2009, total emissions of greenhouse gases in 14 Norway amounted to 51.3 million tonnes of CO2 equivalents. Production of oil and gas accounted 12

for 12.4 million tonnes, or a share of 27 per cent. 2

Greenhouse gas emissions from the facilities on 8

the continental shelf largely originate from com- 6 bustion of gas in turbines, diesel consumption, Mill. tonnes CO 4 and flaring of gas. 2 It is estimated that greenhouse gas emis- 0 sions from the petroleum activities in the next 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 few years will be around 14 million tonnes of 60 CO2 equivalents per year. The development in emissions is uncertain, but forecasts indicate 50 x

that we will reach peak emission level by 2020. 40 Total NOx emissions in Norway in 2009 amounted to 180 600 tonnes, a decline of 4 per 30

cent from 2008. The petroleum activities were Thousand tonnes NO 20 responsible for 49 800 tonnes, which means that 10 the Norwegian Shelf accounts for 29.7 per cent 0 of the total Norwegian emissions. About 65 per 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 cent of the NOx emissions from the Norwegian 300 Shelf come from turbines. NOx emissions from turbines depend on turbine loads as well as the 250

type of fuel. For example, combustion in gas tur- 200 bines results in lower NO emissions than com- x 150 bustion in diesel engines. NO emissions from the petroleum sector 100 x Thousand tonnes nmVOC are estimated at about 44 000 tonnes in 2020. 50

The Norwegian emissions of nmVOC were 0 141 200 tonnes in 2009. The petroleum sector 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 was responsible for about 45 000 tonnes of this. The emissions in the petroleum sector have Figure 7.4 Greenhouse gases, NOx and nmVOC been reduced by 82 per cent from the peak year, emissions on the Norwegian Shelf. 2001. The majority of the reduction is due to Source: Ministry of Petroleum and Energy and Norwegian emission-reducing measures targeting loading Petroleum Directorate. and storage of oil on the continental shelf. NmVOC emissions from the petroleum sector are estimated at about 28 000 tonnes in 2020.

ment of the emissions in 2020 by about 23 per duction and transport of liquid. In addition, reser- cent, from the same point in time, cf. Figure 7.5. voir pressure declines as the fields age, thus The development in large parts of the Norwe- increasing the need for energy in process facilities gian Continental Shelf is trending towards more and for gas compression. Each of these factors mature fields, while gas transport distances are alone tends to increase energy needs, which in rising as many of the new gas fields are situated turn often means greater emissions per produced farther from the markets. Gas production makes unit. up an increasingly larger part of the production on Reservoir conditions are another factor that the continental shelf. Treatment and transport of can lead to more need for energy. The further out produced gas is more energy-intensive than pro- in the field’s lifetime, the more water in the well- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 121 An industry for the future – Norway’s petroleum activities

The introduction of a CO2 tax in 1991 contrib- 16 uted to development and use of technology which allowed us to switch off the flares. The solution 12

2 entailed the flare being automatically lit when it

Historical was necessary to burn the gas for safety reasons. 8 This contributed to reducing the flare volume. In Forecast 2007 2010, flaring was responsible for 11.6 per cent of

Mill. tonnes CO 4 Forecast 2011 CO2 emissions from petroleum activities in Nor- 0 way. This is low compared with other petroleum- 2007 2009 2011 2013 2015 2017 2019 producing countries. The largest source of CO2 and NOx emissions is energy production on the facilities. There are Figure 7.5 CO2 emissions from the petroleum two main ways we can reduce this: sector. – Reduce the energy need Source: Norwegian Petroleum Directorate. – Produce the energy more efficiently and/or with less emissions stream. Since the total volume of liquid and gas The best way to achieve this is to establish policy (water, oil and gas) generally determines the need instruments to ensure that the companies benefit for energy in the process facility, a field will have from limiting their emissions. This can be done by higher emissions per produced unit when produc- setting a cost for the emissions, so that the compa- tion declines. Therefore, improving the recovery nies maximize profits when they implement the rate from the fields will also tend to increase emis- appropriate emission measures. On the continen- sions per produced unit. tal shelf, this is accomplished by the companies Different types of emissions must be weighed having to pay CO2 tax and purchase greenhouse against each other. One example is the connection gas emission quotas for their emissions. This between discharges to sea and emissions to air. comes in addition to the value the companies can Stricter requirements for e.g. discharge of pro- achieve by exporting and selling their gas instead duced water will lead to increased need for clean- of using it on the field. ing or injection. These processes demand energy The petroleum sector has paid CO2 tax since and will entail increased emissions to air. Like- 1991, and has participated in the quota system wise, efforts to reduce NOx emissions from a facil- since 2008. Before the petroleum sector joined the ity can impact emissions of CO2, as this entails a quota system, the CO2 tax for the petroleum sec- special way of operating the turbines. All of these tor amounted to about NOK 350 per tonne of CO2. considerations must be sensibly balanced through When the petroleum sector joined the quota sys- the correct use of policy instruments. tem in 2008, the CO2 tax was reduced to correspond with the level of the quota price, so that the total CO2 cost (tax + quota price) for the petro- 7.3.1 Policy instruments for reducing leum sector would remain at the same level as emissions to air before. However, the total CO2 cost does vary in Based on resource management considerations, step with the quota price, which is also the case ever since the beginning of the petroleum age, for other EU industries subject to a quota system. Norway required that all fields have a solution in Both the CO2 tax and the quota system are place for gas. Extensive flaring of gas – a practice cross-sector policy instruments that have had a with significant associated emissions seen in significant effect in reducing emissions. “Cross- many other countries – has therefore never been a sector” means that these policy instruments cover relevant solution on the Norwegian Shelf. Instead, several sectors. Nevertheless, the CO2 tax is a dif- the gas has become useful, e.g. in meeting the ferentiated tax across sectors, and the petroleum energy needs of purchasers of Norwegian gas on sector are among the sectors that have tradition- the Continent, or for injection for improved recov- ally paid the highest CO2 tax. Therefore, the Nor- ery. Flaring gas and cold venting, beyond what is wegian petroleum sector has long had a substan- necessary to ensure normal operations, is not per- tially stronger incentive to carry out relatively mitted pursuant to the Petroleum Act without expensive emission-reducing measures, as com- approval from the Ministry. pared with most other players in Norway and abroad. 122 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Over time, this has triggered emission-reduc- tor and followed up by the authorities in connec- ing efforts where the cost of measures has ranged tion with processing each individual new plan for up to this CO2 cost. In total, the petroleum indus- development and operation. Power from shore is try estimates that the CO2 tax has triggered meas- discussed in more detail under Chapter 7.3.3. ures that have reduced CO2 emissions by 40 mil- Research aimed at reducing emissions to air lion tonnes since 1991. As many measures have was reinforced through the Climate Compromise. already been triggered, the sector has few remain- Publicly-funded petroleum research was to have a ing emission-reducing measures with low costs. sharper focus on greenhouse gas emissions. Start- The work done under Climate Cure 2020 confirms ing from 2009, NOK 25 million has been ear- this cost picture. marked for research on energy efficiency and The best available technology must be used reduction of greenhouse gas emissions related to for the installation of new energy production oil and gas production on the Norwegian Shelf. equipment on facilities. The requirement for use Relevant research challenges include reduced of such technology has contributed to considera- greenhouse gas emissions through less flaring ble reductions in emissions to air. (optimised running of processes, fewer shut- In 1996, the Storting resolved that an overview downs, etc.) and lower emissions from power gen- of energy needs and the costs associated with eration (managing and exploiting gas turbines, using power from shore instead of gas turbines etc.), as well as more efficient use of energy (opti- must be submitted for all new field developments. mising operations, heat recovery). Power from shore must be evaluated by the opera-

Box 7.3 Examples of emission-reducing measures

The emissions from the petroleum sector in tonnes of CO2 has been separated out on Sleip- Norway are subject to relatively strong policy ner in order to meet the gas quality require- instruments, and much has already been done ments. This CO2 gas has been stored in the to reduce the emissions to air from this sector. Utsira formation. When Gudrun starts produc- Emissions of CO2 from power production on the ing and is tied in to Sleipner in 2014, the plan is continental shelf account for about 90 per cent of to separate CO2 and store it in the Utsira forma- the total emissions from the offshore activities. tion. In April 2008, the Snøhvit field started to Many energy efficiency measures have been separate and store CO2, before the natural gas is implemented after the introduction of the CO2 cooled into liquid gas (LNG). The CO2 gas runs tax in 1991. In order to achieve a significant in a pipeline from the LNG facility on Melkøya increase in energy efficiency over the longer and back to the field where it is injected and term, a shift in technology and energy supply stored in the Tubåen formation, 2600 metres concept is necessary. This requires a long-term below the seabed. When there is full operation commitment to development, testing and imple- on Snøhvit, up to 700 000 tonnes of CO2 per year mentation of new technology. can be stored. These facilities where offshore Combined cycle power is an example of CO2 injection takes place are unique in a global emission-reducing technology where heat from context. turbine exhaust gas is used to produce steam, The petroleum activities are subject to many which is in turn used to produce electricity. policy instruments designed to reduce emis- Combined cycle power boosts energy efficiency, sions to air, both in the planning and operations and is currently used on the Oseberg, Snorre phases of the projects. Focus on reducing emis- and Eldfisk fields. These facilities are unique in sions to air has been, and will continue to be, a global offshore perspective. More low-NOx important for the petroleum sector. Over time, turbines have also been installed, which leads to the sector has had a higher CO2 cost than other a substantial reduction in NOx emissions. sectors, both in Norway and abroad. This has Another example is the work related to already resulted in major emission reductions. injecting and storing CO2 in depleted oil or gas Further measures in the petroleum sector will reservoirs, or in geological formations under be relatively costly, a fact which was highlighted water or on land. Since 1996, about one million most recently in the Climate Cure Report. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 123 An industry for the future – Norway’s petroleum activities

NOx emissions do not depend solely on fuel nmVOC in connection with storage and loading and efficiency, as is the case for the CO2 emis- offshore, an industrial cooperation agreement was sions, but also on combustion technology and tur- signed in 2002 to satisfy these requirements in the bine loads. The activity on the Norwegian Shelf most cost-efficient manner. During the last dec- has also been in the forefront of the work to ade, this has led to the installation of oil vapour develop gas turbines with lower NOx emissions – recovery technology for use on ships. Together so-called low -NOx-turbines. with reductions in the volume of oil stored and 3 The Storting introduced an NOx tax in 2007, loaded, this has yielded results. From 2001 to and excluded emission sources that entered into 2009, nmVOC emissions have been reduced from an environment agreement with the Norwegian 250 000 to 45 000 tonnes. state. In 2008, the Ministry of the Environment and the industry organisations signed the first 7.3.2 Climate Cure 2020 NOx agreement, entailing a reduction of annual NOx emissions by 30 000 tonnes by the end of Climate Cure 2020 has studied measures so that 2011, although this has subsequently been down- the Norwegian petroleum industry can reduce its graded to 18 000 tonnes. A new agreement was overall greenhouse gas emissions by 5.5 million signed in December 2010 with the aim of ensuring tonnes of CO2 equivalents. The measures have a that Norway reduces its annual NOx emissions by price range from NOK 400–4000 per tonne of an additional 16 000 tonnes by 2017. The Environ- reduced CO2. There is great uncertainty associ- ment Agreement on NOx regulates the industry ated with the estimated costs of measures and organisations’ obligations vis-á-vis the authorities technology development. to reduce total NOx emissions from the sources These measures are major, complex industrial covered under the agreement. All operating com- projects that will take time to realise. It has been panies with active operations on the Norwegian deemed feasible for the petroleum sector to imple- Shelf participate in this agreement. The rate of ment reductions of up to three million tonnes by payments to the Industry’s NOx fund is NOK 11 2020. In Climate Cure 2020, the petroleum sector per kilogram of NOx. These funds will be used to encompasses all of the petroleum facilities on the provide subsidies to enterprises that implement Norwegian Shelf, as well as the land facilities at cost-effective NOx measures. Kollsnes, Stura, Nyhamna, Melkøya, Mongstad In 2009, a total of NOK 653 million was paid and Kårstø. Climate Cure 2020 has studied meas- into the NOx fund. The oil and gas industry ures within three areas: accounted for NOK 444 million (68 per cent) of – Energy efficiency that amount. Through 2009, 80 per cent of the – Electrification emission reductions supported by the fund were – Carbon capture and storage (CCS) triggered in the maritime sector, while 7 per cent of the fund’s emission reductions were carried out In 2009, the petroleum industry was responsible directly in the oil and gas sector, and 4 per cent on for 27 per cent of Norway’s total greenhouse gas rigs. While NOx emissions in the petroleum sec- emissions. Most of the emissions are linked to tor have remained relatively stable over the last energy production. Introduction of the CO2 tax on ten years, the oil and gas industry finances signifi- the shelf in 1991 caused the companies to be more cant emission reductions in other sectors. The aware of energy-efficient operations. Many CO2- payment rate for the petroleum sector is nearly reducing measures have been triggered as a con- three times higher than for other sectors that par- sequence of the tax. Reduced flaring and upgrad- ticipate in the NOx fund. Through the SDFI ing of turbines are examples of measures that scheme and the tax system, the Norwegian state have had substantial impact. There are still oppor- covers a substantial part of the revenues to the tunities for reducing emissions through energy NOx fund. efficiency measures. Emission projections (refer- Some light oil components (nmVOC) evapo- ence path) for the petroleum sector include rate from the crude oil in connection with storage expected measures in energy efficiency and and loading. The oil terminal at Sture started to improved technology. The measures are not speci- use technology to recover this oil vapour as early fied and amount to about one million tonnes of as in 1996. Following a requirement from the Cli- CO2 in 2020. mate and Pollution Agency to reduce emissions of In Climate Cure 2020, the NPD has updated the estimated costs of measures from the report 3 NOx tax in 2010 is 16.14 NOK/kg NOx 124 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

exclusive, which means that carbon capture and storage will not be relevant if the facility is electri- Box 7.4 Climate Cure 2020 fied, and vice versa. In 2008, the Ministry of the Environment The costs of measures to reduce emissions for appointed an agency group under the leader- first-generation full-scale facilities are estimated at ship of the Climate and Pollution Agency. This NOK 1300–2250 per tonne of CO2. group was called Climate Cure 2020. The man- No costs of measures have been calculated for date called for the final report to cover the fol- capture and storage of CO2 from offshore emis- lowing Chapters: sion sources. Previous analyses indicate that the 1. Assess the expected quota price in 2012, cost of measures will be considerably higher than 2015 and 2020 for petroleum facilities on land. However, techno- 2. Review international goals and instruments logical development could change the cost picture in climate policy. The development in for offshore carbon capture and storage. Europe was to receive particular attention, Use of CO2 to increase recovery from produc- including examining potential conse- ing fields can provide a revenue contribution for quences for Norwegian policy instruments carbon capture and storage in Norway. A high oil 3. Consider the need for new or adapted pol- price can make it profitable to inject CO2 for icy instruments in Norwegian climate pol- increased recovery. However, this requires stable icy. Particular emphasis was to be placed access to large volumes of CO2, larger than can be on policy instruments that contribute to ful- provided from Kårstø and Mongstad. No assess- filling the goal of reducing emissions by 15 ments have been made of the possibilities of using to 17 million tonnes by 2020. At the same CO2 for improved recovery in Climate Cure 2020. time, there was a desire to identify policy Together with e.g. the consultation submis- instruments with long-term efficiency in sions regarding this work, updated emissions esti- terms of both management and costs. mates and macroeconomic analyses of measures, the studies carried out under Climate Cure will The Norwegian Petroleum Directorate (NPD) form the background material for the work on the has been responsible for administration of the upcoming Climate White Paper. petroleum sector analyses.

7.3.3 Power from shore Power from shore to the Norwegian Shelf, sub- Starting from 1997, power from shore has been mitted in January 2008. This report calculated the considered for all new developments and major cost of measures and emissions reductions modifications on the continental shelf. The Troll A through replacing equipment for electrical power platform was the first facility on the continental production on the facilities with power from shelf to be run using power from shore. Subse- shore. Updated costs of measures associated with quently, fields such as Ormen Lange, Snøhvit and area electrification (southern, central and north- Gjøa have been powered by electricity from land. ern parts of the North Sea and the Norwegian Valhall and Goliat will receive power from shore Sea) were estimated at between NOK 1350 and when they come on stream. The Kårstø, Kollsnes, 3100 per tonne of reduced CO2. The NPD has Tjeldbergodden and Nyhamna land facilities studied measures that could provide overall emis- receive all or part of their power from the grid. sions reductions of about 4.6 million tonnes. The Nearly 40 per cent of Norwegian gas production updated analysis shows that the southern part of currently comes from these fields. the North Sea is the area with the lowest measure In 2009/2010, the NPD and NVE conducted an costs for electrification, in part because the fields analysis of the power need for fields that already here have long expected lifetimes. In 1996, the receive power from shore, or have decided to Storting resolved that power from shore must be implement this. It is estimated that these fields studied by the operator and followed up by the will demand slightly less than 5 TWh in 2011, authorities in connection with each new develop- growing to nearly 6.5 TWh in 2020. It is important ment on the shelf. See also Chapter 7.3.3. to view power from shore to the petroleum activi- The NPD has also considered electrification of ties in context with the power system on land. the land facility on Melkøya and parts of the Delivery of power to the petroleum activities Kårstø facility. CCS has also been considered for beyond what has already been approved can be these facilities. These measures are mutually challenging. Building new transmission lines is 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 125 An industry for the future – Norway’s petroleum activities important in order to make the onshore power Production and consumption of electricity is system more robust. not evenly distributed throughout the country, The Ministry has also examined the possibili- and the ability to transfer power between the vari- ties of taking power from shore to existing fields ous parts of the country depends on sufficient on the continental shelf. The Norwegian Petro- grid capacity. This entails that a planned increase leum Directorate, the Norwegian Water in power consumption as a consequence of fur- Resources and Energy Directorate (NVE) and the ther electrification must be considered in relation Climate and Pollution Agency prepared the report to both regional and national reliability of supply. entitled ”Power from shore to the Norwegian Establishment of new consumer units could occur Shelf” in 2008. This analysis has been updated in faster than the establishment of new production connection with the work on the Climate Cure and transmission grids. Therefore, careful plan- 2020 study. ning is necessary to ensure that this type of estab- The solution for energy supply to a petroleum lishment does not result in regional power system facility is considered in connection with the imbalances. Establishment of large new consumer authorities’ approval of a development. This takes units has contributed to the regional imbalances place both in the impact assessment process and we have experienced in recent years. in the subsequent consideration of the develop- Earlier, the establishment of enterprises ment plan. All plans for development and opera- involving high power consumption were often tion of oil and gas fields must contain an analysis linked with the development of major production of the possibility of obtaining power from shore. facilities. Much of the power production devel- This applies both to new field developments and oped today consists of small-scale power plants to major modifications of existing facilities. and wind power with little regulation ability and significant geographical spread. This means that a solid electricity grid and transmission capacity is Access to power even more important than previously. A sound In light of the desire for increased use of power electricity grid is extremely important for deliver- from shore to facilities on the shelf, particular ing power from shore to new facilities on the con- attention to the interface between the power sys- tinental shelf. Statnett’s development plan for 2010 tem and the petroleum sector is important. A pre- aims for a significantly strengthened central grid, condition for a solution involving power from with an investment scope of about NOK 40 billion shore is that it can be implemented without nega- towards 2020. The plan also includes facilitation tive effects on the power system, and that the con- for planned petroleum activity and increased use sideration for nature diversity must be safe- of power from shore. guarded. Therefore, electrification of the shelf The Energy Act was amended on 1 January presumes simultaneous development of sufficient 20104 to improve coordination of investments in new power, or that there is sufficient new grid the grid, production and consumption, in part by capacity to ensure that regional imbalances do not introducing a requirement for the grid companies occur. to tie-in new production facilities at all levels of the When estimating the cost of electrification grid, when the production project and grid invest- measures, Climate Cure assumes that the neces- ment makes good socioeconomic sense. The pre- sary power is available at the presumed power vious practice of tying consumption to the price. In some cases, however, electrification regional and central grid was laid down in the law. could entail considerable extra costs associated If necessary, the grid companies must invest in with the development of new transmission lines. grid facilities, but it is emphasised that tie-ins to Hydropower accounts for nearly all land-based the power system must wait until it is prudent production of electricity in Norway. The dominant from an operations viewpoint. In extraordinary role of hydropower means that Norwegian elec- cases, the Ministry can also grant exemptions tricity production varies substantially from year to from the tie-in and investment obligation for con- year, depending on water inflow to the reservoirs. sumption. This entails that large consumer units It is important to take this aspect of the Norwe- must take greater responsibility for their own gian power system into consideration, also when power supply, also within the petroleum sector. assessing power supply for the petroleum activities. 4 Odelsting Proposition No. 62 (2008–2009) Regarding amendments to the Energy Act. 126 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

