Ladies and gentlemen!
It is an honour and pleasure for me to address you today at the 6th Oil Summit conference in Paris.

When crude oil prices hit 50 USD last year, the common view was that such a price level was unsustainable and that market forces soon would bring prices down.

However, as we speak, crude prices are still around 50 USD and many believe prices may rise even higher.

I do not have a crystal ball answer to this, but at least I share the view that what we are seeing is not just a price spike, but indeed a new price level.

Oil demand continues to increase rapidly, despite high prices. The total increase in demand in 2004 an 2005 could be as much as 5 mbd or a bit less than the total annual oil consumption of Japan.

Growth in non-OPEC supply has by and large been relatively weak for several years. In Russia, the second largest oil producer in the world and the main engine of growth in recent years, production growth is now slowing markedly. This is a cause for concern.

Finding and development costs seem to be rising, meaning that more resources will be needed to add capacity than before. With oil demand exceeding Non-OPEC supply and expected to do so in the long run, the call-on- OPEC continue to increase. This is an important change compared to the 80s and 90s, when Non-OPEC seized most of the demand growth.

Reserve capacity within OPEC now stands at around 1 – 2 mbd, a very low figure compared with historical figures. The reduction in spare capacity increases the sensitivity of oil prices to supply disruptions. In addition, the marginal barrel from OPEC is rather heavy and sour, whereas refineries increasingly are demanding light and sweet oil.

The market is responding to the developments we experience:

• Higher crude oil prices - spot as well as future prices
• Increased price volatility and
• Broadening of the heavy-light crude differentials.

More than anything else the market signals a need for more investment in the oil industry, upstream as well as downstream.

The question I will address today is how governments and the industry are responding to these signals. I will focus on the upstream part, and present to you recent developments in the Norwegian petroleum sector.

However, I would also like to point out that, faced with rapidly increasing demand and limited growth in production capacity, oil and energy conservation and measures to improve energy efficiency, also have to be high on the agenda. Especially in the industrialized world, where oil consumption per capita is high. The technical and economic potential for energy savings is substantial along the whole energy chain from production to end use. I welcome the initiatives taken by the International Energy Agency to address oil saving policies both in a short and long term perspective.

The investments needed to expand oil production capacity will be huge. In addition - but often forgotten - investments are also needed to sustain current capacity, because of natural decline rates.

According to the IEA, about 75 % of upstream oil investment will be needed just to maintain production capacity.

Somewhat surprising, there is yet no strong indication that high oil prices are driving investments. Some recent industry surveys suggest that a cautious approach is still being taken towards boosting capital expenditure. Surveys by Lehman Brothers and Citigroup indicate that worldwide expenditure upstream will increase by less than 6 % in 2005. This represents a reduction from the double digit growth seen in 2004.

Furthermore, reserve replacement among oil companies has been modest in recent years. For 2004, reserve replacement ratios were below 80 % among major oil companies.

Why are investments not increasing more? One reason is that the major oil companies continue to use relatively low prices for their long term investment decisions. This could perhaps be understandable. Oil prices have a history of being unpredictable and volatile. Upstream investments often mean large upfront capital outlays and long lead times, and uncertain prices and thereby cash flows, tend to delay investments.

Furthermore, a larger part of companies' cash flows are now being returned to shareholders in the form of dividends and share buy back programs. The amount of money available to capital spending is thereby less.

I will certainly not criticise oil companies for doing so. But we should reflect on the consequences of their strategy as it affects future supply of oil and prices.

Host governments will need to adapt to oil companies strategies in order to attract investments.

International oil company executives often emphasise lack of access to resources as one major cause why they are not investing more. And it is a fact that very large oil reserves are located in countries where the international oil companies have no or limited access. In these countries – among which we find several of the resource rich OPEC countries - the bulk of investments are undertaken by national oil companies.

Energy investments often compete with other needs in these countries. Competing requirements for social and infrastructure expenditures can limit funds available for energy investments.

Limited foreign investment could also prevent countries from fully benefiting from technological advances that have taken place in the petroleum industry.

The important questions are: will governments make sufficient funds available for petroleum investment or do they have more urgent needs to fulfil? And will international and private oil companies be offered attractive investment conditions, political and other risk factors taken into account?

These are important questions which must be addressed by host governments.

I will not prescribe any solution for any country. It is my firm conviction that every country has to find its own way. But based on our own experience, it's my strong belief that the international oil companies can play an important and necessary role in developing national petroleum resources. This can be done without loosing national control and also without loss of income.

Our experiences with this model in Norway have been good. Petroleum activities in Norway are now showing strong signs of growth.

Norway is still a promising petroleum province with large resources to be discovered. Slightly less than one third of the recoverable resources have been produced. Furthermore, estimates show that one fourth of the total oil and gas resources on the NCS remain to be found. We need to explore for these resources, find them and develop them efficiently.

The latest forecasts indicate a high level of exploration activity in coming years. For 2005 twice as many exploration wells are expected to be drilled than last year. In fact, availability of drilling rigs could be a limiting factor.

The high oil price is a big contributor to this development. But the government has also implemented targeted initiatives strengthening a positive development.

We have increased the frequency and the scope of licensing rounds, as well as tightened work commitments. The government will continue to ensure that the industry has access to prospective areas, both in mature parts of the shelf and in less developed areas.

An important priority for us is to establish the NCS as an attractive province also for new entrants. During the last 5 years, 22 new companies have become pre-qualified or have established operations on the NCS. Many of these companies play or will play an active role in licensing rounds and contribute to a constructive and competitive environment. I would however also stress that the established companies are essential for the future developments of the Shelf. The new companies will not substitute, but supplement the existing players.

Also looking at field developments, activity is picking up. The investment level in 2005 is expected to reach all time high. For the next five years total investment forecasts are almost 10 billion USD higher than what we expected just six months ago.

Efforts to increase the recovery rate from existing fields are high on the operators' agenda. Today we expect an average recovery rate of 46 percent on the NCS. This is a considerable increase compared to 1991, when we expected an average recovery rate of 34 percent. Our ambition is to reach a recovery rate of 50 percent or even higher.

Norway is now producing 3, 2 mbd of oil, a level we expect to sustain for a few years, before production starts to decline.

For natural gas the picture is different. Gas resources are plentiful and we expect to increase gas production by about 50 % in 5 years, from a current level of 80 billion m3. Nevertheless, by 2020, the total production of oil and gas could be some 25 % lower than it is today.

The development in the Arctic region could change the prospects significantly.

Many believe that the world's Arctic regions contain significant amounts of petroleum resources. The US Geological Survey (USGS) estimates that as much as one fourth of the world's remaining petroleum resources may be found here. Although Norwegian authorities do not necessarily agree with the exact numbers presented by the USGS, we expect that large resources of oil and gas are still to be found in the Barents Sea.

The Barents Sea will be included in the next license round in Norway. The received nominations from oil companies show that there is a strong interest in the industry for exploring for oil and gas in the Barents Sea.

Let me conclude,
It is likely that we will continue to see high oil prices in coming years, supported by growth in oil demand and limitation on capacity.

National and international oil companies will have to face the challenge of implementing viable investment programs to meet the growth in demand. The challenge for host governments is to offer attractive investment opportunities for oil companies.

Governments must also consider implementing stronger measures for energy efficiency, especially in OECD countries, with their high energy consumption per capita.

And with respect to Norway, I can ensure you that we will do our utmost to develop our oil and gas resources efficiently and continue to be reliable supplier of energy.