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Interview

with Ola Borten Moe, Minister, Ministry of Petroleum and Energy

09.12.2012 / Energyboardroom

There are pressures in the Norwegian parliament to slow down the pace of oil and gas industry development to allow the rest of the economy to catch up. Is Norway a victim of its own economic success in the oil and gas industry and should the industry be reigned in a little?

I experience broad support in our parliament when it comes to oil and gas policy. That said, the success experienced by the industry as well as the wealth that we are generating confers on the Norwegian government a strong responsibility towards Norwegian society. Ultimately we must use these opportunities to further improve the situation for Norwegian society at large and help it to do what Norwegians have always done in the past, which is to pull themselves up by the bootstraps and move forward.

In the years to come, the cost inflation will increasingly require Norwegians to find new innovative ways to compete internationally. Norwegians will therefore have to work smarter in the future than we do today and this is a continuous task for Norwegian society.

We have established a fiscal rule limiting the spending of proceeds generated by the petroleum industry to just four percent of the Government Pension Fund. The reason for this limit is that the moment we start spending this wealth simply to go on holiday, is the moment we turn a great opportunity into a limiting factor on our development as an economy. At this point, I believe we manage the distribution of wealth quite well. Furthermore, the oil and gas industry is without doubt the most innovative business in Norway and is capable of competing admirably on a global level. In my view we need to keep this pressure on to allow this innovation to continue.

Regarding the development of the Norwegian Continental Shelf, is there not a danger that “over enthusiasm” regarding investments in E&P activity could lead to skills shortages, further opex inflation and even neglect of mature assets?

I think that an important part of Norwegian culture is that we do not easily get over excited. When it became clear that Johan Sverdrup was a giant field and the largest oil discovery on the NCS since the 1980s, it was greeted by the Norwegian society both with joy and a strong sense of responsibility; we are aware that this is a significant resource that will require extremely responsible management. For me this was a healthy reaction.

It is true that we need to stay focused on access to skilled workers, we need to look at costs relating to the rig market and overall drilling capacity. We also need to maintain our focus on improving fields’ recovery rate even though it is just as interesting to move towards frontier discoveries.

Norway is currently in a unique position within Europe. Our economic challenges are very different to those of the rest of Europe, yet we are part of the same labour market. Many Norwegian companies are therefore recruiting outside of Norway, which is good for Norway and the workers who come here. Norway is growing and our population is increasing with a good demographic balance and therefore the number of people that the oil and gas industry will be able to draw upon is increasing every year.

Over the last few years I also believe that we have succeeded in generating Norwegian interest in this industry. We have been telling the Norwegian youth that the oil and gas business is an industry for the future and about its importance not just for Norway, but for the global provision of energy. As a result, I believe it has become obvious to many people that the oil and gas business has a future and there are many barriers that will be broken over the coming years. I see my role as helping to promote the energy businesses.

Onshore we also have a lot of activity based around the renewable sector. We are therefore framing the oil and gas industry within a larger energy picture. Up until now, the industry had to put up with the criticism that they were not the good guys in society. This does not prohibit interest in oil and gas companies in fact Statoil is the most popular employer for graduate students. However, the reputation of this industry is changing and the youth is coming to understand that the oil and gas industry not only secures Norway’s future but helps the world to progress.

Over the last year, the Ministry of Petroleum and Energy has been trying to make people understand that the efficient production of oil and gas is not part of the problem but part of the solution. There is no doubt that the world needs more energy and it is often too easy to sit here in a wealthy, energy-rich country and forget that 1.3 billion people on this planet do not have access to electricity – a basic modern need. The oil and gas industry should work with the mindset that they are helping to address this problem.

On the issue of cost there is no easy answer; there are basic market forces at play. However I do believe that this is one of the factors driving the industry into an even more innovative mode. The level of cost is so high that you need to work smarter to unlock resources. There is a tremendous drive to create efficient technologies and improve working procedures throughout the value chain. Cost inflation will be an increasingly important issue for Norway over the coming years and the most obvious way to deal with this challenge is to develop technologies which can bring operating costs down by generating greater efficiencies.

At the Stavanger ONS conference it was clear to me that there are a lot of technologies being developed. I am an optimist. I may not have the full picture of what is in development in every company but I do see that both oil and gas operators as well as technology providers from rig companies to subsea equipment providers are making great progress in their capabilities. Norway is growing as one of the largest offshore markets globally and this is a great testing facility for technologies for the rest of the world.