sions within Norway’s borders as long as the The time aspect power need is met by emission-free power produc- Development projects on the Norwegian Shelf are tion in Norway, or by imported power. Therefore, comprehensive and require a substantial amount power from shore can be a way of reducing of time for both planning and development. To off- national emissions. set regional imbalances, operators of fields con- Increased power going to the petroleum sector sidering tie-in to the power system on land, or that will have an impact on the Norwegian power bal- plan to significantly increase existing power con- ance. Recent years have seen considerable varia- sumption, must contact the energy authorities and tion as to whether Norway is a net importer or net the relevant grid company at an early point in exporter of power. The result of increased con- time. sumption as a consequence of power from shore Very extensive processes are associated with to the petroleum sector will therefore reduce our planning, licensing and developing the electricity exports or increase our imports of power. grid. In many cases, development of the grid will Both the petroleum sector and production of take considerably longer than the development electricity are subject to mandatory quotas under projects on the shelf. This underlines the impor- the EU ETS (Emission Trading System). The fun- tance of early contact by the developer to energy damental basis for this system is that the overall authorities and relevant grid companies. emissions are determined during the quota Accordance between production, consumption period. This means that reduced emissions from and transmission capacity is important to prevent one location within the system are offset by regional imbalances. This will be a significant increased emissions somewhere else. Therefore, issue for the Ministry when considering these in such a system, the only direct way to reduce issues. emissions is to reduce the number of quotas. The time dimension is also important when During the period from 2008–2010 (the Kyoto planning field developments as, in extraordinary period), Norway will contribute around seven cases, the operator can risk that the grid company million tonnes of CO2 per year in reduced emis- is exempted from the tie-in and investment obliga- sions through the EU ETS. We will accomplish tion for the field’s consumption. If such an exemp- this by awarding fewer quotas than were entailed tion is granted, there is a risk that the projects will by our estimated emissions from Norwegian not be implemented, or that a different energy enterprises subject to the quota obligation. The solution will have to be selected. quota volume in the EU’s system is largely fixed. Statnett plays an important role as facilitator For the period 2013–2020, the quota volume in for consumption through its grid development the EU system must be reduced by 21 per cent, work. The NPD plays a key role in mapping poten- or 1.74 per cent each year. The EU Commission tial development in consumption in the various has indicated that the quota volume could be fur- areas of the continental shelf. Such a mapping will ther reduced by setting more rigorous European include consumption from developers that have climate targets. Therefore, the quota system will not progressed far enough for it to be natural for be a key policy instrument for achieving reduced them to contact the energy authorities and rele- emissions in Norway and Europe over the next vant grid companies. This will ensure that knowl- decade. edge concerning potential future power consumption in the petroleum sector is passed on for the benefit of central power sector players at the earli- New developments est possible point in time. The authorities do a thorough job of assessing A specific assessment in each individual case power from shore in connection with new develop- is necessary in order to clarify the extent to which ments and major modifications on the Norwegian power from shore to fields on the continental shelf Shelf. Historically, power from shore has not been is a potential solution in terms of the power sys- a realistic alternative due to high costs and techni- tem. cal challenges. Over time, technological development has made power from shore more relevant. Power from shore still requires very significant Impact on emissions investments, and will usually only be relevant in Power from shore to the petroleum sector will connection with major, independent developments reduce emissions of CO2 from the Norwegian or major modifications of larger fields. Shelf. It will also contribute to a reduction of emis- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 127 An industry for the future – Norway’s petroleum activities

Table 7.1 Projects where power from shore has been considered since 2005.

Approx./ original  reserves as of 31 Dec. 2010* million Sm³ Field PDO year Type of facility o.e. Energy supply Knarr 2011 FPSO 8 Traditional power supply Visund Sør 2011 Subsea to Gullfaks 10 Host facility Valemon 2011 Platform 34 Existing facility Eldfisk II 2011 Platform 35 Existing facility Ekofisk Sør 2011 Platform 35 Host facility Gudrun 2010 Platform 20 Host facility Marulk 2010 Subsea to Norne 12 Host facility Gaupe 2010 Subsea to Armada 5 Host facility Trym 2010 Subsea to Harald 6 Host facility Oselvar 2009 Subsea to Ula 9 Host facility Goliat 2009 Floater – Sevan 39 Power from shore Yttergryta 2008 Subsea to Åsgard 2.5 Host facility Morvin 2008 Subsea to Åsgard 14 Host facility Alve 2007 Subsea to Norne 9 Host facility Gjøa 2007 Floater – semi 55 Power from shore Vega and Vega Sør 2007 Subsea to Gjøa 25 Host facility Skarv 2007 FPSO 70 Traditional power supply Valhall Redevelopment 2007 Platform 53 Power from shore Yme 2007 Platform 12 Traditional power supply Rev 2007 Subsea to Armada 7 Host facility Volund 2007 Subsea to Alvheim 7 Host facility Tyrihans 2006 Subsea to Kristin 77 Host facility Oseberg Delta 2005 Subsea to Oseberg 9 Host facility Blane 2005 Subsea to Ula 1 Host facility Fram Øst 2005 Subsea to Troll C 12 Host facility Ringhorne Øst 2005 Wells from Ringhorne 15 Host facility Volve 2005 Platform 9 Traditional power supply Vilje 2005 Subsea to Alvheim 8 Host facility Enoch 2005 Subsea to Brae 0.5 Host facility

* Reserves recorded for PDO received in 2011. Source: Norwegian Petroleum Directorate.

A calculation of the costs of measures for well as future electricity and gas prices. It is power from shore is based on a number of important that the calculations prepared in the assumptions regarding future development, years to come are based on realistic assumptions including the scope of potential modification, regarding field lifetime. When considering the investment and operating costs, field lifetime, as cost of the measure for the Ekofisk Sør and Eld- 128 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities fisk II developments, for example, a cost of meas- available space on the facility. A lengthy shutdown ures was estimated for lifetimes both to 2028 and would, for example, entail significant losses in the 2049. Lifetime is an important factor in the cost form of deferred sales revenues. Such solutions level of the measures. Calculations prepared by are more realistic when the existing energy sup- the operator of the Ekofisk area provide a good ply must be replaced or upgraded. illustration of this. The costs of measures were Power from shore to existing fields on the Nor- 5 estimated at NOK 5310 per tonne of CO2 with a wegian Shelf has been analysed and considered lifetime to 2028 and NOK 3585 for a lifetime to on a number of occasions. In 2002, the NPD and 2049. the Norwegian Water Resources and Energy Today, the Troll A platform, Gjøa, Ormen Directorate prepared a report on power from lange and Snøhvit all receive their power supply shore to the Norwegian Shelf. This report was from shore. The new platform on Valhall, sched- updated in 2008 as a consequence of guidelines in uled to start operation in 2011, will also receive the 2007 Climate White Paper. The Petroleum power from shore. Of the new developments, it Safety Authority Norway and the Climate and Pol- has been decided that Goliat will receive power lution Agency also participated in the update. The from shore when the field starts operations in recently presented Climate Cure report also esti- 2013. At the same time, the Kårstø, Kollsnes, Tjel- mates the costs of measures for power from bergodden and Nyhamna land facilities receive all shore, both for existing and new fields. or part of their power from the grid. The Climate Cure report shows costs of meas- A review of all developments approved since ures varying from NOK 1350 per tonne of CO2 2005 shows that four of the developments have a and upward for power from shore to existing solution entailing power from shore, cf. Table 7.1. areas (power from shore to multiple facilities at As regards subsea developments (including new the same time). For individual fields, however, it wells), power from shore is only realistic if the will in most cases be far more costly to replace the host platform already has this as its power solu- power supply on individual facilities with power tion, such as is the case for Vega and Vega Sør. If a from shore. host platform receives power from shore in the All of the power from shore projects presented future, the tied-in resources will also be produced in Climate Cure are based on partial electrifica- with power from shore. The Gudrun platform gets tion. This means that only the power from the tur- its power from Sleipner, and will therefore also bines that generate electricity will be replaced receive power from shore if Sleipner were to with power from shore. About half of the turbines adopt such a solution in the future. on the Norwegian Shelf produce electric power, A coordinated development could be very while the rest of the turbines directly run equip- beneficial in the event of multiple smaller discov- ment such as pumps and compressors. In total, eries in the same area. A coordinated develop- the turbines account for 75 per cent of the CO2 ment can also make power from shore a more emissions from the petroleum sector. The poten- realistic alternative than if the fields are devel- tial for emission reductions as a consequence of oped individually. The NPD plays an important partial electrification will therefore be limited to role in ensuring that these alternatives are stud- about half of this. ied. The assessments made by the companies and In some cases in connection with major modifi- the authorities in each individual case will deter- cations of existing fields, power from shore can be mine whether or not power from shore is an expe- a real alternative, as a rule in cases where there is dient solution. talk of replacing old facilities on fields with new facilities. These types of cases normally require a new development plan, which means that power Existing fields from shore is considered on an equal basis with The energy needs of most of the fields on the new developments. Valhall is an example of the shelf are currently met by gas turbines. Extensive possibility of running power from shore to exist- modifications and retrofits are usually necessary ing fields that are rebuilt. The development plan in order to modify these units to receive power for redevelopment of the field was approved in from shore. This is cost-intensive and requires 2007. The new field centre on Valhall will receive power from shore and replace two older facilities, 5 Estimated at seven per cent annual real discount. with planned start-up in 2011. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 129 An industry for the future – Norway’s petroleum activities

The Government will: 5 000 20 Size of accidental discharges

• Require consideration of power from shore as Number of accidental discharges an energy solution for new fields and in connec- 4 000 16 tion with major modifications of existing fields, including consideration of relevant lifetime. 3 000 12

• Follow up to ensure that operators of new field 3 m

developments in the petroleum sector apply for 2 000 8 tie-in to the grid at an early point in time, in

those cases where power from shore is rele- Number of accidental discharges 1 000 4 vant. • Statnett will facilitate future power consumption, including major specific increases in 0 0 petroleum sector power consumption, if this is 1997 1999 2001 2003 2005 2007 2009 socioeconomically profitable. Figure 7.6 Acute discharges of oil greater than 1 m3 from the petroleum sector. 7.4 Acute discharges to sea Source: Norwegian Petroleum Directorate.

It is important to differentiate between normal and acute discharges to sea. Acute discharges to During the course of 40 years of activity, there sea are spills that are not planned, and not have been only three incidents involving dis- approved by the Climate and Pollution Agency. charges of oil greater than 1000 cubic metres: the Acute discharges to sea can consist of oil, chemi- Bravo blowout in 1977, the spill from Statfjord C in cals and drilling fluids. 1989 and from Statfjord A in 2007. To date, there The great majority of acute discharges are have been no acute discharges of oil from the small, but some larger oil spills can also occur. petroleum activities on the Norwegian Shelf that There were 139 acute discharges of oil in 2010, of have reached land. which 132 were less than one cubic metre. The total volume of all the discharges was 105 m3, cf. Figure 7.6. 7.4.1 Risk of acute discharges of oil We can never reduce the risk of acute pollu- The Petroleum Safety Authority Norway monitors tion to zero, which means that good risk manage- risk development in the petroleum activities in ment is even more important. In order to achieve several different ways. One important tool in this this, we must work to reduce both the likelihood context is the mapping work in RNNP – Risk level and the consequences of acute discharges. Under in the petroleum activity. Since 2001, extensive the Pollution Control Act, the operating compa- data material has been gathered under the aus- nies are both responsible for and have a duty to pices of RNNP and analysed primarily with a view establish necessary emergency preparedness to towards risk related to major accidents and work- deal with acute pollution. ing environment. The environmental consequences of an acute In 2010, the Petroleum Safety Authority pub- discharge of oil depend on many factors. While lished the report entitled “RNNP – acute dis- the size of the spill is obviously the key factor, the charges 2001–2009”. This report provides an anal- location, season, wind speed, current and emer- ysis of the above-mentioned basic data, supple- gency preparedness will be crucial as regards the mented with information from the Environmental scope of the damage. Most spills in Norway have Web database, with a view towards acute dis- occurred from ships near the coast. charges (actual and potential) in the period 2001– There has been extensive growth in the activ- 2009. A total of 452 acute discharges of crude oil ity level in the petroleum industry, without an have been reported on the Norwegian Shelf from accompanying increase in discharges. Over time, 2001 to 2009. 439 of these end up in the lowest cat- the petroleum activities on the Norwegian Shelf egory, 0 to 10 tonnes. have experienced a varying number of smaller The RNNP data show that the number of acute acute discharges and some larger acute spills. discharges of crude oil to sea on the Norwegian Shelf, viewed together, was more than halved in the period 2001–2004, while the level remained 130 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Box 7.5 Deepwater Horizon accident On 20 April 2010, there was an explosion on the the US sector of the Gulf of Mexico were closed Deepwater Horizon drilling rig as it was in the for fishing. On 19 April 2011, the last remaining process of completing drilling on the Macondo closed areas above the discharge point were prospect in the Gulf of Mexico. The rig burned reopened for fishery activity. Differences in sea- for two days before it sank. The well was shut in food quality before and after the accident have mechanically on 16 July, and declared perma- been noted to a limited extent. Even the extreme nently plugged on 19 September. The accident levels that were measured are well within the claimed 11 lives, and caused the largest blowout US authorities’ requirements for seafood. The ever experienced in US waters. About region is also one of the US’ most important 800 000 m3 of oil leaked out of the well until the tourism areas, with tourism accounting for an discharge could be stopped. US authorities have annual turnover of more than NOK 240 billion estimated that more than 40 per cent of the oil (USD 40 billion). was either naturally broken down or evaporated. A total of 8 183 seabirds, 1 144 sea turtles Seventeen per cent of the leakage from the well and 109 sea mammals were found, dead or alive, was recovered at the wellhead. Another 16 per that were most likely affected by the spill. Four cent was collected, dissolved using chemical dis- of 100 dead sea mammals were observed fouled persants or burned. with oil. A total of 210 km of the coastline was The investigation report drawn up by the moderately to heavily affected by oil. The imme- Presidential commission was submitted in Janu- diate consequences of the accident have not ary 2011. The main conclusion was that the acci- been as extensive as many feared in the early dent could have been prevented, and that the phases of the incident. It is too early to say any- underlying causes were: ”a complex and inter- thing about the overall consequences of the spill woven series of mechanical failures, bad deci- on the ecosystem. Almost one-quarter of the sions, design, operational implementation and spill remained in the marine environment. In team cooperation”. addition, there has been no previous experience The Norwegian Ministry of Labour will with such extensive use of dispersants. cover the HSE authorities’ follow-up of the Deep- It will take years before we have a complete water Horizon accident in the Gulf of Mexico in overview of the effects of the accident. A lot of an upcoming Storting white paper. work will be done to map this in the years to The accident took place in one of the USA’s come. BP alone has allocated NOK 3 billion most important fishing areas. One-third of all (USD 500 million) towards independent studies the seafood in the US comes from this area. of the consequences of the spill. A number of Fishery activity was halted throughout large investigations and reports related to follow-up of parts of the areas immediately after the acci- the accident in the USA are still under prepara- dent. In June 2010, 37 per cent of the waters in tion. constant in the period 2004–2009. There has been errors, and a large percentage are related to die- a clear reduction in the number of crude oil spills sel leaks/discharges. Information like this is per year in the North Sea. This reduction was important in the preventive work to reduce the greatest in the period up to 2003, while there was risk of acute discharges to sea. a more modest reduction in the last six years. In the Norwegian Sea there was an increase in the early 2000s, followed by a substantial reduction, 7.4.2 Policy instruments and measures to and then a stable level from 2004. reduce the risk of acute discharges Looking at the last five-year period, there have The risk of acute discharges is equal to the likeli- been 15 incidents in the petroleum activities that hood of an acute spill multiplied by the associated have resulted in discharges larger than 5 m3, cf. consequences. To reduce this risk, we must there- Table 7.2. By far most of the spills are small, and fore focus on measures that can reduce the likeli- only eight spills were larger than 10 m3 during the hood and consequences of acute discharges. period. These spills have many different causes. The RNNP work is an important supplement The majority of the spills relate to operational to the factual basis for prioritising accident pre- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 131 An industry for the future – Norway’s petroleum activities

Table 7.2 Acute discharges greater than 5 cubic metres in the period 2005–2009.

