Speech under the NPF conference "Business opportunities and challenges in mature fields" in Stavanger 17.04.2012.
Good morning everyone, and thank you to NPF for the invitation. I am glad to have this opportunity to address such an important and timely topic for the industry and for the authorities.
Over the last year or so, I have spent a lot of time talking about the significant discoveries made on the Norwegian Continental Shelf, and the impact this will have on our industry.
Let me be clear: 2011 was a very good year for the Norwegian petroleum sector. However, the discoveries made in the recent year do not mean that we can allow ourselves to sit back and relax.
Our biggest discovery in 2011last year, Sverdrup holds resources estimated at between 1,7 and 3,3 billion barrels of oil equivalents. A middle value of 2,5 billion barrels equals more than 3 years of current liquids production of liquids from the Norwegian Continental Shelf.
However, even a huge discovery like this will not arrest the gradual decline in our oil production. Nor has it changed my view on how we should go forward in our petroleum policy to safeguard the vast value that is still hidden beneath the seabed.
But first, a few words about on safety. Since the very beginning, considerations for other industries and safeguarding the external environment has formed an integral part of the management of our activities.
We have developed extensive policy systems to ensure that this is done. As a result, the Norwegian Continental Shelf is a world leader when it comes to safeguards for the environment, for preparedness and for safety in the offshore petroleum activities.
This is important to me. Also going forward, regulation of these important aspects of the offshore activities will be a national responsibility. At the same time it is important for offshore producing countries to share experiences and good practices. As a part of this effort, Minister Bjurstrøm and myself, will hold a offshore safety Ministerial in Trondheim this summer..
In White Paper no. 28 : An industry for the future, the Government established that a steady activity level must be maintained in order to achieve a long term goal of maximum value creation. This strategy should be realised through an active commitment in these areas:
i. We need to increase recovery from existing fields and develop commercial discoveries
ii. We need to explore opened acreage
iii. And we need to open up new acreage for petroleum activities
We must do all of these! At the same time, we must address issues such as capacity constraints in the industry and development of the cost level.
In the context of today’s main theme, this means that we are able to identify the opportunities that lie in or around mature fields, and make good, informed decisions that will stand the test of time. It means finding innovative solutions and developing new technology, and it means realising opportunities before existing infrastructure becomes unprofitable or technically unsuitable.
OPPORTUNITIES IN MATURE FIELDS
The history of petroleum production in Norway is also a story of utilizing opportunities. For years, we have proved our ability to perform above and beyond what is expected when it comes to adding value.
I often tell the Ekofisk-story, and it is one worth mentioning once more. As the first producing fields on the NCS, Ekofisk and Eldfisk had produced for 40 years when a plan for further development was submitted last year. This is likely to set the stage for another 40 years of production.
The recovery rate on the field has gone up from 17 originally to over 50 percent under the current plans. This is a net addition of around 470 million barrel of oil equivalents. To me, this is a great illustration of exploiting opportunities.
On average, fields on the Norwegian Continental Shelf have increased their oil reserves by a factor of around 1,7 from the original development plans and up to 2010. Our average oil recovery rate is high compared to other oil provinces. This is good, but I believe we must always aim to do even better. The higher oil price environment we now live in, will help make more of resources commercial as well.
Based on current field plans, we stand the risk of leaving around 30 billion barrels of oil equivalents in the ground. The remaining resources are considerable, and a one per cent increase in the recovery rate in producing fields alone will generate more than 500 million barrels of oil. With an oil price of 120 dollars, this equates to around 60 billion US dollars, or around 340 billion kroner.
It is also worth remembering that there is often a considerable exploration risk associated with new projects. Mature field resources have no exploration risk and therefore comes with a different, and often much lower volume uncertainty.
Recovering more volumes means introducing measures that can contribute to maintain production in existing fields. Within this frame of thought, we must include the phase-in of new fields and near field exploration that can contribute to lifetime extension for existing fields. Thus, near field exploration can be seen as an indirect form of increased recovery.
There is a large resource potential in and around mature fields. However, realising this potential may prove challenging, and requires a multitude of decisions to be made by the operators, the licensees and the industry in general.
