Chapter 1: Shooting the moon

It was Prime Minister Jens Stoltenberg who first articulated Norway’s ambition to lead international efforts to develop CCS, comparing it to the Cold War race to put a man on the moon in terms of both expenditure (the Apollo programme cost the United States more than Chapter 1: Shooting the moon00 billion) and urgency.

The new budget, the Ministry of Petroleum and Energy said, reaffirmed the government’s “goal of establishing carbon capture and storage (CCS) as an effective instrument against climate change”. The proposed investment in the technology of almost NOK 3.5 billion represented an increase of not quite NOK 1.6 billion over 2009, “the largest ever”, energy minister Terje Riis-Johansen said.

Generally speaking, carbon capture and storage technology aims to combat global warming by trapping emissions of carbon dioxide (CO2) released by burning fossil fuels such as oil and coal, and transporting them by pipeline to sites where they are injected into deep rock formations and so permanently removed from the atmosphere. By happy coincidence, CO2 injection is also a useful technique, in the right conditions, for enhancing oil recovery.

If nothing else, this determination to “shoot the moon” showed that Norway’s petroleum industry was facing the future with its customary optimism, global economic crisis notwithstanding.

Sophisticated technologies
In the meantime, companies continued their deployment of ever more sophisticated technologies to lengthen the lifespan of North Sea fields and tap less easily accessible reserves. Offshore investments  which had almost doubled during the previous five years to well over NOK 100 billion p.a.  remained high and were expected to continue rising despite sharply lower oil prices, according to the Norwegian Petroleum Directorate (NPD).

Although oil output had dropped to about 2.3 million barrels per day in 2008 as oilfields matured, increased sales of natural gas had made Norway the second biggest net exporter after Russia.

“I don’t believe we have any reason to anticipate any serious decrease in activity on the Norwegian shelf, although some marginal projects with higher break-even levels might be affected”, an NPD spokesman told Reuters news agency. Break-even levels in recent years had varied greatly from one project to another, he added, from as low as 0 to $50 or $70 per barrel.

Norway’s importance as a key global player in maintaining a diversified supply of oil and gas is also growing. As Fatih Birol, chief economist of the International Energy Agency (IEA), told a conference in Oslo, the world needs “every drop of oil we can get from Norway”. Small wonder that a record 46 oil companies had bid for exploration licenses off its coasts in the 20th licensing round  as against 19 bids in the previous round in 2005.

	Designing Processes – Constructing Plants.

Ormen Lange
A high point of Norway’s North Sea Saga in the 21st century was the opening in 2007 of the Ormen Lange gas field, Norway’s second largest, after ten years of development.

In terms of cost (NOK 50 billion, plus at least another 16 billion earmarked for phase two), Ormen Lange is the industry’s, and Norway’s, largest-ever single development. Its gas is brought 120 km from the offshore field to Aukra, in the west coast county of Møre og Romsdal, from which the world’s longest pipeline takes it to the British port of Easington. With a peak capacity of 70 million cubic meters a day, Ormen Lange is expected to supply up to 25 per cent of Britain’s annual gas consumption. According to Aftenposten, a leading national newspaper, at the time of its official opening, the project had accounted for precisely 13,509,528 man-hours of work.

A prodigious merger
Ormen Lange’s opening ceremony, attended by the Norwegian King and Queen, followed by barely a week another historic event for the petroleum industry: the merger between Norwegian energy giant Statoil and Norsk Hydro’s oil and natural gas divisions to form a prodigious new corporate entity. Statoil had been founded by the Norwegian parliament in 1972 as a government-owned company to manage the commercial development of the nation’s oil and gas industry. In 2001 the company was partially privatized with listings on the Oslo and New York stock exchanges; the decision to merge with the oil and gas division of Hydro  itself one of Norway’s industrial giants, founded as Norsk Hydro in 1905  was agreed by the boards of both companies in December 2006.

The merger had taken the better part of a year to complete, but was well worth the wait: by the new company’s own account, it had created the world’s largest offshore oil and natural gas producer.

StatoilHydro ASA opened for business on 1 October 2007 with a staff of over 30,000, a listing on the Oslo stock exchange, production of 1.9 million barrels per day and proven oil and gas reserves of 6.3 billion barrels of oil equivalents.

