We are facing interesting times. Oils are in nominal terms at an all time high. There is unrest in many corners of the world and this is fuelling high energy prices. China has emerged as the manufacturer of goods for the world and this is certainly fuelling demand for energy, especially oil. We are all affected by these developments and that is my subject today.

The petroleum industry is very important for our economy and Norway as a whole. This industry contributes to a large share of our GDP, total investments, state revenues as well as total exports. It is therefore vital to ensure that the oil and gas activities will remain a sustainable, long-term industry in Norway.

World energy demand is increasing. Norway as a major producer of oil and gas has limited domestic consumption - we export most of our production. We are committed to remaining a stable, long term supplier of oil and gas.

I would like to start with my views on the oil and gas markets. I will move on to how we view the situation on the Norwegian continental shelf today and the challenges and opportunities I see going forward.

The energy markets and the oil price
Norway is the third largest exporter of oil globally, behind Saudi Arabia and Russia. Production of crude oil and liquids is about 3, 3 million barrels per day. We are also the third largest exporter of natural gas, behind Russia and Canada. It goes without saying that developments and events in the global oil and gas markets are of greatest importance to the government and to our industry.

Oil market
2004 was a particular eventful year in the oil market:

At the onset of 2005, crude oil prices are still at a very high level. Are current prices a bubble that will burst? Or is the surge in spot prices a signal that also future oil prices will be significantly higher than what we have seen in the past?

I think an increasing number of observers share the view that high oil prices are here to stay, perhaps not above 40 USD, but at least above 30 USD.

Why is this so?

One reason is that oil demand is expected to grow at a strong pace. The International Energy Agency estimates the world's need for oil to be 50 % higher in 2030 than it is today.

Demand will be driven by growth in the transportation sector, where there will be no competitive alternatives to oil for many years to come. Growth in demand will be particularly strong in developing countries, where there is a vast unsaturated need for oil. Developments in 2004 to a large extent confirmed the demand potential in countries like China and India. What we have seen of oil demand in these countries is probably just the beginning.

In addition, demand appears to be more resilient against high oil prices than earlier expected. Oil now plays a less significant role in the world economy than in the 1980'ies, when high oil prices caused a recession. The surge in oil prices last year, however, seems to have left the global economy relatively unmarked, at least so far.

Furthermore, growth in production outside OPEC, has, with Russia as one notable exception, been somewhat disappointing in recent years. Rising finding and development costs, lack of large new discoveries and slow investment by the industry has led many to believe that future expansion of Non-OPEC production will be more difficult and more expensive than in the past.

With oil demand growing stronger than supplies from Non-OPEC sources, the inevitable consequence is that the dependence on OPEC will increase. The dependence on supplies from regions which historically has been politically unstable will thereby grow. OPEC history tells us, that supply disruptions are unpredictable and frequent. But history also demonstrates that OPEC as a whole has been a reliable supplier and able to compensate unforeseen shortfalls in production in member countries due to their willingness to hold spare capacity.

Will OPEC be able to increase capacity sufficiently to meet the increased demand for oil? OPEC countries undoubtedly have the reserves to sustain higher production levels. But the timing and extent of capacity additions would be a challenge and add to the uncertainty in the market. In any case, we should not be surprised if spare production capacity will be on the low side for some years.

Since early 2000 OPEC has had an official price target of 22 – 28 USD/barrel. I understand that OPEC at their meeting on Sunday temporarily suspended this price band while keeping the quotas unchanged. When it was introduced, there was much scepticism about OPEC's ability to sustain the oil price at a level that was almost 10 USD higher than the average price in the 1990'ies. Today we know that such scepticism was unfounded.

OPEC is now in a process whereby the price band is being evaluated. There seems to be much uncertainty about which price target OPEC are seeking, and this might be a source of volatility in the market. The decline in the value of the dollar, which has reduced the buying power of OPEC's export income and reduced the price effect for non-US buyers, will presumably be taken into account by OPEC when deciding a new price target. To compensate for the decline in the US dollar the price band or price target could be lifted by almost 10 USD.

