Giant Oil Field Spells Promise for Statoil

Johan Sverdrup Field Could Be Profitable Even at Low Oil Prices

One of Norway’s biggest-ever oil projects edged closer to production Friday, a field of rare size and potential that officials said could be profitable even if crude prices fall further.

The Johan Sverdrup field in the North Sea will start pumping oil by 2019 under a plan presented by Statoil AS A and its partners to the Norwegian government on Friday. The field is among a handful of “elephants”—fields exceeding one billion barrels of recoverable resources—found globally each year. It is estimated to hold between 1.7 billion and 3 billion barrels.

“This is a monster,” C. Ashley Heppenstall, chief executive of Lundin Petroleum AB, one of the project’s partners, told The Wall Street Journal. “In a $50 oil price environment, Johan Sverdrup is probably one of the very few projects which will go ahead, globally.”

Even as oil companies including Statoil slash their capital spending as crude prices flounder near 5½-year lows, Johan Sverdrup has demonstrated potential for big profits, analysts said. Statoil has said Johan Sverdrup would be the only major project to get the go-ahead this year because of lower oil prices and spending cutbacks.

“This plan represents the most extensive development of any oil field on the Norwegian continental shelf since the big giants in the 1980s,” Statoil Chief Executive Eldar Sætre told an Oslo news conference Friday. “The field has robust economics with a break-even price at below $40 per barrel.”

Statoil’s move comes as oil companies are pulling back from more expensive projects, in particular American shale oil. The number of drilling rigs in the U.S. has fallen in recent months as the price of oil halved to less than $50 a barrel from June to January, before recovering some of the losses.

Statoil said the field’s crude could be profitable even if the oil price were to fall to $40 a barrel. The Brent crude benchmark was trading at about $61 on Friday afternoon, up about 3.1% on the day.

Norwegian oil projects usually require prices at between $40 and $70 a barrel to make a profit. Statoil last week said 14 other planned projects, including assets in Norway, Tanzania and the U.S., risk delays at current oil prices.

Johan Sverdrup’s potential stems from the high quality of its oil and its location in shallow waters near existing infrastructure, as well as its sheer size.

Discovered in 2010, Johan Sverdrup will be a cornerstone of Norway’s oil production, contributing about 40% of the country’s total crude output in the 2020s, Statoil said. Spending in the project’s first phase is set to total 117 billion Norwegian kroner ($15.35 billion).

Energy research firm Wood Mackenzie estimated that Johan Sverdrup would produce more crude oil than the entire U.K. oil sector by 2025, and contribute 10% of Statoil’s global crude production—or 5% of the company’s combined oil and gas output—by 2020.

Norway’s Parliament is expected to approve the plan this spring.

In an unusual move, four out of the five owners asked the government to decide the final size of each partner’s stake in the field, which stretches over three licenses. The move came after protests from Det Norske Oljeselskap ASA on the size of its stake.

“We cannot sign an agreement,” said Det Norske Chief Executive Karl Johnny Hersvik.

The government wasn’t happy about the disagreement.

“If you’re a player on the Norwegian shelf and [are] allowed to produce our energy resources…you also have a responsibility to find good solutions,” said Tord Lien, Norway’s minister of petroleum and energy.

The current proposal says Statoil should get roughly 40% ownership, Lundin 22%, Det Norske 12%, Maersk Oil 8% and Petoro 18%.

WSJ