2008 Outlook for the Norwegian Continental Shelf

Europe's Lynchpin

More than 40 years after the first exploration well was drilled on the NCS, Norway has firmly established itself as the most important oil and gas producer in Europe and a key energy supplier to the region. This year, the country is on track to produce an average of 2.55 million barrels of oil, condensate, and natural gas liquids (NGL) and 237 mmcm/d of gas. Nevertheless, despite Norway's strong position, many major oil and gas fields on the NCS are now in decline and the country is striving to extract maximum resources from these fields and to seek out new reserves and launch new production projects. Mixed progress towards these goals can be expected in 2008.

Exploration

This year has seen an increase in exploration activity on the NCS, with 31 exploration wells spudded (20 wildcat wells, 11 appraisal wells) as of the beginning of December compared with 26 wells spudded during 2006. High oil prices have continued to support exploration activity, as has Norway's relatively open investment environment, which has only proven more attractive as other oil-rich nations clamp down on access to their upstream resources. In addition, the greater availability of exploration rigs was a key enabler of this trend. Twenty-five rigs are currently active on the NCS. While all but one of these is booked to capacity through to 2009, additional availability will be provided by the arrival of newly constructed rigs. A total of eight new rigs are contracted for drilling in the area, with the first of these to arrive in spring 2008. As such, rig availability is set to continue to improve on the NCS in 2008, paving the way for continued growth in exploration activity. With most existing and new rigs also contracted under long-term agreements, this growth can be expected to be sustained. Reinforcing this positive outlook, Norway's national statistics agency has predicted that spending on exploration activity will come to 29.6 billion kroner (US$5.32 billion) next year, up from 19.2 billion kroner in 2007.

New focuses for exploration activity are also expected to emerge through 2008, with the Barents Sea—which extends from Norway's northern coast into Arctic waters—in particular likely to become a more prominent exploration destination. StatoilHydro, the Norwegian state oil company, initiated an Arctic drilling programme in November and plans to have a rig drilling continuously around the Snøhvit development over the next 18 months. In addition, Norway's 2007 Awards in Predefined Areas (APA) licensing round saw a further 13 blocks or part-blocks made available in the Barents Sea region. Results from the round are expected to be announced in late 2007 or early 2008, paving the way for greater Barents Sea exploration to get under way next year.

Production

While the picture for exploration activity looks to be positive, more challenges can be expected next year in maintaining Norwegian production levels. Year-to-date figures for 2007 indicate oil and liquids production on the NCS fell by 8.0% in comparison with the same period in 2006. Gas production has offset this fall somewhat, achieving growth of 1.6% over 2006 levels. Declining overall production levels have been driven by higher-than-expected decline rates at existing fields, but new field start-ups have also progressed more slowly than originally anticipated and repair and maintenance work have also caused notable disruptions.

At the beginning of December, StatoilHydro, the key producer on the NCS, was forced to announce that it would undershoot its 2007 production target of 1.735 million boe (see Norway: 10 December 2007:StatoilHydro to Miss 2007 Output Target, Downgrades 2008 Outlook). The announcement was received with surprise by market observers as the company had already lowered its output goals earlier in the year (roughly 12 months ago the company's target was approaching 2 million boe/d), and had only confirmed its latest target four weeks prior. Problems at several of the company's key NCS projects—including difficulties in carrying out a redevelopment programme at the Kvitebjørn field and the slow ramping up of production at the Ormen Lange and Snøhvit gas fields—were cited as the primary reasons for StatoilHydro's poorer-than-expected performance.

Unfortunately, these issues are set to spill over into 2008. StatoilHydro has indicated ongoing repairs to the Kvitebjørn pipeline will cut 30,000 boe/d from its 2008 production tally. Production increases at Ormen Lange and Snøhvit are also expected to remain slow. As a result, StatoilHydro has set a production target for 2008 of 1.75 million boe/d on an entitlement basis, just 15,000-boe/d higher than its 2007 estimate, and substantially below expectations of an 8-10% output bump. With the company responsible for around 60% of production on the NCS, expectations for total Norwegian production in 2008 will accordingly also remain modest.

Outlook and Implications

Declining oil production and rising gas production will continue to be the overall trends on the NCS in 2008. Norway's Ministry of Petroleum and Energy has suggested overall NCS oil production will decline by around 100,000 b/d next year, with gas production to climb by up to 20 bcm on the back of increased output at Ormen Lange and Snøhvit. However, this year has clearly indicated such estimates only act as initial indicators: there remains ample scope for events to shape a variation on these themes. Indeed, recent history would suggest that the stance of some NCS players has proven somewhat over-optimistic, and companies and authorities may now enter 2008 with a greater degree of cautiousness.

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