Foils (pdf format)

Good afternoon!
First of all; I like to thank you for the invitation. This gives me an excellent opportunity to present some aspects of the Government's energy policy and more importantly the potential I believe exist both within the Norwegian oil and gas sector and the electricity sector.

I will start off talking about the oil and gas sector and then proceed to speak about the electricity sector.

The Government wants to secure efficient and profitable production of oil and gas
The petroleum industry is crucial for the Norwegian economy and for the welfare of today’s and future generations. In 2003 it represented 19 % of the Norwegian GDP and 77 000 people were employed in the petroleum related activities. During 2004, the petroleum fund will exceed one thousand billion Norwegian kroner, a vast amount of money.

As being a relatively new minister it is important to make clear that my focus is on the opportunities that lie in the petroleum industry, the important challenges this industry is facing, and how we can secure long term activities and high value creation.

Let me start by describing the opportunities. So far 29 % the total recoverable petroleum resources on the Norwegian Continental Shelf have been sold and delivered since production started in 1971. If we look at the remaining potential, 26 % of the total petroleum resources are still undiscovered, almost as much as we have produced.

In immature areas there are still good opportunities to make new discoveries that could be classified as large by international standards. In addition, there are considerable resources more easily available in the more mature areas.

While the influence of the petroleum industry on the Norwegian economy has increased during the past decades, in a few years we can see the beginning of a gradual decline in the activity level in the petroleum industry, gradual reduction in production and we experience that new discoveries do not replace the rate of production.

But still there is a great potential for attaining a high rate of production for many years. This graph illustrates the potential for profitable production, and it is our ambitious goal to fully exploit this potential.

But, there are many challenges which need to be addressed. These issues were described in the White paper no 38, which was approved by the Parliament with broad support this spring.

A more mature continental shelf creates challenges
New discoveries are necessary in order to secure long-term value creation. In recent years we have had a reduced exploration activity. The average size of new discoveries is declining as petroleum provinces mature. It is therefore important that we work to increase exploration activities and to change this negative development. This has to be done through access to more acreage and reinforced work commitments.

At the moment, we see few large discoveries being planned for development. The exceptions being the Ormen Lange project in the Norwegian Sea and the Snøhvit project in the Barents Sea. Both Ormen Lange and Snøhvit are made possible by cutting edge technology. Technological development is in my view essential for developing new fields, and there is clearly a need to increase the emphasis on research and development.

Another part of the challenge is the effects on the cost level of maturing fields. As fields are maturing, the production unit costs tend to increase and can lead to an early production cut-off, if measures to increase cost-efficiency are not taken. Furthermore, the cost level on the Norwegian Continental Shelf is high and represent a challenge in all the phases of the petroleum activity.

It is essential to maintain a high level of investment in order to maintain and develop the competence Norwegian industry has built up through 30 years. This is important for oil companies, supply industry and shipping companies. It is the goal of the Government to maintain a competitive, Norweigan supply industry, in order to secure a long term profitable development of our petroleum resources.

In the white paper, the Government suggested a number of measures in order to deal with these challenges. Separately, none of the measure can solve them, but together they provide a good basis.

The Government’s measures to meet these challenges
One of the most important measures is to secure increased exploration. This Government is having a strong focus on giving the petroleum industry access to prospective acreage. As a result of this we announced the largest licensing round in frontier parts of the Shelf since 1965.

The interest for this licensing round was very good. The result of the round was the award of 16 production licenses to 16 companies covering 46 blocks, and it is interesting to see that the round attracted interest from most of the world largest oil-companies and from smaller and relatively new companies to the Norwegian shelf. The next award in predefined areas round has by the way deadline for submission of applications the 1st of October. With all the new companies now seeking pre-qualification I think this will be a very interesting round.

All parties in the industry have a joint responsibility for the meeting the challenge to reduce the high cost level. The Government will give full support to the industry’s efforts. The Government has also announced that it will evaluate the regulation of the petroleum activities, with a focus on cost efficiency. This work will include regulation by all relevant ministries and other regulatory bodies.

For me increased recovery from existing fields is an area of concern. We have set an ambitious target of an extraction rate of 50% for oil and 75% for gas, which we will follow up.

Research and development is also a part of the solution. The Government will increase the fund for research and innovation by one billion Norwegian kroner this year. The increased return will be spent on long term, basic research related to the petroleum sector. The Government will also maintain its support to existing programmes and stimulate cooperation on technological development across licenses.

