Government of Norway’s Energy Policies and Bilateral Cooperation

Foils from the speech in pdf

Ladies and Gentlemen,
It is a pleasure to be back in Houston. I have fond memories from my previous visits to Houston and I appreciate the oppotunity to address you here today.

In my presentation I will concentrate on the following topics:

• Norway as an oil and gas supplier
• Energy security
• The High North

I would also like to say some words about the ongoing merger between Statoil and Hydro and industry co-operation between US and Norwegian companies.

Global investment levels - offshore
As the Consul Genreral said in his introduction, indeed Houston is a hot spot. According to reports by Infield (tidl. Douglas Westwood), the US Gulf of Mexico dominates a growing offshore market.  Thus, it is not surprising that Houston is a hub in the exploration and production business, which makes it so important for the Norwegian oil and gas industry to be present here.

The Norwegian Continental Shelf (NCS) is also a vibrant offshore market for the petroleum industry, in fact it comes second only surpassed by the US Gulf of Mexico. The activity level is very high at the moment and the next years look promising too.

Investments on the NCS
In the period from 2007-2013 it is estimated that the investments will increase with more than 130 billion NOK  - about 21 billion USD - compared to the forecast given in the state budget for 2007. In the coming four years existing fields will account for 70% of the investments.

This is of course a sign of a maturing shelf. On the other hand these are positive figures because it means that we can prolong cost efficient production from existing fields. This is to a large extent due to the high oil prices, which also makes production from marginal fields more economic. But new business models and technology development come into play. Actually, we see that fields that have been closed down, will be reopened to extract the remaining reserves.

For 2007, the investments excluding exploration costs are expected to amount to about 13 billion USD (82 billion NOK). An estimated 3.7 billion USD (NOK 23 billion ) will be expended in connection with exploration.  The Norwegian Petroleum Directorate will revert to this in more detail.

Norwegian petroleum production
The basic objective for Norway is to be a stable and predictable supplier of energy. Last year we produced about 2.6 mill barrels per day and with a domestic consumption of just over 200 000 barrels per day, we have long been one of the world’s major oil exporters. 

When it comes to gas production, we produced 3.1 tcf (trillion cubic feet) of natural gas in 2006. With negligible amounts used domestically, we rank third among the world’s largest gas exporters.  And we will soon by-pass Canada to second place, as our gas exports by early next decade will increase with 50 percent to around 4.6 tcf (trillion cubic feet).  This implies that exports from Norway accounts for or will account for nearly a third of natural gas consumption in countries such as France, Germany and Britain. 

Energy Security
This brings me to the question about energy security more generally.  It is a complex issue.  It affects energy choices, trade and political relations between countries as well as the environment. 

At least 4 different issues are discussed under the headline of energy security. 

First, there is the question of whether resources will be sufficient to meet future energy demand?  Particularly for oil, this has been a much debated issue.  However, today most experts believe that oil and energy resources should be sufficient for several decades.  I share this view.  I think we will manage this through research efforts, new and improved technology, enhanced oil recovery and development of non-conventional resources. 

Given that there are sufficient resources, the next question is whether timely investments in new production capacity will be made. 

Many see the National Oil Companies – the NOCs – as obstacles to the objective of timely investments.  Globally, National Oil Companies now control around 90 % of oil and gas reserves and 75 % of production.

Personally, I think it is wrong to make the investment issue a question of NOCs versus IOCs.  In some cases where the NOCs are very integrated into the state budget, it may be problematic to finance new investments.  But with the oil prices of recent years, there is generally no shortage of cash among the NOCs.  Moreover, the supply industry can deliver the technology needed as well as project management to supplement the NOCs capabilities.

Whatever role and relations the NOCs and IOCs will have – the importance of the investment and operating environment must be underscored.  A stable, predictable and transparent system will facilitate investments in the energy sector.

The third issue that affects energy security has been labeled “resource nationalism”.  As a new term resource nationalism encompasses many actions by host governments.  In some cases there are clearly reasons to be worried.  However, all changes to framework conditions in producer countries should not be labeled resource nationalism.  Now that oil prices have moved to a much higher level than the 20 dollars of a few years ago, it is evident that governments would want a fair share of the economic rent. 

