40 Years and Counting

The theme for this year’s Offshore Europe is “The Next 50 Years”.

It really doesn’t matter what perspective you take, the theme can be applied to any aspect of oil and gas activities across the entire North Sea region. And it not only inspires thoughts of future developments, it gives us an opportunity to stop and think about where we stand now and what it’s taken to get to this point.

In this issue, we published an interview with Bent Høie of Norway’s Conservative Party, who was elected to Parliament by his constituency in the Stavanger area, Norway’s “oil capital”. Perhaps not surprisingly Høie’s father was an engineer who worked at Norway’s first field, Ekofisk, from its earliest days.

When Høie was young, his father, who is now retired, told him that by the time he was ready to enter the workforce, the field would be decommissioned – but we all know the end of this story.

Ekofisk is undergoing both decommissioning and renewal – and the field is a very good metaphor for the North Sea oil and gas industry as a whole. As the decades have gone by since the earliest discoveries and developments, we can point to a vast array of technologies that have been enhanced or created that we’re almost unimaginable 40 years ago.

Extrapolate these developments over the coming 50 years, and it’s not surprising that the Offshore Europe theme is so inspiring.

Yes, the region is mature, but it’s not without its surprises. On the Norwegian Continental Shelf, the industry is still smiling about Johan Sverdrup – with reserve projections that continue to grow – as well as other high-impact discoveries over the last couple of years.

Add to that the opening of new acreage in the Arctic and the outlook is more than positive.

So the industry has been doing well. There’s been a good rebound from the credit crunch. Lessons learned from the crunch have meant the way forward is taken with caution – but it is moving forward.

But that’s always been part of the process. Economic realities, technology and attitudes – whether positive or cautious – all working together as the industry moves forward.

In a recent release, Douglas Westwood reminds us that over the last five years, exploration and production costs have increased 11% per annum. This rate of increase is happening most quickly in the Arctic, where the harsh offshore environments demand additional considerations.

The opinion from DW is that looking forward in time, the exploration and production costs will continue outpace oil price gains – which has already been the case for the last two years.

This brings to mind government incentives to encourage the industry to develop new discoveries, especially in the north. DW points out a troubling recent trend – that the governments of Alaska and Norway have taken “diametrically opposite courses”. As Douglas Westwood reports, “Alaska decreased its marginal tax on oil production from 85% to 35%, and BP promptly moved to add two new rigs to its Prudhoe Bay operations. By contrast, the Norwegian government has raised taxes on its oil industry, prompting Statoil to defer the Johan Castberg north Barents Sea project.”

Could this mean a “mid-life” crisis for the NCS? The way forward can possibly be eased by compromise.

The Norwegian government should consider strengthening the incentives that will lead to the development of the fields that are technologically feasible to develop. We’ve already seen the deferment of Shtockman due to a combination of economic and technological reasons.

But if the tax burden alone can be clearly shown to hinder the creation of value, then the future doesn’t look nearly as bright.