Reducing oil production on the Norwegian Continental Shelf

- We are currently facing an unprecedented situation in the oil market. Both producers and consumers benefit from a stable market. We have previously stated that we will consider a cut in Norwegian production if several big producing countries implement significant cuts. The decision by the Norwegian Government to reduce Norwegian oil production has been made on an independent basis and with Norwegian interests at heart, says Minister of Petroleum and Energy, Tina Bru.

A faster stabilisation of the oil market is important for good resource management and for the Norwegian economy.

A group of oil producing countries within and outside of OPEC (OPEC+) has decided to reduce their production significantly from May 2020 to help stabilise the oil market. Norway – which accounts for approximately 2 per cent of global oil production – is not part of that cooperation. In an extraordinary energy ministers' meeting in the G20 in April, the ministers committed to taking necessary measures to ensure energy market stability.

- We will cut Norwegian production by 250,000 barrels per day in June and by 134,000 barrels per day in the second half of 2020. In addition, the start-up of production of several fields will be delayed until 2021. Consequently, the total Norwegian production in December 2020 will be 300,000 barrels less per day than originally planned by the companies. The regulation will cease by the end of the year, Bru adds.

The basis for the regulation is a reference production of 1,859,000 barrels of oil per day. Thus, a cut of 250,000 barrels per day in June 2020 gives an upper limit for oil production on the Norwegian Continental Shelf of 1,609,000 barrels per day in June. A cut of 134,000 barrels per day in the second half of 2020 gives an upper limit for oil production on the Norwegian Continental Shelf in the same period of 1,725,000 barrels per day.

The cut will be distributed between individual fields and implemented by granting revised production permits to the relevant fields. Companies that hold licenses in fields covered by the regulation will be affected through their ownership shares in the various fields. The effect for individual companies will thus depend on their ownership share in the various fields. The oil companies will be consulted before revised production permits are granted.

- The cut will include oil fields on the Norwegian Continental Shelf and be fairly distributed between the fields and thereby between companies. It will imply a limitation of production for those oil companies with ownership shares in the relevant oil fields. Gas fields are exempt. Thus, the cut will not affect Norwegian gas production or Norwegian gas exports, Bru says.

Throughout the second half of 2020, oil demand is expected to grow gradually as economic activity is resumed. However, a low oil price will also affect oil production globally going forward. A significant reduction is expected in the more costly oil production – like shale oil and oil sands from North America.

Norwegian oil is produced with relatively low production costs. If global oil storage fills up, all producing countries will face a very demanding situation. This might also affect resource management on the Norwegian continental shelf. Norwegian production in 2020 will also be affected by the pandemic. Several oil fields where operators expected start-up of production in 2020 will be delayed until 2021. That is oil that will not enter the marked in today's demanding situation. In total, these volumes amount to 166,000 barrels per day in December 2020

Production regulation will be implemented through a proportionate limitation for those fields covered by the regulation based on production permits granted, the reference production and other relevant information from the companies.

Background

Pursuant to section 4-4, third paragraph, of the Petroleum Act, the Ministry of Petroleum and Energy issues production permits to the individual field on an annual basis where the quantities permitted to be produced are given. When so required due to important interests of society, the King in Council may, according to Section 4-4 fourth paragraph of the Act, stipulate other production schedules than those stipulated or approved in accordance with section 4-4 first and third paragraphs of the Act. A decision by the King in the Council is planned to be made shortly.

The International Energy Agency's (IEA) latest estimate from mid-April suggests a fall in demand for oil of approx. 23 percent (23 million barrels/day) in the second quarter This large, sudden and temporary fall in oil consumption represents an unprecedented event in the oil market. Efforts to contain the pandemic have so far only had a limited negative effect on world oil production. The combination of these factors has resulted in a large surplus of oil in the market and large quantities of oil in stock. Oil prices have fallen about 70 percent since the beginning of 2020.

The unstable situation in the oil market with low and falling oil prices has led to a reduction in the State's revenues. The situation also means that the oil companies are forced to reduce their planned investment activities in exploration, development and operation. This will have consequences for the supply industry and the activity in the Norwegian economy, as well as the possibility to retain and develop competence in the industry. Seeking a faster normalisation of the oil market, and thereby avoiding major fluctuations in activity and investment levels and taking into account the Norwegian economy and the state's revenues, is clearly considered an important societal consideration that justifies the regulation of production.

The basis for regulating production of oil on the Norwegian continental shelf is a reference production. The Ministry of Petroleum and Energy has established such a reference production based on information from the licensees in their applications for production permits for 2020 and in their reporting to the national budget process in autumn 2019. In cooperation with the Norwegian Petroleum Directorate, the Ministry has adjusted the information with new important information received from the companies during the first quarter of 2020. The Ministry has not been in in contact with the licensees on the Norwegian continental shelf in the process of establishing the reference production. Affected licensees will be consulted before the regulation is implemented through revised production permits for each field.

In the reference production, adjustments have been made for maintenance shut-downs planned for spring 2020 that have been postponed due to infection control measures related to the Covid-19 pandemic. In addition, adjustments have been made following production experience from the start-up phase of the Johan Sverdrup field. These adjustments indicate increased production from the fields in question compared with figures reported autumn 2019.

The reference production does not include fields where the operating company in the national budget process reported expected production start-up in 2020, but where start-up now is postponed until 2021, inter alia as a consequence of infection control measures. This applies to the fields Yme, Martin Linge, Njord, Hyme, Bauge and Tor.

The regulation covers Norwegian oil production. The following fields will therefore be exempt from the regulation:

• Gas and condensate fields
• Fields bordering on other countries
• Some fields, where paricular problems related to resource management apply in a production regulation; including fields in a late tail end production phase

The production regulation will be implemented by the Ministry of Petroleum and Energy granting the fields a revised production permit for the month of June and the period from 1 July 2020 until 31 December 2020.