Actually, Norway is one of the very few producer countries which has not increased the government take in the last years.  There are no plans to change our government take system.  We aim at maintaining stable and predictable framework conditions to ensure a favorable business climate.

The fourth issue affecting energy security is the question of supply source diversification.  Oil resources are, as we know, strongly concentrated in the Middle East.

To meet a growing energy demand it makes sense to increase investments and supplies from sources outside the Middle East.  However, high costs and limited oil resources are constraining supply from a growing number of Non-OPEC countries.  Thus we must expect OPEC and the Middle East to play a significant role also in the future.   

Producer consumer dialogue
I think energy security is best served by having an open and constructive dialogue between producers and consumers.  Energy security is a two-way street.  Where the consumer is looking for security of supply, and the producer is seeking security of demand.  The interests of both parties must be taken into account for a stable energy relationship to emerge.

The reality of energy interdependence is reflected in the producer-consumer dialogue. This dialogue serves to promote global energy security by focusing on issues of common interest.  Minister of Petroleum and Energy Odd Roger Enoksen will be chairing the next IEA meeting.

The High North

The Barents Sea
The Norwegian oil and gas sector is maturing.  However, our geologists estimate that nearly a third of the petroleum resources are yet to be found on the Norwegian Continental Shelf.  That is over 20 billion barrels of recoverable oil equivalent.

Unfortunately, by the end of the last millennium we saw a negative trend in the exploration activity on the Norwegian shelf – fewer exploration wells and fewer major discoveries.  Measures had to be taken to realize the potential still there.

Consequently, we have in the last few years made several amendments to our licensing system.  The main changes are:

• Introducing a new licensing system in mature areas on the Shelf,
• fiscal incentives to reduce fallow acreage,
• attracting new and competent oil companies to the shelf, to foster new ideas and increase competition,
• and a symmetrical tax system where the oil companies are reimbursed 78 per cent of their exploration costs.

 Today we see a massive upsurge in activity on the Norwegian Continental Shelf.  In my opinion, this is not only the result of a high oil price, but also the changes in the framework conditions.  Over 40 new oil companies have entered since year 2000 and exploration activities have rebounded.  This will create the basis for future production.

The Norwegian petroleum activity started in the North Sea some 40 years ago. Since then it has gradually moved to the north.  Today we venture along the Atlantic Margin and to the High North, beyond the Arctic Circle into the frontier areas of the Barents Sea.

The optimism regarding the resource potential of northern waters is partly based on estimates by the US Geological Survey (USGS) assessing that the Arctic holds a quarter of the world’s undiscovered hydrocarbons.  Considerable reserves of oil and gas have already been found in the Barents, Pechora and Kara Seas.

Arctic Challenges
This implies that the High North can be a key area for global oil and gas supply in coming decades.  However, oil and gas extraction in the Arctic also faces significant challenges – technological challenges related to low temperatures, long distances and darkness, as well as environmental challenges.

In the eyes of the Norwegian public, a licence to operate in an arctic environment cannot be taken for granted.  The government is required to balance all interests and limit activities if the risks are too high.  The industry has to demonstrate safe and non-polluting operations. I know the same concerns are important factors here in the US too.

In Norway we have addressed this challenge by developing a so-called integrated management plan for the marine environment.  The management plan considers the compound effects of all human activities in our northern and arctic waters. Environmental consequences of such diverse activities as fishery, maritime transport, long-distance pollution and petroleum extraction have been integrated. 

The government’s decision was to allow for petroleum activities in certain parts of the Norwegian Barents Sea, whereas other areas were deemed too sensitive and vulnerable (for the time being).

Snøhvit LNG
This fall, we will have the first production of natural gas from the Barents sea and the shipments of liquefied natural gas - LNG - from the Snøhvit field will sail to the Cove Point terminal in Maryland – creating yet another strategic bond between the United States and Norway across the Atlantic.

And it may be a new bond to last for a very long time: The Snøhvit licensees are currently planning for the construction of new production capacity at Snøhvit LNG - a train two. In order to make such a development possible, it is necessary to make new gas discoveries in the area. New exploration activity is therefore essential. Recent discoveries, give reason to be optimistic.

The Goliat oil discovery is another very promising project. The exploration wells drilled so far have proven that Goliat is a major discovery. Developing the Goliat field is likely to exceed 3.2 bill USD (20 billion NOK). This makes it one of the most significant future field developments on the NCS. 