The fundamentals of the oil market should make it possible for OPEC to achieve a higher price target than the current price band.

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 ¾ of upstream oil investment will be needed only to counteract a natural decline in production.

Will oil companies face the challenge of expanding production fast enough in order to meet growing demand?

The study Global Oil and Gas Risks and Rewards published by Wood Mackenzie last fall examined the results of the exploration activities in 60 countries open for the international oil companies over the last decade. The study confirms that in total the exploration activities have been highly profitable - both for the host nations and for the oil companies. In the study Norway ranks 5th in terms of resources discovered and 7th in terms of total value created from the exploration activities.

Oil companies have generated large profits in recent years and with crude prices at 30 – 40 USD they should have every incentive to increase their exploration and development activities.

Others argue that higher oil prices have yet to be fully reflected into oil companies' oil price expectations. The industry was quick to cut price forecasts when the prices fell in 1998/99, but seem to have been slow to adjust to the higher price level we have experienced during the past 5 years.

But in all fairness, oil companies have started to move oil price assumptions upwards. Smaller, independent companies perhaps more so than the oil majors. But long term projects still seem to be evaluated at low prices, in the low $20's or even lower.

On the NCS, activities are definitively on the way up. This is most welcome and I see this as an indication that confidence in sustainable, higher oil prices is gradually taking hold within the oil industry. However I think it is still fair to ask if the oil industry is still too conservative in their price assessment.

Gas market
Gas demand has been through a tremendous growth period during the last decades, and most analysts expect this trend to continue. Gas demand will increase more than energy demand, as natural gas is expected to constitute an increasingly large share of the energy mix.

This is good news. From an environmental point of view, natural gas is the fuel of choice among fossil fuels. As a producer of natural gas, I am therefore pleased to see that natural gas is replacing the use of more polluting fuels in several countries.

There is reason for optimism in the gas industry. However, the positive trends must be handled with care. One uncertainty is the development of gas fired power plants in Europe. Whether or not these power plants will be developed depends on the competitiveness of gas vs. other fuels, and not least on future political framework conditions for electricity generation in consumer countries.

Coinciding with the expected rising demand, many countries also face decreasing domestic gas production. This is particularly evident in the UK, and adds to the net need of gas in Europe. However, continuing high gas prices could reduce this trend significantly by extending the production from existing fields.

In addition, the construction of substantial LNG import capacity opens for gas from a number of new sources around the world. We have just heard from his Excellency Al-Attiyah that Qatar is one of the major new players in the LNG gas market.

Although LNG has inherent flexibility in that it can be diverted to different markets, there is a definite possibility that the market could be temporarily oversupplied.

Russia, Algeria and Norway are the main exporters of gas to Europe. Allow me to focus on Norway. Norway has a favourable geographical position close to the gas markets in Europe. We have the largest offshore gas transportation system in the world which paves the way for Norwegian gas to the markets in Europe. Norway currently ranks as the world's third largest exporter of natural gas. In 2004, exports of natural gas from the Norwegian Continental Shelf amounted to 76 BCM, up from 71 BCM in 2003. Production is expected to continue to rise. As 99 percent of the production is exported, Norway is a very essential supplier to the European gas market. Currently, we supply almost 15 percent of European consumption.

The development of the European gas market has been discussed for decades. When the first discussions on liberalisation of the gas market started in the 1980's, the direction was that this would lead to a market with more players and more dynamics. If we look at the status today, ongoing investments undertaken on the Norwegian Continental Shelf have not been fully based on long term contracts, in contrast to previous major developments where such contracts provided the necessary economic basis. This is in part a consequence of a developed and liberalised British gas market and the full opening of the Norwegian gas sector. I am concerned when it comes to the progress in the opening of the rest of the European downstream market, and that the concentration may inhibit growth in the European economy, and therefore also growth in the energy sector. To date, we have not seen sufficient change downstream to secure fully the access of producers to the market. Such full opening is essential for the development of a market that will secure long term investments in gas projects.

