Norway’s oil industry hides behind flagship project

Norway’s oil industry hides behind flagship project

 

The imminent start of production from Norway’s giant Johan Sverdrup field this autumn has obscured some big challenges facing the country’s oil industry.

State-controlled Equinor has been trumpeting its progress on the 2.6 billion barrel oil project, due on stream in November, and particularly the reductions in its expected price tag by more than a third to NOK127 billion ($14.5 billion).

 

Production from Johan Sverdrup should ramp up to 440,000 b/d in the first year, with a second phase after that, alleviating a steep decline in the country’s oil output. Norway’s oil production has fallen 10% since 2016, and according to the International Energy Agency is set to drop 6% this year.

 

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Those rates have exceeded the forecasts of the Norwegian Petroleum Directorate. But success with one project, albeit large, will only count for so much.

Equinor changed its name from Statoil last year to reflect a shift away from oil, but the rebranding doesn’t solve deep-seated challenges and the regulatory system.

While the likes of BP and Shell have slimmed down their portfolios to focus on big projects that play to their strengths, and expand in LNG, Equinor has insisted on hanging on to fields all the way through their decline and decommissioning.

It operates nearly half of Norway’s 85 producing fields, including facilities such as Gullfaks, Oseberg and Statfjord that date from the 1970s and 1980s, while trying to find and develop new fields, expand overseas and build its renewables business. Outsourcing of day-to-day operations to service providers is non-existent.

The glitches of the last 18 months, including an apparent oil leak at the Statfjord field in May and equipment failures last year, contrast with the UK and its reviving oil production , up 30% in five years. And they suggest Equinor has too much on its plate.

Goliat problems

It is also hard to overstate the debacle at Norway’s first Arctic oil project, Goliat. Operated by Italy’s Eni and brought on stream in 2016—prematurely it now seems—the project could have been a template for relinquishing control to a competent international partner, and helped propel expansion into Arctic waters.

Instead, Goliat is starting to look like a failure, particularly damaging in a country ill at ease with reliance on hydrocarbons.

Map of Norway's Barents Sea oil and gas fields

Click to enlarge

Production has been lackluster, running at less than half the platform’s capacity in recent months. And the project has been beset by safety breaches—colliding crane arms, falling objects, gas leaks and power outages among them—and claims its cylindrical platform design was flawed in the first place, all leading to official reprimands.

The problems at Goliat have damaged the Petroleum Safety Authority itself, and Equinor, which played a mediating role as the minority partner in the project, and has been heavily criticized.

In January, Norway’s Auditor General criticized the PSA for poor oversight of Goliat, prompting PSA director general Anne Myhrvold to speak of a loss of trust engendered by the project. The Auditor General said Equinor “is responsible for over 70% of all petroleum activity in Norway, and it is troubling that even this company does not follow up on notices from the Petroleum Safety Authority.”

Despite the signs of trouble, Eni held onto its minority stake in Norway’s next Arctic oil project, Johan Castberg, when it was approved last June, with Equinor as operator.

But there is a risk that rising public disquiet erodes Norway’s willingness to cede control to international partners, just when help is needed.

Some newer players are building up a presence, notably Aker-BP, a spin-off of BP’s assets created in 2016; and Neptune Energy, created in 2015, which is helping rejuvenate the Njord and Troll fields. In July, Eni announced it would emulate BP and spin off its Norwegian business into a joint venture with private equity-backed Point Resources. Such collaborations point to a way forward.

But the state’s direct holder of oil field stakes, Petoro, is sounding the alarm over rising costs in the Norwegian sector, which a greater degree of international involvement could help remedy. In March it said improvements had “levelled off, and we are not seeing the results of further efficiency gains.”

And underlying exploration prospects do not look good, as a run of success early in the decade has dried up, calling into question a system that reimburses 78% of exploration spending.

Arctic fears

Alex Schneiter, CEO of Swedish-owned Lundin Petroleum, which made the original Johan Sverdrup discovery, known as Avaldsnes, is an enthusiast for expanding north into Norway’s Arctic waters, and has voiced optimism about the company’s Alta oil discovery, following a recent production test. Alta could supplement Johan Castberg, currently the main focus of Barents Sea hopes.

But other finds are questionable. OMV’s 440 million barrel Wisting discovery lies in ice-prone waters hundreds of kilometers from shore and in around-the-clock darkness for part of the year. Along with the safety and environmental issues involved come geological challenges, which center on the shallowness of the reservoir, and risk of leakage during injection operations.

Andy Samuel, CEO of UK regulator the Oil & Gas Authority, cast doubt on companies “charging off to the Arctic” when asked recently to compare Norway and the UK’s industries. “Environmentally, there are going to be far more questions about that,” he told an event in Aberdeen.

For the time being, it seems Norway has a lot to do to chart a way forward.

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