"North Sea Oil and Gas – Structural Changes"

Ladies and gentlemen, good morning,
I would like to welcome you to this ONS press breakfast on the occasion of the Offshore Technology Conference here in Houston. The ONS press breakfast is a tradition and a great opportunity for me, as a representative of the Norwegian Government, to give you an update on the recent developments in Norwegian oil and gas policies.

As you all know, Norwegian oil and gas policies are in a phase of substantial change. I will elaborate on this later. First, I would like to give you an update on the key figures of Norwegian oil and gas activities.

First of all I would like to remind you that Norway is a major oil producer and exporter. Currently Norway is the sixth largest oil producer and the third largest oil exporter in the world.

The resource base on the Norwegian Continental Shelf (NCS) is substantial. According to our latest estimates, we have more than 13,8 billion Sm ³> petroleum on the NCS – this is equivalent to more than 86 billion barrels of o.e.

By the beginning of 2001 about 22 percent of Norway’s petroleum resources have been produced. Considerable oil and gas resources accordingly remain to be discovered and produced. Possibilities for making large new discoveries, primarily of gas, are good. In our estimates, 27 percent of the resources on the NCS are yet to be discovered.

From the early 1970-ties the total petroleum production from the NCS has been increasing quite rapidly. The petroleum production in 2000 was all time high with an oil production in the range of 3 million barrels per day and a gas production of 1800 billion cubicfeet.

The low oil prices of 1998/99 had a major impact on the investment level on the NCS, as in the rest of the world. Today, we see that the oil companies are investing in exploration and new field developments again. In our prognoses the investment level is expected to be around 5,5 billion dollars in the years to come.

I will now turn to the challenges facing the NCS and Norwegian oil and gas industry – before I give an overview of the policy changes meeting these challenges.

Some of these challenges are:

• The opening of new petroleum provinces.

New petroleum provinces have been opened and provinces, which were closed, are in the process of being reopened. In this picture the NCS is one of a number of options available to oil companies worldwide. This means tougher competition between the different petroleum provinces for investment capital and the best human resources.

Opening of new petroleum provinces also increase the international market opportunities for the Norwegian oil and gas industry. The Norwegian oil companies and supply industry are today exploring investment opportunities and markets in these new areas.

• Consolidation in the oil and gas industry.

The oil and gas industry has displayed a strong trend towards consolidation with mergers and acquisitions in recent years. This trend has led to fewer and bigger oil companies and increased competition, which has consequences for the player picture on the NCS. We see the same trend within the supply industry as a response to the consolidation among the oil companies.

• Parts of the NCS are maturing.

Parts of the NCS have moved into a mature phase – especially in the North Sea. Discoveries are fewer and smaller – and commercially more demanding. The challenges faced in recovering as much as possible of the resources and in utilising existing infrastructure are growing. Developing resources from these mature areas in a profitable manner is more demanding than in the case of the largest oil and gas fields.

In these areas there is a need for players with expertise in marginal field development and tail end production. The experience from other maturing oil provinces shows that other companies than the major oil companies could be better at developing the oil and gas resources in these areas.

We believe that increased diversity of players on the NCS, with smaller and more specialised oil companies, downstream companies and service companies will be necessary to further develop the petroleum resources. This need for new participants has been addressed in a recent White Paper by the Government, which opens up for new players and licensees. The Ministry has already pre-qualified some new companies as stakeholders on the NCS and is positive to new entrants.

At the same time as some areas are maturing the frontier areas of the Norwegian Sea are still highly prospective. Development of these areas will require the competence of the major oil companies and their abilities in raising capital and developing technology for more complex operations in deeper waters and rougher environment.

This year we are facing the 17 ^th> licensing round. It will be launched in the third quarter of 2001 and includes areas in the Norwegian Sea. Awards during this round may be given in the second quarter of 2002.

Statoil/SDFI
The single most important adjustment in Norwegian oil and gas policy is the ongoing process of improving the State's ownership interests to the oil and gas activities. This is the issue concerning ownership of Statoil and future management of the SDFI.

Norway’s oil and gas resources belong to the whole Norwegian society and must be managed to the best advantage of present and future generations. The largest possible value creation to society from oil and gas operations accordingly represents an overriding objective for the government’s oil and gas policy.