Cubic metres Field Year of oil Description Statfjord 2007 4400 Loading hose rupture in connection with loading crude oil at Statfjord A Norne 2005 340 Valve in wrong position when flushing flowlines and risers Tordis 2008 100 Leak to seabed from injection well for produced water. Draugen 2006 98 Discharge in connection with loading crude oil Statfjord 2009 95 Oil-contaminated water to sea. Statfjord 2008 50 Oil leak in Statfjord A leg, controlled discharge to sea for safety reasons Åsgard 2007 22 Incorrect valve setting led to overflow from diesel tank Ekofisk 2008 12 Incorrect operation in connection with draining raw diesel tank. Snorre 2007 10 Operational error led to diesel going to sea from fire pump. Snorre 2007 10 Valve and operational error led to diesel going to sea via fire pump. Gullfaks 2005 8.8 Incorrect operation following repair of flotation cell Statfjord 2007 8.5 Leakage of seal oil to open drain. Heidrun 2008 7 Discharge of diesel oil to sea after diversion to new diesel tank Statfjord 2005 7 Pipe leakage Draugen 2008 6 Coupling rupture due to pressure build-up when loading crude oil vention work so that the likelihood, and thus also This responsibility includes strategic manage- the risk, of acute discharges can be reduced. In ment. The Norwegian Clean Seas Association for addition to illustrating the development of risk on Operating Companies (NOFO), on behalf of the the Norwegian Shelf as a whole, it is also organ- operators, is responsible for strategic and opera- ised so as to view each sea area independently, tional management of the oil spill response making this also suitable for use in the work on resources that are used. NOFO establishes and management plans. safeguards oil spill preparedness on the Norwe- The report entitled “Technology and knowl- gian Shelf in order to combat oil pollution on edge status of significance for reducing the risk of behalf of 25 operating companies, both in open undesirable incidents that can lead to acute dis- waters, in coastal areas and in the beach zone. charges to sea in connection with petroleum activ- Both public and private sector oil spill resources ities in the Northern Areas” was released in Janu- are combined in the Norwegian preparedness ary 2010. The report prepared by the Petroleum model. The cooperation between municipal and Safety Authority Norway, the University of Stavan- state oil spill preparedness and NOFO means that ger and the International Research Institute of Norway’s overall emergency preparedness Stavanger confirms that technology and knowl- resources are available 24/7. The Norwegian edge development is crucial for keeping accident Coastal Administration handles the State’s respon- risk at a low level. This can reduce the likelihood sibility for acute preparedness and will supervise and consequences of acute discharges. It is there- oil spill campaigns. The Norwegian Coastal fore important that the industry and the authori- Administration can also consider whether the ties learn from undesirable incidents, so as to State should take over as leader of an oil spill cam- reduce the risk of new acute discharges. paign. Oil spill preparedness on the Norwegian Shelf There is no guarantee that a future oil spill will is important in reducing the consequences of not reach vulnerable resources in the sea or on potential major acute discharges. The Climate and land. Oil fields are being developed further north Pollution Agency sets requirements for oil spill than ever before. The risk of an acute spill reach- preparedness, and the operating companies are ing land increases (seen in isolation) when the responsible for combating oil spills from petro- activities are carried out closer to the coastline. leum facilities on the seabed or the sea surface. This requires development of new equipment, so 132 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities as to discover, monitor and recover pollution. The tionnaire survey every other year. The results are geographical spread of the activities all along the presented in annual reports, which also provide a coastline could also initiate a need for more equip- basis for implementing measures to counteract ment. negative trends. NOFO has access to considerable oil spill Overall, the latest RNNP survey shows a weak response resources that can be mobilised to all negative trend in the risk picture in 2010. The parts of the Norwegian Shelf. This includes 20 overall indicator for major accidents has levelled dedicated full-time employees, 50 on-call/rein- out in the last five-six years, both for production forcement personnel from operating companies, facilities and mobile facilities. Continuous 25 oil recovery vessels, 25 towboats, 20 ocean- improvement is the goal. going mechanical recovery systems and 80 people There were no fatal accidents on the shelf in associated with 5 oil spill response bases. There 2010, and the frequency of serious personal inju- are large stores of dispersants, oil spill recovery ries has shown positive development in recent equipment for operations near the coast with years. The injury rate for the entire shelf is now access to fishing vessels, and special teams for 0.68 serious personal injuries per million hours organising and managing the need for operations worked. This is significantly lower than in the pre- in the beach zone. The oil spill response work vious ten-year period. focuses on 5 barrier levels, where Barrier 0 is pre- Up to 2008, we saw a consistently positive venting the oil from reaching the water, Barriers development in the number of well control inci- 1, 2 and 3 are related to recovery at sea and Bar- dents. However, there was a sharp increase in the rier 4 is clean-up in the beach zone. 2008–2010 period, from 11 incidents in 2008 to 28 There are also restrictions on exploration drill- in 2010. The increase is also clear when taking ing in oil-bearing layers during certain parts of the into account the development in activity level year. This is done to limit environmental conse- (number of wells drilled). The Petroleum Safety quences for e.g. fish and birds as a consequence Authority Norway has asked the industry to of potential acute oil discharges in connection address the challenges associated with hydrocar- with exploration drilling. These restrictions are bon leaks and well control incidents, urging it to specified in the license documents from the come up with concrete measures that can contrib- authorities or in the management plan for a spe- ute to a trend in the right direction. cific sea area. Requirements relating to prepared- Over the past decade, the industry has aimed ness against acute pollution are stipulated for all considerable focus on reducing the number of exploration drilling. hydrocarbon leaks, and has established clear reduction targets. Gas leaks have high damage potential due to the danger of explosion associ- 7.5 Safety on the Norwegian Shelf ated with the spread of gas clouds. The target of maximum 20 leaks was achieved in 2005, while The Ministry of Labour/Petroleum Safety Author- the target of maximum ten leaks per year was ity Norway are responsible for the regulations achieved in 2007. Since then, the trend has been relating to, and supervision of, both technical and negative; with 14 leaks in 2008, 15 in 2009 and 14 operational safety, as well as the working environ- in 2010. There was a particular increase in 2010 in ment in the offshore petroleum activities and cer- the category 0.1–1 kg/s. One leak with a rate tain land facilities. The authorities’ responsibility higher than 10 kg/s was reported in 2010. More covers all phases of the activity, such as planning, goal-oriented and continuous efforts from the engineering, construction, use and subsequent industry are necessary to reverse this trend. final removal, if applicable. The indicator for the most serious helicopter RNNP was initiated in 1999/2000 to develop incidents shows positive development from 2009 and apply a measurement tool to illustrate devel- to 2010, as is also the case for the number of ships opment in the risk level on the Norwegian Shelf. on collision courses. This work occupies an important position in the In an upcoming Storting white paper on work- industry in that it contributes to a unified under- ing environment, working conditions and safety in standing of risk development among the parties. Norwegian working life, the Ministry of Labour The RNNP work follows risk level developments will present a broader updated status of HSE con- using various methods such as incident indica- ditions in the activities. The white paper will also tors, barrier data, interviews with key sources, point out important features of the HSE regime working seminars, field work and a major ques- for the Norwegian petroleum activities, as well as 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 133 An industry for the future – Norway’s petroleum activities the most important challenges for the HSE work In addition to the fact that the shutdown date in the years to come. The information will also may deviate from the original plan, start-up and include the HSE authorities’ follow-up of the duration of the cessation project itself can also be Deepwater Horizon accident in the Gulf of Mex- uncertain. The respective fields have considerable ico. differences with regard to size, complexity and number of facilities. Some fields may undergo development and operation in several phases, 7.6 Disposal where some facilities are phased out and others will remain in operation. For many other fields The Petroleum Act requires licensees to submit a there will also be other factors, such as the period cessation plan to the Ministry two to five years during which wells are plugged, disconnecting before the production license expires, or use of pipelines or third party use, that will affect the the facility ceases. The cessation plan must con- removal work. The availability of heavy lifting ves- sist of two parts: an impact assessment Chapter sels will be another important factor, along with and a disposal Chapter. The impact assessment weather conditions, as many such activities will be provides an overview of the various consequences restricted to the summer months. associated with disposal of the facilities, such as The authorities base their disposal decisions environmental consequences. The impact assess- on both national and international regulations. ment Chapter is submitted for consultation to The Petroleum Act of 1996 regulates disposal of affected parties. The disposal Chapter is pro- facilities, and Norway’s own regulations also cessed by the Ministry of Petroleum and Energy encompass the ban on dumping disused facilities and the Ministry of Labour, both of which will sub- at sea adopted under the OSPAR Convention. The mit their evaluation. Based on the impact assess- OSPAR resolution determines what types of dis- ment with pertinent consultation statements and posal alternatives are acceptable for the various the disposal Chapter with pertinent evaluation by types of offshore facilities, and allows for excep- the two ministries, the Ministry of Petroleum and tions in certain specific cases. Norway has issued Energy will prepare a Royal Decree regarding dis- two such exceptions: the concrete substructure posal, which will be submitted to the Government. for the Ekofisk tank and the concrete substruc- To date, the Ministry has processed more than ture for TCP2 on the Frigg field. There are ten ten disposal plans for disused facilities. In most other concrete facilities on the Norwegian Shelf cases, the facilities have been removed and taken where removal may be possible. However, this to land for scrapping, with examples of this includ- could also have environmental and safety conse- ing Odin, Nordøst Frigg, Øst Frigg, Lille Frigg quences that could make it most appropriate for and Frøy. Two consents have been granted for these facilities to be left in place. In 2013 OSPAR abandoning facilities at sea: the concrete sub- will once again consider whether there are structure for the Ekofisk tank and the concrete grounds for reducing the possibility of exemp- substructure for the TCP2 facility on the Frigg tions from the dumping ban based on experience field. and technological development. The Norwegian Great uncertainty is associated with disposal Petroleum Directorate has taken the initiative for activity in the years to come. It is difficult to pre- a collaborative project with the Climate and Pollu- dict when a facility will be shut down. The shut tion Agency and the Petroleum Safety Authority to down dates for the various fields and facilities consider future challenges and measures for depend on a number of factors; primarily oil price, removal and scrapping of concrete facilities on the expected production development, operating and Norwegian Continental Shelf. maintenance costs and technical condition. 134 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

8 Employment, spin-off effects and research

The petroleum resources on the Norwegian Shelf 200 000 jobs can be directly or indirectly linked to have laid the foundation for a highly competent the demand from the activities on the shelf. This and internationally competitive oil and gas indus- amounts to nearly eight per cent of overall try. Oil companies, in cooperation with the supply employment in Norway. industry and research and educational institu- The activity level on the Norwegian Shelf is at tions, have found solutions to challenging condi- a very high level. It looks like this will continue in tions offshore. Major development projects have the coming years. A continued high activity level stimulated new technological solutions. Favoura- means that there is a considerable market for a ble framework conditions for research and tech- petroleum-oriented supply industry and for other nology development have been an important pre- associated industry activity. However, small dis- condition. coveries make it more challenging to achieve new, One of the goals in the Government’s petro- joint technology advances in the industry. leum policy is facilitating profitable production of The activity level in the petroleum activities oil and gas, which can also provide a foundation over time depends on how much of the remaining for profitable and attractive jobs onshore. The resources are utilised. If merely the current petroleum activity on the Norwegian Shelf gener- investment plans are implemented, the petroleum ates jobs all over the country. The industry cur- activity will quickly decline. Strong efforts in rently employs about 43 000 people, but over existing fields, new profitable field developments

250

Unopened areas 4 Open areas Discoveries 3,5 200 Resources in fields

150 2,5

Mill. scm o.e. 100 Mill. barrels o.e. per day

1,5

1 50

0,5

0 0 2010 2015 2020 2025 2030 2035 2040

Figure 8.1 Possible production course on the Norwegian Shelf. Source: Ministry of Petroleum and Energy and Norwegian Petroleum Directorate. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 135 An industry for the future – Norway’s petroleum activities and exploration will provide the basis for a high dependent on activity throughout the entire petro- and stable activity level in the future as well. In a leum activity value chain. time perspective beyond 2020, exploration in Over the last decade, the investments and opened areas and access to new exploration area operating costs on the Norwegian Shelf have will be crucial as regards the activity level. Meas- increased significantly. The activity level on the ures are necessary within all these areas to Norwegian Shelf is high, and indications are that ensure the industry has new tasks. Therefore, the this will continue in the coming five-year period, Government has decided to start an opening pro- cf. Figure 8.2. A continued high activity level also cess for the sea areas around Jan Mayen and the entails that there will be a considerable market for part of the formerly disputed area west of the a petroleum-oriented supply industry and other delimitation line in the Barents Sea South. associated industry activity in the future. New discoveries provide the basis for new The volume of assignments associated with developments and associated spin-off effects. The operating fields is a core market for the Norwe- greatest potential for making major, new discover- gian supply industry. Norwegian suppliers are ies is in the waters off Northern Norway. New particularly well-positioned to compete for assign- activity and significant spin-off effects in the north ments associated with operating fields because are facilitated through expanded exploration activ- they are geographically close to the Norwegian ity. The development of Snøhvit, Goliat and Skarv Shelf and often have experience from previous illustrate that petroleum activity provides consid- assignments on the relevant fields. erable value creation and employment, locally and If merely the approved investment plans are regionally. implemented, the Norwegian Shelf will experi- By utilising the resource potential on the Nor- ence a swift decline in production. Amplified wegian Shelf, the oil and gas industry will be able efforts in improving the recovery rate from exist- to create considerable activity in the country’s ing fields can curb the decline in production. This economy for decades to come Development and will provide great possibilities for new assign- operation of fields will create knowledge-intensive ments as measures that increase the recovery of jobs and other positive spin-off effects. Utilisation resources on fields often require considerable of the resource potential will contribute to investments. It will also form the basis for more research activity and development of expertise. long-term operation of the fields. In this year Research and development are important to alone, investment decisions are planned for new improve recovery of resources and ensure that facilities, modification and wells on Ekofisk, Eld- the industry is internationally competitive. The fisk, Åsgard, Snorre and Troll, each with invest- industry is, and must continue to be, a driving ment frameworks exceeding NOK 10 billion. force within research and development. The Measures to improve the recovery rate and life- authorities play an important role as facilitator, time are important for large parts of the supply and in certain areas where the industry’s efforts industry’s volume of assignments in the medium are not sufficient, there is a need for public funds. term.

200 000 8.1 Shelf and shore

A continued high level of demand from the activ- 150 000 ity on the Norwegian Shelf is crucial for the future of several companies and jobs across the country. 100 000

This applies to both companies and jobs in oil Mill. 2011 NOK companies, the petroleum-oriented supply indus- 50 000 try and in other associated industry activity.

Norwegian companies are involved through- 0 out the production chain. Various companies 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 carry out e.g. offshore activity, exploration, devel- Investments Operating costs opment, modification, maintenance, operation and Figure 8.2 Level of activity (1971–2015). disposal. For these companies and associated employment, the total level of demand is not the Source: Ministry of Petroleum and Energy and Norwegian Petroleum Directorate. only important factor. These companies are 136 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

The number of new discoveries on the Norwe- In the long-term, it is crucial that sufficient gian Shelf is increasing in mature areas. The aver- new resources are proven to ensure regular and age size of discoveries is, however, significantly high activity on the shelf, and thus also new tasks lower than in the 1970s and 80s.The size of discov- for the industry. Continued new field develop- eries is important for development solutions and ments require access to new area. Without access the prevailing trend is fewer independent develop- to area, the demand impulses toward the supply ments and more wells and satellites connected to industry will wane in correlation with reduced existing infrastructure. Smaller discoveries, com- activity level on the shelf, and thus weaken the bined with a relatively high cost level compared basis for a Norway-based supply industry. with other petroleum provinces, mean that the When production ceases, the facilities on the industry is facing new technological and financial Norwegian Shelf must be removed. Currently, challenges in the coming years. there are about 500 facilities on the Norwegian Large parts of the exploration area the indus- Shelf. There will be considerable work involved in try currently has access to, are relatively well- phasing out fields that have been in production. explored. The promising deepwater areas in the The costs associated with handling the facilities Norwegian Sea have not yet met expectations. on the Norwegian Shelf have been estimated at The recent Skrugard discovery is good news for about NOK 160 billion1. This means that handling exploration of the Barents Sea. The last time new scrapped facilities will be a large market that can area was opened for petroleum activity was in provide great industrial opportunities for onshore 1994. It takes a long time for discoveries to mature companies. so they result in field development and produc- It is estimated that about 30 facilities on the tion. For example, the years of discovery for Snøh- Norwegian Shelf will be taken out of use on the vit, Gjøa and Skarv are 1984, 1989 and 1998, Norwegian Shelf in the period 2010-2020. On the respectively. Snøhvit started production in 2007, UK shelf, it is estimated that about 260 facilities Gjøa in 2011, while Skarv is still being developed. will be taken out of use during the same period. In the last ten years, the discoveries have been This is a growing and interesting market for Nor- smaller than previously. This will play a role in wegian removal players and receiving facilities. which developments move ahead. Currently, there are three facilities in Norway that Access to new, prospective exploration area is can receive and process scrapped oil installations. important to facilitate new, larger projects that can The uncertainty associated with the prognoses is harbour the future’s technological solutions. great since it is difficult to predict when a facility Therefore, the Government has decided to start will be shut down. The shutdown time for the dif- an opening process for the sea areas around Jan ferent fields and facilities depends on several fac- Mayen and the part of the formerly disputed area tors, mainly oil price, expected production devel- west of the delimitation line in the Barents Sea opment, operation and maintenance costs and South. The petroleum industry prioritises its technical condition. Historically, the lifetime esti- resources where there are interesting business mates have varied greatly and the current trend is opportunities. In order for Norway to be a host for lifetimes to be continuously extended. The country for an innovative and highly technological capacity of the above-mentioned facilities is oil and gas industry, access to attractive explora- expected to be sufficient to handle the volumes tion area is a prerequisite. Major discoveries in expected for scrapping towards 20202. frontier areas often require larger basic investments in the form of independent developments and infrastructure. Such discoveries therefore The Government will: provide a basis for larger assignments for the sup- • Maintain an effective petroleum industry in ply industry per field development than develop- Norway over time by facilitating profitable ment of smaller discoveries in mature areas. Fur- future activity on the Norwegian Shelf through thermore, new, independent developments pro- development of discoveries, improved recov- vide the possibility for tasks for wider Chapters of ery, exploration in open areas and opening new the supply industry than smaller satellite fields. areas. The industry must cooperate to find cost-effective solutions that enable realisation of resources both 1 See the Climate and Pollution Agency, Phasing out in new areas and mature areas. scrapped platforms, TA-2643/2010 2 See the Climate and Pollution Agency’s report: Phasing out scrapped platforms, TA-2643/2010. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 137 An industry for the future – Norway’s petroleum activities

Box 8.1 Industry founded on traditions The petroleum activity on the Norwegian Shelf 2013 goes to vessels used in the oil and gas requires solutions that are adapted to the activities. weather and sea conditions in the North Sea, Norwegian offshore shipowners own and Norwegian Sea and Barents Sea. The strong tra- operate one of the world’s most advanced off- ditions and knowledge from shipping and ship- shore fleets. The Norwegian fleet of service ves- building provided a good foundation for taking sels (supply, anchor handling and specialty the next step and delivering goods and services ships) is the second largest in the world. For to the petroleum activity as well. With this point every offshore ship built in Norway, jobs are of departure, the Norwegian maritime sector created across the country. The building of the and associated equipment suppliers have devel- anchor handling ship «Normand Prosper» oped into an important part of the petroleum-ori- involved equipment deliveries from 91 Norwe- ented supply industry. About 90 per cent of the gian companies. The ship was delivered on 9 overall contract value of ships delivered from April 2010, from STX Norway Offshore in Bratt- Norwegian shipyards during the period 2009- våg to Solstad Offshore ASA in Skudeneshavn.

3 8.2 The petroleum activity employs about 43 000 people . About half of these are many people employed in the oil companies. This does not include all of the employees in the petroleum Building a strong supply industry has been an activities. If we include what Statistics Norway objective since the petroleum activity started on defines as petroleum-related industries, the num- the Norwegian Shelf. This has been successful ber is higher. Using this definition, 63 000 people and the supply industry currently consists of are employed in the industry, 65 per cent of which many competitive companies that deliver techno- live in Rogaland and Hordaland. 424 of the coun- logically advanced products and services to the try’s 430 municipalities have at least one citizen Norwegian Shelf and to international markets. employed in what can be called the core activity The industry is active within exploration activity, and includes direct employment in the petroleum new developments, operation, maintenance, modi- activity. fications and cessation of fields. Some focus on The effect of the overall demand from the one of these markets, while others carry out activ- petroleum industry is significantly greater. Sev- ity in several parts of this value chain. Norwegian eral companies deliver goods and services to the companies have become market leaders within petroleum activity or to companies in the industry seismic services, subsea production systems, groups mentioned above. This applies to e.g. seis- drilling equipment, offshore service vessels, float- mic companies, engineering companies and ship- ing production and transport services. yards. In the aftermath of the development of a com- The demand from the petroleum industry has petitive supply industry in Norway, the import been and is very significant for the activity in percentage in the petroleum sector has been many companies across the country. Researchers reduced. This entails that the demand from the from Statistics Norway have analysed the effects activity on the shelf has become more important of this demand4 on e.g. employment in Norway. for the activity level in the Norwegian economy. By taking a basis in direct and indirect deliveries This also means that changes in the activity level to the petroleum activities, an estimate of the on the shelf, and thus the demand from the indus- scope of employment that can be directly and indi- try in general, has a greater effect on employment rectly connected to the deliveries to the petroleum in the country. Early in the 1970s, the import per- industry has been carried out. The calculations – centage was very high – nearly 100 per cent. As Norwegian industry has built up expertise within petroleum-related activity, the import percentage 3 Statistics Norway’s industry groups: "recovery of crude oil has now been calculated at between 20 and 30 per and natural gas", "services associated with oil and gas recovery" and “pipeline transport". cent. 4 Financial analysis 3/2010; The demand from the petroleum According to Statistics Norway’s (SSB’s) defi- activities, significance for production and employment in nition of the petroleum industries, they employ Norway, Statistics Norway. 138 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

pies a special position. Proximity to southern Other private services Extraction of petroleum and transport via pipelines parts of the North Sea, where the petroleum activ- Wholesale and retail trade ity started, is an important factor in this. Strong Transport and communication Other industry industry environments have gradually developed Shipbuilding industry in the rest of the country. This includes strong Machinery and other equipment Construction environments within operation and maintenance Public administration in the Bergen region, for instance, subsea equip- Banking/insurance Foreign shipping ment in the Kongsberg/Asker region, shipowners Primary industry and shipbuilding activity in Sunnmøre and Sun- Power production 1000 employees nhordaland and the NODE cluster in Southern 0 102030405060 Norway which is e.g. characterised by deliveries Figure 8.3 Number of employees that can be of drilling equipment, cf. Figure 8.4. directly and indirectly linked to the demand from As the petroleum activity moved north, there the petroleum activity, in 1000 employees, 2009. has been onshore industry development further Source: Statistics Norway. north as well. In recent years, there have been significant developments off Central Norway. This has created activity and employment in the based on numbers from 2006, show an employ- region. Development and operation of Snøhvit has ment of 206 000 in 2009, c.f. Figure 8.3. generated considerable spin-off effects for land- The deliveries to the petroleum activity come based activity in the north, particularly in Ham- from many parts of Norwegian industry. The merfest, where several companies have experi- demand from the petroleum activities influences enced a boost as regards expertise, technology not only what we primarily think of as supply and capacity. industries. It applies to a wide spectrum of indus- Supplier companies also give assignments out- tries, including building and construction, com- side their own local environment. Major supplier munication, trade in goods, banking/insurance companies purchase from the entire country. In and other parts of private services, cf. Figure 8.3. 2010, FMC Technologies purchased goods and Over the last decade, the supply industry has services totalling more than NOK 3 billion distrib- experienced considerable growth. The growth is uted across 18 of the country’s counties5. not only reflected in increased employment, but also in turnover and value creation. Expertise from petroleum activity is also relevant to other types of assignments. Norwegian construction yards have received considerable contracts for production of jackets for offshore windmills. Simi- larly, Statoil’s expertise as an operator of oil and gas fields has had great significance for the development of full-scale floating windmills. In the same way as the knowledge and experience from shipping was important to the development of the supply industry, the current knowledge foundation provides a good basis for future activity within renewable energy as well.