The third issue we face is maintaining production. The ministry of petroleum and energy released a white paper a year ago where our principal conclusion was that we needed to succeed in four key areas to make sure that Norway was fit for the future and could extract its resources as efficiently as possible. The first and most important element in this plan was to increase recovery rates from existing fields through Improved Oil Recovery (IOR). Secondly, we decided to build up resources close to existing infrastructure to maximise the capex savings that this would provide. Both IOR and our subsea tie-in projects are time critical; they must be completed before the existing infrastructure, platforms and connecting pipelines, are removed. Thirdly, we saw that we had to discover additional reserves in already opened areas and Johan Sverdrup has been a great example of what can happen in this regard. It was an area opened up in the first licensing round in 1965 and several companies were very close to finding it but it finally took Lundin and Statoil to succeed. The fourth element of this strategy was to open up new acreage. Over the last 50 years, Norway has opened approximately half of the total production area available and we are now in the process of establishing a new third petroleum province in the Barents Sea. By working on this strategy, we see the potential to arrest and even reverse Norway’s production decline.

The 22nd Licensing round marks the most significant step towards Arctic oil and gas production. How do you make the judgment call on what is acceptable risk in extending E&P into this sensitive area?

We have for 30 years been operating far beyond the Arctic circle but no further than they are operating in other countries like the USA, Russia and Canada. However, what these countries lack and what Norway can take advantage of is the mild climate in the North thanks to the Gulf Stream. The parts of the Barents Sea that we have opened up are ice free, which makes a difference from an operating and cost perspective.

If we move further north then we will operate in a harsher climate with different challenges and we are not ready for that yet.

In Norwegian history, Ekofisk was Norway’s first major discovery located at in the very southern part of the country. 30 years ago we opened up the middle parts of Norway and we have taken over 50 years to reach the Barents Sea. We have applied a stepwise approach when exploring these areas. This is a history of an industry taking on new challenges as they demonstrate their improved technological capabilities and learn to handle the challenges associated with the production environment. As the industry has progressed we have extended the acreage up and away from the shore to deeper projects with higher temperatures and pressures. I see the capabilities of operators continuously improving and there is no reason why we as a society cannot handle these challenges in the high north. Norwegian oil and gas history has not been written yet; we are still in the midst of this progression towards the North.

The Norwegian government has three principal sources of revenue from the NCS: Statoil, the State’s Direct Financial Investment (SDFI) and the 78 percent tax on oil companies. How do you plan to maximise the government’s benefit from this new petroleum province?

Firstly, we are not going to change anything in the taxation system. We see the fiscal environment we have created as a success: it is steady, predictable and companies value the system. It is a long-term and capital intensive industry so long-term predictability is crucial.

The State is still taking direct shares in new prospective licenses. The SDFI will be an important part of our government’s tax system for years to come. Statoil is not going to receive any special treatment in the licensing round just because it brings revenue for the government. Our income as an owner of Statoil is very limited compared to the SDFI and the oil company tax. Therefore Statoil will be rewarded on the basis of the quality of the work they do and the quality of their license applications. So far Statoil, together with Eni, has been very patient in the Barents Sea and has recently made large discoveries, which they thoroughly deserve given the investment they have placed in this region.

My own target for the extension of the oil patch is to explore the resources available as efficiently and responsibly as possible. For this to occur we need healthy competition on the NCS. Large international companies have the insight and technologies to contribute to this development and I encourage them to put in high-quality applications for the licenses in the Barents Sea. We also need companies specializing on the other parts of the value chain to contribute with new approaches. There are many operators and even more companies qualifying for the shelf which is very exciting.

Norway is internationally known for the high quality of its oil and gas industry standards. To what extent do you see Norway playing a role in shaping the international oil and gas industry which is traditionally conservatively minded?

Working in Norway, I have come to know the industry as very innovative. People tend to characterize the oil and gas industry as conservative but that is not my personal opinion. I see this industry as ready to change and think differently. There is no doubt that the Macondo incident was a game changer for the international oil and gas community which has quickly adapted to a new world.

Personally I hope that I can contribute to maintaining Norway’s ability to compete internationally, increasing the Norwegian industry’s presence on a world scale. Oil and gas as a commodity is by far Norway’s most important revenue stream but the second most important revenue comes from the export of technology and services. All manner of companies need to contribute and Norwegian industries need to expose themselves to more international competition to build on this. In this way, Norway will be able to export its high oil and gas industry standards.

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