The changes in market and competitive conditions in the oil and gas industry necessitate adjustments to achieve this goal and to continue safeguarding employment, high value creation and a strong Norwegian oil and gas industry. It is important that this industry both fulfils its responsibilities on the NCS while at the same time being competitive internationally.

Accordingly, the Government put forward a Storting proposition just before Christmas, concerning the above. Last Thursday this proposition was discussed in the Storting, which approved the proposed restructuring.

Statoil was established in 1972 as the State’s commercial instrument in petroleum activities. It was long a privileged national State-owned oil company. Statoil’s role in Norwegian oil and gas policy has changed fundamentally over the past 10-15 years. The company operates today under the same commercial terms as the other participants
on the NCS, and is no longer a petroleum policy instrument. Statoil pursues operations in several business areas: exploration for and production of oil and gas, refining, petrochemicals, marketing and other activities. In addition to being the largest operator on the NCS, the company has secured a number of good positions in other petroleum provinces.

One proposal to the Storting was to open up for private owners in Statoil and to list the company. The Storting approved this proposal.

Expanding ownership will supply new expertise, partners and capital. The State will retain at least two-thirds of the shares in the company. Initially new owners corresponding to 15-25 per cent of the company’s value will be brought in through the listing.

The SDFI was established in 1985, by dividing most of Statoil’s production licenses on the NCS in a direct financial interest for the state (the SDFI) and a commercial share for Statoil.

An SDFI share has been included in nearly all production licenses awarded since its establishment. The size of the share is related to the profitability and resource potential of the individual production license.

The SDFI represents substantial State assets and revenues. Through this arrangement, the State is a direct participant in more than 150 production licenses as well as in pipelines and land-based plants. At present, Statoil manages operational and commercial functions for the SDFI on behalf of the State. After privatisation, however, a new company will take over the responsibility for managing the SDFI.

The Storting has decided that holdings, corresponding to 21,5 per cent of the asset value of the SDFI, are to be sold to Statoil and other companies as part of the restructuring of the State's assets, providing the State achieves satisfactory terms in the transactions. 15 per cent of the assets will be sold to Statoil and 6,5 per cent to other companies.

The Government envisages that the State will continue to take SDFI assets in future licensing rounds.

A restructuring along these lines would give companies increased license interests on the NCS. Larger holdings will provide companies with stronger incentives, allow them to take better advantage of economies of scale and coordination benefits in and between production licenses, and strengthen the decision-making processes. This will enhance exploration, development and operational efficiency as well as extending production.

As a consequence of a privatisation of Statoil, the present management arrangements of the SDFI cannot continue unchanged. An important question has therefore been how to manage the SDFI assets the State decides to retain.

Today’s management model for the SDFI has functioned satisfactorily since it was established in 1985. The present management model contains a number of positive features, which we have decided to retain.

The Government proposes to establish a new State-owned incorporated company to manage the SDFI portfolio. This new company will fulfil its purpose without possessing all the expertise of a traditional oil company. The company will not apply for licenses on its own account. It will not be given operatorships. Activities in which the company is involved will be functionally related to petroleum activities on the NCS. The company will manage SDFI assets at the State’s cost and risk.

Neutral and efficient utilisation and development of natural gas transport and processing facilities are important for realising the value of Norway’s natural gas, and must be viewed in a long-term perspective.

Statoil has a key role in the gas transportation system, but the privatisation of the company necessitates some adjustments to the system.

Thus, the Government has proposed to establish an independent company to transport natural gas on the NCS. This proposal was approved by the Storting last Thursday. The new company will concentrate its activities on system operation, license administration and overall supervision of the transport infrastructure on the NCS. For the time being, this company will be owned by the State until a durable form of ownership has been found for the Norwegian pipeline system.

Preparatory work for establishing a management company for the SDFI and a transport company for natural gas is also well in progress.

The Norwegian oil and gas industry is in a phase of major structural changes. These changes are challenging the present Norwegian oil and gas policy and make policy changes necessary. The government has taken steps to substantial adjustments in the oil and gas policy to respond to the dynamics of the oil and gas industry. I believe that these policy adjustments will strengthen the competitiveness of the NCS and secure the future of the Norwegian oil and gas industry.

Thank you for your attention!

Foils in PDF format
Foil: Production/export.
Foil: Petroleum resources NCS.
Foil: Oil production.
Foil: Challenges to the NCS.
Foil: Map of the NCS.
Foil: Ownership of Statoil
Foil: Restructuring of the SDFI