8.2.1 The supply industry location Menon Business Economics, IRIS and Ramm Figure 8.4 Location and employment in the Nor- Energy Partner have carried out an analysis wegian supply industry. which shows e.g. location and employment in the Source: Menon Business Economics, IRIS, Ramm Energy Part- Norwegian supply industry. The analysis shows ner. that the Stavanger region is the economic region with decidedly the most full time equivalents connected with the supply industry. This region occu- 5 Source: FMC technologies, March 2011 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 139 An industry for the future – Norway’s petroleum activities

8.3 Development of the industry (for the Beryl field on the UK shelf). By the end of 1974, the companies had a total of six concrete In 1959, the Groningen field in the Netherlands platforms under construction in Jåttåvågen. was discovered. This caught the attention of the Besides the Ekofisk tank, 18 concrete platforms major international oil companies, who requested were built in Norway, fifteen platforms in Stavan- access to carry out seismic surveys in the North ger, two in Åndalsnes and one in Hanøytangen. Sea off the UK and Norwegian coasts. At this Aker Solutions has continued the experiences time, there was little expertise within exploration, within design, construction and installation of off- production or refining petroleum in Norway. shore concrete structures. Concrete has proven There was no education directed at petroleum to be very suitable in Arctic regions and/or when activity, and no public agencies or institutions encountering icebergs, drift ice and ice build-up. working with oil and gas. Aker Solutions still makes concrete platforms for In the first years with oil activity on the Norwe- rough weather areas in Canada and Russia. gian Shelf, the authorities were therefore con- The shipping knowledge Norwegians had cerned with establishing a good framework for gained over many generations, became a great the activity. Important considerations included advantage when oil exploration and production maintaining national control over the resources was starting. Many sailors who were used to and ensuring positive effects in the event of devel- working away from home for long periods were opment of these. Furthermore, they were con- recruited to the oil industry. Experiences at sea cerned with attracting the large, international oil and great adaptability were important in an inter- companies. These companies’ technical expertise national industry such as the oil activities. Norwe- and technical and financial capacity were key fac- gian shipowners had experience from operating tors in ensuring a responsible start. internationally, and already had contacts in the oil industry. Many shipowners had strong capital and the shipowners were used to making major, and 8.3.1 Industrial experience and culture often risky, investments. In the beginning, foreign suppliers dominated all Norwegian companies quickly became impor- areas. The newest technology and the best devel- tant in e.g. further developing the seismic technol- opment solutions were imported. They were not ogy and adapting the technology to be used off- necessarily adapted to the conditions in the North shore. Norwegian factory trawlers were particu- Sea. Therefore, there was room for improvement, larly suited for modification and were used as seis- which Norwegian industry quickly stepped in to mic vessels. Crews that previously manned fish- fill. Initially, there was therefore a focus on learning vessels joined the seismic vessels. ing to adapt solutions developed abroad. Geophysicists and engineers received valuable Even though Norwegian companies possessed knowledge about handling equipment from the little expertise as regards petroleum activity, fishing fleet. The synergy effect between fisheries there were environments with industrial experi- and seismic has resulted in Norway playing a key ence and industrial culture that could be utilised. role in this discipline. It started with the establish- For example, there were environments with expe- ment of Computas and Geoteam, and continued rience from building large structures such as with the development of Geco and PGS, which dams, bridges and ships. both became world-leading within seismology. The Norwegian contractor companies Selmer There were many large and small shipyards and Høyer-Ellefsen received the task of building a for new construction and ship repairs along the concrete storage tank for the Ekofisk field. Jåt- coast. These were not particularly involved with tåvågen outside Stavanger was chosen as the con- building platforms during the first years. After a struction site. Using concrete was a French sug- decline in the oil price, and a collapse in the tank gestion, and became a success and breakthrough market and several discoveries on the Norwegian for offshore concrete installations. The technol- Shelf in the 1970s, many of the yards adapted to ogy was developed further by several companies. the needs of the oil industry. They did this The Norwegian contribution was named Con- through building drilling rigs, production plat- deep6. Norwegian Contractors was established by forms and supply and support vessels. The indus- the companies Høyer-Ellefsen, Selmer and try structure in Norway necessitated dividing Furuholmen to build the first platform of this kind large assignments into smaller units, as the yards were small and geographically spread. The work 6 Concrete Deepwater Structure distribution between several yards enabled more 140 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Box 8.2 Subsea expertise The subsea segment has become a business for x-mas trees. The force behind the strong area where the Norwegian supply industry is a subsea environment in Norway includes world leader within technology. Norwegian demanding customers (oil companies) that have companies operate within all segments of the contributed capital for R&D and the willingness supply chain, main contractors, system opera- to test technology on the Norwegian Shelf. At tors, product suppliers and service companies the same time, the suppliers have been able to are all in the chain. Companies such as FMC recruit competent work forces in cooperation Technologies, Aker Solutions, GE Oil&Gas, with university and college environments, e.g. in Framo, ClampOn and Subsea 7 are examples of Kongsberg and Bergen. The University of Ber- various cutting-edge expertise areas within this gen holds the status of a Norwegian Centre of market. Norwegian-based suppliers have, for Expertise (NCE) within subsea solutions. example, about 60 per cent of the world market

Figure 8.5 Templates. Illustration: FMC.

rapid delivery and simultaneous utilisation of expertise in the individual local yards and work- 8.3.2 Expertise shops. The authorities saw that the major oil companies The first Norwegian platform was built in possessed both the technological expertise and 1966. Rosenberg Mekaniske Verksted in Stavan- capital necessary to find and utilise potential ger and Akers Mekaniske Verksted were also cru- petroleum resources. During the first years, Nor- cial in building the platform. Aker also developed way was therefore dependent on the multinational a new type of drilling rig, the first of which started companies in order to utilise the resources. The operations in 1974. The company’s concept has State policy was based on attracting international been further developed and several shipyards oil companies and technology. around the world have built rigs on license from Several major fields were discovered in the Aker. The most recent generation of these rigs 1970s and 1980s. The increased water depth and can drill in water depths of up to 3000 metres. climatic conditions required considerable techno- Throughout the years, several special vessels, logical development before these fields could be platforms and various modules for the petroleum developed. In connection with the fourth licensing activities have been built at Norwegian shipyards. round in 1979, technology agreements between Long industry traditions, strong scientific and the Norwegian state and the foreign oil compa- technological expertise and a strong engineering nies were signed. The objective of the agreements environment are important reasons why compa- was to stimulate Norwegian industry and increase nies in the Kongsberg-Oslo area are world-leading Norwegian expertise. The foreign companies con- as regards subsea equipment for the petroleum tributed the financial means and expertise to activities. develop technology in Norway. The Norwegian research environments and companies thus received access to petroleum-related research. Through active policies from the authorities and great efforts on behalf of the companies, exper- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 141 An industry for the future – Norway’s petroleum activities

Box 8.3 Well service – a key area for increased oil and gas production Well service entails operations in connection traditional coiled tubing or pressure pipe opera- with drilling new wells and operations in produc- tions. Because a well tractor is relatively easy to ing wells to optimise or maintain production of handle, it also offers HSE benefits. oil and gas. Traditionally, the major international companies Schlumberger, Halliburton and Baker Hughes have dominated this market. The authorities’ prioritisation of improved recovery and increased allocations to research institutions have contributed to a growth of steadily more specialised supplier companies in this market. Many have their origin in Norwegian research environments, for example IRIS in Sta- vanger. Currently, over 140 companies specialis- ing in well service exist in Norway. It is sometimes necessary to enter the wells to carry out maintenance or other technical operations, such as replacing pipes, monitoring production and logging pressure, flow and temperature. This is called well intervention. Aker Well Service, along with Statoil, has developed a so-called well tractor (pictured). This is a device of approx. five metres which can push equipment as far as ten kilometres along the horizontal parts of a well. A well tractor makes it possible to recover even small production volumes of oil. Statoil alone estimates that the well tractor will result in improved recovery with a value of Figure 8.6 Well tractor – example of new well NOK 300 million annually. In addition, Statoil technology. estimates a cost savings of about NOK 500 mil- Illustration: Statoil. lion per year by using a well tractor instead of tise and new activity within seismology, drilling, depths, has also been very important for this building supply ships, drilling platforms, produc- development. tion platforms, research and education were Since 1980, activity has been ongoing to find quickly built up. solutions for transporting untreated wellstreams The expertise within these areas has been over long distances in the same pipeline, so-called important for the development of the Norwegian multiphase transport. Active use of multiphase Shelf and Norwegian jobs. For example, new transport represented an important shift in the technology such as horizontal drilling, multilat- development, both on the Norwegian Shelf and eral drilling, three and four dimensional seismic internationally. The multiphase technology experi- and many different injection technologies, have enced a crucial breakthrough with the develop- contributed to enabling development of new ment of TOGI (Troll Oseberg Gas Injection). This fields and have allowed many fields on the Nor- also enabled the process part of the Troll A devel- wegian Shelf to increase resource utilisation and opment to be established on land, through the thus extend their lifetimes. It was also important establishment of the gas treatment facility at for the transition from large, integrated concrete Kollsnes. Additional advances made the develop- platforms to subsea solutions tied in to existing ment solutions on Snøhvit and Ormen Lange pos- platforms, new floating platforms, production sible. vessels or simple, unmanned platforms. The The combination of new and challenging tasks development of solutions enabling both remote within development and operation, strong univer- operation of platforms and wells at ever greater sity environments and competent supplier compa- 142 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Box 8.4 Innovative industry with a starting point in Agder Hardly any other oil and gas environment has tant products. Through close cooperation with experienced such considerable growth as the demanding customers, targeted R&D work, par- so-called Southern Norway cluster in recent ticularly within mechatronics (mechanics and years. The oil and gas environment in Southern electronics), and cooperation across the cluster, Norway has formalised a cooperation through the companies have developed innovative solu- the NODE secretariat (Norwegian Offshore & tions that have proven most cost-effective. Drilling Engineering), which also facilitates The largest suppliers of drilling equipment cooperation between industry and educational include Aker Solutions, National Oilwell Varco, and research environments in the region. In TTS Energy and Nymo. APL and Aker Solutions 2009, NODE became a Norwegian Centre of have specialised in anchoring and loading/off- Expertise and includes around 50 companies loading technology. The NODE companies and about 6200 people. Drilling equipment, load- make up a strong and important industrial envi- ing/offloading and anchoring systems as well as ronment in the Agder region, with a turnover of wave-compensating cranes are the most impor- NOK 40 billion in 2009.

Figure 8.7 Examples of anchoring, loading and offloading technology and drilling technology. Illustration: NODE.

nies and oil companies, have been important fac- opment of employment in the supply industry will tors in Norway’s success in these areas. take place. This is also the case. The Rogaland and Stavanger region is the largest region measured in the number of employees, 8.3.3 Regional development but its position has over time been reduced due to Over a period of 35 years, Norway has built up a significant growth in Southern Norway, in the supply industry which is at the global forefront in “subsea corridor” Oslo-Kongsberg and with ship- several fields. During this period, specialised owners and shipyards from Flekkefjord to Rissa. enterprises have been established and a knowl- Central Norway has also been included in the edgeable work force has been developed. Particu- activities, while Northern Norway lacks larger larly in the marine sector, investment environ- dynamic growth enterprises outside the Hammer- ments have developed that have been visionary fest area. and willing to take risks, but several investors Geographical proximity is, however, not suffi- have become more willing to gamble on develop- cient. The growth of the industry has also settled ment of technology-driven enterprises over time. in a regional division of labour where different For a great deal of activity in the supply indus- regions have utilised their own advantages to try, it is beneficial to be located near the develop- establish new activity. Regional specialisation can ment and operation activity. With the gradual be observed. The dynamics in the industry are advance to the north on the Norwegian Shelf, it strongest in the Stavanger region. The growth in can be expected that the same geographical devel- the subsea environment in Kongsberg or the ship- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 143 An industry for the future – Norway’s petroleum activities owner and ship building activities in Sunnmøre forms a basis for proving new resources and thus are other examples. positive spin-off effects. A common denominator for all of these envi- The development in the northern areas and ronments is that they were not built from scratch, the Arctic provides challenges and opportunities. but developed from already existing environments The northern areas are the Government’s most for mechanical construction, machine produc- important strategic focus area in foreign policy tion, shipping or seagoing fisheries. At the same and will contribute to a positive development in time, the Norwegian Shelf and various oil compa- the northernmost areas. The overall goal of the nies on the Norwegian Shelf have offered many Government’s policy is to ensure peace and stabil- challenges that have required creativity and ity in the region. Furthermore, the target is to knowledge development. The merger of unique, ensure a sustainable and environmentally respon- highly specialised expertise has been important sible management and utilisation of resources for in order to achieve this and close regional envi- the future. This entails paving the way so that peo- ronments contribute to this. Areas with many ple in the north can build an existence in viable small enterprises with relatively weak resources local communities, with future-oriented jobs, good have seen weaker effects than other regions with health and educational opportunities and diverse other qualifications. nature and cultural experiences. The northern area policy also deals with utilising the possibilities for increased international cooperation on 8.4 Great possibilities in the north resource utilisation, environmental management and research through closer contact with our Rus- The Government wants, and will facilitate, profita- sian neighbour and our partners in Europe and ble offshore activity to also provide a basis for North America. Safeguarding Norwegian inter- spin-off effects on the mainland. Creating spin-off ests in the northern areas mainly concerns a effects on land when new offshore activity is strengthened presence and increased activity established is also important for the population’s along multiple political dimensions, both national support of the activity. and international. New discoveries provide a basis for new devel- The current basic industries are an important opments and associated spin-off effects. The foundation for further development, but they will waters off Northern Norway are the most inter- not be able to create the desired growth by them- esting as regards making new, large discoveries. selves. The region therefore also needs other These areas have been important in the last num- growth impulses. The petroleum activity can pro- bered licensing rounds. vide such a contribution. This is contingent upon Environments across the country have experi- exploration for resources in existing and new enced positive industry development in light of areas to increase the likelihood of making new the petroleum activities. Central regions in West- and large discoveries. The Government will facili- ern Norway have experienced the strongest tate further development of the petroleum activity growth. The number of people employed in petro- in the Barents Sea and ensure that the activity will leum-oriented activity in Rogaland increased from have significance for Norwegian and Northern the early 1970s from 2000 to 30 000 employed Norwegian expertise development, as well as over a 15-year period. In the 1990s, Møre og local and regional industry development. Romsdal County experienced an increase in A high percentage of the deliveries to the oil employment in the same industry from about and gas activities on the Norwegian Shelf come 1000 to 5000. The basis for the development is from Norwegian industry. The positive spin-off complicated, but proximity to resources and exist- effects of the petroleum activity in the north have ing expertise have been important preconditions. not been as significant as in the rest of the coun- It must be possible for Northern Norwegian try. In the areas where activity is taking place, the industry to participate as competitive suppliers to spin-off effects are considerable. The expertise, the activity. The starting point for Northern Nor- industrial experience and culture possessed by an wegian petroleum activity differs from the situa- area are crucial as regards how large the spin-off tion in the North Sea 40 years ago. The same fun- effects will be. During the summer of 2009, Petro damental drivers for development which Arctic in Hammerfest carried out a survey which increased activity entails are, however, present. showed that companies in Finnmark had deliver- The high exploration activity in the North Sea ies to the oil and gas industry totalling NOK 1.9 billion. The corresponding number for Nordland 144 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities was NOK 1.6 billion and NOK 430 million for ble regional spin-off effects by contributing to Troms. development of industry and workplaces. In order Consequential research analyses show that to achieve this, the societal consequences of a petroleum activity results in considerable spin-off development are an important topic when new effects in the form of increased employment, a development plans are highlighted. This ensures broader industry base and more expertise jobs. attention to this important area from both The petroleum activity thus represents an oppor- involved companies and local and regional author- tunity, both for Norwegian industry and local ities. The experiences from recent years’ develop- communities/regions in the province. ments in the north show that new, large develop- Spin-off effects from the petroleum sector are ments result in local and regional effects. the result of both decisions regarding establish- It is important that the petroleum policy is ment and structure, as well as the ability of exist- designed such that the northern areas become ing industry to compete to offer their goods and attractive and are prioritised in the companies’ services in the value chain. It is desirable for com- portfolio. This is contingent upon promising panies in the province to have the opportunity to exploration areas being made available and that compete for relevant contracts. profitable and large discoveries are made. The In the work with ensuring spin-off effects from increased access to interesting exploration areas the oil and gas activity in the north, it is very that the Government has planned through the important that companies in Northern Norway management plan for the Barents Sea – Lofoten, participate in more, and increasingly specialised as well as the new discovery of Skrugard will con- areas. Sufficient expertise and market networks tribute to achieving this. must be built in order to compete with an already The experiences from Skarv, Snøhvit and the well-established southern Norwegian or foreign studies from Goliat show that new, large develop- industry. Northern Norwegian supplier networks ments provide spin-off effects in the north, and industry associations play an important role regardless of development solution. in strengthening the local industry’s ability to prequalify for coming tender processes. The daily operation of the supplier network is financed by Snøhvit annual contributions from the oil companies and The development of the Snøhvit field in 2002 was through membership fees. In order for the indus- a milestone for the development of the Barents try in Northern Norway to be able to benefit from Sea as a petroleum province. It is the first gas the petroleum activities, the oil companies must development in the Barents Sea and the first facil- also qualify competitive northern Norwegian ity for liquid natural gas in Norway. At its peak, companies. Through conscious strategies that do 2500 people were employed during the construc- not hinder local purchases, regional effects of the tion activity until production started in 2007. Oper- petroleum activity can be strengthened. ation, maintenance, modification and support ser- The Sami people have a special status pursu- vices for Snøhvit have created 400 jobs, where ant to international and national law, including the three-fourths of the employees have been right to be consulted in matters that could have a recruited from Northern Norway. Nearly NOK 3 direct impact on them. An agreement has been billion of the overall deliveries to the field come signed between the State and the Sami Parliament from companies registered in Northern Norway. regarding how consultations will take place. The Consequential research analyses show that consultation procedures apply to all types of Snøhvit has reversed a negative population and cases, such as in the work with laws or administra- employment trend in Hammerfest. New compa- tive measures that could directly impact Sami nies are being established in the city, and the interests. This also applies in connection with the region now has a shortage of labour. There has petroleum activity. been a significant expansion in residential construction. There have also been considerable investments in upgrading school buildings, infra- 8.4.1 Spin-off effects from developments structure, and development of cultural activities in One objective of the Government’s petroleum pol- Hammerfest. The development has created exper- icy includes facilitating profitable production of oil tise building in the region, which also has a posi- and gas, which can also provide a basis for profita- tive effect on other industries. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 145 An industry for the future – Norway’s petroleum activities

Skarv/Idun is an oil and gas field under devel- Goliat opment in the Norwegian Sea. They will have an The Goliat field located 85 km northwest of Ham- operation base in Sandnessjøen and a helicopter merfest is the first oil field to be developed in the base in Brønnøysund. Production is expected to Barents Sea. Goliat is one of the biggest industry start in 2011. The Helgeland base in Sandnessjøen projects ever carried out in Northern Norway. will be the supply base for Skarv/Idun. The opera- Through this development, the industry in the tor, BP, has emphasised utilising the local and region has continued to evolve. Goliat continues regional supplier network7. Sandnessjøen doubled to build upon and strengthen the activity that was its petroleum-related turnover from 2005 to 2008. established in connection with Snøhvit. This can indicate that the proximity to Norne, The operator, Eni, is developing the field with Skarv and Idun, stimulates growth in the region.8 a floating facility. The oil will be loaded onto tank- The above examples show that new independ- ers and transported to the market. Possible gas ent developments provide regional and local spin- transport to Melkøya (Snøhvit) will be studied. A off effects, both during development and in the regional office for the Barents Sea with opera- operation phase. Field developments generate tional functions for the field, as well as a helicopter positive spin-off effects for the region, regardless and supply base, are being built in the Hammer- of chosen solution. fest area. This will contribute to a total of about 150-200 jobs over the operational period. The operator will facilitate further spin-off 8.4.2 Future developments effects, including adapting the contract strategy Apart from Goliat, there are currently no profita- on maintenance and operations contracts, cooper- ble discoveries in the region that are ready for a ating with regional supplier networks, establish- development decision. The further development ing auditing schemes for local companies in their of Melkøya is a concrete project that is being dis- own organisation, as well as ensuring that suppli- cussed. The new Skrugard discovery could result ers that win central contracts within maintenance in a new, independent development sometime in and modification are present in Finnmark. They the future. will also cooperate with upper secondary schools Exploration in awarded area, annual licensing and higher education and research environments rounds in mature areas, as well as regular licens- in Finnmark, to contribute to building local and ing rounds, usually every two years, in frontier regional petroleum expertise. With an expected areas is crucial as regards making new discover- operational phase of at least 15 years, local compa- ies. The most prospective parts of the continental nies will be able to build expertise and capacity shelf that are not opened for petroleum activity and become important suppliers to the petroleum are located off Northern Norway. In these areas, industry in the north. the potential for making new discoveries is greatest. Making discoveries large enough to warrant new infrastructure is important for a further Norne and Skarv/Idun development of the petroleum activity in North- The Norne field is an oil and gas field located in ern Norway. the Norwegian Sea off Helgeland. The field The Government therefore wants to award fur- started producing in 1997. The Helgeland base in ther production licenses off Northern Norway. Sandnessjøen supports the oil fields off the cost of This will be in addition to the considerable num- Helgeland, where the Norne field is the largest. ber of licenses awarded in the present and previ- About 50 people are employed at the Helgeland ous years. In coming rounds, the Ministry will base, 30 employees in the base company and an offer area in a belt off the Finnmark coast and additional 20 employees in associated activities in parts of Troms, as well as by the so-called Egga- the base area. Furthermore, Statoil has estab- kanten in the Barents Sea. New licenses have not lished offices in Harstad. been awarded in these areas in more than ten For nearly 25 years, the Helgeland base in years. Sandnessjøen has delivered goods and equipment to the drilling activity off the Helgeland coast. The 7 activity on the base purchased goods and services Regional spin-off effects from the oil and gas industry; a summary of the available mappings, Arbo, Eikeland, Her- from companies in Nordland totalling about NOK vik, Norut NIBR Finnmark, Report 2007:04. 280 million in 2007. The same year, the base had 8 Delivered! Petroleum-related supplier industry in North- nearly 390 ship calls. ern Norway. Andersen, Johansen, Norvoll, Nyvold, 2009. 146 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Box 8.5 Petro Arctic Petro Arctic was established in 1997 as an interest organisation for companies that want to position themselves as suppliers for development and operation of Snøhvit, the Goliat project, Norne, Shtokman and future development projects in Northern Norway and the Barents Sea. Petro Arctic’s main objective is achieving the largest deliveries of goods and services possible from the member companies of Snøhvit and Goliat as well as future development projects in Northern Norway and the Barents Sea. This will be achieved through marketing the member companies vis-à-vis the developers, as well as motivating and preparing the members through participation in network and expertise building programs.

