Deepwater Challanges and the role of the Government

Distinguished guests, Ladies and Gentlemen,
It is a great pleasure for me to be here in Stavanger and share with you some thoughts on the importance of deepwater developments and the role of the Government.

First of all, let me underline that the Government of Prime Minister Stoltenberg intends follow the overall consensus on the major principles of the environment and energy policy.

The Government has already taken decisions that are expected to have positive bearings for the Norwegian petroleum industry, such as the:

• awards of the 16 ^th> licensing round and
• the approval of Kvitebjørn and Grane, which are major development projects.

The Government keeps a close eye on the activity level of the petroleum industry, and we are aware that the yards attach great importance to new development projects.

Having gone through a difficult period with low oil prices and a low activity level, it is now vital to restore optimism in the petroleum sector and continue to develop the basis for a sustainable industry.

Only by keeping up our national skills and competence, we can meet future challenges.

The discovery of significant volumes of hydrocarbons in deepwater over the last decade has signalled the beginning of a new era in the development of the oil and gas industry. Major deepwater developments have already been started up and several more are in the planning phase. This is a trend we know from Brazil, the Gulf of Mexico and West Africa, in particular.

In Europe, Norway has significant proven reserves of oil and gas in deep water areas, some of which have been developed. The development systems used for some of these fields such as Troll, Draugen, Heidrun and Åsgard, have set new milestones in deepwater acreage.

From a Government perspective it is interesting to note that Norway is expected to represent one of most important deepwater gas basins globally. We are in a fortunate situation to have available markets in Europe and have already acquired considerable experience in handling gas. This is promising with regard to the long-term exploitation of our resources.

Globally, the current proven hydrocarbon reserves in deepwater exceeding 200m are approximately 80 billion boe, whilst estimated deepwater reserves could be as much as twice as this. It is estimated that only about 5% of these volumes have been produced to date (May 1999 Shell report).

In terms of investments, estimates of future capital expenditure across the major deepwater basins are difficult to predict, especially on account of the fluctuating oil price. However, recent estimates indicate that future global capital expenditure could increase from approx. 10 billion USD in 1998 to more than 18 billion USD in 2002 - assuming reasonably stable oil prices above 15 USD.

Europe, with Norway being the major oil and gas province, is expected to account for more than 20% of the worldwide investments.

In other words there is a huge potential. It is therefore important for the Government to assist the Norwegian petroleum industry in unlocking this potential both…

• on the Norwegian Continental Shelf (NCS), and
• in international markets

The obvious question is then: How can the Government contribute?
I think there are three main paths to follow, all of which are inter-connected:

• Stable framework conditions
• Technology development
• Internationalisation

All of above are important policy principles for the petroleum sector as such, but exploitation of deepwater reserves can be said to deserve special consideration due to the complexity and inherent economic and technical risks involved.

First I would like to address the importance of stable framework conditions:

The Norwegian petroleum policy has been based on the principle of attracting the best of international expertise and competence. There has been a consensus that pluralism in the petroleum sector would be the basis for developing a competitive domestic oil industry. By involving foreign oil companies and forging links between research institutions, supply and oil companies, we have managed to develop knowledge clusters, which are fundamental in ensuring a sustainable industry.

In order to achieve pluralism, a viable petroleum policy requires:

• predictability and stability for all parties involved, and
• framework conditions formulating acceptable commercial incentives

With this as a basis, Norway has succeeded in attracting the world leaders in the oil and gas business and thus become a centre for technological development and innovation.

Still, the Norwegian Continental Shelf is different from many other petroleum provinces in that the number of companies active here is relatively small. Only a minor part of the producing fields and fields under development are operated by international oil companies. On the partner side the picture is more diverse and international companies are more involved. This is true both in the mature areas and in the deep-water basins.

Along with the restructuring in the engineering industry, we have, over the last few years, seen a quite dramatic restructuring of the global Exploration and Production industry, i.e. the E&P companies.

At the same time, the international petroleum industry now has access to large petroleum resources that were not available to them a decade ago. Host nations are therefore faced with increased competition.

Together, these changes have a strong impact on the competitiveness of the Norwegian Continental Shelf. It is the Government's intention to strengthen a policy that will allow international companies to invest and operate in Norway in the future.

With the North Sea steadily maturing, we have gradually been opening up deepwater acreage in the Norwegian Sea. The Ministry firmly believes that in the deepwater and frontier areas of the Norwegian Sea and in the Barents Sea, the most experienced oil companies from similar challenges will be the most prominent players.

It is therefore crucial to design a framework that both will give these companies interesting business opportunities and that will secure the Norwegian society a large proportion of the value creation in the sector. This means that we must be prepared to adapt the Norwegian framework conditions to the changing realities of the petroleum environment.

Let me elaborate a bit on the licensing policy, one of the main areas in which the authorities can take an active part in developing the deepwater resources.

From the Government's point of view, a wide range of operating environments will contribute to a better resource management. This is true for both the shallow water regions and the deepwater regions.

However, it's important to keep in mind that the challenges connected to exploration and production in deepwater are in many ways different from those in shallow waters.

Consequently, it might be a need for different companies in different regions of the NCS. In the deepwater regions, the major international oil companies will continue to be the preferred players. They have the manpower, the financial strength, and the experience from other demanding deepwater projects around the world, which will be required to develop Norwegian deepwater acreage.

