Building a sustainable petroleum industry - The Norwegian experience

Foils from the speech in pdf

Your Excellency. Ladies and gentlemen

I have been asked to talk about the Norwegian experience with developing a petroleum industry.

I will start by giving some general background regarding the Norwegian petroleum sector to get the right context for our approach.

 

Industry development - Building a petroleum industry
The competence in the Norwegian oil and gas industry today is a result of cooperation and competition. The interaction between the different players in the sector – the companies, the government and the research institutions – has been a prerequisite for developing the Norwegian competence.

An important element in Norwegian petroleum policy has been to attract the best of the international expertise and to promote cooperation between domestic and international companies. Transfer of technology and experience from international companies became key to the development of our national petroleum capabilities.

• Through the licensing framework, we established technology agreements with the international oil companies.
• Training programmes organised by international oil companies, staff exchange as well as integrated project teams helped develop national competences.
• Through targeted R&D efforts we managed to overcome the technological challenges and barriers that exploitation of the resources on the NCS represented.
  

The openness towards international companies has been combined with a strong focus on national control and value creation. This benefited the development of the Norwegian oil and gas industry.

I will now discuss in more details the Norwegian resource management system starting with the national organisation.

 

National organisation of the petroleum sector
Many ministries are involved in issues regarding the petroleum sector in Norway. You can say that we have a system of “checks and balances” within the Government and 5 Ministries have key roles.

• Activities on the NCS will be carried out with due considerations to the environment. Hence, the Ministry of Environment is central. 
• As our petroleum activities take place offshore, we have to take into account the fisheries. Therefore the Ministry of Fisheries is heavily involved before new areas are opened up for petroleum activity.
• The Ministry of Labour and Social Inclusion focuses on every aspect regarding the working environment and safety issues.
• The Ministry of Finance is responsible for the tax system and revenue management. 
• The role of the Ministry of Petroleum and Energy is to facilitate and implement the petroleum policy to efficiently exploit the petroleum resources taking into account all relevant aspects.
  
• The Norwegian Petroleum Directorate is the technical adviser to the Ministry and you will later hear more about their role.
  

Regarding the other companies/organizations listed under Ministry of Petroleum and Energy, they have important roles in either taking part in or securing an efficient organisation of the petroleum sector. 

 

Petroleum policy
The main elements of the Norwegian Petroleum policy is as follows:

The petroleum resources shall be managed for the benefit of the Norwegian society as a whole.

From the very beginning it has been an aim that we shall have  skilled and competitive oil companies and supply industries based in Norway.

Regarding the incomes from the petroleum sector Norway has established a Petroleum fund which at the end of 2006 was worth 1 800 billion NKR (257 billion US$) for use of todays and future generations.

The right to sub sea petroleum deposits is vested in the State, that decides what means should be used to exploit the resources. We have chosen to invite the international oil companies to take part along with our national oil companies. To maintain national control and benefits we have established frameworks aiming at giving the companies the right incentives.

Focus and continous attention to the environment and HSE. This has been the case from the very beginning.

Goal of the Norwegian Petroleum policy is to:

• Maximize value creation through the following instruments
  - the legal and licensing system
  - resource management policy
  - R&D and industrial development

 

Key principles of the Norwegian resource management system
These are some of the cornerstones or principals of the Norwegian resource management system:

The industry needs framework conditions formulating acceptable commercial incentives. Investors in the oil and gas business face huge uncertainties (geology, price and technology). Uncertainty about terms and contractual stability should therefore be minimised.

Clarity of the State’s different roles in the petroleum sector is another important element of our policy.

The State is the resource owner. Thus, the state decides how to exploit the resources and is directely participating through the States Direct Financial Interests.

The state act as regulator of the offshore activities, developing the framework conditions.

The state has ownership interest in the National oil companies Statoil and Hydro, which are both listed companies on the New York and Oslo stock exchange.

Another important element has been to attract companies with international competence and experience. By cooperating with the international companies Norwegian companies have been able to develop and become competitive in a long term perspective.

