Norway raises drill costs alarm

The head of Norway’s oil agency has sounded the alarm over high drilling costs on the country’s continental shelf that are putting a serious restraint on its ability to tap new reserves to reverse a production decline.

At the same time, offshore operators are delaying drilling due to factors such as a lack of rig capacity and stalling on investments in technology to boost recovery, putting a further brake on reserves expansion, Bente Nyland, director of the Norwegian Petroleum Directorate (NPD), warned on Wednesday.

However, presenting Norway’s latest resource report, she noted that the country’s resource growth is set to exceed production this year for the first time since 1997 following recent stellar discoveries both in the mature North Sea and Barents Sea.

“The discoveries made in 2011 confirm what the NPD has been saying for quite some time now – specifically, that significant undiscovered resources still remain on the Norwegian shelf,” she said.

“The remaining resources can form the basis for considerable production and value creation for many decades to come.”

Statoil’s Skrugard and Total’s Norvarg discoveries in the Barents Sea have opened up a new exploration frontier in the north, while the giant Avaldsnes-Aldous find by Lundin Petroleum and Statoil has significantly raised reserves expectations in the mature North Sea.

The NPD estimated total recoverable resources on the Norwegian continental shelf at between 62.9 billion and 100.6 billion barrels of oil equivalent at the end of 2010, of which 34.5 billion boe – or 43% – has already been produced.

Of this total, about 20% represents oil and gas that is yet to be discovered.

The agency expects Norway’s oil and gas production, which was at about 1.4 billion boe last year having dropped from a peak of about 1.6 billion boe, to remain at current levels over the next decade, despite a gradual decline in output from major fields.

The country’s production of oil, natural gas liquids and condensate fell last month by 105,000 barrels per day to 1.89 million bpd compared with August, while gas output was down 0.5 billion cubic metres to 7.4 Bcm, based on preliminary official figures.

Beyond 2020, production from undiscovered resources will account for an increasing share of total output, according to the NPD report.

Nyland told Reuters that Avaldsnes-Aldous, now estimated to hold between 1.2 billion and 2.6 billion barrels of oil equivalent, could be brought into production by 2018-2019.

However, resources from the find will not be booked by the NPD until 2012 as it waits on further appraisal work to finally determine the size of the discovery, which could become the third largest off Norway.

To exploit its remaining reserves, Norway is looking to boost output from existing fields through enhanced recovery and tapping marginal finds that can be cost-effectively and quickly developed via existing infrastructure, as well as bringing online new discoveries and opening new areas for exploration.

The country has been shooting seismic in a vast tract of the southern Barents recently demarcated under a treaty with Russia, with a view to opening it up for exploration.

However, Nyland said a licensing round for the Barents would not come until late 2013 or in early 2014.

She also expressed concern over the laggardly rate of drilling off Norway, saying: “Fewer development wells are drilled now than around the year 2000, and plans for drilling new wells are being postponed. We could risk losing reserves if this trend continues.”

She explained that some companies were unable to complete their development drilling commitments due to a lack of available rig capacity at a time when more wells were urgently needed.

Furthermore, she said higher rig charter rates and an historic dearth of new finds have contributed to a drastic increase in exploration costs, which have risen fivefold over the past two decades.

Nyland also emphasized the need for further research and development of advanced water and gas injection methods and new technology to ensure future value creation off Norway, with plans in train for a new research centre to develop improved recovery methods.

She said the NPD was concerned at the trend by the industry of delaying or cancelling such technology projects and pilot testing efforts.

However, banging the drum for prospecting off Norway, Nyland said an NPD analysis of exploration between 2000 and 2010 showed it yielded “significant profitability” with a net value from discoveries over the period of Nkr510 billion ($90.5 billion).

Although many of these finds were relatively small, they could be profitably developed from nearby production facilities, she said.

The NPD report also revealed that new, smaller companies have contributed more than half of this exploration value over the past two years, vindicating Norway’s policy to bring in fresh blood alongside state behemoth Statoil.

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