We are also working eagerly in promoting our continental shelf to companies that possess the relevant competency. Tail-end production is an example where smaller companies can play an important role. Therefore the Norwegian petroleum authorities are actively seeking to attract smaller and new companies.

Earlier this year the industry put forward a tax report. It is my Government’s firm view that the proposals put forward were not the proper means to reach the goals. In the revised national budget (RNB 2004) the Government proposed changes in the tax system. These changes contribute in my view to increase incentives for investments in tail-end production, improved recovery and to attract new companies.

Oil Market and oil price
With oil prices at present levels it is no surprise that the situation in the oil market has drawn a broad interest. Let me briefly comment on this. Today's crude prices are at their highest level ever in nominal terms. In real terms though, the crude price was higher in the 1980ties.

The price developments this year has surprised us, and is not easy to explain. However, one can point to some factors: First, oil demand has been growing at a very rapid pace this year. According to the IEA, global oil demand will grow by about 2,5 mbd in 2004; the highest volume growth for more than 30 years. This has been the driving force in the market this year. Secondly, there is limited spare production capacity available. Spare capacity within OPEC is estimated to be no more than 1 – 1,5 mbd, which is historically very low. Fear of supply shortage is driving the market and is causing prices to increase.

Norway produces at full capacity, as we normally do, so there is nothing we can do to dampen prices. Only when prices are low Norway in cooperation with other producers can have some influence in the oil market by reducing production, which we did in 2000.

In the present oil market situation with scarce production capacity and unrest and tensions in several oil producing countries there is a risk that oil supply could be disrupted. As a consequence there is a large premium in the crude price caused by fear of supply shortage.

In my view oil prices most likely will remain at a high level for the rest of 2004 and into 2005. Global oil production is increasing - particularly from OPEC - and now exceeds demand. Inventories are building. If this continues we should see prices falling. However, a return to prices below 20 USD seems unlikely.

The higher price level we have seen for several years now, has yet not led to a noticeable increase in oil companies' capital expenditures. Until recently companies based their investment decision on low price assumptions. However, oil companies are now adjusting price assumptions upwards. This will most likely have the consequence that more projects meet companies' rate of return requirements and could lead to higher activity level in the upstream industry in the years to come.

This concludes my remarks about the oil and gas sector. I now like to proceed by speaking about the electricity sector .

A strengthen security of power supply
The power balance in Norway has developed from a surplus situation to a shortage situation in the last few years, as the illustration shows. This makes Norway increasingly dependent on imports of electricity to serve the domestic demand. This is an unsatisfactory situation, and in my opinion, we are in a need of increased production capacity.

In believe Norway has the right qualifications and conditions to produce enough energy to serve our domestic use, and even contribute to a better power balance on a Nordic level via exports. I believe there is a number of ways to achieve this, and I will proceed by talking about some of the possibilities in a few moments.

Generally, there is a large potential within well known energy sources. We still have many unused hydro power resources, many of them in connection with already existing hydro power plants. We also have a large potential of wind power in Norway. In this context I like to mention the support scheme administrated by Enova, that is an important contribution to the strategy of increased new renewable energy production and energy savings in Norway.

A more secure energy supply also requires an energy system that is less dependent on hydropower as an energy source and electricity as an energy carrier. This necessitates a long term change of energy use from electricity to for example natural gas. Shortly I like to say more about the advantages of natural gas as fuel in production of electricity and for use in industries and households.

In the end, I believe that it is important to promote the consumers as partakers in the electricity market to obtain a functional electricity market and develop the flexibility in the consumption. The Government has a continuous focus on the consumer's situation and needs in the power market. Several actions to improve the consumer's situation are presented in the white paper on security of supply.

A well function Nordic energy market is fundamental for the security of supply
The security of supply is a common concern within the interlinked Nordic power market. Apart from more available production capacity, an efficient use of the Nordic transmission capacity and the capacity to neighbouring countries is vital to secure a more reliable energy supply situation. I therefore like to underline the importance of a well-functioning Nordic energy market.

A well-functioning Nordic power energy market leads to an efficient use of the resources available and give signals to obtain the investment needed. We have to make sure that the transmission grid within Norway and to our neighbouring countries is sufficient and well-functioning. In this context, I will point out the responsibility Statnett has as the Transmission System Operator in Norway, and the importance of a good Nordic collaboration.

The Government prioritise the co-operation with other Nordic countries, and issues like security of supply and vulnerability in the Nordic energy market are of most recent concern.

