Bloomberg News

Norway’s Arctic Oil Bonanza Gets Reality Check in Pipe Limbo

April 26, 2012

A Statoil drilling rig. Photographer: Harald Pettersen/Statoil

A Statoil drilling rig. Photographer: Harald Pettersen/Statoil

Norway is grappling with how to turn last year’s oil and gas finds in the Arctic Circle into real money as the world’s seventh-largest crude exporter seeks to sustain output after more than 40 years of extraction.

Norway, whose oil finds in the North Sea starting in 1969 helped turn it into the world’s second-richest nation per capita after Luxembourg, can’t waste time in deciding on how to transport what it finds off its northern tip down south to the rest of Europe, Petroleum and Energy Ministry Ola Borten Moe said at a conference in the Arctic town of Hammerfest this week.

The issue is “when we need more gas transportation capacity, not whether,” he said.

Companies including Statoil ASA (STL), Norway’s largest oil producer, and Total SA (FP) of France, Europe’s third-biggest, last year made commercial discoveries of oil and gas in the Barents Sea, the first in more than a decade. Norway is moving into the waters off its northern tip to boost output after oil production fell by half in the past decade amid dwindling North Sea output.

The Nordic country also offered 72 new blocks in the Barents Sea for exploration as part of its 22nd licensing round. Statoil, which is 67 percent-owned by the Norwegian government, signaled it may boost the pace of production at its Snohvit gas field, the only producing deposit in the Barents Sea, to free up transport facilities and send more gas south.

The company would reduce the commercial life of Snohvit by 20 years to 2030 should it push ahead with plans to double production capacity, spokesman Anders Ola Skauby said.

‘From Scratch’

“We’re now starting to build a production cluster here from scratch,” Oeystein Michelsen, Statoil’s executive vice president of development and production in Norway, said on April 24 in Hammerfest. “The question is should we aim to produce more so we can open up capacity for our new fields later.”

Statoil’s Snohvit sends gas to the Melkoeya plant in Hammerfest where it’s turned into liquefied natural gas and put on tankers for shipment as far away as Japan. At issue is whether Norway should invest in pipelines that will connect to its network in the Norwegian and North Sea that is hooked up with continental Europe.

Gassco AS, Norway’s gas network operator, in January proposed a pipeline to tap the Barents Sea deposits. An analysis of resources showed there may be a need for a 25 billion-krone ($4.4 billion) pipe to connect with existing facilities in the Norwegian Sea by 2020, the operator said.

Russian Delays

Norway’s neighbor to the east, Russia, is also grappling with the difficulties of Arctic oil development. In March, OAO Gazprom (GAZP), Russia’s gas export monopoly, and its partners Total and Statoil postponed a final investment decision on the Barents Sea Shtokman gas project, adding to previous delays in part because of high costs. The partners held off on an agreement, saying they’re “confident the project can be improved further, both technically and economically.”

Statoil’s discoveries at Skrugard last year and nearby Havis may hold 600 million barrels of oil equivalent. Total’s Norvarg discovery, announced in August, may hold 10 billion to 50 billion cubic meters of recoverable gas, according to the Norwegian Petroleum Directorate.

Helge Lund, chief executive officer at Statoil, had said the industry had been unable to “crack the code” of the Barents Sea after participating in more than 80 wells there since 1980. Norway directly gets about 25 percent of its economic output from oil and gas.

‘Difficult Decision’

Shares in Statoil, based in Stavanger, have gained 5.1 percent during the last two years, underperforming a 27 percent gain in the oil price on the New York Mercantile Exchange. Statoil closed 1.3 percent higher at 153.20 kroner Oslo, while crude for June delivery was up 0.5 percent at $104.65 a barrel as of 5:55 p.m. in the Norwegian capital, having yesterday climbed to the highest level in more than a week.

“It’s a very difficult decision,” Michelsen said. “Do we go for LNG, which we can export to countries willing to pay the most, or do we build a pipeline to the south, which will create opportunities for other actors.”

While output is waning in the North Sea, the area is also vying for investments after Statoil and partners last year discovered the Johan Sverdrup deposit, the country’s largest find since 1974. It may hold 3.3 billion barrels of oil equivalent, which has helped rekindle interest in the North Sea.

‘Sea of Possibilities’

Norway produces about 100 billion cubic meters of gas a year and is the second-biggest supplier to Europe after Russia. Norway, for example, supplied an average of 100 million cubic meters a day to the U.K. from Jan. 10 to March 31, according to Gassco. LNG terminals provided 33 million cubic meters.

Norway is likely to meet plenty of demand from willing buyers. World energy demand will grow 20 percent to 50 percent by 2035, meaning new discoveries must be made if only to replace existing reserves, according to Statoil, which operates about 80 percent of Norwegian production.

The Barents Sea region could produce about 400,000 to 500,000 barrels of oil equivalent per day by 2020, more than four times what Statoil gets from Snohvit today, Michelsen said.

Success may also open a gateway even farther north.

“The Barents Sea itself is a sea of possibilities,” he said. “But it’s also the gateway to other parts of the Arctic. What we do here and now gives us the competencies and experience we need when we start developing even farther north.”

To contact the reporter on this story: Alastair Reed in Oslo at areed12@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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