An opening process will start for the southern part of the formerly disputed area vis-à-vis Russia in the Barents Sea. In the northeastern Norwe- Figure 8.8 2009 Scenario. gian Sea, an opening process will not be started during this Storting period; however, the Ministry Source: Norwegian Petroleum Directorate. will carry out knowledge acquisition in the area, cf. Storting White Paper No. 10 (2010-2011). processes are established that enable participa- When new, profitable discoveries are made in tion from companies in the province. It is also the future on the Norwegian Shelf, the Ministry important to ensure an efficient base and opera- will follow-up the development plans with the tion structure, which contributes to local and objective of promoting profitable production of regional industry and expertise development. resources and simultaneously ensuring that local and regional industry are given the possibility to participate as competitive suppliers to the petro- 8.4.3 Analysis of spin-off effects in the region leum activities. It is important that the operator Asplan Viak, in cooperation with the Nordland facilitates local industry receiving the possibility Research Institute, has carried out a study exam- to compete for the assignments from a develop- ining possible spin-off effects associated with ment. potential expanded petroleum activity in the Bar- Early contact between the operator and local/ ents Sea and the northeastern Norwegian Sea9. regional industry and relevant authorities is This study shows what spin-off effects various important so that the industry receives good infor- field sizes and development solutions could entail mation about the business opportunities the new in the north. activity in areas will entail. Relevant societal fac- The analysis is based on a resource scenario tors must be studied in connection with develop- developed by the Norwegian Petroleum Directo- ment plans, including regional and local spin-off rate, cf. Figure 8.8. The resource scenario effects from the development. It is important that includes the sea area from the coastal zone in the these elements receive early focus from the devel- Norwegian Sea up to and including opened areas oper in order to achieve good solutions. in the southern part of the Barents Sea. The study When a field is being developed, and as opera- has been planned so that it provides a basis for tions start, it is important that involvement of roughly assessing spin-off effects with different competent industry in the region is facilitated. It is important, for instance, to facilitate qualification of 9 http://www.regjeringen.no/upload/OED/Rapporter/ relevant local/regional suppliers, and that tender Ringvirkningsanalyse.pdf 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 147 An industry for the future – Norway’s petroleum activities resource outcomes. The calculations in the study The petroleum industry is a difficult business show estimates for the size of employment effects to become established in, due to strong competi- to be expected when developing fields of varying tion from existing players. There are certain fac- sizes, with alternative location choices and alter- tors that speak for a positive regional development native development solutions. The size of the spin- in Northern Norway. The geographical proximity off effects to be expected depends on how large to new fields provides a cost advantage that is par- the discoveries actually are and whether they are ticularly important for players that compete for commercially viable. less technologically-advanced assignments. This The 2009 prognosis was established to help provides a platform for further development. In illustrate what petroleum activity could mean for order to achieve this, it is important to strengthen the area. The study shows the effects of a single educational institutions and technological field with a unique location, size and development. research environments located in Northern Nor- It contains 18 different fields with an overall way. These must have close ties to other national resource estimate of nearly 600 million scm o.e. and global knowledge suppliers. The establish- The study shows that development of these fields ment of oil companies and global service suppli- can provide increased employment in Northern ers in the region is important as it facilitates Norway of between 4000 and 6000 full-time equiv- improved contact with and knowledge regarding alents over a period of 30 years. local industry with central purchasers. The expected recoverable resources in the When you look at possible local and regional northeastern part of the Norwegian Sea and the industry and employment effects of increased Barents Sea are considerably larger than what has petroleum activity, the industrial experience and been used as a basis in the 2009 prognosis. The culture, as well as the competence of the work NPD’s expected value for the entire area is 1 090 force in the area, will be important. In Asplan Viak million scm o.e. This estimate is uncertain; the and the Nordland Research Institute’s regional resource base could be much larger, but also spin-off effect analysis, prepared in connection smaller. The fact that the expected value of the with updating the management plan for the Bar- resource estimate is higher than what was used as ents Sea – Lofoten, these elements are assessed a basis in the spin-off effect analysis indicates for Nordland/Sør-Troms/Midt-Troms and Finn- there might be larger spin-off effects. mark/Nord-Troms, respectively. The petroleum activity is already creating positive spin-off effects in the north. If this is to increase in scope, the industry must establish and Industrial experience and culture develop itself in Northern Norway. New field The two industrial environments best suited to developments will largely contribute to this, but in qualify for and receive larger deliveries are the the long-term, the activity will be contingent upon support industries that are related to the power- more exploration and opening more new areas. A intensive process industry in Northern Norway, lasting petroleum industry in the north will not as well as the maritime industries. only increase employment, but also prevent There are substantial differences between depopulation. Depending on physical establish- these two regions, also as regards utilising oppor- ment of supplier companies in the region, this will tunities to deliver goods and services to the petro- also contribute to increasing expertise and build- leum sector. The southernmost region has more ing professional networks. This forms the basis than twice as many inhabitants as the northern- for building a petroleum industry in Northern most. A mapping of the number of employees in Norway. companies with head offices in Northern Norway and that deliver to or are in a position to deliver to the petroleum activity, shows that there are 118 8.4.4 Challenges associated with increased companies with a total of 4 500 employees cur- spin-off effects rently in Nordland/Sør-Troms/Midt-Troms. The The number of employees in petroleum-related corresponding numbers in the northernmost industries amounts to about 63 000 people in the region are 36 and barely 500. These numbers entire country. In 2008, about 2000 of these were include businesses that are currently mainly employed in the three northernmost counties. In geared towards other sectors, but that have possi- addition, the activity results in spin-off effects for bilities for delivering goods/services to the petro- several adjacent industries. The figures do not leum sector. include this. 148 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Nordland, Sør-Troms and Midt-Troms thus better foothold due to increased activity in the have a broader set of industries and more robust north. Over time, you can then expect to see companies than Finnmark and Nord-Troms. The increased participation in the supply industry in industry in the southernmost region therefore the north. However, many of the heavy, estab- has greater qualifications in order to come into a lished environments in the south will still be key delivery position in a competitive sector, which is in order to further develop the Norwegian supply the case here. There are also several strong indus- industry in relation to increased activity in the try environments that include educational and north. research institutions in Nordland, Sør-Troms and The study compares the industry in Northern Midt-Troms which primarily revolve around the Norway with the industry in Sogn og Fjordane. As larger cities. These environments mean that is generally known, players in this county have not larger spin-off effects can be expected in the been as successful as the neighbouring counties southernmost region. in the south and north in acquiring positions in Companies in several industries are now the supply industry that have contributed to emphasising expertise building and capacity employment and value creation in the county. development in order to position themselves as suppliers. This includes both development of cooperation relationships with the oil companies Expertise and company development. Supplier network initi- When activity is established to meet demands atives have worked well. The initiatives are sup- arising from development and operation of a field, ported by the policy instrument systems of Inno- a large share of the local jobs created will require vation Norway, SIVA, and the Research Council of employees with a high level of expertise. The Norway. increased activity expected in the northern areas/ Proximity is another important factor in the arctic regions in the years to come will also analyses. Finnmark and Nord-Troms have good demand expertise. Northern Norway faces con- locations as regards the activity in the Barents siderable challenges in developing training and Sea, and can achieve employment connected to education schemes to meet the oil and gas indus- the oil and gas sector’s operative core activity, as try’s need for expertise. well as to some extent within transport and other In order for these jobs to benefit people from related industries. This will mainly be newly or with ties to the local community, the people established activity that is set up by players who must possess the right expertise and competence. are headquartered elsewhere in Norway, or out- Oil companies that are active in Northern Norway side the country’s borders. and the supply industry will face a growing need Another survey carried out in 200710 shows for personnel with vocational training from the the same scenario. It concluded that growth of a upper secondary school system, as well as engi- specialised supply industry had started in North- neers. This currently poses a challenge. Moreo- ern Norway as well. Many of these were estab- ver, there is no satisfactory program for students lished by players further south or bought by who want to pursue higher education within sci- these. Northern Norwegian industry consists of ence and engineering subjects in Finnmark small enterprises. During the decades with petro- county. However, a partial engineering degree can leum activity in Norway, they have not been able be taken in Alta. The Nordkapp Maritime voca- to establish themselves as volume producers or tional school offers education in electrical disci- specialists in the business. There is little reason, plines as well as a maritime vocational school and with some notable exceptions, to believe that such safety training approved by Veritas. local units will succeed solely because the activi- EnergiCampus Nord – which is collaboration ties move north. In addition, the market is already between NTNU (the Norwegian University of Sci- characterised by highly specialised enterprises ence and Technology), the University of Tromsø, that would likely move north with the activities the University of Stavanger and the University that depend on proximity to the fields. It is also in Colleges in Finnmark, Narvik and Tromsø – rep- this segment that the local industry in the north resents an innovative collaboration between vari- has its biggest chance. There are some small, but ous educational institutions, the authorities, and successful players in the north that could gain a the business and industry community. The objective is to develop technological education in Finn- 10 Regional distribution of employment in Norwegian petro- mark county, and thereby facilitate spin-off effects leum-related supplier industry, Eirik Vatne SNF 22/07. from petroleum development. Another objective is 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 149 An industry for the future – Norway’s petroleum activities to contribute to utilising the growth stimulus from conduct HSE supervision in relation to develop- the petroleum activities to also develop adjacent ments and operating fields in the northern areas. industries and the public sector. This will take As of May 2011, there are ten employees assigned place through a gradual build-up of a course port- to the Harstad office. These personnel are closely folio that can be worked into the curriculum of integrated with the organisation at the NPD’s other institutions, and thus form a foundation for office in Stavanger to ensure the best possible uti- both national and international cooperation. lisation of the Directorate’s professional capacity. There is a need for special knowledge and The office has a solid staff of geological experts expertise in the increased activity expected in the and the employees primarily work with produc- northern areas and arctic regions in the years to tion licenses associated with the Barents Sea and come. Many of the challenges require more the Norwegian Sea. The NPD’s goal is to gradu- research, development and expertise. There is a ally increase capacity at the Harstad office from need for improved geological understanding that May 2011, in line with the general growth in the can form the basis for new and improved play industry. models. Installation and operation in dark and cold conditions in a unique natural environment place different demands on technological and The Government will: operative solutions. The same is true of develop- • Facilitate additional discoveries outside North- ment and production with potentially long dis- ern Norway by: tances to land and in areas where there could be – Implementing annual APA licensing rounds drift ice during parts of the year. This is important in mature areas. knowledge acquisition for a long-term develop- – Implement numbered licensing rounds; ment in the Barents Sea and Northern Norway. normally every other year. Therefore, the Ministry wants to focus on – Initiate an impact assessment pursuant to building up expertise and research communities the Petroleum Act with the objective of linked to petroleum activity in arctic regions. In awarding production licenses in the previ- this connection, the Ministry will consider estab- ously disputed area west of the delimitation lishing a research centre for this purpose, cf. line in the Barents Sea South, when the Chapter 8.7. Such a centre could contribute to agreement with Russia on maritime delimi- developing expertise, e.g. through a Master tation and cooperation in the Barents Sea degree program, as well as PhD and post-doctoral and the Arctic Ocean enters into force. fellowships. This expertise will be important for – Initiate data acquisition in the previously the industry and the research sector, which will disputed area west of the delimitation line need to recruit new researchers and highly com- in the Barents Sea South, when the agree- petent labour. ment with Russia on maritime delimitation We must spark the interest of children and and cooperation in the Barents Sea and the young people in science subjects in order to Arctic Ocean enters into force. inspire them to pursue studies in oil and gas sub- – Facilitate new petroleum activity in the area jects. Therefore, a real commitment to science from 35–50 km from the baseline along the subjects is needed in the primary, lower second- coast from Troms II to the border with Rus- ary and upper secondary schools. As part of this sia and in Eggakanten by including these effort, companies must also visit schools and areas in future licensing rounds. inform the pupils about what they do and the • When large new commercial discoveries are opportunities they represent. As regards recruit- made on the Norwegian Shelf: ing, the Ministry also works with the Norwegian – Ensure that new discoveries create the Centre for Science Education to boost interest for greatest possible values for society, and energy and petroleum among young people in the facilitate positive local and regional spin-off so-called Energy School Project. Alta and Ham- effects. merfest upper secondary schools in Finnmark – Ensure early contact between the operator county are represented in this project. and local/regional business and industry In 1976, the Storting endorsed the establish- and the authorities. ment of a Norwegian Petroleum Directorate office – Stipulate requirements for assessment of in Harstad. The office was subsequently estab- societal aspects in connection with plans for lished in 1980 with the purpose of following up development and operation, including production licenses north of 69 degrees, and to regional and local spin-off effects. 150 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Box 8.6 Some important international markets

technologies. Australia is expected to develop Brazil’s petroleum production is growing rapidly into the world’s largest subsea market in the The large discoveries made on the Brazilian next few years. shelf in recent years have made this an attractive market for the petroleum industry. The Norwe- gian petroleum industry and maritime sector, Houston and the US sector of the Gulf of Mexico (US with their technology, expertise and experience GoM) from the Norwegian Shelf, are well-positioned Houston is an international hub for the global oil for assignments in this market. Many compa- and gas industry. Only the Norwegian Shelf nies have already secured major contracts in comprises a larger offshore market than US Brazil. Statoil will start production on the Pere- GoM. At the same time, many of the largest oil grino field in 2011. The challenges associated and supplier companies carry out their interna- with development of resources in deep water tional projects with Houston as their base. About and under deep layers of salt mean that Brazil 140 Norwegian oil and gas-related companies could be a research laboratory for tomorrow’s are established in Houston, and it is estimated technology. The industry considers Brazil to be that about 7000 Norwegians live there, most of one of the highest prioritised offshore markets them affiliated with the oil and gas activities. in the years to come. The supply industry’s annual sales in this market are around NOK 10 billion, a large portion of which are generated through subsidiaries. Australia – subsea market experiencing strong Together with Statoil’s commitment to the deep- growth water areas in US GoM, this makes the US and Recent years have seen increasing drilling activ- Houston the largest foreign market for direct ity in Australia, in deeper and deeper waters, Norwegian investments in the oil and gas sector. particularly on the northwest coast. Major dis- The Norwegian supply industry has often coveries have been made and several fields are built up a local presence in countries that under development. The offshore market in require national content. Local presence is Australia is very interesting for the Norwegian essential to compete for assignments in national supply industry because the developments that maintenance and modification markets, which are located far from land require e.g. advanced are a growth sector. To contribute to this pro- multiphase technology and subsea solutions. cess, INTSOK has established dedicated pro- Australia’s considerable gas reserves also mean grams where Norwegian suppliers are offered that LNG technology is in demand. Many Nor- local business counselling in foreign markets. wegian-based companies have expertise in these

– Facilitate qualification of relevant local/ regional and local spin-off effects from the regional suppliers in the development and development. operations phase. • Consider establishing a research centre – Facilitate establishment of tendering pro- devoted to challenges faced by petroleum activ- cesses in connection with new develop- ities in arctic regions, based on open competi- ments that allow participation by compa- tion. nies from the region where the develop- • Gradually build up capacity at the Norwegian ment will take place. Petroleum Directorate’s office in Harstad. – Ensure an efficient base and operations structure, which contributes to local and regional development of business and 8.5 International success for the expertise. industry – No later than two years after the field starts producing, operators of new independent The internationalisation of the Norwegian supply developments must conduct an analysis of industry has accelerated over the last decade. The 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 151 An industry for the future – Norway’s petroleum activities strong international position achieved by some not entered into binding agreements on interna- Norwegian supply communities is a direct result tional trade and investment, which means that of the need to develop and apply new technology Norwegian suppliers encounter demands regard- on the Norwegian Shelf. The interaction between ing local content. This entails that the industry the oil companies on the Norwegian Shelf, the must compete under terms that favour domestic Norwegian and international supply industry and industry, or firms from places where bilateral the research communities has yielded good trade and investment agreements exist. There- results. fore, it is important to work to ensure that the A high and stabile activity level on the Norwe- Norwegian oil and gas industry can compete for gian Shelf is important to ensure that interna- market access under predictable and equal terms tional oil companies and supplier firms retain a with their competitors. This is done in part presence in Norway. This is important because through WTO, as well as entering into free trade these companies need goods and services from agreements with key trade partners. supplier firms and research communities in Nor- way. They contribute capital and knowledge for research and development of technology. At the 8.5.1 INTSOK same time, it is important for the Norwegian sup- INTSOK is a foundation established by the ply industry to be able to serve international mar- authorities and the industry in 1997. INTSOK’s kets. Through internationalisation, Norwegian goal is to strengthen the long-term basis for value companies will acquire new experience and creation and employment in the Norwegian petro- knowledge from other petroleum provinces, leum industry through focused international activ- which in turn provides a basis for innovation and ity. INTSOK markets the Norwegian oil and gas more efficient oil and gas production on the Nor- industry in selected areas. The main markets are wegian Continental Shelf. For many companies, Australia, Brazil, China, Russia, the UK and the access to markets in other countries provides an US sector of the Gulf of Mexico. INTSOK also opportunity to grow and diversify commercial directs its efforts to areas of technology where the risk. Norwegian petroleum sector has cutting-edge The Norwegian supply industry is primarily expertise. Two of the main commitment areas are oriented towards the offshore markets, but also enhanced oil recovery and technology to reduce has deliveries to petroleum activities on land, par- environmental and climate effects of oil and gas ticularly in the Middle East. From 1995 to 2009, production. the Norwegian supply industry has more than Analyses show that internationalisation has quintupled its international sales. In recent years, been important for regional industry development growth has been greatest in China, Southeast Asia and employment, and INTSOK makes an active and Australia. Currently, the fastest-growing mar- contribution to this. Small and medium-sized com- ket is in Brazil. panies derive particular benefit from interaction Norwegian companies serve the international with larger companies, research communities and markets both through exports and dedicated the authorities when they are working to gain a establishment of businesses abroad. The 2009 foothold in new markets abroad. Of INTSOK’s exports of petroleum-related goods and services approximately 200 member companies, 80 per amounted to about NOK 80 billion, while sales cent are small and medium-sized businesses. through foreign subsidiaries abroad were NOK 38 INTSOK has 13 local advisors in the most impor- billion, which yields total foreign sales of NOK tant markets for the industry. INTSOK cooperates 118 billion11. with Innovation Norway and the various outposts. The Norwegian Shelf will be among the larg- National oil companies control a large percent- est offshore markets in the years to come. age of the world’s oil and gas resources. These Together with the United Kingdom, the North Sea companies have increasingly opted to cooperate Basin is still a power centre for the oil and gas with the international supply industry to optimise industry. This provides a good starting point for resource utilisation. Previously, the major interna- maintaining an internationally competitive supply tional oil companies were the preferred partners. industry in Norway. This means that the Norwegian supply industry to A number of countries are attempting to a greater extent than previously has customers develop a national industry. Several of them have whose decision processes may be political in nature. The interaction with Norwegian authori- 11 Source: Menon Economics ties and INTSOK has thus become even more 152 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities important in order to achieve access to relevant regarded, with their high-tech expertise and decision-makers. broad-based experience from demanding conditions on the Norwegian Shelf. A petroleum industry with strong expertise in Northern Norway, The Government will: proximity to the Russian market, along with expe- • Together with INTSOK, contribute to Norwe- rience and well-adapted technology, will represent gian-based enterprises winning work and con- a competitive advantage for Norwegian suppliers. tracts also outside the Norwegian Shelf. The work done by the supplier networks and • Work to strengthen the Norwegian oil and gas industry associations to reinforce the ability of industry’s access to international markets, and local companies to prequalify for participation in ensure that the industry can compete on equal complex tender processes is important in order to terms with its competitors. promote participation by Norwegian companies in Russian petroleum activities. Statoil is already involved in the Shtokman development in the Bar- 8.5.2 Northern Russia – a new opportunity ents Sea. Participation in the project could give for Norwegian business and industry Statoil a good foundation for further commitments It is expected that a significant portion of the in arctic regions, and entails a substantial opportu- world’s undiscovered oil and gas resources will be nity for northern Norwegian business and indus- found in the Arctic regions. Russia has defined try. Norway as its strategic petroleum partner in the In 2006, the Government launched the Bar- north, and Norway can become an important ents 2020 grant scheme. The purpose of the mainstay as a supplier of expertise to the petro- scheme, managed by the Ministry of Foreign leum activities in the northern areas, and as a Affairs, is to realise the Government’s northern teammate in joint projects. areas strategy (2006) and the action plan ”New One of the clear objectives of the Govern- building stones in the north” (2009) by stimulat- ment’s strategy for the northern areas has been to ing increased activity, knowledge and presence in find a solution to the border issue with Russia. In the north. Grants have already been provided to a September 2010, Norway and Russia signed an number of projects that produce knowledge in, on agreement regarding delimitation and coopera- and for the northern areas. Barents 2020 will also tion in the Barents Sea and the Arctic Sea, follow- stimulate the establishment of arenas for coopera- ing 40 years of negotiations. tion with Norwegian and foreign groups with Our relationship with Russia, as neighbour northern area expertise in relevant disciplines and the nation with which we share the Barents such as Norwegian-Russian energy cooperation. Sea, is key in our northern areas policy. Several of the challenges in the northern areas, including as regards the environment and resource manage- The Government will: ment, cannot be solved without Russian involve- • Conduct an active energy dialogue with Russia ment and Norwegian-Russian cooperation. The • Stimulate increased cooperation with Russia as Government assumes that Norwegian policies vis- a consequence of the agreement on maritime à-vis Russia must be pragmatic and based on com- delimitation and cooperation in the Barents Sea mon interests and cooperation. and the Arctic Sea. Norway has a good energy dialogue with Rus- • Facilitate partnerships between Russian and sia, and the dialogue regarding the northern Norwegian companies, e.g. through INTSOK areas is the mainstay in our energy cooperation. and Innovation Norway. Ensuring political stability and sustainable development are the Government’s primary goals for its northern area policy, and it is important that 8.6 Industrial use of gas in Norway – Norway exhibits a single, unified policy: presence framework and possibilities and enforcement. Development of the petroleum resources on Norway has a good starting point for developing the Russian side of the Barents Sea, and the role gas-based industry. We have significant oil and Norwegian enterprises can play in the offshore gas resources on the Norwegian Shelf, and most development in Northwest Russia could be signifi- of this gas is brought to land for processing prior cant for vitalisation of Northern Norwegian busi- to export. Therefore, there are large volumes of ness and industry. Norwegian suppliers are well- gas available for petrochemical activities in Nor- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 153 An industry for the future – Norway’s petroleum activities