These are among several topics to be discussed with my Nordic colleagues at the annual meeting of the Nordic Energy Ministers in Akureyri, Island the 2 ^nd> September.

Large potential for upgrading and extension of existing hydropower
Several of the existing hydropower plants in Norway are old and in need of refurbishment. There is a potential for increased power production if plants are upgraded, and combined with extension of the waterways, the increase in production capacity might be even larger. In my opinion, this may be done in an environmentally friendly way and lead to more economically feasible projects. There has been a broad political consensus regarding the concept of a better utilisation of developed hydropower resources.

Additional benefits include better flood control and increased peak-load capacity.

The government is also supporting an increase in the establishment of small hydropower. According to the NVE there are more than 400 hydropower plants in Norway with an installed capacity below 10 MW. Together they have a mean annual production on about 4500 GWh. An important point is that small hydropower plants usually are environmentally acceptable.

A mandatory certificate market for renewable electricity
A mandatory certificate market is a new support scheme for electricity from renewable energy sources. This support scheme may have considerable influence on energy policy in many years to come. I believe a broad international certificate market has several advantages.

The Norwegian government gave an orientation about the ongoing process of establishing a certificate market in the white paper on development of CO ₂ sequestration for gas-fired power plants, domestic use of natural gas and a mandatory certificate market.

I aim to put forward a proposal for a common certificate market with Sweden during spring 2005, so that a market can be established 1. January 2006. The Swedish certificate market was established 1 May 2003, and some of the Swedish experiences are discussed in the white paper.

A common market with Sweden can be established if Norway creates a certificate system similar to the Swedish one. In a common market both countries would then accept certificates from the other country. The Ministry of Petroleum and Energy are having continuous discussions with the Swedish Ministry of Industry, Employment and Communications to find the right solutions for such market.

A mandatory market for certificates is a long-term policy instrument, and should have duration of at least 20 to 30 years to work well.

The scope of the scheme and the possibilities for value creation in Norway is strongly influenced by the kind of energy sources included in the market. Additionally, the financial target for new renewable electricity production set for the market will be one of the deciding factors for the size of the scheme. I expect the Storting to make a decision on this and other issues when discussing the proposal for a mandatory certificate market.

Gas fired power
There is no doubt about the potential for increased domestic use of natural gas in Norway. Natural gas can be used an environmental friendly energy source in industry processes and transportation. For this reasons we need a wide-ranging focus on distribution and domestic use of natural gas.

The use of natural gas in power production can contribute to a larger domestic market of natural gas. Further, gas fired power plants can give important contributions to a better security of supply of energy and to the generation of national earnings. But, not to forget, the emissions from gas fired power plants represent a challenge with regards to the level of CO ₂ and NO _X.

With respect to the planned gas fired power plants, I base my view on the decision taken by the Storting. There exist three valid concessions for construction of gas fired power plants based on conventional technology.

New applications for concessions for construction and emission permits will be processed according to normal procedures. It is primarily NVE and SFT that will consider such applications.

Gradual development of domestic use of natural gas
Natural gas in interaction with other energy sources can contribute to a more flexible and sound energy supply. In the white paper on development of CO ₂ sequestration for gas-fired power plants, domestic use of natural gas and a mandatory certificate market there is a particular focus on a gradual establishment of a domestic market for natural gas.

The domestic market for natural gas is still small. Figures from Statistics Norway show that natural gas only represented 1, 1 percent of the total end use of energy in Norway last year. The share in 2000 was 1, 0 percent. However, the use of natural gas is increasing. Last year the consumption was 217 million Sm3, this equals 2, 4 TWh. This is the largest registered consumption ever. The industry accounted for almost 90 percent of the domestic use of natural gas in 2003.

The Government will support a gradual development of a domestic market for natural gas. The total use of natural gas is wide spread and it will take time to build up a market. It is necessary to find transport solutions that can support this form of utilisation of natural gas. The best way is to find solutions that can grow together with the growth of the market.

The available analysis supports a strategy of a gradual development of a market for natural gas. The natural gas should be utilised first where the conditions are best prepared.

The energy policy – Summing up
To conclude, I like to sum up my presentation with the following statements:

The Norwegian energy policy shall:

• Promote and create value and be based on a sustainable development
• Provide profitable conditions for production of oil and gas in a long time perspective

To improve our security of power supply:

• There is a need of more power production and a more diversified use of energy
• The Nordic electricity market must be well- functioning

I thank you for your attention.