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The current oil price decline, and the prospect for lower prices, raises the issue of the robustness of Norway’s petroleum industry. In recent years, exploration and development have boomed, as have the costs. The concern is that low oil prices, e.g., $50-$60/bbl, will put an effective brake on E&P in Norwegian waters. The concern is justified, but there is hope.
Norway’s offshore is huge, stretching from the Barents Sea border with Russia in the northeast, to the North Atlantic border with Iceland in the northwest, and to the North Sea border with Germany and the Netherlands in the south, not forgetting the North Sea border with the UK in the west. Conditions are different; as a mature oil province, the North Sea has the easiest conditions in terms of water depth and weather; it is considered fairly well explored. The Norwegian Sea in the middle, and the Barents Sea in the north, are more challenging and little explored.
Indeed, since petroleum activities commenced in 1966, and as of 2013, less than 1,000 exploration wells (wildcats and appraisals) have been drilled in Norwegian waters, about a third of the number of wells drilled in the much-smaller UK offshore. By contrast, the success rate, measured by commercial finds, has been 43% in Norway, against 23% in the UK.
The North Sea is likely to stay attractive, but the Barents Sea may suffer. Throughout Norwegian waters, marginal projects are threatened by the oil price decline. Indeed, historically, Norwegian petroleum activities have been highly sensitive to oil prices. In the low-price environment of the 1990s, exploration fell. It picked up only in 2006, as prices rose markedly, and new tax rules provided better incentives for newcomers.
Even before this fall, a reduced E&P pace was in the cards for the next few years. The oil price decline will cause several projects to be delayed or abandoned. Paradoxically, that may be advantageous. Cost increases in recent years have been driven largely by industrial factors, rather than geology. In Norwegian oil projects, drilling typically represents 50% to 60% of total cost. Since 2002, rig rates have followed oil prices; the floater daily rate has risen from $100,000 in 2002 to $500,000 in 2013. Lower activity is likely to moderate costs, as is already evident with rig rates. A more alarming sign is the loss of drilling productivity. There is no good explanation why drilling operations have become slower. With lower oil prices, the problem is acute.
Norwegian petroleum taxation permits a 90% deduction of capital costs against a 78% tax bite of the net income. The disparity does not provide strong incentives for cost-consciousness.
By the end of 2013, exploratory drilling had occurred on blocks totaling less than 5% of the area that the Norwegian Petroleum Directorate considers to have potential. The reasons are complex. Technology has been an obstacle, but the desire to keep a moderate pace in licensing and exploration is also due to environmental concerns and economic needs. Norwegian waters are some of the world’s major fishing grounds, important to global food supplies. Moreover, Norway’s population of just 5 million has limited economic requirements. GDP, per capita, is about twice the U.S. level. There are serious concerns about the economy overheating and being dominated by petroleum. The oil price decline has strengthened these concerns.
Nevertheless, even in the North Sea, a major field was found in 2011, which should produce up to 650,000 bopd for decades. Technically, the find should provide incentives for more exploration. Economically, it could strengthen the argument for holding back. Anyway, that single find is likely to arrest or even reverse the decline in liquid production that has taken place since 2001.
Technological progress is making Norwegian waters more accessible and attractive. Since 1980, there has been a gradual increase in efficiency and productivity that has yielded a cost decrease on comparable projects of 3% to 4% per year. The trend contains some qualitative leaps, such as 3D seismic, stratigraphic drilling and joint transportation of liquids and gases. This has gradually expanded the field of action. The majority of Norwegian waters can still be defined as virgin territory from a petroleum point-of-view, whose potential is difficult to quantify. Therefore, Norway’s offshore represents a frontier. For Norway’s actual output, the time horizon has probably been underestimated.
Major uncertainties remain. Exploration levels not only depend on geology, but also on oil prices. With lower prices, the Norwegian petroleum frontier becomes more marginal, and of less interest to the industry. A number of years ago, Russia’s Barents Sea prospect, Shtokmanovskoye, was scrapped, even when prices were high. Oil company interest in the Arctic is fading quickly. Also in Norway, several marginal prospects are expected to be deferred or abandoned, due to lower prices.
Indeed, the Norwegian supply industry is likely to lose contracts, both at home and abroad; the oil price decline is universal and hitting all producers. Lower prices affect the earnings of all oil companies, but more so those that are upstream, only. In Norway, many smaller newcomers that have succeeded in exploration in recent years will be affected badly, and probably will be bought up by larger companies.
So, what measures can the Norwegian government take to stimulate activity? The Special Tax on petroleum extraction, currently at 51% in addition to the corporate income tax of 27%, may be cut. The depreciation schedule also may be accelerated from six years to one. Rig rates are falling quickly. Lower activity will create spare capacity in the supply chains and reduce costs. Finally, lower oil prices will again, as in the late 1980s, force innovation and cost-cutting on the industry. The potential is considerable. 
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