Eivind Reiten, former CEO of Norsk Hydro, current Chairman of Norske Skog, Norway
As CEO of Norsk Hydro when it merged with Statoil in 2007, Eivind Reiten discusses his vision for the evolution of the company when the decision was made to merge, through to the business as it stands today: the rapidly increasing costs associated with drilling, and the soft pressures that have already begun to have serious consequences for the entire industry.
Norsk Hydro had a significant presence in the oil and gas industry until October 2007 when the oil business merged with Statoil. Prime Minister Stoltenberg said at the time: “the merger is the start of a new era.” To which extent does the reality today match the vision you had at the time of the merger?
The most obvious reason to merge was that both parties realized that we had been successful in developing the Norwegian Continental Shelf for the last 30 years. Hence, the focus of the next 30 years would be more towards expanding internationally and managing a more mature Norwegian Shell in a productive and efficient way.
Norsk Hydro and Statoil found their selves increasingly competing for international assets. Naturally it was not by accident that we ended up competing for similar assets as we came out with equal competences and legacy. As a result both companies fell in love with assets in places such as Brazil, Angola and the Gulf of Mexico where we could deliver most value.
On behalf of our shareholders and Norwegian society as a whole it became clear to take advantage of these unique competences and join forces instead of fighting each other internationally. In that respect the merger has worked out very well—Statoil is internationally very successful with operations in more than 30 countries.
What we did not see at that time are the fortunate findings on the Norwegian Shelf over the last years. This has come to a positive surprise to all of us. Nevertheless, the new discoveries do not change the fact that the Norwegian Shelf is being emptied in a pretty high speed when it comes to oil. There is a steep decline in production.
Earlier this year you gave a presentation at RWE Dea where you said that: “Rapidly increasing costs associated with drilling could, despite recent new discoveries, have significant and negative consequences for the industry as a whole”. Do you believe that the “Dutch disease” might become a treat to Norway?
Costs that come with offshore operations have significantly increased compared to 2005 in West Africa, Golf of Mexico and even more so in Norway. My concern is that the industry has not sufficiently fought the cost side of their operations.
The Norwegian oil industry is sort of living in a bubble regarding its cost level, salary level and working conditions. However these costs are not affordable for other parts of the Norwegian society.
The oil industry is creating a tremendous challenge for itself because costs to drill a standard production well to increase or maintain production are becoming almost too expensive. We run the risk of leaving too many resources undeveloped.
Cost pressures have already begun to have serious consequences for the entire industry, which will undermine profitability. As a result of these booming costs we simply cannot afford to drill sufficiently to maintain production. That is today a serious problem because so many of the big oil fields of the North Sea are coming to a life end.
Drilling costs in Norway have doubled between 2000 and 2010 and are about 40 to 45 percent higher than in the UK. How do you explain this?
In fact, enhanced oil recovery was the main theme of an expert committee appointed by the Minister of Petroleum and Energy. In the report from the committee presented in 2010, one of the key recommendations was to establish an expert committee to review how to increase drilling and well activities. This committee, which I chaired, was established by the Norwegian government at the end of 2011 with the mandate to identify possible obstacles that may reduce the capacity for drilling and well operations on the Norwegian continental shelf and to recommend measures that may minimize or even eliminate these obstacles.
The government must consider regulations on working hours for offshore personnel. Under current rules, oil service workers in Norway can legally work 1,582 hours a year before overtime, compared with 2,160 in the U.K. The pay each receives per hour, the salary level as such is not that much higher than in the U.K. but if we include the 2/4 (2 weeks on, 4 weeks off) arrangement and overtime the salary cost level is about 60% to 70% above the U.K. salary level.
Frankly, we did not deliver any great news from our analysis as we basically confirmed what we already knew. Nevertheless, the report was received very well by those who are concerned by the cost level. I wrote an article in the Norwegian financial newspaper elaborating on the outcome of the report. The CEO of Statoil was happy about the analysis as the outcome goes hand in hand with his view. However politically it is not easy because we need to start discuss issues that have been negotiated between employer and trade organizations. This is not only to blame the workers association but also the industry that has gradually given in on those things—it is a shared responsibility.
My main concern on behalf of the next generation is that we leave too much oil and gas undeveloped. It is not about the sexy new finds. Prospects will eventually be drilled, either tomorrow or in ten years but if the oil is there it is there. However if we do not take out the last millions barrels in mature fields, it will never be taken out and we will lose them forever. This is really a loss of value!
Naturally Norway is fortunate with its resources. However on the other side we see ordinary businesses suffering from rising costs in the oil and gas industry and increasing wages in the public sector. Where is the end?
It is not something that is starting to hurt—it has been affecting our economy since the mid-eighties. At that time I was in the government where we discussed the successful development of the oil and gas industry without squeezing out the traditional industries.
The government has always been conscious about the situation but has been unsuccessful in preventing other industries to be squeezed out. Looking at the statistics you will see that the numbers of workers and activity in traditional industries – except for fish farming – has declined since the eighties.
That being said, the only way a society can benefit from oil and gas income is to bring it into the economy. As a result the society as a whole has benefitted from the oil and gas industry. For that reason, we should not be sorry about a certain level of squeeze out—it is a result of macroeconomics.
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