Under our system, it is mainly the responsibility of the industry to solve these challenges every day,– on every field and in every licence.
Let me share with you some of the key challenges I see for the industry in mature fields:
Investment in existing fields. The shelf is maturing and parts of the infrastructure are aging. Upgrading and further investment in the existing infrastructure to ensure long term production is time critical. It is the responsibility of the licensees to make the necessary investments to exploit the full economic potential within their licences. This is an important part of your licence to operate.
Cost. The costs on the Norwegian Continental Shelf have increased significantly since the turn of the century and are higher than in other, comparable petroleum provinces. The high cost level has a direct effect on overall profitability, on the viability of new IOR projects and on the lifetime of producing fields. The cost level is a very real challenge to reaching the full potential of our resource base. It is the responsibility of all stakeholders involved in our industry to work actively to keep cost at an acceptable level.
Access to drilling rigs. Drilling new wells and maintaining existing ones is critical for future production. In the short term, drilling is crucial in order to recover as much as possible of remaining resources in and around existing fields.
In addition to being a central component in all stages of activity on the shelf, drilling is the single most significant cost component. In 2010, 47 per cent of all investments in discoveries and fields were related to drilling. Increased drilling cost has been an important cause of recent growth in costs.
Against this background, I have established a group of experts that will examine the nature of the rig-market in Norway, and make recommendations as to what can be improved. The group is headed by Eivind Reiten, has broad representation among its members, and it will deliver its recommendations to me this summer.
Technology. Improvements in technology have always been a driving force for improved oil recovery. Therefore, research, development and implementation of new technology must be given the highest attention. I will come back to this.
THE TIME FOR BOLD INVESTMENT DECISIONS
There is a time and a place for everything. The recent cover story in Time Magazine stated that while crude demand and prices are strong and unconventional sources are on the rise, these projects often come with considerable complexity and risk, and often with a high break-even price.
In this context, mature field developments makes good sense. And while a new discovery may take from 5-6 years and onwards to develop into production, new projects on existing fields will yield value creation and opportunities in the short to medium term.
For some of the smaller field developments, we could see lead times down to about half that of a stand-alone development. By introducing measures such as drilling more wells or improving operational performance, improvements could come within months. In our industry, this is as close as we get to an instant reward!
Achieving improved recovery from mature fields requires hard work and continuous effort in order to secure maximum value creation. It is often the sum of all the smaller investment decisions and everyday work in the licenses and the industry that adds up to realising the full potential.
I am a firm believer in the value of a stable and predictable framework for the industry. I think two of the greatest success factors in our oil and gas policy are the predictability in our policymaking, and the way we have incentivised operators and partners. Under our system, most decisions companies make to maximise their profits, also maximise the value for the State.
Let me briefly touch upon another follow-up from last year’s White Paper, namely how we should formalise and intensify our follow-up of mature fields.
Today, we are in a position to require new plans for recovery in the late phase of a field where this is deemed suitable.
We are looking into the need for different measures to ensure that sufficient attention is given to improved recovery and sound resource management. Instead of the regulator requiring a plan when deemed suitable, perhaps we should turn this around so that field owners must prove to us that they are committed to a plan that will recover all economic resources in their asset?
This leads me to a second important point I also would like to make – the responsibility of a licensee on our shelf. I expect every partner to participate actively in the assets they hold. This is a crucial element in a company’s licence to operate.
Each licensee has the important role of challenging the operator in a constructive way to further strengthen value creation from the asset. All economically viable projects must be proposed and matured, and decisions must come in a timely way and without undue delay.
I am serious about this. This is the reason for our decision last year to give Petoro, as the caretaker company for SDFI, additional funding. I have asked Petoro to be an even more active and impatient contributor to increased recovery and value maximisation from the SDFI portfolio.
I expect the same active commitment from other partners! That said, this does not reduce the responsibilities of the operators to create value from fields. Together, operators and active partners can create additional value by challenging each other and by working together. I am convinced that there is room for improvement in this respect!
