Norway Leverages Its Petroleum Know-How
Summary
Ever
since hydrocarbons were first discovered in Norway in 1969, they have
formed the backbone of the Norwegian economy and government revenues.
Oslo has used petrodollars to set up the world's largest sovereign
wealth fund, the $878 billion Government Pension Fund Global, along with
expansive social welfare programs. The money has also enabled Norway to
achieve spectacularly low unemployment rates even as the rest of
Europe's economies struggle. Unlike many of its European neighbors, the
Norwegian government also retains significant stakes in many of the
country's key companies, including Statoil, Norway's major oil company.
The Norwegian government has a 67 percent stake in the firm.
Maintaining
oil and natural gas production, which makes up two-thirds of Norway's
exports, is imperative for Norway, which is proactively maintaining
production rates. Norway's state-backed energy production at home and
abroad is not only critical to the country's domestic stability by
helping finance state welfare programs, it is also critical to Norway's
foreign policy objective of counterbalancing Russia's energy dominance
in Europe.
Analysis
While
Norwegian natural gas production continues to rise, oil production
peaked in 2001 at 3.4 million barrels per day. Oil production now stands
at around 1.8 million bpd, having declined an average of more than 5
percent each year since its peak. The North Sea has long been Norway's
center of hydrocarbon production, but after nearly five decades of
output, many of the more accessible resources have been produced, and
the decline has hit many North Sea fields hard.
Completely
reversing the decline in the North Sea may not be entirely possible,
but new technological developments can at least slow its decline. And
while the North Sea will remain Norway's most productive hydrocarbon
zone for the next decade or so, Norway has significant potentially
productive areas farther north on its continental shelf in the Norwegian
and Barents seas and the rest of the Arctic. These regions, however,
carry their own set of challenges -- hurdles that will not always
overlap with the problems operators face in the North Sea.
Technological
challenges are nothing new for Norway, and neither is overcoming them.
When foreign companies first came to Norway to explore for
hydrocarbons in the 1960s and 1970s, the country's domestic knowledge
and capabilities in the area were practically nonexistent. Oslo soon set
up Statoil, requiring operators to hire a minimum number of local
companies in order to cultivate a technically proficient domestic
industry. Norway also quickly adapted its shipbuilding and maritime
technology, gained over centuries of experience, and merchant shipping
sector to serve a burgeoning offshore oil and natural gas sector.
Norway
is now home to dozens of innovative oil and natural gas companies that
rank among the world's leaders in offshore technology, most commonly in
offshore environments similar to Norway. This includes everything from
behemoth Statoil to service companies such as Aker Solutions. Of course,
not all of the groundbreaking technology being deployed in Norway is
developed by Norwegian companies. But Statoil and Norway have an ongoing
history of working assiduously to set up joint industry projects in
order to solve some of the challenges to, and develop some of the
necessary technology for, hydrocarbons production in Norway.
Maintaining North Sea Production
Like
the Netherlands and the United Kingdom, Norway is doing everything it
can to sustain production levels in the North Sea. But new discoveries
in the region are becoming increasingly expensive to produce, usually
because of a combination of factors: The discovery is relatively small,
geologically challenging (such as a high-temperature, high-pressure
area) or isolated from existing infrastructure. Meanwhile, old fields
are becoming more difficult to manage. Many have been in production for
years and are losing reservoir pressure. This means gas injection wells
are needed to maintain pressure and production rates.
Statoil
and its partners hope to overcome many of these issues by continuing to
transition away from traditional processing facilities onshore or above
water. In most typical offshore oil and natural gas production schemes,
there is limited infrastructure on the seabed, usually just a few wells
with underwater pipelines that send oil and natural gas to facilities
above water for processing. These above-water facilities control most
operations involved in managing an oil field, such gas injection, water
separation, natural gas and oil separation and a host of other
processes. But as production zones venture farther offshore, depths
increase and the surface environment becomes harsher, making the
traditional operations setup more expensive.
Norway
has slowly but surely paved the way for the integration of some of
these processing facilities into subsea infrastructure. In 2007, the
world's first subsea water separation, boosting and injection system was
installed at Statoil's Tordis field, increasing the aging field's
recovery rate from 49 to 55 percent. In 2009, a subsea seawater
injection system was installed at the Tyrihans field, increasing the
recovery rate by 10 percent. In the first quarter of 2015, Statoil will
launch the world's first subsea gas compression system -- a system the
size of a football field -- at the Asgard oil field. The system is
expected to increase overall recovery by 280 million barrels by
injecting gas into the reservoir. By 2020, Statoil hopes to have every
process done on the seabed, a scheme it terms a "Subsea Factory."
Many
obstacles to that lofty goal remain. But even so, the development of
subsea technologies can improve the economics of many of the North Sea's
marginal and mature fields. Such technologies can increase recovery
more efficiently, since injection facilities are best suited to be
deployed closer to production wells. They also eliminate the need
for facilities above water or onshore, potentially reducing capital
expenditures. They are unmanned as well, reducing operational
expenditures. And perhaps most significantly, these systems can be
adapted to subsea environments beyond the North Sea. For while Statoil's
goals for subsea technological development are being designed for
immediate use in the North Sea, Statoil also envisions them as potential
solutions to problems farther north.