Gas security of supply is becoming an increasingly important issue in Europe. It is of crucial importance for Norway to remain a stable, secure supplier of gas. However, security of supply is not provided by the producers alone. A secure market for gas will contribute to the development of new resources. Security of demand breeds security of supply. The Norwegian gas industry is fully adapted to a new future, but consumer countries must provide an attractive market for gas. For instance, taxation of gas which distorts competition and is not based on relative environmental merits may lead to discomfort for investors in new gas capacity. The same goes for subsidies on competing fossil energy sources.

In order to establish security of supply, consumer countries must help build confidence in gas as a preferred choice of energy. Consumer countries can to a large extent themselves ensure that Norway – and other suppliers – can remain long term suppliers of gas to the European market.

Let me now move on to the current activity level on the NCS and how we see the activity level in the next few years.

The prospects for 2005 are much brighter than what they looked like one year ago.

We expect record high investments in 2005. For the next five years total investment forecasts are approximately 50 billion kroner higher than what we expected six months ago. We believe that this positive development is viable going forward.

Resource potential
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 remains to be found.

We need to explore for these resources, find them and develop them efficiently.

Furthermore, we must increase the rate of recovery from existing fields in mature areas of the shelf. 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 more.

Increased recovery rate requires targeted efforts by the industry, also with respect to research and development (R&D). Finding new and innovative ways of developing resources in a cost efficient manner requires a long – term focused committment to research and development.

Over the past three years this government has doubled public spending on petroleum research. Today this amounts to approximately 300 million kroner every year.

Many operators have ambitious plans for increasing production from their existing fields.We welcome this positive development – it will contribute to extended lifetimes for the fields and thereby enhanced value creation. To illustrate that point clearly, a one percentage point increase in recovery rate amounts to approximately 170 billion Norwegian kroner in additional income, based on a 45 USD per barrel oil price.

In this context I would also like to mention the cross-border cooperation between Norway and the UK which will contribute to efficient development of smaller fields located on the shelf boundary. I am also pleased that Norway and the UK recently agreed on a framework treaty.

Mature areas present, though, new challenges in terms of decreasing production, higher unit costs and smaller discoveries.

In the white paper which was published in May 2004, this Ministry emphasised the need for cost reductions on the NCS. Focusing on cost reductions is therefore a robust strategy in order to ensure solid profitability and extended lifetimes for the fields.

The government as regulator and the industry itself are jointly responsible for reducing the cost level.

Exploration
The latest forecasts indicate a high level of exploration activity in the coming years. In 2004 17 exploration wells were spudded. In 2005 the NPD has estimated that as much as 30 – 40 exploration wells could be spudded. Today availability of drilling rigs could, however, be a limiting factor. Who would expect this development one year ago?

The high oil price is of course a main explanation behind this development. However, this government has implemented targeted initiatives which I believe are important contributors as well.

We have increased the frequency and the scope of licensing rounds, as well as reinforced work commitments. I will continue to ensure that the industry has access to prospective area, 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 for new entrants. Since 2000, 22 new companies have become pre-qualified or have established operations on the NCS. It is evident that many of these companies play an active role in licencing rounds and contribute to a fruitful competitive environment. In the next 3-4 years we expect these new entrants to account for approx. 30 percent of total exploration expenditure on the NCS.

Ensuring a high rate of exploration and continued high activity levels also in mature areas of the NCS are important challenges which we are very much focused on.

We can therefore this year and in the nearest couple of years lean back and follow developments. We expect new discoveries to be made and the recovery rate to increase. What about the more long term perspective? In my mind there is one element which could really alter the future significantly. That is the development in the Arctic region.