As a long term petroleum producer, Norway has clearly had an interest in pursuing a sustainable policy where focus on the environment, health and safety and our concern for future generations are taken into account.

I will now turn to the main elements of our licensing policy.

 

The Norwegian licensing system
The Norwegian licensing system is not a system based on auctions, but a discretionary system.

The system is as follows:

• The Cabinet announces a number of blocks for which the companies may apply for production licenses
• Based on applications from single companies or a group of companies the authorities award production licenses to groups of companies based on objective criteria. Any licence awarded is to be considered as a joint venture where the companies resources, capital, competence, research, plurality of ideas and internal checks and balances are pooled.
• A production license confers an exclusive right to exploration for petroleum, exploration drilling and production of petroleum within the license area for a defined time period.
• The companies in the production license share risk, cost and profit.
• The licensee becomes the owner of his proportionate share of the petroleum produced. This means that risk cost and profit is shared in accordance with the companys participating interest in the joint venture.
• The state participate in the licence on equal terms and conditions as any other company in the license. 
   

Licensing system- results

• The size of the Norwegian continental shelf is about 1.4 million square kilometres.
• Petroleum activity has been going on since the mid 60’ies in the Norwegian North Sea with the first licencing round in 1965. In the 1980ties there was a substantial production from the Norwegian North Sea and exploration activity in the Norwegian and Barents Sea. The 1990ties were characterised with production build-up in the Norwegian Sea. From 2000 we have seen deepwater exploration and gas evacuation from the Norwegian Sea and development and further exploration in the Barents Sea. 
• About 60 % of the Norwegian Continental Shelf areas is opened for exploration and 16 % of the opened area is currently licensed.
• Close to 1100 exploration wells have been drilled, proving over 60 billion barrels o.e. of recoverable resources.
• There are more than 300 active production licences on the Norwegian Continental Shelf. Statoil and Hydro are operators in around 80% of these licenses.
• More than 35 years after production started, about 1/3 of the overall estimated recoverable resources are produced and sold. This leaves 2/3 for future production.
• There has been 19 concession rounds so far, normally every second year in frontiers areas.
• In 2003 the Government introduced award of production licences in predefined areas (APA). The premise of this system is the designation of large, predefined exploration areas that encompass all mature areas on the NCS. The forth round of APA, which was announced end of January this year proved that there still is a great interest for the Norwegian Continental shelf. 48 production licences were awarded to 33 companies. 8 of these were new companies on the Norwegian Continental Shelf.
• During the last years we have encouraged more oil companies to be active on the NCS, which we think will contribute to enhanced value creation.

Resource management – depletion policy
When recoverable gas or oil resources are found the next step is that the licensees makes a plan for development and operation, outlining the details of the project. This plan is submitted to the Ministry which makes a recommendation to the Storting or the cabinet, depending on size, of whether to approve the plan.

The approval is subject to fulfilment of several conditions regarding resource management, HSE, environment etc. The plan is the authorities’ instrument to ensure that the resources are developed efficiently.

When the fields are in operation, the licensees need production permits each year. This is to ensure that the Norwegian resources are developed in the best way possible, with due consideration to extraction of both oil and gas.
Also disposal plans for platforms, pipelines etc, no longer in use have to be approved. With a few exceptions all installations must be removed.
 

Petroleum Research and Technology
In order to stay competitive it is important that both the companies and the Government have focus on R&D.

Over the years, investment in R&D has paid off significantly. When we look at the diverse nature of challenges on the NCS activities, the importance of research and technology should not be underestimated. The Government has a high focus on R&D in the oil and gas sector.

The Government’s contribution to R & D is mainly channelled through the research programme Petromaks and the demonstration programme DEMO 2000. These programmes are intended to contribute to attaining the goals set in the national technology strategy OG 21 (Oil and Gas 21) developed jointly with the industry.

