OFFSHORE TRANSPORTATION OF NORWEGIAN GAS TO EUROPE The case of The Barents Sea Gas Infrastructure Doctor of Business Administration HENLEY BUSINESS SCHOOL Michael Ingenbleek January 2018 Declaration I confirm that this is my own work and the use of all material from other sources has been properly and fully acknowledged. Michael Ingenbleek. I At the basis of the monopoly of the Standard Oil Company in the production and distribution of petroleum products rests the pipe line. The possession of these pipelines enables the Standard to absolutely control the price which its competitor in each given locality shall pay. (ICC, 1907 cited in Boyce, 2014 pp.5) II Introduction This study is concerned with Norway’s role in supplying gas to Europe through offshore pipelines. One reason for choosing this topic is the difference in available research between the number one supplier of gas to Europe, Russia, and the number two, Norway, where there is much less published research. This study aims to bridge the gap by considering, for the Norwegian gas Sector, issues of gas supply, a competitive gas market, a sustainable effective, efficient offshore infrastructure and access for all where and when it is required. It further explores whether the regulation of the Norwegian Gas Sector, through national regulations, the Gas Target Model and three EU gas directives is meeting its goals or actually hinders development. Another reason to choose this subject is the low volume of investments in the Norwegian gas offshore infrastructure, which consequently will lead to reduced volumes of supply. In relation to the abovementioned, the third reason is to investigate whether current and anticipated prices justify further investment in Norwegian natural resources and offshore infrastructure. The fourth reason is to explore the possibilities and preferences for Europe to support investment in Norway’s most promising sector, the Barents Sea, or if competition and pricing do not warrant further investment. III Table of Contents INTRODUCTION .......................................................................... III TABLE OF CONTENTS ................................................................. IV ABBREVIATIONS .......................................................................... IX 1. NORWAY AS A MAJOR GAS TRANSPORTER ................... 1 1.1. Introduction .............................................................................. 1 1.2. Developing natural resources - a historical perspective ........ 2 1.3. Fields and infrastructure expansion ..................................... 16 1.4. Responsibilities and relationships ......................................... 22 1.5. Research questions, methodology and disposition ............. 33 2. THEORETICAL PERSPECTIVE ............................................ 38 2.1. Introduction ............................................................................ 38 2.2. Factors on market failure ....................................................... 50 2.3. Transaction cost economics ................................................... 60 2.4. Principal-Agent theory........................................................... 64 2.5. Conclusion .............................................................................. 69 3. REGULATIONS AND INVESTMENT DECISIONS............ 71 3.1. Introduction ............................................................................ 71 3.2. European union regulations .................................................. 72 3.3. Infrastructure investment barriers ........................................ 85 3.4. Investment solutions .............................................................. 89 3.5. Conclusion .............................................................................. 99 4. REGULATORY FACTORS ON THE NCS...........................103 4.1. Introduction ...........................................................................103 IV 4.2. Norwegian governmental organisation ...............................105 4.3. Revenue and cash flow .........................................................122 4.4. Infrastructure development processes .................................128 4.5. Conclusion .............................................................................136 5. NORWAY’S ROLE IN THE NATURAL GAS MARKET ...140 5.1. Introduction ...........................................................................140 5.2. External suppliers of gas .......................................................144 5.3. Asia and the role of the USA ................................................150 5.4. Norway’s role over the next two decades ...........................155 5.5. Conclusion .............................................................................158 6. NORWEGIAN SEA GAS INFRASTRUCTURE ..................160 6.1. Introduction ...........................................................................160 6.2. Resources, reserves and potential ........................................161 6.3. Description of the project ......................................................168 6.4. Analysis ..................................................................................169 6.5. Conclusion .............................................................................179 7. BARENTS SEA GAS INFRASTRUCTURE ..........................183 7.1. Introduction ...........................................................................183 7.2. Transmission systems ...........................................................188 7.3. BSGI project assumptions .....................................................196 7.4. Analysis ..................................................................................202 7.5. Conclusion .............................................................................206 8. SUMMARY AND CONCLUSIONS .....................................209 8.1. Research motivation and problem definition ......................209 8.2. Theoretical considerations ....................................................211 8.3. Case studies ...........................................................................216 8.4. An Unchanging supply of gas ..............................................222 8.5. Recommendations on further research ................................224 REFERENCES ................................................................................225 V APPENDIX ....................................................................................253 1) Pipeline calculations ..............................................................253 2) NPD resource classes and project status categories ............254 3) A Considerations on capacity calculation ...........................256 4) Compressor power ................................................................260 5) Public and private ownership ..............................................262 6) Credit ratings .........................................................................264 7) NOK Exchange rate 1960-2017 .............................................266 8) Conversion table ....................................................................268 9) Financial equations ................................................................268 10) Summary EU regulations ......................................................269 Table of Figures Figure 1 The Norwegian continental shelf ...................................... 5 Figure 2 Awarded licenses from 1965 onwards ........................... 13 Figure 3 Licencing rounds and acreage 1965-2015. ...................... 15 Figure 4 layout of the NCS ............................................................. 17 Figure 5 North Sea water depths and the Norwegian trench ..... 19 Figure 6 Gassled ownership ex-ante and ex-post 2010 ................ 29 Figure 7 Research outline ............................................................... 36 Figure 8 State organisation of petroleum activities .....................105 Figure 9 Organisation of sales in the GFU period .......................119 Figure 10 Gassco-Gassled Sales construction ..............................120 Figure 11 Procedures for development and operation ...............131 Figure 12 Investments in pipelines and facilities on the NCS ....134 Figure 13 EU28 Gross European consumption. ...........................141 Figure 14 EU Energy production (Mtoe)......................................143 Figure 15 Gas - production, net imports and demand ................144 Figure 16 EU natural gas import in Twh. ....................................145 Figure 17 Short, medium, long- term LNG trade 2010-2014 ......147 VI Figure 18 Additional LNG capacity 2005-2020 ............................149 Figure 19 Natural gas prices across five regions .........................152 Figure 20 Resource account on the NCS in 2017. ........................163 Figure 21 Historical production versus resources. ......................164 Figure 22 Total resources per region. ...........................................165 Figure 23 Undiscovered resources per region. ............................166 Figure 24 total recoverable undiscovered resources. .................167 Figure 25 Polarled pipeline ...........................................................169 Figure 26 IRR E&P vs Gassled ......................................................172 Figure 27 Resource discoveries in 4-year periods (2000-2015) ...184 Figure 28 Barents Sea natural gas resources. ...............................185 Figure 29