As for the Norwegian companies, both Norsk Hydro and Statoil will always play a significant part in developing our deepwater recourses. It is important for the Government to give the two major Norwegian companies opportunities to gain experience on the NCS, in order for them to be able to compete internationally. These opportunities, however, have to be based on a system of competition on equal terms and conditions.

It is up to Norsk Hydro and Statoil to prove that they can meet the challenges that deepwater exploration and production implies.

Technology Development
Norway has for many years encouraged co-operation between the industry, research institutions and authorities with a view to ensure continuos technology development.

These efforts, we believe, have made it possible to obtain better and more cost efficient solutions to meet technological challenges - whilst at the same time safeguarding health, safety and the environment.

The cluster of Norwegian oil and gas companies, engineering companies, contractors, equipment suppliers and research institutions have led the way towards technologies that are versatile, cost effective and also environmentally friendly.

In 1999 the Government launched a new Technology Programme called DEMO 2000. This programme reflects the joint commitment of the industry, the research institutions and government to continuous technology development.

The primary objective of the programme is to sustain long term competitiveness in the E&P industry and ensure profitable developments on the NCS. Joint industry and government funding is now allocated to pilot projects that have a potential for:

• Rapid improvement of field economics
• Technological innovations
• Export of new products

Technology for deepwater exploration and production is one of the prioritised areas of DEMO 2000.

Much of the Research and Development committed to deepwater is generic and is applicable world-wide.

Even though we have seen 10 years of tremendous improvements, there are still gaps to be covered: There is still a need to improve existing technology, such as the feasibility and cost of subsea technology with floating production systems, including cost effective design for riser and mooring systems.

In the near future, we can also expect technology leaps having a more profound impact on developments. Widespread use of seabed separation and extended wellstream transfer to onshore plants may become viable options and set the standard for a new and different approach to development projects. Platformless field developments may become tomorrow's main option.

As most deepwater projects require major capital investments, typically in the range 1-3 billion USD, ways to reduce both cost and implementation time without degrading the quality of the production system must be continuously challenged.

Continuous technology development and reduction in both development costs and schedules are therefore required to ensure that deepwater production remains competitive - even in a low oil price regime.

Internationalisation
Even though Norway does not have the same extreme water depths that are found in West Africa and Brazil for instance, we have by harnessing a rough climate and developing large and complex fields – "taming the Trolls" – accomplished a technology and competence base which has proved to be competitive world-wide.

It is a Government priority to maintain a stable level of activity on the NCS sufficient to support a sustainable industry – also beyond the duration of our petroleum resources.

It is therefore a prerequisite that Norwegian oil and gas companies, suppliers and contractors are able to compete internationally. Thus, our industry can contribute to sustaining employment and revenues, but also acquire experience and skills that are fundamental for upgrading the national pool of human capital. This is crucial for further economic growth and industrial development for the nation as a whole.

It is encouraging to see that Norwegian companies are holding leading positions internationally in key technology areas such as:

• floating production, and
• subsea production systems

The combination of a strong home base with the exposure to fierce international competition has no doubt contributed to sharpening their competitive edge in these areas.

However, we cannot take it for granted that Norway will remain a strong home base. There is an increasing trend among technology suppliers to establish core activities in other markets.

Houston for instance is very much in demand for investments related technology development, and many oil companies and suppliers manage their international operations from London, which is a financial centre.

One of the major challenges for the Government is to make sure that we can maintain and further develop a strong petroleum cluster in Norway faced with liberalised capital markets and a globalised world economy. The competitive pressure is increasing and it is not evident that yesterday's winners will be the winners of tomorrow.

The room for Government intervention seems to diminish as the world economy grows more inter-related. This is a new challenge that will have bearings on the Norwegian petroleum policy, but we do not have all the answers yet.

However, it appears that those companies that are internationally exposed, and have managed to take advantage of opportunities for exports and foreign direct investments, have improved their position.

To go international and to maintain the activity level on the NCS are therefore not conflicting, but mutually reinforcing objectives.

I think that both DEMO 2000 and the Norwegian Deepwater Programme are good examples of this.

With regard to internationalisation, the Government will continue to enhance technology development and encourage intra-industry co-operation. The Government will also continue to support governmental bodies and foundations working with internationalisation. In this context, INTSOK will be instrumental. INTSOK was established jointly by the industry and the Government in 1997 to facilitate the internationalisation of the Norwegian oil and gas industry.

The Government strategy for strengthening the competitive edge of the NCS, fostering technology development and supporting internationalisation is part of a White Paper to be presented to the Parliament in June this year. I have now mentioned a few of those issues that are elaborated in the White Paper.

To conclude, I think there is good reason to be optimistic about the future of the NCS:

• Firstly, there is a solid resource base on the NCS, both in terms of reserves proven in deep and shallow waters. These reserves will require new investments and industrial activity, albeit in different technology areas involving different players.
• Secondly, the interest shown for the 16 ^th> licensing round indicate that Norway is still able to attract foreign investment and the attention of key international oil companies
• Finally, the Norwegian oil and gas industry has demonstrated the will and capability to go international.
• With the Norwegian industry’s endeavours to find solutions to the deepwater challenges, I am confident that the recent advances in technology will prove successful, not only on the Norwegian Continental Shelf, but also elsewhere in the world. In this respect, I believe that initiatives like the Norwegian Deepwater Programme have played an important role.

With these words, I wish the steering committee and participants of the Programme a successful symposium, and I hope everybody present will have a fruitful stay in Stavanger.

Thank you for your attention.