• PETROMAKS serves as an umbrella for most of the petroleum related research supported by the Research Council. This large programme covers both long-term basic research and applied research, resulting in the development of new competence as well as new technology.
• The DEMO 2000’s objective is to contribute to faster market introduction of new petroleum technology. Recent evaluation of DEMO 2000 proved very positive which makes it easy for continued support of DEMO2000.

The industry and research institutions are invited to propose projects to these programmes. The approved projects will then be partly financed by the state in partnerships with private sector.

Technology development: Snøhvit and Ormen lange
Over the years there have been many technological challenges on the NCS.

The resent development of Snøhvit and Ormen Lange can serve as a proof that the Norwegian oil and gas cluster use state of the art technology.

• The Snøhvit Project in the Barents Sea developed by Statoil is the first field development in Norway based on an LNG solution. It is also the northernmost LNG development in the world. Snøhvit also represents the first large-scale LNG facility for export in Europe.
• The construction of Ormen Lange with Hydro as operator is the largest industrial project ever carried out in Norway. Beneath nearly 1000 metres of water, the underwater installations and pipes transport the gas to shore. From there the gas will be transported in the longest underwater pipeline (1200 km) to Great Britain.

Both these projects are made possible by using new technology and both will start producing in 2007.

Norwegian industry – competent and competitive
The Norwegian Continental Shelf has proved to be a sound home base and a training arena for the industry.

Today we have developed a world class petroleum cluster consisting of oil companies, the supply industry, research institutions, shipping as well as the bank and finance industry. In fact, most of the companies also have market shares in other petroleum provinces.This is a clear sign of their international competitiveness.

This chart shows that international sales of the supply industry have tripled since 1995. This development is remarkable since the activity in the home market has never been higher than in the recent years. The industry has managed to maximize value creation on the Norwegian Continental Shelf and to expand internationally.

Mexico is of course among the most interesting markets for the Norwegian industry because of its its rich natural resources and its deepwater basins.

To facilitate the internationalization process of the Norwegian oil companies and supply industry INTSOK - the Norwegian Oil and Gas Partners - was established in 1997 by the Norwegian oil and gas industry and the Norwegian Government. INTSOK’s objective is to assist companies in getting business opportunities in international markets.

 

Merger and internationalisation
As mentioned the Norwegian petroleum cluster is in an increasing degree looking abroad for new assignments. One very visible result of this process is the plans for the merger between Statoil and Hydro.

This merger is mainly based on a need to be more competitive abroad. With this merger Statoil/Hydro will be one of the largest offshore companies in the world, and a potential partner or operator for any offshore activity.

In a white paper that will be put forward to the Storting (Parliament) before Easter, issues related to the state ownership of the merged company, and the management of the NCS will be treated.

 

Industry cooperation between Mexico and Norway
My main point has been that the development of a sound and diversified petroleum industry is dependent on cooperation between the government and national and international oil companies and supply industry.

International companies bring the necessary experiences and skills to develop the national petroleum resources in an efficient way. I have also tried to demonstrate that the resource management system and the licensing system can be designed in a way that leaves full national control over the resources and also benefits the national oil companies and the supply industry. 

Norway has today reached a point were both Statoil and Hydro and the Norwegian supply industry are internationally competitive. This is proven by the fact that Norwegian companies to an increasing degree are winning contracts abroad. Especially in exploration and extraction for oil and gas in deep waters and for sub-sea technology, Norwegian companies maintain state of the art technology, experiences and skills.

Norwegian suppliers have already signed contracts with PEMEX and I know that more Norwegian companies are eager to cooperate with PEMEX. The large Norwegian industry delegation that have participated in the INTSOK/PEMEX arrangement in Cidudad del Carmen, and that will take part in the industry business dialogue tomorrow indicates a profound interest for cooperation with Mexico.
 
In my opinion both Mexico and Norway have much to gain, and  much to learn from each other. At political and administrative level we should make sure that the MoU and the addendum to the MoU signed today will be followed up. I am confident that our two countries will benefit from exchange of experiences on both governmental and industrial level.

Thank you for your attention.