NEAR FIELD DEVELOPMENT AND EXPLORATION
In 2011, the Ministry approved 10 new development projects. Several of these will also contribute to increased oil recovery from existing fields by holding up production over their infrastructure, thus prolonging the economic lifetime of these facilities. We expect companies to submit numerous development plans over the next two years.
A number of the new developments are designed as tie-backs to existing infrastructure. These projects are by profitable in their own rights. Profits from tie-back projects will benefit the new field – rather than create a super-profit for the host infrastructure.
Many of these so-called fast-track projects are meant to reduce the time from discovery to production. These projects are characterised by standardised equipment, subsea development and low-to-medium tie-in and reservoir complexity.
As the NCS matures we are dependent on developing smaller and medium sized discoveries. I am satisfied to see that the companies on the NCS are making the smaller projects highly profitable. These projects are positive contributions to the activity level and the value creation on the NCS.
The APA scheme has proven to be a great success. It has been important for efficient exploration of mature areas and it has contributed to strengthen the diversity and competition within exploration on the Norwegian Shelf.
Areas close to planned and existing infrastructure form parts of the annual APA-rounds. This system has ensured that interesting exploration acreage in mature areas is explored in a timely manner so that time-critical resources may be proven and produced.
The results from the recent APA-rounds show that the interest for mature areas on the NCS is very good. In APA 2011 I awarded 60 production licenses. This is the largest number of licenses ever awarded in one single licensing round. I have also just recently expanded the APA area with new blocks, and the application deadline for APA 2012 is the 6th of September.
COST CONTROL /KONKRAFT
The industry cooperate on factors that are crucial to the further development of the Norwegian Shelf through KonKraft. Rederiforbundet, LO, Norsk Industri and OLF participate in KonKraft. An important part of its work involves directing focus to the oil and gas industry’s opportunities and challenges.
KonKraft is well-positioned to help establish an appropriate follow-up of the various areas where the industry is challenged by the expert committee to improve recovery. I therefore requested that KonKraft for advice on how to go forward in those areas.
Last week, I met with the Konkraft organisation. They presented 12 action points for further work. The action points include different aspects of the offshore activities – from research and development in general to well management, handling of contracts, more standardization and other cost management measures.
Konkraft has done a very good job in making this important contribution to the industry. It is my distinct impression that all stakeholders share a common understanding of the challenges ahead, and I look forward to see how the industry will respond to these challenges.
Finally, a few words on technology. Deployment of new technology has been a key component of high recovery rates from a number of significant fields, and the story continues. The Åsgard Subsea Compression project is now approved. The project involves installing a subsea compressor close to the wells on the seabed. This will add an estimated 280 million barrels of oil equivalents in reserves. The size is impressive, and the project is even bigger than some of the stand-alone developments at the shelf.
This project is important. Subsea-based processing and compression on this scale has never been done before. It represents a significant technological step for subsea developments.
New technology and new solutions will be necessary to mature new profitable reserves and to realise the potential from improved recovery.
I am eager to see what part new technology can play in maturing new volumes. Through the establishment of FORCE, the authorities have taken an initiative to facilitate cooperation between companies wanting to work together on new technology testing across the licenses.
On behalf of the Government, I will continue to work to promote increased efforts on testing new technology together with other stakeholders in our industry.
To sum up, I think that this is yet another good occasion to reflect on what this industry has achieved so far. We should be proud of these achievements, and draw inspiration and motivation from them going forward.
This is no time to rest. We must maintain focus on realising value from opportunities in mature fields. The key to exploit these opportunities often lies in the hard day-to-day work. It’s often about making a string of smaller decisions that together will add significant volumes.
At the same time, we must maintain our competitiveness by having a firm focus on costs and other factors that may pose a threat to good, long term decisions.
I will do my best to provide a good and predictable framework, and to continue to work together with the industry on maximising the value creation from the petroleum sector.
If anyone had any doubts, I believe that the time to improve oil recovery from mature fields is now. And it is on every field.
All owners, on every field has an obligation to achieve optimal resource management and effective operations from their assets. All economic resources shall be exploited. This, together with safe operation, is clearly the most important part of your licence to operate on our shelf.
Thank you very much for your attention.