Johan Castberg: Norway’s new Barents Sea cash machine wins approval

OSLO -- Formal approval by the Norwegian parliament of Equinor’s plan to develop the Johan Castberg field in the Barents Sea signals the start of an ambitious project that is poised to generate some NOK 264 billion ($33 billion) in profits, according to calculations by energy research and business intelligence company Rystad Energy. The vast majority of these profits will go to the Norwegian government in the form of tax revenues.

“This marks the end of a seven-year struggle by Equinor and its partners to make this discovery commercial, and it marks the launch of a lucrative new development phase for Norway’s northernmost oil province,” says Espen Erlingsen, head of upstream at Rystad Energy. In total, Rystad Energy calculates that the project could generate around NOK 235 billion in revenues for the Norwegian government.

Johan Castberg is located in the Barents Sea about 110 km north of Equinor’s Snøhvit gas field, and is estimated to hold proven volumes of between 400 MM and 650 MMbo, making it the largest and most important oil and gas project in the Barents Sea to date. “Its impact on the Norwegian continental shelf will be eclipsed only by that of the giant Johan Sverdrup project currently progressing in the North Sea,” Erlingsen adds.

The Johan Castberg project is scheduled to come on stream in 2022 and involves the joint development of three separate fields – Skrugard (discovered in 2011), Havis (2012) and Drivis (2014). The development concept – based on a large floating production, storage and offloading vessel (FPSO) – was selected after initial plans to develop the field as a subsea tieback to shore were deemed too expensive and therefore shelved.

A disappointing exploration campaign in 2014 and greater focus on cost reductions are likely reasons for why an FPSO concept was selected. Operator Equinor (formerly Statoil) reports that the development costs have been cut from NOK 100 billion in 2012 to less than NOK 50 billion at present. These savings reflect a combination of the redesigned development solution, lower unit prices from the oilfield service industry and beneficial currency effects.

Rystad Energy estimates that the breakeven price for the project has declined gradually over time, from about $80/bbl in 2012 to just above $30/bbl at present.

The combination of lower development costs and stronger oil prices have transformed Johan Castberg into a highly commercial project. With a Brent oil price of $75/bbl, Rystad Energy estimates that the cumulative revenue of the project will be around $45 billion for the duration of the field’s production life.

The cumulative cost of the project is estimated to be $12.3 billion, thus leaving $33 billion of profit to be split between the Norwegian government and the oil companies in the license group. Out of this, some $25.1 billion will go to the Norwegian government through direct taxes.

In addition, the Norwegian government is a direct owner in Johan Castberg through its ownership of state oil company Petoro. This ownership is expected to generate $1.6 billion in revenue for the government. The government also owns 67% in Equinor, which is expected to contribute another $2.6 billion to the Norwegian state.

“In total, this implies that the Norwegian government stands to earn $29.5 billion, or NOK 235 billion, from this frontier project,” Erlingsen concludes.