1200 gas, either through pipeline export, LNG or con-

Scenario version technology as gas-to-liquid (GTL) or other 1000 Base case domestic use. 800 Ethane is the most important raw material for

600 NGL-based industry. Ethane that is not sold with the dry gas is mainly used as a raw material in the 400 petrochemical industry, primarily in the produc- 1000 tonnes per contract year 200 tion of ethylene. Ethane must be separated from the gas produced in the oil and gas fields, which 0 2010 2012 2014 2016 2018 2020 2022 2024 requires significant investments in separation Contract year (contract year starts in october) plants. These plants require large volumes of gas in order to produce the amount of ethane neces- Figure 8.9 Estimated ethane production, base sary for a modern processing plant (a so-called case and scenario volume. “cracker”). All gas exported as LNG or via pipe- Source: Gassco. lines will contain some ethane, as this is necessary for maintaining properties such as calorific way. Furthermore, we have a well-established pet- value and ignition quality. rochemical industry, mainly at Rafnes and on the Generally speaking, ethane transport by ship Herøya peninsula in Telemark county, as well as at only takes place in Norway and the North Sea. Tjeldbergodden. Ethane is processed at the separation site (where Industrial application of gas in the domestic the ethane is separated from the rich gas) at all market must be viewed in context with interna- other petrochemical plants. The end price of tional development trends for the petrochemical ethane at various locations will be a function of industry. The sector has undergone significant many factors, the most important of which are the consolidation in the last ten years, and the produc- degree to which ethane is actually available in suf- ers have moved production closer to the customer ficient amounts over time, how much gas is (mainly Asia), or where inexpensive raw materials exported and to which destinations, as well as have been available (mainly the Middle East). whether the seller of ethane is willing to subsidise While the trend shows that many major new pet- the price to ensure petrochemical investments. rochemical plants will be built in the Middle East and Asia in the years to come, a very large per- 8.6.1 Natural gas liquids (NGLs) centage of the global petrochemical activity will still be in Europe. Substantial sums have been Required ethane needs for establishing NGL-based invested in the capacity that has been built up in industry Europe. Management of these assets comprises Ethane-based petrochemical industry requires enormous values. Steadily increasing competition large volumes of gas. For example, Ineos’ ethyl- from other parts of the world means that Norwe- ene plant at Rafnes uses around 500 000 tonnes of gian and European activities must continue to ethane per year. An annual gas production of ensure efficient operation and continuously evalu- more than 10 billion scm is necessary to cover ate various upgrades and improvements that are such a need for ethane12. This is approximately necessary to address the global competition. equivalent to the annual gas volume transported in the Åsgard transport pipeline, or around 10 per cent of Norway’s total gas export in 2010. Modern Division between dry gas and natural gas liquids new ethylene plants are constructed with double There is an important division between dry gas the production capacity, and that need twice as (methane) and natural gas liquids (ethane, pro- much ethane as the Rafnes plant. pane, butane). Norwegian pipeline exports to Europe mainly consist of dry gas, but also contain heavier components. The lightest part of the gas; Potential for ethane production on the Norwegian methane, is mainly used for energy for heating, or Continental Shelf for power plants, but also functions as a raw mate- In Norway, ethane is only produced at Kårstø, rial for production of methanol and ammonia. The where the annual production amounts to approx. price of gas for dry gas-based industry is in direct competition with alternative application of the dry 12 Assuming that 2.5 per cent ethane remains in the sales gas 154 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

0.9 million tonnes. The amount of ethane exported in Norwegian natural gas amounts to a 8.6.2 Dry gas significantly higher volume. Around 100 billion Around 75 per cent of the gas exported from the scm of dry gas was exported in the 2009 calendar shelf is brought to land in Norway, at Kårstø, year. This gas contained about 7.7 million tonnes Kollsnes and Tjeldbergodden, for treatment prior of ethane, of which 4 million tonnes has been to export. onshore at either Kårstø or Kollsnes. Industry based on dry gas uses little gas com- More ethane can be separated from Norwe- pared with the gas volumes that are exported. For gian gas than is currently done. Assuming that all example, the methanol plant at Tjeldbergodden, dry gas from the Norwegian Shelf must, on aver- which is Europe’s largest methanol plant, uses a age, contain some (around 2.5 mol per cent) gas volume of about 0.7 billion scm per year. If ethane for export, and assuming current gas Yara’s ammonia production in Grenland used export volumes, there is still a theoretical oppor- exclusively dry gas, it would have an annual gas tunity to separate around 4.4 million tonnes of need estimated at 0.5 billion scm per year. ethane from the gas each year13. For example, it Norway has a well-developed gas infrastruc- could be possible to separate 1.3 million tonnes of ture that enables export to the European gas mar- ethane per year from Europipe II at Kårstø, ket. The alternative value of the gas is to sell it in assuming that about 3.0 mol per cent ethane is this market. Industrial use of gas in Norway must retained in the gas to be exported. therefore be profitable with market-based gas pur- Unless new, very large rich gas fields are dis- chase agreements. Profitability is a major chal- covered on the Norwegian Shelf, this means that lenge for dry gas-based activity in Norway. assessments of new or expanded ethane production should be based on utilising ethane from the existing receiving terminals at Kårstø and Kolls- 8.6.3 Assessments nes. The potential for ethane production at The Ministry is of the opinion that the greatest Nyhamna appears to be limited. The volumes at possibility of available dry gas volumes and natu- Tjeldbergodden are negligible. ral gas liquids components such as ethane in the Today’s ethane production takes place at years to come can be found at the current gas pro- Kårstø. Gassco has estimated expected future cessing locations in Norway. The value of this gas ethane production from the facility, cf. Figure 8.9. will be based on prices that Norwegian gas pro- The estimate is divided between base case volume ducers can achieve in the European market. (volumes from fields that are currently producing, Opportunities for other new types of gas-based or where a development decision has been made) industry that are related to existing industry, such and scenario volume (volumes that are under as the mineral and metals industry, can be located development, but where no development decision where the gas is already brought to land. has been made). The estimate shows that Further development and upgrades of existing expected ethane production will fall rapidly if new facilities generally yield better economy than new gas volumes are not added. The current produc- establishments, as one can benefit from existing tion level cannot be maintained for longer than a infrastructure and expertise. A further develop- period of ten-twelve years, unless new ethane-rich ment of the dry gas-based methanol production at gas is supplied to the Kårstø plant. Profitable long- Tjeldbergodden is not restricted by access to nat- term production of oil and gas will therefore be ural gas. For a further development of the petro- important in order to maintain stabile ethane pro- chemical industry in Grenland, more ethane can duction at Kårstø. be made available by investing in increased separation at some of the landing sites, or transporting the gas to Grenland and separating the ethane there. Locations that have no existing gas processing capacity and industry infrastructure may seem attractive, as a potential lack of export alternatives 13 Some ethane must be left in the dry gas that is exported in order to meet the calorific value specifications agreed with can make the gas price more competitive in rela- the dry gas buyers. To meet the calorific value and other tion to other, more mature areas with developed requirements in the gas sales agreements, the gas must export alternatives. However, industry activity contain between 2 to 3 mol per cent ethane, depending on based on NGL at completely new locations will be the other components in the gas, e.g. how much CO2 the gas contains. restricted by gas volumes, unless new gas fields 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 155 An industry for the future – Norway’s petroleum activities are discovered that are much larger and richer in gas production, gas composition, etc. is available. ethane than what the authorities currently believe It is particularly important that the companies are is likely. The establishment of conventional dry informed about the development projects under- gas-based industry will be demanding because way at any given time on the Norwegian Shelf. the need for gas will not normally be great enough Opportunities and challenges related to industrial to warrant the development of new gas fields. use of gas in Norway can be discussed in this New development and potential landing of gas will arena. Two meetings were held in the industry generally demand such huge gas volumes that an arena context in 2009, and petrochemical analyses export solution would be necessary. With an avail- were a key topic in these meetings. In cooperation able export solution, much of the reasoning for with gas and industry players in Norway, as well considering industrial development in other loca- as IndustriEnergi (employee organisation) and tions than where industrial production already Norsk Industri (employers’ organisation), petro- takes place will disappear. chemical analyses were presented and debated. To ensure good framework conditions for fur- One meeting was held in 2010, focusing on the ther development of gas-based industry in Nor- sector’s joint CO2 challenges. way, the Government believes it is important to In 2011, Gassco’s plans include conducting a ensure the availability of sufficient gas over time study of development scenarios for gas infrastruc- at existing and/or new landing facilities in Nor- ture in the northern areas, including opportuni- way. Long-term access to gas can best be achieved ties for industrial use of gas. The study will be par- through proving and developing expected remain- tially financed by the industry arena, with input ing gas resources, and ensuring that Norwegian from arena participants. Through the industry processing plants are operated as efficiently as arena, Gassco believes it has succeeded in creat- possible, so that they emerge as the best alterna- ing a meeting place that is relevant for both tive when selecting future gas evacuation solu- upstream and downstream players. Gassco tions. reports good attendance at all meetings and posi- The Government’s assessments are based on tive feedback. The Ministry believes it is useful to the industry developing in an environmentally have a forum where ideas, concepts and concrete friendly direction, and within the framework of projects can be identified, analysed and discussed Norwegian climate policy. This applies with in order to achieve the objective of continuing and regard to production in the most environmentally hopefully increasing investments in Norwegian friendly manner possible, efficient logistics and gas-based industry. eco-friendly products. Development of infrastructure may be necessary in order to increase industrial use of gas in Norway. Any such projects must The Government will: be market-based and driven by commercial inter- • Facilitate increased industrial use of gas in Nor- ests. way, including contributing to the industry The Ministry has bolstered the independent arena as a meeting place for industrial players operator Gassco’s mandate for evaluating compre- and oil companies. hensive gas infrastructure solutions, which will now also include responsibility for informing relevant industry players at an early stage in the plan- 8.7 Technology, research and expertise ning process. Furthermore, at the request of the Ministry, Gassco established an arena in 2009 The Norwegian Shelf has been characterised by where industry players with desires or plans to major investments in new field developments. establish industrial activity linked to application of Technological development was necessary in natural gas can consult with expert environments order to make production profitable and techni- in the fields of gas transport, gas quality and gas cally feasible. Innovation has taken place in stages availability in Norway. as the operating companies have encountered The arena was formed on the basis of the cur- new challenges. Technological breakthroughs rent situation wherein, to a large extent, the same from the concrete structures of the 1970s to float- companies do not operate oil and gas activities ing production facilities and subsea solutions, to (upstream activity) and industrial activity (down- horizontal drilling and multiphase transport, have stream activity). In order for industrial companies taken place in an interplay between oil companies, to consider opportunities in Norway, it is impor- research institutions and the supply industry. tant that access to information related to current Many factors have driven this technological devel- 156 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

Box 8.7 Marine Technology Centre Norway has top expertise within research, tech- become international leaders within their fields. nology and innovation connected to the ocean. Upgrades are important for such research envi- Water covers nearly 70 per cent of the earth’s ronments to be able to offer their customers, surface. An important element in order to oper- e.g. within the petroleum industry, attractive ate a sustainable management and harvesting of research services. This is the reason why the the ocean is development of modern ocean tech- Government has, along with industry and technology. nical environments, financed a pre-study which An important Norwegian environment in the maps the need for upgrades of the research area is in Trondheim. Through establishment of infrastructure at the Marine Technology Centre. experimental infrastructure in the research The environments in Trondheim are working on environments at the Marine Technology Centre realising a future knowledge centre connected in Trondheim, MARINTEK and the Norwegian to ocean technology in the city, the Ocean Space University of Science and Technology have Centre.

opment. Large discoveries with good profitability year’s production at today’s level. However, this is have given the companies the financial muscle to urgent – new technology must be in place well develop new solutions. Favourable framework before the fields are shut down and the installa- conditions from the authorities have given the tions removed. Advanced injection methods must companies incentives to do drive research and be refined and tested on the fields in order to development. Development and first use of tech- improve recovery. Faster, better reservoir model- nology on the Norwegian Shelf have been impor- ling tools can provide better understanding of the tant in the development of a globally competitive reservoirs, and thus better resource exploitation. supply industry. Together with new geophysical methods, this can New methods, knowledge and technology will allow us to place wells more accurately and con- be important in finding more resources in the tribute to optimise production. New drilling and frontier areas on the Norwegian Shelf. New and intervention methods can contribute to more cost- improved methods for geophysical acquisition, effective production, and constitute an important processing and interpretation will yield more effi- measure in increasing recovery. cient exploration and help uncover new resources. The oil and gas resources must be developed For example, being able to “see” what lies under and produced in a manner that is as clean and volcanic basalt layers on the Vøring plateau in the energy-efficient as possible. This requires devel- central part of the Norwegian Shelf poses quite a opment of methods and technology for maximum challenge, as does the identification of deeper, efficiency in energy use and reduced greenhouse more complex reservoirs. Improved geological gas emissions, with less flaring and power genera- knowledge and interpretation are important in the tion. development of new play models. Development of The driving forces for development of new discoveries far from infrastructure will require technology are the same as previously when the new concepts for subsea systems and multiphase major field developments helped finance a num- transport over considerable distances. High rig ber of major technology development projects. rates also pose a challenge for the industry, and Today’s situation with many small discoveries and the development of new drilling concepts is an developments makes financing new technology important factor in reducing exploration costs. more demanding. Maintaining and reinforcing the As regards the mature areas on the Norwe- impetus towards developing new technology is gian Shelf, a substantial commitment is necessary important if we are to achieve our petroleum pol- in order to improve recovery from existing fields. icy objectives. The players on the Norwegian With the current plans, about half of the oil will be Shelf and the State as resource owner must there- left in the ground. This represents a huge value fore work together to find good solutions. A con- potential. A single percentage point increase in tinued commitment to research, development and the recovery rate on the Norwegian Shelf for expertise is an important prerequisite for a com- fields currently in operation would boost oil pro- petitive and future-oriented petroleum industry. duction by about 570 million barrels, or about one The expertise developed in connection with petro- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 157 An industry for the future – Norway’s petroleum activities leum activity can also be utilised in other areas, expertise development and long-term technology such as ICT and offshore wind power. development. Short-term challenges will to a Oil companies and supplier firms are responsi- greater extent be the industry’s responsibility. ble for a significant research effort in Norway, but The strategy has established so-called TTA this research is largely aimed at short-term objec- groups (Technology Target Area) that are com- tives and technologies. The public commitment posed of a wide selection of experts and focuses contributes to promote cooperation, expertise and on the following topics: a long-term perspective in petroleum research, as – Energy efficiency and environmentally- well as to support high-risk projects. friendly, sustainable technology – Exploration and improved recovery – Cost-effective drilling and intervention 8.7.1 Priorities within research and – Future technology production, processing and development transport. Good cooperation between industry and authorities has been important for research and develop- OG21 recommends that public financing of petro- ment on the Norwegian Shelf. The industry is and leum research should prioritise the following the- must be an initiator, while the authorities play an matic areas: important role by creating framework conditions – Energy-efficient technology to reduce emis- and incentives that stimulate research and devel- sions to air and discharges to sea. As regards opment (R&D) which will benefit the entire soci- emissions of greenhouse gases to air, this has ety. The public means are therefore directed at been followed up through the agreement on research and development in selected areas where the climate report between the coalition gov- the industry’s efforts are not sufficient. Publicly ernment parties and the Conservative Party, financed research and development will contribute the Christian Democratic Party and the Liberal to trigger socio-economically profitable projects Party on 18 January 2008 (the Climate Com- that would not otherwise have been carried out. promise) which states that government- The authorities are dependent on advice and financed petroleum research must have a sig- input for the prioritisations of the means for nificant focus on climate issues. Through the research and development. The Ministry e.g. has Climate Compromise, starting from 2009, NOK a running dialogue with the Norwegian Petro- 25 million per year will be earmarked for leum Directorate, the Research Council of Nor- research aimed at energy efficiency and reduc- way, OG21 and several industry and research ing greenhouse gas emissions linked with oil players regarding such priorities. and gas production on the Norwegian Shelf. – Improved oil recovery solutions and services designed to maximise the recovery rate from National R&D strategy for the sector and other mature fields during the lifetime of the infra- priorities structure. An important area will be developing OG21 – oil and gas for the 21st century, is a drilling technology to reduce costs and envi- national R&D strategy for the petroleum sector. ronmental impact. The Åm Commission has The work with the strategy started in 2001, and also been mentioned, with its recommendation was revised in 2010. The board and technology that public research programs in petroleum groups under OG21 represent a network of over topics should prioritise improved recovery. 100 experts from the oil companies, supply indus- The Commission particularly emphasises the try and research environments that prepare sub- need for further technological development strategies and action plans. This work uncovers within specific areas such as drilling and wells, knowledge gaps and maps challenges that will be reservoir mapping and advanced injection faced by the sector in the future. The Ministry techniques. The Ministry has followed up takes a basis in the OG21 strategy when new these recommendations in its management of guidelines are made for the PETROMAKS and the Research Council of Norway through the DEMO2000 programs in the Research Council of 2011 allocation letter. Norway. – Stimulate development of advanced subsea The strategy points out that the authorities systems to maximise value creation at Norwe- have a special responsibility to maintain financing gian offshore installations, as well as develop of the long-term research, and that public support technology for subsea multiphase transport should be directed at education, basic research, over considerable distances. New subsea tech- 158 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