Describing the deal as an historic milestone, Helge Lund, former President and CEO of Statoil (and head of the new company), declared: “The time is right for one strong Norwegian-based energy champion. We are creating a stronger and more competitive company. Combining the best of both organizations, we will significantly improve our competitive position internationally and promote long-term vitality of the Norwegian continental shelf.”

Press offices went into overdrive to describe the other key characteristics of the new company. These included “strengthened production and development portfolio..., a presence in nearly 40 countries, extensive exploration programme and acreage, proven technology and project execution skills, world-class gas value chain, integrated refining and marketing, with substantial trading positions, [and] commitment to renewable energy, carbon capture and sequestration”.

“The Norwegian government, StatoilHydro’s majority shareholder, believes the combined group will have the muscle to expand internationally at a time when production from maturing North Sea oilfields is starting to decline”, Reuters reported. Russia’s natural gas monopoly Gazprom wasted no time in recruiting StatoilHydro as a partner for the development of the vast Shtokman gas field in the Barents Sea.

Gazprom agreed to give the Norwegian company a 24 per cent stake in the venture, described by the Financial Times as “a project seen as crucial for supplying Europe’s gas needs for decades to come”.

	”Inspired by the starry skies of the north”

The name game
Just over two years later, on 1 November 2009, StatoilHydro announced that it was changing its name... back to Statoil.

Explaining the rebranding, the company said: “Although we have a competitive edge and a strong position in Norway, we are relatively unknown compared to the largest global energy companies. To make us stronger without spending large sums on marketing, it is important to create a distinct identity that conveys an interesting story.

“With our new identity we wish to convey what makes Statoil attractive, both as a partner and as an employer. History and nature have shaped us. We have learned to perform under extreme conditions, and we have a culture of taking on difficult tasks where the solutions are as yet unknown. We have pushed the boundaries before, and we’ll do it again. We are a company that works every day to make the impossible a reality, leading the way forward within our industry.

“Our new logo, the star, is inspired by the starry skies of the north. It symbolizes our highest aspirations: continued focus on the Norwegian continental shelf, international growth, and active and targeted work to develop effective new energy solutions.”

Value creation
Norway’s petroleum sector is by far the country’s largest industry, accounting for roughly a quarter of gross domestic product. At the latest count, there were 60 fields in production on the Norwegian continental shelf (NCS) producing 2.5 million barrels of oil (including NGL and condensate) per day and over 99 billion standard cubic metres (scm) gas, for a total production of saleable petroleum of 242 million scm oil equivalents (o.e.). Norway ranks as the world’s third largest oil exporter and the eleventh largest oil producer in the world, as well as the third largest gas exporter. Recent projections suggest that Norway might well have overtaken Canada as the second largest natural gas producer.

Petroleum activities have contributed enormously to economic growth in Norway and to the financing of the Norwegian welfare state. Through nearly 40 years of operations, the industry has created values in excess of NOK 7000 billion in current terms; in 2008, it represented 26 per cent of national value creation. The value created by the petroleum industry is three times higher than in land-based industries and around 23 times the total value creation of the primary industries.

Tax revenues from the production companies and direct ownership (SDFI - the State’s Direct Financial Interest), ensure that the State receives much of the values created from the petroleum activities. In 2008, the State’s net cash flow from the petroleum sector amounted to approximately 34 per cent of total revenues. After more than 35 years of production, the sector has generated net revenues to the State in the order of NOK 3750 billion in current terms. The State’s revenues from petroleum activities are allocated to a separate fund, the Government Pension Fund - Global: on 30 September 2009 its market value was NOK 2549 billion.

Crude oil, natural gas and pipeline services now account for half the value of Norway’s exports. The value of petroleum exports is NOK 600 billion, 15 times higher than the export value of fish. Since the petroleum industry started its activities on the Norwegian continental shelf, enormous sums have been invested in exploration, infrastructure and land facilities: to date, more than NOK 210 billion in current terms. Year-on-year investments totalling NOK 130 billion account for 23 per cent of the country’s total real investments.

	2.5 million barrels a day

Production forecasts
Despite decades of production, only about 38 per cent of the estimated total resources on the Norwegian continental shelf are thought to have been extracted, leaving a huge potential for further value creation. Forecasts of future production, based on calculations by the Norwegian Petroleum Directorate of recoverable resources, presuppose that the authorities and the industry will implement the necessary measures to recover the remaining volumes.

