Full speed ahead?

SVEIN TOLLEFSEN, Manager, Reservoir Technology, Statoil ASA

The oil and gas industry has risen from the trembling aftermath of the global financial crisis and is, yet again, climbing to an all-time-high activity level. The markets are burning hot, and the future is bright. The world needs energy, and our industry is set to deliver. But beware: some dark clouds are on the horizon!

Today, many traditional and conventional oil and gas regions throughout the world are well-matured and already heading steadily toward production declines. Yet, considerable volumes still remain in these regions, and they are far from dead. On the contrary, the industry response has been overwhelming, picking up the challenge and turning fading futures into new, blooming business opportunities. Effectively re-using already existing infrastructure, and available process and transport capacity, we have adapted to a new reality with new conditions. Certainly, over the past decade, many good measures have been taken to maximize exploitation and slow down declines, as much as possible.

We continue to invest heavily in new technology development needed to overcome challenges and obstacles standing in the way of further, cost-effective development and production, while facing ever-higher complexity and risks, and with tougher conditions. This allows us to open up new areas previously inaccessible for field development, such as the Arctic, and to expand mature regions further, capitalizing on already-existing infrastructure and the enormous experience base that we have established. It also allows us to continue our efforts to increase recovery from fields already in production.

The combination of extensive field experience and access to new and better technology has unleashed an additional recovery potential that can maintain production rates and extend field life considerably. Step changes have already been taken, and Statoil has now launched their new recovery ambition, lifted up to a breathtaking 60% for oil fields on the Norwegian Continental Shelf (NCS). This sends a clear message to energy markets, and to the industry at large—the NCS will still play an important role in supplying oil and gas to world markets for a long time to come, and much work and many technical challenges still lie ahead of us. No need for the industry to prepare for down-sizing; rather, the contrary.

In spite of all this effort, however, the longer-term worldwide trend is still the same—production from today’s conventional, mature regions faces a merciless, irreversible decline over time. Thus, these regions are no longer enough, so we turn to ever-more-complex resources, to meet current and future energy demands. Most major companies are now stepping up their focus on exploration and continued exploitation of heavy oil and unconventional resources, including shale gas and oil. We have developed advanced technology necessary to unlock such sources, and we keep pushing the limits to unlock more. This is where the vast majority of the worldwide, remaining reserves are found, and this is the arena in which future business development will play. This will result in a longer-term, more diversified, worldwide energy supply.

So far, so good. However, let’s stop for a moment and think through what is really happening. Here are some observations:

• The cost spiral. In general, very high activity levels, and demand for technical services, have led to considerable price increases over the past decade, escalating development and operational costs. In addition, substantial investments are made into costly IOR measures, further development of more challenging areas, as well as an increased focus on development and exploitation of unconventional resources, increasing overall cost commitments and the financing burden on companies further. Consequently, many firms need to borrow more to keep up the pace, eventually reducing company robustness.
• Lower margins. Total production unit costs have quadrupled over the past decade, whereas corresponding output has hardly increased at all. And even though the oil price has risen considerably too, reflecting an increased, worldwide energy demand, it is not enough to offset all the added costs. The inevitable consequence, therefore, is reduced profitability margins for both ongoing operations and new development projects.
• Higher risks. New projects seem to be sanctioned at increasingly higher break-even oil price forecasts. Having more than doubled during the last decade, many projects are now approaching the $100/bbl milestone, decreasing project robustness and increasing financial risks substantially. Likewise, as we keep entering into, and operating in, increasingly challenging and environmentally sensitive areas, it pushes the technological barriers and development complexity further. This, too, greatly increases operating risks and consequences, if anything goes wrong.

No wonder, then, that the stock markets no longer seem to appreciate the real value of our assets. Because even though we do more and do it better, it all costs more. At the same time, risks are higher, and profitability margins are lower. Therefore, we must respond to another reality gradually evolving around us. We need to ask ourselves, not how far we can go, but rather how fast we can go.

We all have a collective responsibility to continue to build and develop a robust, sustainable industry. The right balance between short-term profitability gains, and long-term sustainable development and growth, at the right pace, is the simple key to this challenge, but yet so difficult…