Further development in theBarents Sea
The geopolitical interest connected to the Barents Sea will most likely increase in the years to come. The environment, the ice, the darkness, national bounderies to be determined, long distance to markets – the challenges are many. But so is the potential reward.

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

Issues related to the Arctic are global in nature.The clean and productive waters of the Barents Sea, the vulnerable environment and the potentially huge petroleum resource base here, naturally draw global attention. On the other hand, more than one third of Norway's territory lies north of the Polar Circle. Areas under Norwegian sovereignty reach far into the Polar oceans. Our responsibilities and obligations in this respect concern areas that are more than six times the Norwegian territory.

In Norway, our renewed focus on the Arctic has led to a stronger than ever need for a national policy for the North. The Government therefore plans to present a White Paper to the Storting before summer, outlining such overall policy and what measures are to be taken. Our fundamental aims for the North are based on

- a stringent and consistent assertion of sovereignty

- a responsible and sustainable management of all natural and marine resources

- environmental protection and climatic change

- peace and stability

Norway has strong interests in good resource management in the Arctic and we have an international responsibility in this respect. This responsibility is shared with other Arctic nations such as Russia, USA, Canada and Denmark. We must work together to ensure that this part of the world is managed in a prudent and sustainable manner.

Petroleum activity in the arctic offshore is very much in its infancy.

In Norway we have decided to proceed slowly and with great caution. We have built knowledge about the environment and the petroleum activity through comprehensive studies of the area. We have adopted a precautionary principle with the strictest conditions for petroleum exploration and production in the Barents Sea. In practice we adopted a 'zero-discharge to sea from operations' policy when the Government decided to allow petroleum activities to be resumed in 2003. We have introduced a flexible regulatory system. The regulations are based on expected technological progress that will benefit the industry and the society as a whole. I believe that all these measures have been and will be necessary in order to achieve or earn the public opinion's acceptance to operate in these areas.

I believe it has been proved possible to have large scale petroleum activities in the Arctic in a manner that is environmentally acceptable and in line with sustainable development criteria. This is backed by recent studies, but more studies and R&D efforts are required.

The industry now has a major responsibility to demonstrate that exploration and production of petroleum can be conducted safely and without harming the environment in the Arctic. Appropriate technologies and knowledge must be developed to meet this goal. There is a need to develop this technology before we move deeply into the Arctic region itself. The oil industry has a responsibility to bring forward this technology. Contributions from the industry are essential elements in order to ensure public acceptance for activities in the North.

Currently a drilling campaign of 3 wells is under way in the Norwegian part of the Barents Sea South. The geological risks are high, but so is the potential. Following the 19. concession round to be announced this summer, new exiting opportunities to test the multitude of possibilities in the Barents Sea will be made available to the oil & gas industry. It is our hope that the huge successes we have experienced in the North Sea and the Norwegian Sea can be repeated in the Barents Sea.

We share the Barents Sea with our Russian neighbours. Like us, the Russians have recently signalled the intention of a comprehensive concession rounds in their part of the Barents Sea. This is good. Activity and success in one part of the Barents Sea can bring about success and activity in other parts of the Sea. In the future, I believe there is a huge potential for creating value through different forms of cooperation between Russia and Norway in the field of oil and gas. These resources are expected to be a substantial part of Norway's ability to remain a stable, long-term supplier of energy in the future.

Conclusion
To sum up: Global energy demand is increasing and going into 2005 we see market conditions as favourable. This government is taking every measure to ensure that Norway will continue to contribute as a major European energy supplier. Our focus is on ensuring access to prospective acreage for the industry through frequent and extensive licensing rounds, further development of the Barents Sea into a substantial petroleum province, increase the rate of recovery and reduce the cost level. We seek to continue our productive cooperation with the industry in meeting these challenges. In terms of resources the NCS is still prospective holding exciting opportunities for further development in the future.

Thank you for your attention.