Oil production is expected to remain steady over the next few years pending a gradual decline. Gas exports, on the other hand, look set to increase, reaching 125 to 140 billion scm within the next decade. From representing approximately 40 per cent of the total Norwegian petroleum production, the share attributed to gas production will increase considerably in the future. In the longer term, the number and size of new discoveries will be a critical factor for the production level.

Despite the financial crisis, the level of investment activity on the Norwegian continental shelf has remained high in 2009, largely driven by decisions that had already been made and contracts that had already been signed. The effects of the negative economic trend are expected to manifest themselves in more force later on. However, activity in the industry is still expected to remain high over the long term, particularly in modification and drilling. In addition, forecasters predict an annual market for operations and maintenance of approximately NOK 50 billion for many years to come.

Innovative technology
Technology developed on the NCS is utilized by the international oil and gas industry all over the world. The two largest projects under development on the Norwegian continental shelf, Ormen Lange and Snøhvit, are good examples of world class technologies developed in Norway during the past 35 years.

Snøhvit, which started production towards the end of 2007, is the first field development in Norway based on a liquid natural gas (LNG) solution, and the northernmost LNG development in the world. The sub-sea solution at Ormen Lange, a large gas field in the Norwegian Sea, takes deepwater technological development a significant step forward. Unprocessed gas is transported to shore where process facilities are located. When the field reaches full production, it will meet 20 per cent of the UK demand for gas.

In accordance with government policy formulated when petroleum was first discovered offshore, both the Ormen Lange and the Snøhvit LNG developments are working to the benefit of local communities. Another objective, long since realized, has been to develop a world-class knowledge cluster centring on the Norwegian petroleum industry and the NCS.

Big decisions
Shortly before his resignation in mid-2007 to head Petoro, the state-owned company responsible for managing Norway’s offshore oil and natural gas properties, NPD director general Gunnar Berge wrote: “If we are to achieve the development that we want, with only a slow and gradual decline, serious efforts must be made in several areas.”

Noting the year-on-year increases in the numbers of exploration wells, he urged the industry to take more account of NPD estimates showing that Norway had produced and sold about a third of its petroleum resources to date, while perhaps a quarter had yet to be discovered. It was important to find deposits which, even though they might be smaller than the largest discoveries, were still large enough to warrant development, and to make new discoveries close to fields that were currently in operation, so that the new fields could start producing while the production facilities were still in place.

Among the most crucial decisions facing the industry over the next five to ten years, Mr Berge continued, is the issue of whether the gas resources in the respective fields are to be used as a drive mechanism to increase oil recovery, or whether it is more profitable to sell the gas.

Many of the largest oil fields, such as Oseberg, Heidrun, Åsgard, Gullfaks Sør, Snorre and Grane also have substantial gas volumes that have been used for injection and pressure support for the oil production. To date, at least 500 billion Sm3 (standard cubic meters) of gas have been injected in about 30 fields on the Norwegian continental shelf, yielding more than 200 million Sm3 of additional oil.

As oil production declines, these fields will face important choices: when to stop gas injection and turn to full gas export, for example. When the gas is produced without being reinjected, the pressure in the reservoir drops and it becomes more difficult to extract the remaining oil. Therefore, if too much gas is sold too early, significant volumes of oil will be lost. With constant improvements in technology, gas injection will probably become more efficient in the future, even when the volumes of oil are small. The authorities have to ensure that the decisions made regarding gas export are considered very carefully.

Arctic issues
Another important decision involves the Arctic region, which could account for almost a quarter of the world’s undiscovered petroleum resources. International concerns over security of energy supply, combined with Norway’s determination to make the most of its mightiest industry, have put northern areas high on the geopolitical agenda.

The Barents Sea in particular, by far the least explored part of the NCS, is promising. Although, parliament decided to open the southern reaches of the Norwegian sector of the Barents Sea for petroleum activities as early as 1980, relatively few exploration wells have been drilled. However, the discoveries of Snøhvit (“Snow White”) and the Goliat oil field are compelling evidence of the oil and gas resources to be found in the area, by some estimates totalling 3.5 billion barrels of oil equivalent in crude and gas.