Operations in the Arctic and Farther Afield
Production
in the Norwegian and Barents seas and the broader Arctic carries more
challenges than operating in the North Sea. The entire region is
isolated from existing infrastructure, meaning all of it must be built
from scratch. As a result, discoveries will likely be too small to make
economic sense -- at least initially -- because existing infrastructure
cannot be used to reduce costs. The region is also much colder, so
icing, hydrate formation and the risk of iceberg strikes must also be
addressed. Additionally, operations in much of the Arctic involve
drilling wells through subsea permafrost, requiring care to ensure that
the subsea permafrost does not melt from the heat generated by drilling.
Operations
in these regions will also pose significant logistical difficulties.
With little to no daylight during the winter months and the potential
for sea ice, the drilling season will be limited. The environment in the
Arctic is also fragile, creating other obstacles. Even health and
safety protocols for workers will be challenging because of the harsh
climactic conditions and extreme isolation. Thus, operations here will
almost certainly be megaprojects with high capital expenditures and
development times running into years if not a decade, adding financial
risks due to the likelihood of cost overruns and other financial
burdens.
In
a bid to overcome some of these hurdles, Aker Solutions is developing
an Arctic drillship with unique icebreaking capabilities that would
enable it to work in areas with ice drift. Normal icebreakers break ice
by lifting their mass onto the ice. For a drillship, this can be
problematic because broken ice can affect the drilling riser. Aker
Solutions is getting around this problem in part by redesigning the hull
to redirect broken ice to the ship's sides.
Statoil's
offshore acumen has also made it a key explorer and producer far from
northern waters. It has operated in most of the world's busiest offshore
oil and natural gas regions, everywhere from Nigeria, Angola, the Gulf
of Mexico and Canada to, more recently, Tanzania, where Statoil is
helping pave the way for the African country to export natural gas in
the coming years. It has also provided technical expertise and served a
supplier role in other areas, such as Australia and in the South China
Sea, where it has installed subsea components for China National
Offshore Oil Corp. But the most geopolitically important petroleum relationship abroad for Norway will be with Russia.
Russian Complications
Norway's
subsea technical proficiency means it probably will always be at the
forefront of solving Arctic or near-Arctic offshore challenges, making
Statoil and other Norwegian companies logical partners for Russia. But
this cooperation is complicated by Oslo's unique relationship with
Moscow. Russia and Norway share a maritime and land border in the
Arctic. The maritime border was disputed for decades before the
countries signed a treaty demarcating it in 2010. Russia agreed to the
demarcation treaty in exchange for technology and help developing its
resources.
Video: Russia's Arctic Ambitions
These
included a Rosneft and Statoil partnership in the Perseevsky concession
in Russia's portion of the Barents Sea. Statoil is also helping Russia
in pilot programs for onshore shale oil and heavy oil production --
other areas where Statoil has extensive experience from work in the
United States. As Russia's own onshore production becomes more complex
and expensive and declines in some areas, Russia will be more reliant on
these partnerships -- which bring in foreign technology -- especially
in offshore and unconventional plays. This is because Moscow relies on hydrocarbon production to give it geopolitical heft.
Like
Russia, Norway is a significant natural gas producer and exporter to
the European market. But for Norway, while partnership means leveraging
technology for economic opportunities, safeguarding its own interests in
the Arctic from potential Russian aggression is also a major
consideration.
Western
countries with an interest in the Arctic, including Norway, Denmark,
Sweden, Finland, Canada, Iceland and the United States, are all trying
to extend their territorial sovereign rights around the North Pole to
exploit natural resources. Russia is no exception.
Control of the Arctic also has military implications.
Norway's location straddling the North Sea and the Arctic means that it
is a natural point of resistance to the projection of Russian naval
power, potentially giving Norway the ability to interdict the supply
lines linking Russia's Baltic and Arctic fleets. This makes Norway a
vital member of NATO. Norway will continue to work with NATO to ensure
that Norwegian sovereign interests in Norway's maritime zones are
protected, even as the Russians actively send warships across the
Barents, Kara and Laptev seas.
In
the context of recent events in Ukraine, Norway's possession of key
subsea and other technologies suited for cold offshore environments
means that Oslo's position on Russian sanctions becomes more
significant. Although Norway is not a member of the European Union, it
has typically followed the bloc's lead on sanctions. Europe's latest
round of sanctions on Russia barred new contracts for the export of
equipment and technologies for deep-water, shale oil and Arctic oil and
natural gas exploration and production. Norway has said it will align
itself with the new sanctions but has not yet followed through.
Even
if it never did, many Norwegian companies are subsidiaries of European
companies, meaning they fall under the jurisdiction of EU sanctions. In a
deal that this mechanism would now prohibit, North Atlantic Drilling,
the Norwegian subsidiary of London-based Seadrill, signed a $4.25
billion contract with Rosneft for the use of offshore rigs just hours
before the EU sanctions took effect.
Ultimately,
the European Union faces an already large and growing energy deficit,
potentially increasing its reliance on Russian energy resources. This
means that for the rest of Europe, investments in the Norwegian
hydrocarbon technological sector not only will be a profitable business
endeavor, they will be strategic, too.
Link: http://www.stratfor.com/sample/analysis/norway-leverages-its-petroleum-know-how