nology can reduce the costs of new develop- Through FORCE, the NPD has taken the initi- ments and contribute to developing resources ative to help bring forth more pilots on the Nor- located far from infrastructure, for example in wegian Shelf, as well as work to reinforce existing the Arctic. policy instruments such as DEMO2000. The Min- istry also sees a need for mapping other potential Cooperation with leading international research measures, e.g. as proposed by the expert commit- communities can help contribute to new knowl- tee and OG21, to achieve more piloting on the edge and internationalisation of Norwegian tech- Norwegian Shelf. nology. International cooperation is also important to ensure quality and strengthen Norwegian expert milieus in the international research arena. Petroleum research centres However, with the major technological challenges The Research Council of Norway has established we face on the Norwegian Shelf today, it is essen- a number of Norwegian Centres of Excellence tial that public funding goes to support projects (COE) and Centres for Research-based Innova- that contribute to cost-effective and sustainable tion (CRI), several of which are relevant for petro- production of the petroleum resources on the leum. NIFU (the Nordic Institute for Studies in Norwegian Shelf. Innovation, Research and Education) has evalu- There will also be a need for a further commit- ated the COE scheme as very positive, with partic- ment to HSE research in the petroleum activities ular mention that the centres have been especially in the years to come. It is also important that successful in promoting recruiting and interna- safety challenges are integrated and taken into tionalisation. The scheme has also contributed to account in connection with the strategic selection more national and international interdisciplinary of future technology and development. OG21 will cooperation. be a natural arena for this work. A majority of the expert committee on improved recovery has suggested establishing a centre devoted to improved recovery. The com- Piloting mittee points out that improved recovery meas- New technology and new solutions will be essen- ures will require more personnel and expertise, tial in maturing profitable new reserves and realis- and that strong university and research communi- ing the considerable potential that lies in ties are crucial in facilitating this effort. Such cent- improved recovery on the Norwegian Shelf. The ers can also be important ways of gathering exper- Norwegian State as resource owner plays an tise and coordinating further research. important role as initiator and facilitator to ensure The Ministry will consider establishment of a optimal and efficient production of the petroleum research centre for improved recovery, but this resources on the Norwegian Shelf. must be viewed in context with other research State co-funding of pilots can contribute to centres in petroleum subjects. A significant por- accelerating and realising more socio-economi- tion of the remaining resources consist of immo- cally profitable projects. There can often be signif- bile oil. A key challenge for such a centre could be icant transfer value from a pilot on one field to researching and developing advanced recovery other fields. The owners of an individual field will methods that enable profitable exploitation of the not take this into account when they decide immobile oil on the Norwegian Shelf. Through whether or not to implement a pilot. Substantial such a research centre, we can build up and refine values are at stake here for the State as resource fundamental expertise and research in an impor- owner. If the market itself is not able to bring forth tant area. sufficient new technology or pilots, the authorities The petroleum activity in the north will be should initiate various measures. demanding, requiring new knowledge and tech- Like the expert committee on improved recov- nology in connection with the activity we expect to ery, cf. Chapter 4.5, OG21 recommends a greater see in the northern areas/arctic areas in the years commitment to piloting new technology. The strat- to come. Installations and operations in dark and egy particularly highlights the need to ease risk cold conditions in a unique natural environment and uncertainty for small and medium-sized com- place different demands on technological and panies. DEMO2000 will be an important policy operative solutions, as do development and pro- instrument for the development of smaller proto- duction with potentially long distances to land and types and qualification of technology for the sup- in areas where drift ice could be present during plier firms, in cooperation with the oil companies. parts of the year. The potential for new discover- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 159 An industry for the future – Norway’s petroleum activities

Box 8.8 Research and exploration activity New and improved geological knowledge and will be utilised by the industry to reduce the understanding of the Barents Sea will be crucial exploration uncertainty in the Barents Sea, an in order to make accurate and sound exploration area which offers many complex challenges. models. In the PETROMAKS program, several One of the research challenges in the Barents projects are supported to improve petroleum Sea is understanding the effects from the last ice geology understanding in the Barents Sea. ages, when the Barents Sea was elevated and These projects have received full support with lowered. During periods with elevation, several about NOK 80 million from the program. kilometre-thick layers of sediments were The PETROBAR project at the University of scraped off. The gas expanded and oil was Oslo is one of these projects. The main objective forced out of the reservoirs. of the project has been to increase understand- The Ministry will evaluate the public support ing of the fundamental, large-scale processes schemes within petroleum research in connec- that control the formation and development of tion with the expiry of PETROMAKS in 2013, sediment basins in the Barents Sea area, and including to what degree the public funds trig- how they impact the petroleum system. The ger research and development in the industry new, partially quantitative understanding of and contribute to elevate expertise. basin development and the petroleum system

ies in the northern areas is considerable, but the companies and supplier companies. The public geological uncertainties are significant. Better funds must therefore prioritise research and geological models and understanding will be development in certain areas where the industry’s important for more accurate exploration. These own efforts are not sufficient. challenges require particular attention from the The State assumes a great deal of risks and public authorities. An assessment will therefore costs associated with large technology projects be made of whether a research and expertise cen- through a high tax rate and the SDFI ownership tre should be established with focus on research interests. Several large technology development challenges for petroleum activity in arctic areas. projects are currently financed in the production licenses’ budgets, such as Ormen Lange gas compression. This project alone has a budget totalling 8.7.2 Incentives and financing of research NOK 4.5-5 billion. and development Research and development through the pro- The State mainly provides incentives to research duction licenses’ accounting agreements is also and technology development through the regula- facilitated. The majority of the oil companies’ R&D tory framework and direct allocations to the funds are triggered through the accounting agree- Research Council of Norway. Oil companies and ments. The accounting agreements are part of the supplier companies use considerable means for licensing scheme, and the operator charges R&D research and technology development. The total expenses over the production license’s accounts level of both publicly and privately financed petro- through these agreements. The expenses are cov- leum research in Norway was about NOK 4 billion ered over the production license’s joint account, in 2007 according to Statistics Norway and NIFU and are determined by various percentages for STEP. For comparison, the public allocations exploration, development and operation costs with channelled through the Research Council of Nor- an upper limit14. It must be documented that the way amounted to NOK 410 million. In addition, funds will be allocated to R&D relevant to the Nor- the basic allocations and other long-term financ- wegian Shelf. ing to universities, colleges and research institu- The Tax Deduction Scheme also promotes tions are important in order to maintain the petroleum research. The scheme was launched in research activity within petroleum in Norway. 2002 and is an R&D effort in industry. The There are no overviews of how much of this is allocated to petroleum research. A considerable 14 For example, the operator can charge the production percentage of the funding for research and devel- license for R&D costs equal to 2.5 per cent of the explora- opment within petroleum originates from the oil tion costs, up to NOK 7.5 million. 160 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

PETROMAKS supports a wide spectrum of Box 8.9 Creating interest in projects, from strategic basic research at the uni- energy in upper secondary schools versities via expertise building at the institutes to innovation projects in the industry. The objective The geo-technical students at St. Olav Upper of the program is an optimal utilisation of petro- Secondary school in Stavanger were invited to leum resources and increased value creation for cooperate with ExxonMobil during the 2009- society through strengthened knowledge develop- 2010 school year. The students visited Exxon- ment, industry development and international Mobil and got to know the company and competitiveness. Since 2003, about NOK 2 billion employees. They were introduced to the Jotun has been allocated to 335 projects. This has trig- oil field and what methods are used by geolo- gered NOK 2.1 billion in other financing, mainly gists to examine the field. Seismic Chapters of from the industry. PETROMAKS is an important the field were handed out, and their task policy instrument to promote long-term research involved performing an analysis of the field. and expertise development. The program The students then returned to ExxonMobil finances research-oriented education, and since and recommended where they should drill for its start in 2003, the program has financed 291 fel- oil. The students worked on the analysis for lowships and 136 postdoctoral positions. This is a three months. They learned how to interpret very high number compared with similar posi- seismic, what geologic conditions are needed tions supported by the oil companies and shows to form oil, and where it is most profitable to the significance of the public funds for long-term drill in the field. and basic research. DEMO2000 is an important policy tool to qualify new technology solutions in the petroleum scheme applies to all companies liable for tax in industry. The program’ goal is to reduce costs and Norway. It is administered by the Research Coun- risks for the industry by providing support to pilot cil of Norway in cooperation with Innovation Nor- projects and demonstration. Since its start in 1999, way and the Norwegian Tax Administration. The DEMO2000 has supported 231 pilot projects. The tax deduction scheme had 381 active projects total costs of these projects are NOK 2.7 billion, of within the petroleum sector in 2010. The total which the authorities have contributed NOK 600 budgeted volume was NOK 1 288 million and the million. The program is directed at the supply expected tax deduction was NOK 211 million. industry, which does not have the same regula- The publicly financed petroleum research over tory incentives to develop new technology as the the State budget was about NOK 400 million in oil companies. DEMO2000 also functions as a 2011. These allocations are followed up by the cooperative arena between oil companies, authori- Research Council of Norway, e.g. through the ties and supplier companies. PETROMAKS and DEMO2000 research pro- PROOFNY – a subprogram under the Oceans grams. Each year, both programs contain a large and Coastal Areas R&D program, is directed at amount of high-quality projects worthy of sup- research on long-term effects on the sea from port. Due to limited available funds, a large num- petroleum activities. The program’s main objec- ber of projects that should receive support do not. tive is to promote high quality research on the For example, only 17 per cent of the projects marine environment. received funding commitments from PETRO- PETROSAM supports sociological petroleum MAKS in the announcement during the autumn of research, and will further develop expertise 2010. The Government therefore wants to ensure regarding societal factors as a basis for strategy good conditions for the petroleum research, cf. and policy planning by Norwegian authorities and Storting White Paper No. 30 (2008-2009) industry. The technical objective is increased Research Climate (the Research White Paper). knowledge concerning the value and management of Norwegian petroleum resources, as well as development trends in other petroleum prov- 8.7.3 Organisation of the public petroleum inces. research Strategic petroleum research mainly goes to The authorities’ priorities and efforts within petro- strategic university programs (SUPs). The goal leum research are followed-up by the Research for the funds is to contribute to educating Council of Norway through several policy instru- researchers at Norwegian universities and exper- ments. tise development within key topics in the petro- 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 161 An industry for the future – Norway’s petroleum activities leum area. Furthermore, support is provided to Furthermore, there is a decline in the number the seabird program SEAPOP, to the Integrated of Norwegians completing master’s and doctorate Ocean Drilling Program – an international, degrees in petroleum-oriented studies at Norwe- marine-geological research program, and for a gian universities and colleges. In the PETRO- strategic effort on technology subjects. MAKS program, about 50 per cent of the fellow- The Norwegian Centres of Excellence (CoE) ships supported are from countries other than and Centres for Research-based Innovation (CRI) Norway. About half of the foreign students leave within petroleum have been established by the Norway after completing their doctoral degree Research Council of Norway. Several of these cen- according to a study by NIFU. A high percentage tres are relevant for the petroleum industry. Some of students and fellowships from abroad create a examples include: CIPR (Center for integrated basis for good international cooperation, but the petroleum research) at the University of Bergen is fact that relatively few remain in the country is a research centre within improved recovery. problematic as regards the further expertise FACE at Sintef/IFE will develop better models for development in Norway. It is therefore important multiphase flow, while the IO Center at the Nor- that the authorities, the industry and academia wegian University of Science and Technology will work to keep the expertise in Norway, as well as develop expertise and better tools for integrated increase the recruitment of Norwegian students. operations. The main objective of the Drilling and There must also be targeted work with recruit- Well Technology for Improved Recovery centre at ment from primary school until higher education IRIS/Sintef is to improve drilling and well technol- and for research. The Ministry is therefore work- ogy, as well as increase the expertise required for ing on mapping measures that can contribute to more cost-effective and safe drilling. The support strengthening the recruitment to basic training for the centres is restricted as regards time, and and education that is relevant to the Ministry’s several of the centres will be closed in a few years. areas of responsibility. The Ministry cooperates There are also other centres operating within with the Norwegian Centre for Science Education petroleum, but not as a main topic. at the University of Oslo on establishing “energy schools”. The goal is for the energy schools to attract skilled students and contribute to 8.7.4 Expertise and recruitment of labour increased recruitment to studies that are relevant Within the petroleum industry in Norway, there is for energy and petroleum at universities and col- a great need for access to qualified labour. Good leges. In addition, the energy schools will show cooperation between authorities, industry and how scientific knowledge can be used for concrete educational institutions will be important in the societal challenges. This is carried out in a close coming years. The industry is cyclical, but cooperation between schools and companies. A employment has grown significantly since 2000, model here will be the cooperation between Exx- and can offer many jobs within many different dis- onMobil and St. Olav Upper Secondary school in ciplines. Stavanger, see Box. 8.9. The average age of petroleum industry The Ministry of Education and Research and employees in Norway is increasing, despite a the employer and employee groups have started slight increase in the number of employees in the work on a new “social contract” with the objective youngest age group (15 – 29 years) in recent of e.g. increasing the number of apprenticeships. years15. There is a particular need for technolo- Statoil is the country’s largest apprentice com- gists and scientists. The recruitment is challeng- pany, and several companies within the petroleum ing in parts of the country and for certain profes- industry annually take on many apprentices. The sions. At certain universities, the number of stu- Government will encourage the companies to dents withdrawing from science studies is great increase the number of apprentices they take on and recruitment to geology and other studies rele- and consider whether they can increase the num- vant to the sector is low. Currently, Norway is ber of disciplines for apprentices. among the countries in Europe with the smallest percentage of students from upper secondary schools that choose scientific and technological The Government will: studies in universities and colleges. • Ensure good conditions for the petroleum research. 15 Statistics Norway report: Employees in the petroleum • Prioritise research within improved recovery industries (2009) from existing fields on the Norwegian Shelf, 162 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

including considering whether to establish a • Continue the work on qualifying and testing research centre within improved recovery, new technology. based on free competition. • Contribute to strengthen the recruitment to • Consider establishing a research centre within scientific and technological studies in schools challenges for petroleum activities in Arctic and higher education to ensure labour for the regions. petroleum sector. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 163 An industry for the future – Norway’s petroleum activities

9 State revenues

The resources on the Norwegian Shelf belong to policy guideline is not exercised mechanically, the greater community and provide a significant however, and considerable emphasis is placed on contribution towards financing our welfare sys- stabilising economic fluctuations. The guideline tem. The petroleum activities provide higher thus entails a gradual increase in use of the petro- return than a normal return. These higher reve- leum revenues up to a level that can be sustained nues are the main reason why the Norwegian over the longer term, cf. Figure 9.1. The Govern- State takes a substantial share of the revenues ment Pension Fund Global invests in financial from the petroleum activity on the Norwegian assets outside Norway. The guideline and the Shelf through taxes, fees and the SDFI scheme. administration of the Government Pension Fund The State’s revenues from the petroleum sec- Global is explained in more detail in the annual tor constitute about 25 per cent of the State’s total national budgets and in the report to the Storting income. The cash flow from the petroleum activi- on the Government Pension fund. ties is transferred in its entirety to the Govern- The income base from the petroleum produc- ment Pension Fund Global, previously known as tion is undergoing considerable change. Since the Norwegian Government Petroleum Fund. The 2001, oil production on the Norwegian Shelf has purpose of the Government Pension Fund is to been gradually reduced, while gas production has support government savings to finance the pen- increased. 2010 was the first year ever in which sion expenditure of the National Insurance there was more gas than oil produced and sold, scheme and long-term considerations in the measured in oil equivalents this trend is expected spending of government petroleum revenues. to continue. Over time, the central Government structural The realised oil prices have been higher than non-oil budget deficit shall correspond to the realised gas prices. Cash flow from the petroleum expected real return on the Government Pension activity is affected by the combination of reduced Fund Global, estimated at 4 per cent. This fiscal oil production and increased gas production, and by the lower sales value for gas compared with oil. 140 3 500 Therefore, revenues from the sector will most likely fall faster than indicated by overall produc- 120 3 000 tion decline alone. 100 2 500 The petroleum activities on the Norwegian 80 2 000 Continental Shelf are taxed through ordinary tax on profits, special tax and various fees. Great 60 1 500

Bill. NOK Bill. NOK emphasis is placed on ensuring that the tax sys- 40 1 000 tem does not affect operational and investment 20 500 related decisions on the Norwegian Shelf, i.e. that the tax system is as neutral as possible. Therefore, 0 0 1996 1999 2002 2005 2008 the Norwegian petroleum tax system currently Government Pension Fund Global (r.axis) consists of profit-based elements outside of the Structural non-oil deficit (l. axis) area fee and environmental taxes. Net cash flow from the petroleum activities Figure 9.1 Structural non-oil adjusted budget amounted to NOK 276 billion in 2010. Of this deficit and the market value of the Government amount, ordinary tax on profits and special tax Pension Fund – Global. The non-oil adjusted from the companies operating on the Norwegian budget deficit is a target for use of petroleum Shelf amounted to about NOK 156 billion. As taxa- revenues via the fiscal budget. tion is based on profit, there is a close correlation Source: Ministry of Finance. between oil and gas prices and tax revenues. 164 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

In addition to tax, the companies also pay envi- In accordance with the EITI criteria’s, compa- ronmental taxes and area fees,. Environmental nies and authorities are required to report paid taxes and area fees amounted to about NOK 3.6 and received amounts, respectively, to an inde- billion in 2010. pendent unit tasked with verifying whether the In addition to taxes and fees, the State Direct reported payments correspond to the received Financial Interest (SDFI) ensures that a high per- amounts. The figures are to be published. In Nor- centage of the value creation on the Norwegian way, the consultancy firm Deloitte has been Shelf goes to the State. In 2010, the net cash flow responsible for this work. The results are pub- from SDFI amounted to NOK 104.1 billion. lished in a separate report, which provides information regarding each individual company’s payments of tax, CO2 tax, NOx tax and area fees to 9.1 EITI the State. Correspondingly, the report shows net payments from SDFI. Extractive Industry Transparency Initiative (EITI) So far, Norway has produced EITI reports for is an international initiative aimed at increasing 2008 and 2009. Since 2005, a total of 23 countries transparency surrounding cash flows within the have produced similar reports. For the citizens of petroleum and mining industries (extractive many of these countries, access to information industries). An estimated 3.5 billion people live in regarding the state’s revenues is something new, countries rich on natural resources such as oil, and can make a big difference. In the long term, gas and minerals. Nevertheless, many of these transparency and better governance can contrib- countries are poor, and often troubled by war and ute to economic and social development and a bet- conflicts. Greater openness regarding cash flows ter standard of living. For Norway, the reporting from companies in the petroleum and mining and balancing has confirmed figures that are industries to the authorities can contribute to bet- already published elsewhere, including in the ter governance, less corruption, and help to form State accounts. The EITI effort in Norway also a foundation for economic and social development aims to inform about and increase understanding in these countries. This is EITI’s purpose. of the importance of the petroleum sector in the Over many years, Norway has provided politi- Norwegian economy. cal and financial support to the EITI effort. Among other things, EITI’s international secretariat is in Norway. In addition, Norway, as the only 9.2 The petroleum tax system OECD country so far, has carried out the processes and measures required to be certified as Petroleum taxation is based on the rules for ordi- an EITI country. By implementing EITI in Nor- nary company taxation. Due to the extraordinary way, the goal is to influence countries where there profitability associated with production of petro- is a considerable need for openness and better leum resources, a special tax is added. The ordi- governance. nary tax rate is 28 per cent, as for other companies, while the special tax rate is 50 per cent. Sales revenues for crude oil are calculated on

12,8 the basis of administratively stipulated prices (norm price). The norm price shall correspond to what the oil could have been sold for between independent parties in a free market. For dry and Taxes NGL, the actual sale price is used, with the excep- 104,1 Environmental and area fees tion of propane from Kårstø, for which a norm SDFI 155,6 price will be stipulated starting from the second Statoil dividend quarter of 2011. Investments in operations equipment can be written off according to the straight line method over six years, calculated from the year of the 3,6 investment. All relevant costs can be deducted, including costs associated with exploration, Figure 9.2 Net cash flow to the State from the research and development, financing (debt inter- petroleum activities, 2010 (billion NOK). est), operations and removal. To help ensure that Source: Ministry of Finance. the normal returns are not subject to special tax, 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 165 An industry for the future – Norway’s petroleum activities

250 CO2 tax Area fee 200 Environmental fee The CO2 tax was introduced in 1991 and is an Production fee 150 environmental tax with the aim of reducing CO2 Special tax emissions from the petroleum activities. The CO Ordinary tax 2 Bn. NOK 100 tax in the petroleum industry is charged per standard cubic metre of gas combusted or emitted 50 and per litre of petroleum combusted. For 2011 0 the rate is NOK 0.48 per litre of petroleum or 1975 1980 1985 1990 1995 2000 2005 2010 standard cubic metre of gas. As of 2008, CO2 Figure 9.3 Payment of taxes and fees during the emissions from the petroleum activities are also period 1976–2010. included in the quota system. Source: Ministry of Finance.