Often described as the cleanest stretch of ocean in the world, the Barents Sea has been a contentious issue for successive governments. Commercial fishermen in particular fear the impact of offshore operations on the fragile Arctic environment.

	World-class technology: Snøhvit

In 2006 the Government presented its integrated management plan for the Barents Sea and the sea areas off the Lofoten Islands (subsequently referred to as the Barents Sea-Lofoten area), describing it as “the first regional management plan for a Norwegian sea area, and a milestone in the work towards establishing an ecosystem-based management in all Norwegian seas areas”. Speculation was rife that protected Arctic areas were to be opened to oil and gas exploration.

However, following re-election of Jens Stoltenberg’s “red-green” coalition in October 2009, the government announced that no such decision would be taken before the next election in 2013, and that would depend on the finalization of a revised management plan assessing the consequences of petroleum activities for the area.
 
Lifetime trends
Notwithstanding the industry’s impatience with the slow pace of decision-making concerning the Arctic, elsewhere the government sees “a trend where the expected lifetime for fields is increasing. By making operations more efficient, i.a. through integrated operations, costs can be reduced so that operations are profitable even when production is low. For the largest oil fields, it may even be profitable to build new facilities that are better suited to today’s technology and environmental standards.”

Over a dozen fields in the North Sea have been shut down, mostly in the Frigg and Ekofisk areas. Some of these fields are now candidates for new production. For example, in the southeastern part of the North Sea, Yme, the first oil field to be redeveloped after production ceased six years ago, originally produced 8 million Sm3 of oil. According to the plan, approximately the same volume of oil will be produced from a new production facility operated by Talisman.

Riding out the storm
Until the second half of 2008, the rising price of oil had made world headlines on almost a daily basis for several years. Starting in early 2004, after a period of uncertainty following the terrorist attacks in the United States, global recession and the war in Iraq, crude oil prices had recovered from near disastrous levels to record highs of well over 0. By 2006, prices had doubled; 2007 saw prices exceeding the $90-a-barrel peaks not seen since the Iranian revolution in 1979 and even approaching the psychologically important Chapter 1: Shooting the moon00 mark, which was exceeded for the first time in history in the early days of 2008, with a subsequent surge towards Chapter 1: Shooting the moon50.

At this point, Norway was in the enviable position of being prepared for almost any eventuality. Although the nation’s economy is famously dependent on its oil and gas assets, governments have husbanded these assets diligently through the decades. While making the most of the oil booms, Norway has always done its best to use the good times to hedge against cyclical downturns in future  as witness Statoil’s remarkable paying down of debt throughout 2000 and 2001, or the country’s diligent accumulation of its Petroleum fund since the idea took shape and form in the mid-1990s.

	Facing important choices: Oseberg

By the end of 2008, the price of crude had plummeted below $40. Once this latest downturn had duly arrived  and with astonishing speed at that  the industry, as we have seen, was ready to face it with continuing optimism in the full knowledge that all concerned had plenty of resources with which to ride out the storm. A slow but steady rise towards $80 during 2009 offered encouragement, although market confidence remained shaky as the year drew to a close.

Feet on the ground
In such circumstances, a publication such as this could easily have become an uninhibited celebration of the North Sea saga, Norway’s handsome success in chiselling a viable and self-sustaining oil industry quite literally out of rock and sediment.

But we believe there is more to be learned from this success story. Norway’s standing in the oil and gas world has not been accomplished overnight, but nor is it a fluke or a lucky accident. The nation has worked hard, by the sweat of its brow and by the exertions of its intellect, to get where it is today.

In the following chapters we take pleasure in recounting this tale, less in the spirit of boasting than in the belief that we have something constructive to offer the world. We tell the story from the beginning  the discovery of oil in the last century  and chart the course of this offshore bonanza, exploring some of the ways in which it has changed Norwegian society.

Along the way we look at the development of a world-class technology and its export to an eager international market; environmental issues associated with the industry and how we have tackled them, and the domestic and international policies required to deal with this mighty industry.

Throughout all this runs a recurrent theme: how the Norwegians have managed to keep their feet on the ground and their heads above water through the sudden and unprecedented prosperity created by the North Sea Saga.