Political advicer Erlend Grimstad

Opening address IOR conference

Speech March 9th 1998

Ladies and Gentlemen!

Introduction

It is an honour for me to give the opening address at this seminar, and I am very pleased to see that so many have put aside time to discuss how we can become better at recovering more of the petroleum resources we have found and will find in the future.

Delays of investments in fields not yet approved

Before we start out on the theme of the seminar, I will use the opportunity to say a few words about the recently announced measures the government has initiated to reduce the investment level.

Norway, although a small country, is one of the worlds largest petroleum producers. We may thus risk to enter a situation where the oil- and gas related activities get a too high share of the overall economy. Such a development may cause great structural problems when the activities reaches their end, or when large rapid changes occur.

The government therefore sees it as an important part of the petroleum policy to lay the foundation for a long term stable activity level in the industry, both with regards to investments and production .

The Norwegian economy is now facing clear signs of pressure after several years of continued growth. The growth in GNP is high, there is a lack of skilled workers in many categories, growth in private spending on consumer goods is high and bank lending is also showing high growth rates. All these elements indicate a clear danger of overheating the Norwegian economy. The government therefore sees a need to find measures that can contribute to cool down the economy.

In light of this, the government views the substantial increase in the latest investment prognosis in the petroleum sector as very serious.

There is also pressure tendencies within the industry, which is made visible through record high rates for drilling rigs, shortage of manpower within certain professions and cost increases in projects under development.

In this situation it is to the benefit of all parties to conduct a levelling of the investment activities.

The government is aware that investments in the industry is related to projects in different stages and of different nature. For projects already in production or where development has been decided, delays of investments would be very costly. These projects should therefore not be postponed.

Onshore investments and investments in pipelines are necessary to secure transport and landing of petroleum from fields already in production or under development. In addition, these pipeline investments are necessary for enabling a proper fulfilment of signed gas sales contracts. These investments should therefore not be postponed.

For field developments under evaluation that are not yet approved by the authorities, the picture is more faceted. There is different consequences of an investment delay for each field, and the evaluation is by no means simple.

In the time prior to our decision, the authorities has had a good and constructive dialogue with the industry, and there is consensus that the activity level is very high and that measures need to be taken.

After a thorough overall evaluation, the government has therefore decided to approve PDO's for new field developments in 1998 in a normal manner, with the exception that start up of investment expenditures will have to wait one year from 1998 to 1999. In the waiting period after approval, the companies will be allowed to sign contracts and to work on concept optimisation, but will not be allowed to start significant investment activities or detail planning and engineering.

In our prognosis and analyses twelve field development plans are expected to start investments in 1998, with the 4 majors; Snorre B, Huldra, Gullfaks Satellites phase II and the Valhall water injection developments representing the bulk of the investments. The effect of delaying the investments one year is to reduce the overall investment level in 1998 by roughly 5 billion kroner, and by roughly 12 billion kroner in 1999. In the years after this, the postponement of investments will lead to a less rapid decline in the investment level, and thus contribute to a more gradual and stable development in the activity level.

In the work and evaluations undertaken by the ministry during the latest weeks, we have had a good dialogue and co-operation with the companies in the industry and other parties.

In our proposal we have tried to minimise the negative consequences for the oil companies and the supply industry, and we intend to continue this dialogue as the plan is enacted.

Further, we emphasise that the measures undertaken is a result of the very serious economic situation, and in the evaluation done the macro-economic considerations have outweighed the other aspects.

The potential of IOR measures

This government is very concerned about utilising natural resources in an way such that as little as possible goes to waste. We think that this is the only sustainable policy in the long run, and we are also convinced that it will be beneficial in strict economic terms. The efforts undertaken by the various companies to increase oil recovery is therefore viewed as very positive by this government.

Many fields on the Norwegian continental shelf have started to, or are about to, go off their plateau production level. A continued clear focus on increasing the recovery rates from the various fields are therefore needed both to assure that Norway remains an important oil and gas producer also in the future, and also to maximise the utilisation of the oil- and gas resources totally.