Russia
Discussing the High North without mentioning Russia would be an omission.  Norway and Russia share the Barents Sea. If we are to maintain the northern seas as some of the cleanest, richest and most productive marine areas in the world, our two countries must cooperate.

On the Russian side, President Putin has called for a strategic energy partnership between our two countries in the High North, and successive Norwegian governments have accepted the invitation.

The question is what it takes to realize this ambition and achieve a quantum leap in economic and industrial cooperation between Norway and Russia.  It is really a question of testing Russia’s readiness to engage in real win-win partnerships.

The combination of industrial complementarity and geographic proximity also constitutes potential for energy cooperation between Norway and Russia.  Both sides stand to gain from cross-utilization and co-development of skilled labor, specialized offshore technologies, logistical networks and other infrastructure in the High North.

Merger and internationalisation
Even though the activity level on the NCS is expected to increase in the years to come, Norwegian oil companies and the supply industry are positioning themselves for future activities abroad. 

One element in the internationalisation process is the plan for the merger between Statoil and the oil and gas part of Hydro. This merger is to a large extent based on the companies’ ambitions to enhance their international competitiveness. With this merger the new company will become one of the largest offshore operating companies in the world, and a potential partner or operator for any offshore activity.

The government is positive to this merger. However, there are challenges that need to be addressed.

The government is considering all possible effects of the merger and will follow this process closely. 

International sales in the supply industry
Also the supply industries have a significantly higher orientation towards international markets today, than was the case only some years ago. The influx of the Norwegian oil and gas industry is evident here in Houston, but also other areas in the world are subject to increasing Norwegian exports as well as direct investment.

Today, we see that the Norwegian industry is in the forefront with regard to subsea systems, floating production and drilling equipment to mention some examples.  Technologies for both arctic and deepwater operations are focus areas.

In the period 1995-2005, international sales of the Norwegian supply industry increased from 2.5 billion USD to 8 billion (15.5 billion NOK to about 50 billion)(1)

The main point however is that such a growth would not have taken place without co-operation between the Norwegian supply industry and international oil companies. I think US oil companies in particular have been instrumental in providing overseas business opportunities for Norwegian suppliers. Long standing partnerships on the NCS have no doubt produced a constructive framework for expanded co-operation elsewhere in the world. Likewise, I think the industry cluster here in Houston is one that will strengthen US -Norwegian business relations – relations that will be beneficial to both parties also beyond the Gulf itself. 

US industry in Norway
Let me underline: All along the NCS – from the south to the north – Norway has benefited from the best of American skills and experience. Esso (ExxonMobile today) drilling the first well at the NCS more than 40 years ago.  First production occurred in a different license, Ekofisk, which came on stream in 1971. Today ConocoPhillips is investing heavily to expand production.

Let me also mention Marathon whose approach to the Alvheim field development has helped unlock values also in the surrounding areas.

With regard the supply industry, there are many American companies involved in the exploration and production business on the Norwegian Continental Shelf (NCS). Well service companies like Halliburton and Baker Hughes for instance, play a major role in Norway.

Tendering and contract awards are done according to international rules. This means that the awarding entities have to adhere to the principles of non-discrimination, competition and transparency.

Furthermore American oil companies and suppliers are contributing to research and development in Norway.  It probably goes without saying that arctic conditions as well as deepwater operations are among the top priorities in our national strategy for research and technology development in the petroleum sector.   

Let me conclude:

• Norway intends to contribute to energy security by means of efficient resource management on the Norwegian Continental Shelf. We also support the producer consumer dialogue to align security of supply with security of demand.
• We are currently experiencing a period of vigorous activity on the Norwegian shelf.  Higher oil prices have brought significant increases in the activity level providing ample business opportunities for the global supply and service industry. 
• Only about one third of the total resource base has been produced. There is still a substantial potential for enhanced production and new discoveries.
•  There is still a lot of ground to cover in the Barents Sea and the High North – both in terms of exploration and technology development. But we are moving ahead!
• US oil companies and US suppliers will continue to be important to the future development of the NCS.

Today Norwegian and American corporations share business opportunities worldwide both as partners and sometimes as competitors.  I certainly think this event today illustrates the ties between our respective petroleum clusters.

Thank you for your attention!