Norway's Barents bounce
The death of Arctic exploration has been greatly exaggerated—in Norway, at least
The words frontier and Arctic have been anathema to most cost-conscious explorers since the oil price headed south, so Norway's efforts to bring the two together by trying to entice drillers to the Barents Sea carried some risks. That this effort has met with some success shows Norway is not your typical oil province—and a fresh discovery is likely to provide a springboard for further activity.
Lundin Petroleum's Filicudi discovery in the western Barents Sea, announced in February, may not be the biggest, with a gross resource estimate of 35m-100m barrels of oil equivalent. But its location in the PL533 block is on trend with the Statoil-operated Johan Castberg discovery, just 40km north-west, which has resources of around 0.5bn barrels, and so reinforces the region's credentials as a good bet for explorers. Lundin reckons various other prospects in PL533 could add further gross unrisked prospective resources of up to 0.7bn boe.
Having slashed costs for Johan Castberg to a breakeven price of under $35/b today from $80/b in 2013, Statoil is now hoping to make a final investment decision on a floating, production and storage offshore-based project there later this year. In the central north Barents Sea, the Wisting discovery made in 2013 could hold more than 1bn barrels, according to operator OMV, which is engaged in further exploratory drilling in the region.
Meanwhile, last year's 23rd licensing round, in which Norway awarded acreage in the eastern Barents, a region close to the country's once-disputed maritime border with Russia, attracted consortiums containing some foreign big guns, such as Chevron, ConocoPhillips and Lukoil, as well as Norway specialists like Statoil, Lundin and Aker BP.
While the recent oil-price rise is prompting drillers to take another look at frontier projects shelved in the downturn, there are few similar prospects where serious exploration is yet taking place.
"A lot of drilling is happening in Norway this year. It's ahead of the curve compared to other frontier areas of the world," says Neivan Boroujerdi, a regional upstream analyst at Wood Mackenzie.
According to Oslo-based Rystad Energy, as many as 15 exploration wells could be spudded in the Norwegian Barents Sea in 2017, more than in the rest of Norway's offshore acreage put together. In the North Sea, 11 wells are planned, while three are planned for the Norwegian Sea.
Wood Mackenzie forecasts that 13bn barrels of oil could be discovered in Norwegian waters between now and 2035, of which around half lie in the Barents. Rystad sees annual production there more than doubling by between 2016 and 2025, albeit still a much lower figure than for the North Sea or the Norwegian Sea to the south.
Interest in the acreage close to the Russian border was bolstered by extensive 3-D seismic surveying already carried out in the area, which highlighted the region's promise—especially the Korpfjell prospect in PL859—the block that attracted Chevron and ConocoPhillips to partner operator Statoil and Lundin.
Norway's long track record in the industry, its developed onshore infrastructure and skilled workforce are important to explorers. Meanwhile, the relatively benign conditions and absence of ice, compared to Russian and Alaskan Arctic waters, also make the Barents a lower-cost option. The presence of Statoil as a majority state-owned company with relatively deep pockets and committed to ensuring the longevity of the Norwegian oil and gas industry also helps maintain momentum.
But it is Norway's attractive fiscal regime for drillers that remains one of the country's star attractions. Few places offer such attractive terms. Explorers get a 78% refund on their exploration spend in the year after it's incurred, regardless of their tax position, while the government will effectively cover around 90% of capital investment for oilfield developments in nominal terms. The trade off is that the government takes a high share of the revenue from production (78%), but at a time when oil companies still have very low capex budgets, such upfront assistance is a boon.
Engineers have also had a role to play, completely redesigning projects such as Johan Castberg to make them economically viable. Meanwhile, advances in horizontal and angled drilling meant that an appraisal well on the Wisting find, where reserves lie at less than 250m below the surface, could enter the reservoir at a shallower angle, maximising the chances of encountering oil.
"That well showed you could exploit shallow reservoirs using horizontal drilling in a way that dramatically lowers costs and increases the resources per well quite substantially," says Simon Sjøthun, an analyst at Rystad Energy.
Falling costs have also helped. Statoil says it can drill a well on the Korpfjell prospect for around $25m, a snip compared with the figures seen in frontier plays over recent years.
The case for exploration and production in the Barents has clearly convinced many, but the outlook isn't all rosy. Low drilling costs are partly due to the prevailing depressed rates in the service sector—these may not last, if the market tightens with increased global activity.
Analysts also see a dwindling project pipeline beyond the next five to seven years, and some big names steered clear of the 23rd licensing round, including Total, Eni and ExxonMobil.
Legal challenges relating to potential damage to the fragile Arctic environment could also still hamper development, though the retreat of the ice cap in Norwegian waters—and strong government backing for the industry—may reduce the chances of that becoming a problem.
Still going strong: Norway's offshore riches Source: Petroleum Economist