Let me just illustrate the excellent work done over the past few years. The 23 fields that were producing in 1991 have increased the estimated recovery rates from an average 31 % in 1991 to 41 % in 1996.

In our latest prognosis we now assume that the recovery rates can be increased even further, to an average level of 50 % for oil and 75 % for gas. Such an increase corresponds to around half of all oil produced on the Norwegian shelf and for more than all gas produced to date.

This clearly illustrates the magnitude of our ambitions, and the importance of a continued effort to find and implement measures to increase the recovery rates and thus to improve the utilisation of the resources in existing and new fields.

It should be pointed out though, that this expected increase in the recovery rates depend on technology that is not yet available. Thus, the task ahead of us is certainly a difficult one, but I am quite convinced that the goal can be met.

In the future, substantial gas volumes will be needed for injection purposes. There is still available mature gas resources for new sales, but when also considering contracts under negotiation we are coming close towards a balance. Future gas sales will therefore have to be considered against the need for gas for injection purposes.

IOR and the environment

Although IOR measures are needed and welcome to make our resource utilisation more efficient, we can not ignore that there are considerable environmental challenges to face. This is particularly true in these post - Kyoto times, and I am therefore very pleased that the topic will be thoroughly addressed at this seminar.

The Norwegian petroleum policies has for a long period been based on the concept of overall resource optimisation, exploitation of large scale advantages and optimisation of all installations seen as a whole. This policy has contributed to efficient production and far lower emissions than comparable activity in other countries. We are concerned with maintaining a comprehensive petroleum policy, where environmental issues are given proper attention.

The authorities will, in the near future, adapt its policies and measures towards emissions and discharges from the petroleum activity in two separate ways that may have consequences for the work done on IOR.

Firstly, the Storting has been presented a proposal to adopt a new policy regarding discharges of environmentally hazardous chemicals. The policy implies among other things that new field developments as a general rule shall not be allowed any discharges.

Secondly, there is the follow up of the Kyoto protocol- that is emissions of green house gases. The government will shortly present a white paper on the Norwegian follow up of the agreement and a proposition on the work carried out by the Green Tax Commission. There is a clear link between these documents, as the CO2 tax is the most important "green tax".

The climate issue will most probably be the biggest challenge to the oil industry. Due to the binding agreements on limiting emissions of "climate gases", oil- and gas prices are expected to be lower than would otherwise be the case. The authorities will also implement new measures to limit emissions from national sources of emission, that are currently unregulated. This is done to increase the cost effectiveness related to reducing the emissions. At present there is no intention of increasing the CO2 tax levied on the continental shelf activity.

To speed and encourage the development of technologies that can reduce the environmental problems associated with oil production, the MILJØSOK has been established. This forum acts as a meeting place between authorities, the oil industry and other parties where the aim is to seek and distribute solutions to environmental concerns. The government thinks that this forum will play a vital role in our work towards meeting our international obligations and environmental ambitions.

The different IOR measures have different environmental effects. Up till now much of the production increase has come as an effect of improved drilling technologies and better seismic which is not energy intensive. Other IOR measures, such as gas or water injection are quite energy intensive, thus creating a potential conflict between the goal of maximum recovery and low emissions to air. This is especially true for tail -end production. There is also a problem of increased amounts of produced water as oil recovery increases. The government is therefore pleased that new technologies, such as f. ex. down-hole separation have been developed to help solve these problems.

In light of the obvious advantages of recovering as much of the resources as possible, the authorities are therefore encouraging the companies to work hard to find new and better solutions to these problems. To meet these ambitions it is important to co-operate, and to distribute ideas, experiences and solutions. The NPD has been given responsibility by the MILJØSOK to co-ordinate this work, and to act as a catalyst for new ideas.

The success of our efforts is decisive for our ability to use the resources to the best of the companies as well as our nation. Further, it is paramount that we also manage to recover the resources with as little as possible strain put on the environment, and such that we fulfil our international obligations.

Thank you for your attention.