NOX tax an extra deduction, uplift, is provided in the calcu- Pursuant to the Gothenburg protocol of 1999, Nor- lation basis for special tax. The uplift is stipulated way is obligated to reduce its annual emissions of at 7.5 per cent of the cost price of the operations nitrogen oxide (NO ). As a consequence of this, a equipment. The deduction is given for four years, x NO -tax was introduced on 1. January 2007. For from and including the year the investment is x 2011 the rate is NOK 16.43 per kilogram of NO . made. x In 2007, an agreement was reached between a Companies that are not in a tax position can number of industry organisations regarding a carry forward both deficits and unused uplift with temporary tax exemption for NO . In return, the interest. In addition, companies that are not in a x companies covered by the agreement would allo- tax position have since 2005 been allowed to claim cate means to a fund set up to finance emission- reimbursement of the tax value of exploration reducing measures for NO . The parties have costs in the tax assessment for the year the costs x agreed to continue the NO agreement for 2011. are incurred. x The petroleum tax system is company-based, in contrast to field-by-field taxation. This means that the companies can deduct expenses from one 9.4 Dividend from Statoil ASA field against revenue from another field. A com- The State owns 67 per cent of the shares in Statoil pany is therefore not taxed until it has attained an ASA. Statoil annually pays a cash dividend to its overall profit. shareholders and the State’s dividend is included Tax revenues from the oil companies have in the revenue from the petroleum activities to the been considerably higher over the last decade Government Pension Fund - Global. than previously, cf. Figure 9.3. The historically In total, including buyback of shares, the State high oil and gas prices, together with a high pro- has received NOK 111.18 billion since the stock duction level, are the primary causes for this. exchange listing in 2001. This includes dividend from the accounting years 2001–2010, which is 9.3 Fees disbursed and entered in the State accounts the following year. Area fees In 2010, the company revised its dividend policy. The new dividend policy is as follows: The area fee is paid for holding a license to conduct exploration for and production of petroleum «It is Statoil's ambition to grow the annual cash div- resources on the Norwegian Continental Shelf. idend, measured in NOK per share, in line with The fee is paid per km2 of awarded area. Area fees long-term underlying earnings. When deciding are not paid during the license’s exploration the annual dividend level, the board will take into period. At the end of this period the fee is esca- consideration expected cash flow, capital expendi- lated over a period of ten years. The area fee is ture plans, financing requirements and appropri- deductible against taxable income. The area fee is ate financial flexibility. In addition to cash dividend, intended to contribute towards efficient explora- Statoil may buy back shares as part of its total dis- tion of awarded areas. tribution of capital to the shareholders.» 166 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

On 19 May 2011, Statoil ASA’s general meeting 200 000 750 approved a dividend of NOK 6.25 per share for the Net cash flow SDFI 160 000 600 accounting year 2010. This means that the State Oil price, North Sea oil (r. axis) received a dividend of NOK 13.4 billion in 2010 for 120 000 450 its shareholding in the company. 80 000 300 Mill. NOK NOK per barrel 40 000 150

0 0 9.5 The State’s Direct Financial Interest 1985 1990 1995 2000 2005 2010

The SDFI was established with effect from 19851. Figure 9.4 Net cash flow from SDFI and oil price The scheme entails that the State, just as other (Nominal NOK). players on the Norwegian Shelf, pays a share of all Source: Ministry of Finance, BP, Platts, Central Bank of investments and costs in projects corresponding Norway. to the direct financial interest. The State receives a corresponding share of the revenues from sale of the production and other revenues. Every year, the portfolio’s oil, condensate, NGL and gas the Storting approves the budget framework for reserves were estimated at 6.5 billion barrels of SDFI. The net revenues are transferred directly to oil equivalents. This is presumed to constitute the Government Pension Fund - Global. about one third of the remaining petroleum The first years were characterised by large reserves on the shelf. investments and a negative net cash flow. From The value of SDFI was calculated to be NOK 1989, the net cash flow has been positive. Up to 865 billion2 as at the beginning of 2010, which was the end of 2010, SDFI has contributed a total of an increase of approx. NOK 150 billion since 2008. NOK 1 237 billion to the Treasury. The increase is mainly due to higher future price The net revenues from SDFI have increased assumptions for oil and gas. over time as a result of more fields starting pro- At the beginning of the year, the State had duction, cf. Figure 9.4. The annual net revenues ownership interests in 146 production licenses, as are highly correlated with product prices and well as in 13 joint ventures for pipelines and investment activity. onshore facilities. The portfolio consists of 38 producing fields, many fields under development and several production licenses in the exploration A large and complex portfolio phase. The portfolio’s value is centred on the The paramount long-term goal for the manage- North Sea, but there are also considerable values ment of the SDFI portfolio is to maximise the in the Norwegian Sea, cf. Figure 9.5. State’s revenues from the direct ownership on the In the North Sea there are SDFI interests on Norwegian Shelf. It is important for the Ministry large fields such as Troll, Kvitebjørn, Visund, that the portfolio is managed and developed in the Ekofisk, Gjøa, Oseberg, Gullfaks, Snorre and best possible manner. Grane. In the Norwegian Sea the State has inter- The portfolio is composed of production ests in the producing fields Åsgard, Ormen licenses in the exploration phase, fields under Lange, Heidrun, Draugen, Norne and Kristin. In development and fields in production. Further- the Barents Sea the State has an ownership inter- more, the State is a major owner of pipelines and est in Snøhvit. onshore facilities. The State’s ownership interest In 2010, production from the portfolio was 1,08 in Gassled is about 46 per cent. At the end of 2010, million barrels of o.e. per day, or about 27 per cent of the total production from the Norwegian Shelf. Liquids production accounted for 44 per cent of 1 The scheme was part of the so-called oil compromise in the total SDFI production. 1984, cf. Storting White Paper No. 73 (1983-1984) and Rec- There is currently a high level of activity on ommendation to the Storting No. 321 (1983–1984) «Con- cerning the organisation of the State’s participation in the the Norwegian Shelf, and large investments are petroleum industry» and Storting White Paper No. 33 expected in the coming years. SDFI investments (1984–1985) and Recommendation to the Storting No. 87 totalling about NOK 25 billion are expected in (1984–1985) «Concerning the effect of the reorganisation of the State’s participation in the petroleum industry». The 2011. The largest investments will be for drilling oil compromise resulted in dividing Statoil’s participating interest in two. Statoil kept one part and the other became SDFI. 2 Source: Wood Mackenzie. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 167 An industry for the future – Norway’s petroleum activities on Troll, Åsgard subsea compression, further Norwegian Shelf will be greater for the SDFI port- development of Ormen Lange, as well as drilling folio than for the shelf in general. Many of the and rig upgrades on Oseberg and Gullfaks. Fur- fields will be in their tail phase in 2025. Falling thermore, it is expected that investment decisions production on these fields will have a considerable will be made on some 20 developments with an effect on the total production. SDFI ownership over the next two years. The new, Over the last decade, oil production from the smaller fields are complex with regards to devel- portfolio has been halved, and it will continue to opment, and are expected to be less profitable decline. The gas production is, however, expected than previous, large developments. to increase, so the total production will remain at the current level for the next ten years. Gas production in the SDFI portfolio is dominated by the Future portfolio developments Troll, Ormen Lange and Åsgard fields. These The Norwegian Shelf is changing, and thus, also fields currently account for about 70 per cent of the SDFI portfolio. The future of the SDFI portfo- the gas production from the SDFI portfolio. In the lio depends on factors such as the development of longer term, gas production is also expected to the mature oil fields, gas marketing and new dis- decline. Petoro expects that the total production coveries. Continued operation of the large fields is towards 2025 from fields currently in operation important for profitable development of many and fields under development will decline by 22 new, small discoveries. per cent for gas and 87 per cent for oil, compared The State has kept large ownership interests to current production. in currently profitable fields with substantial pro- In spite of declining oil production, SDFI production. The majority, about 85 per cent, of the duction will still constitute a considerable share of production in 2010 came from the ten fields Troll, the total production from the Norwegian Shelf in Åsgard, Ormen Lange, Oseberg, Kvitebjørn, Gull- the future. The large mature fields are expected to faks, Heidrun, Grane, Snorre and Snøhvit. It is have long lifetimes, new fields are planned for estimated that these fields will still account for 75 development with direct State ownership and the per cent of production in fifteen years’ time, cf. State will continue to keep participation interests Figure 9.5. when awarding new production licenses. In 2025, Due to the fact that the portfolio is dominated SDFI production is still expected to be high; by large ownership interests in the mature fields, around 0.8 million barrels of oil equivalents per the effect of expected production decline on the day.

Southern part of 1 200 the North Sea 1 % Barents Sea 3 % 1 000 Infrastructure Other fields 8 %

800

10 largest fields in 2010 600 Norwegian Sea 24 % Troll, Åsgard, Ormen Middle and Lange, Oseberg, Northern part of 400 Kvitebjørn, Gullfaks, the North Sea Heidrun, Grane, Snorre 64 % og Snøhvit 200

0 2010 2011 2012 2013 20142015 2016 2017 2018 2019 2020 2021 2022 20232024 2025

Figure 9.5 Distribution of the different geographical area’s contributions to the SDFI portfolio’s estimated value. Estimates of the SDFI production distributed by field in thousands of barrels of oil equivalents per day. Source: Wood Mackenzie and Petoro AS. 168 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

SDFI, as well as where the company sees issues Petoro AS and value creation opportunities that the company Since its establishment in 2001, Petoro AS has believes are not adequately addressed by other managed the SDFI on the State’s behalf. Petoro is players, and where the company could have sub- responsible for managing the business interests stantial influence. related to the State’s direct financial participation Petoro has entered into business management in the petroleum activity on the Norwegian Shelf. agreements with various licensees for 14 of the The objective is to ensure the best possible man- fields in operation, as well as for 16 other partner- agement of the resources and the highest possible ships. The bulk of these management agreements value creation. Petoro is different from other com- have been signed with Statoil. The business man- panies in the petroleum industry. The company is ager is authorised to act on behalf of Petoro in a licensee, but does not have ownership interests these production licenses. The company is still on the Norwegian Shelf. Further, the company required to be involved in important decisions in does not act as operator. the fields and production licenses that have been On the basis of the framework and the guide- selected for follow-up. Petoro’s use of business lines for Petoro’s activities that follow from Chap- managers has increased, which must be seen in ter 11 of the Petroleum Act, the company’s arti- connection with the fact that the number of pro- cles of association and relevant Storting docu- duction licenses in the portfolio has increased ments, the Ministry has defined the following pri- considerably since 2001. mary tasks for the company: The company’s strategy was adjusted in 2010, – Management of the State’s direct participating when a decision was made to devote more interests in all partnerships in which the State resources to further developing the mature fields, is involved at any given time. exploration and maturing of discoveries, as well as – Monitoring of Statoil’s marketing and sales of further development of the gas value chain. In the petroleum produced from the State’s direct 2011, Petoro has adapted the organisation to participating interests, in line with the instruc- strengthen execution accordingly. tion given to Statoil by the Ministry of Petro- leum and Energy. – Financial management, including keeping Realising the potential in and around mature fields accounts, for the State’s direct participating There are still significant remaining reserves in interests. existing fields. As the State has considerable ownership interests in mature fields, it is important for As part of the State’s joint ownership strategy, Sta- Petoro to work actively to implement measures toil ASA is marketing and selling the State’s petro- that can, primarily, ensure recovery of these leum together with its own. The objective of the reserves and, secondarily, increase the rate of instruction given to Statoil is to achieve the great- recovery, reduce costs and extend the lifetime of est possible value creation and fair distribution aging facilities. The large, mature fields are now between Statoil and the State. The revenue gener- facing several important decisions, for example ated by selling SDFI petroleum is directly allo- recovery strategy, new wells, rig upgrades and cated from Statoil to the State. long-term infrastructure development, decisions The number of production licenses in which which have a considerable impact on how much the State has an ownership interest has increased can be produced from the fields. The economic from about 80 in 2001 to 146 as at the end of 2010. lifetime is challenged by the fields’ age, lower pro- Petoro continuously prioritises which fields and duction and increasing costs. Furthermore, pro- production licenses that will receive particular jects are time-critical if available process and hands-on follow-up. Challenging issues, a high transport capacity is to be utilised within the facil- level of activity and important decisions are rea- ity’s lifetime. sons why Petoro in 2011 will pay close attention to The oil production in 2010 from the six largest the Heidrun, Åsgard, Ormen Lange, Troll, Gull- fields in the portfolio (Troll, Åsgard, Heidrun, faks and Snorre fields, in addition to the Gassled Oseberg, Gullfaks and Snorre) constituted joint venture. For other fields and production approx. 60 per cent of the total oil production from licenses, Petoro’s efforts in 2011 will focus on the SDFI portfolio. It is estimated that about 20 selected issues and decisions. When deciding on per cent of the oil reserves in these fields is yet to which fields and production licenses to prioritise, be produced To realise remaining reserves and emphasis is placed on the value potential for additional resources, a considerable effort is 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 169 An industry for the future – Norway’s petroleum activities required on the part of the licensees. At the end of perspective. Petoro will work to ensure continued 2010, remaining reserves in the fields are esti- high exploration activity and the maturing of mated at approx. 240 million scm of oil. Further- resources through prioritisation of exploration more, work is underway in the partnerships on rigs. maturing additional resources totalling 287 million scm, where about 155 million scm is considered probable. If all the additional resources are 9.5.1 SDFI interests in the licensing rounds matured and realised, this will, according to The production licenses on the Norwegian Shelf Petoro, increase the recovery rate for these fields are normally awarded through numbered licens- from about 46 per cent to about 54 per cent. An ing rounds or through awards in predefined areas increased recovery rate will result in a considera- (APA), cf. Chapter 5. Based on applications ble increase in values for the State. received, the Ministry awards production licenses Petoro’s efforts to realising the potential in to individual companies or to a group of compa- and around large fields are directed towards nies. It is normal for the State to keep ownership extending the lifetime of prioritised facilities interests in certain production licenses. Primarily, through technology choices, effective drainage the State will keep ownership interests in produc- methods and an increased drilling rate to com- tion licenses that, based on information available plete more wells per year. The company strives to at the time of award, have high expected profita- achieve \comprehensive area solutions through bility, and in production licenses with a high vol- prioritising selected facilities for field centres and ume upside. The State will also participate in addi- timely phase-in of discoveries. Reference is also tional awards of production licenses where the made to Chapter 4 concerning improved recovery. SDFI already has interests. In the most recent APA rounds, the State has, in accordance with the criteria, retained ownership interests of between Further development of the gas value chain 13 and 26 per cent of the production licenses. In The relative importance of gas for the value crea- the 20th and 21st licensing rounds, the resulting tion potential in the portfolio is increasing. SDFI interests were 30 per cent and 29 per cent of Understanding the global market for natural the awarded licenses respectively. In the latest gas, production and sales strategy, proving and licensing rounds, the State has kept smaller own- phasing in gas discoveries, as well as increased ership interests than previously due to fewer pro- production flexibility on the fields adapted to the duction licenses with a large expected present business opportunities in the gas market will have value and/or volume upside having been made a considerable impact on the opportunity to real- available. ise the value potential in the SDFI portfolio. Sta- toil’s and the State’s gas portfolios are different and thus develop differently. It is therefore impor- 9.5.2 The Ministry’s assessment tant for Petoro to safeguard the State’s interests. Managing an increasing number of production Furthermore, the company plays an important licenses, as well as the further development of part within infrastructure development as the multiple fields in production requires considera- largest participant in Gassled. Expected produc- ble work on Petoro’s part. Since the establishment tion development and the facilities’ technical of Petoro in 2001, the number of production integrity will entail important decisions associated licenses in the SDFI portfolio has increased by 82 with the process facilities in Gassled over the per cent; from 80 to 146 production licenses. The coming years. The scope and complexity of these number of producing fields has increased by 23 decision processes will require thorough techni- per cent, from 31 to 38. cal work by Petoro. The scope and complexity of the issues, for example related to improved recovery from the mature fields, require Petoro to have the Seeking business opportunities in Barents Sea South resources and the expertise needed to be able to and Vøring contribute effectively with tangible input to the The southern parts of the Barents Sea and Vøring partnerships. Petoro’s estimates indicate that an stand out as the most important frontier areas in efficient execution of measures on the mature the SDFI portfolio. To ensure an optimal develop- fields will be of considerable importance for the ment of these areas, there is need for parallel positive development of the States value. An exploration and maturing of resources in an area 170 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities assessment made by The Norwegian Petroleum Directorate’s supports this. The Government will: To follow up these challenges in an efficient • Ensure the greatest possible value-creation manner, particularly on the mature fields, the through efficient management of the SDFI company requires adequate resources for carry- portfolio. ing out independent analysis, establishing alterna- • Strengthen Petoro’s competence in following tive suggestions, quality-assurance of the opera- up of mature fields. tors’ work and carrying out its own work associ- • Reserve participation interests when awarding ated with selected strategic issues. new production licenses. The Ministry assumes that Petoro will continue to have an efficient organisation. The company’s role and mandate are unchanged. It will The Ministry of Petroleum and Energy continue to contribute to the highest possible val- recommends: ues from the State’s direct ownership interests on the Norwegian Shelf, through active participation Recommendation from the Ministry of Petro- in the partnerships. Within this framework, the leum and Energy of 24 June 2011 regarding an Ministry will assess the use of resources to industry for the future – concerning the petro- ensure the most efficient follow-up of the SDFI leum activities will be submitted to the Storting. portfolio. 2010–2011 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 171 An industry for the future – Norway’s petroleum activities

Sources

important research areas are petroleum, inte- Asplan Viak grated marine environment, social science and Asplan Viak is a multi-disciplinary consultancy business development, as well as gas and new and analysis company particularly focusing on sources of energy. change and adaptation processes. The company has more than 600 employees and is located several places in Norway. MENON Business Economics MENON Business Economics is a consultancy and analysis company located in Oslo. MENON Econ Pöyry has customers in the private and public sectors Econ Pöyry is an international consultancy com- and carries out consultancy work and studies. pany that works in the interface between market, technology and politics. Petro Arctic Petro Arctic is a supplier network for businesses IEA associated with development projects in Northern The International Energy Agency (IEA) was Norway and the Barents Sea. The foundation was founded in 1973–1974 and currently has 27 mem- established in 1997 and is financed by Statoil ASA, ber countries and a headquarter in Paris. IEA’s Eni Norge AS and its foundation members. The goal is to contribute to security of supply for the foundation cooperates with industry businesses participating countries and promote more sustain- as well as regional and municipal authorities. Its able energy use. IEA also prepares analyses of purpose is to qualify the member companies for and gathers data for the energy markets, and is supplying field developments and operations in important in setting the terms for the discussions the north, including Russia. regarding global energy and climate challenges. PIRA Energy Group IHS CERA PIRA Energy Group is an international consul- IHS CERA is an international consultancy com- tancy company established in 1976 and which is pany which was established in 1983. In 2004, headquartered in the US. PIRA prepares analyses CERA was purchased by the respected informa- and communicates news regarding the global tion company IHS. The company is headquar- energy markets, including the oil, gas, coal and tered in the US. IHS CERA has more than 4500 carbon markets. PIRA prepares price forecasts for employees and delivers knowledge and insight oil and gas in the short and long term. regarding global and regional energy markets, geopolitics and industry trends. Ramm Energy Partner Ramm Energy Partner (previously Ramm Kom- IRIS munikasjon) is an independent enterprise within The International Research Institute of Stavanger petroleum consultancy which is run by Nils Hen- (IRIS) is an independent research institute owned rik Ramm. Ramm’s background includes journal- by the University of Stavanger and the Rogaland ism and he has been a state secretary in the Min- Research foundation. IRIS was established in 2006 istry of Petroleum and Energy, as well as a politi- and currently has 220 employees. The most cal advisor in the Ministry of Finance. 172 Meld. St. 28 (2010–2011) Report to the Storting (white paper) 2010–2011 An industry for the future – Norway’s petroleum activities

SSB Wood Mackenzie Ltd. Statistics Norway (SSB) is the central agency for Wood Mackenzie is a commercial research and collecting, preparing and communicating official consultancy company, established in 1970 with statistics in Norge. SSB was established as a sepa- headquarter in Scotland. The company has more rate institution in 1876 and is a professionally inde- than 600 employees in more than 20 countries. pendent institution, reporting administratively to Wood Mackenzie offers services within energy the Ministry of Finance. The agency’s tasks are and mining and performs valuation of assets and stipulated in the Statistics Act of 16 June 1989 No. companies all over the world. The company also 54. Statistics Norway has wide-ranging research delivers market analyses. activity in addition to the statistics activity. Meld. St. (white paper) to the Storting 28 (2010–2011) Report Meld. St. 28 (2010–2011) Report to the Storting (white paper)

Published by: Norwegian Ministry of Petroleum and Energy An industry for the future – Norway´s petroleum activities Internet address: www.government.no

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