Business trend report Light at the end of the tunnel. for the Norwegian petroleum industry as well?

Transcription

1 1 Business trend report 29 Light at the end of the tunnel for the Norwegian petroleum industry as well?

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3 3 Contents Foreword 5 Summary 6 Developments in the world economy and prospects for energy markets 1 Level of activity on the Norwegian continental shelf (NCS) 2 Environmental status in the petroleum industry 28 Health, safety, the working environment and operations on the NCS 34 Working life and expertise in the petroleum industry 4 This report is based on information available up to 26 October 29

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5 5 Foreword After a year characterised by the deepest recession in the global economy since the Second World War, the bottom appears to have been reached. Growing signs of economic recovery have been observed during the autumn of 29. The upturn looks at present likely to be moderate, and it will take some time before rates of economic growth have returned to the trend of recent years. The crisis in the world economy has helped to curb demand for energy, and falling prices have hit investment in both fossil fuels and renewables. So developments in the energy market will also remain uncertain in the time to come. Norway has managed better in these conditions than the great majority of comparable countries. The level of activity in the petroleum industry has so far remained good despite markedly lower oil prices. With massive injections of oil cash through the government budget and with low interest rates, unemployment looks like peaking at a substantially lower level than in the country s trading partners. This year s business trend report has been entitled Light at the end of the tunnel for the Norwegian petroleum industry as well? That reflects the fact that the world generally appears to be heading for better times, while the oil and gas business faces several important challenges. The investment analysis presented in this report indicates that capital spending on the NCS should remain at a good level for the next few years, but will decline somewhat from a peak in 29. At the same time, uncertainty has increased. Projects which were financially robust with a high oil price will be subject to reassessment when prices have halved. After years of big cost rises, creativity is being put to the test throughout the industry to find openings for new activity. Nevertheless, the biggest challenge facing the Norwegian petroleum industry is the lack of an oil policy and clear political signals in recent years. A number of discoveries are still being made on the NCS, but they are generally small. It is reasonable to relate this trend to the fact that no new areas have been opened for petroleum activity on the NCS for 15 years. A basic assumption underlying the estimated production trajectory for oil and gas on the NCS from the Norwegian Petroleum Directorate (NPD) is that the industry can explore where the resources might be found, and that the companies decide to produce what they discover. The same production forecast also underpins calculations of government revenues from the industry. A review of petroleum policy in a separate White Paper has been announced by the second coalition government headed by Jens Stoltenberg. The entire industry wants clear signals. Access to new exploration acreage will be essential if the petroleum industry is to continue contributing as strongly as before to making Norway the world s best country in which to live. Without such a development, the scaling-down of industry capacity and the deterioration of the knowledge base will happen faster than the remaining resource base alone would require. The Norwegian petroleum industry is an international leader for environment-friendly production. So sacrificing it on the altar of environment policy, before the carbon-free alternatives are in place, cannot be regarded as a sensible environmental choice. «The biggest challenge facing the Norwegian petroleum industry is the lack of an oil policy and clear political signals in recent years»

6 6 «Fossil fuels must remain the principal cornerstone of overall global energy supply for the next few decades» Summary The business trend report 29 from the Norwegian Oil Industry Association (OLF), entitled Light at the end of the tunnel for the Norwegian petroleum industry as well?, addresses the latest developments in the world economy and the global energy market. Its title reflects the fact that the world economy in general appears to be headed for better times, but that the Norwegian oil and gas industry also faces both operational and political challenges with uncertain outcomes. This year s analysis of investment prospects shows that the level of activity on the NCS could still remain high, but that uncertainties related to phasing in future projects have increased. For the first time, this report s investment forecasts have been split between price and volume. The status of the petroleum industry is also presented, along with the challenges faced in important areas for this sector the natural environment, health, safety and the working environment (HSWE) and operations on the NCS as well as the most important challenges related to working life and expertise. From crisis to fragile recovery The deepest downturn in the world economy since the Second World War appears to have bottomed out. With extensive rescue packages for the financial services industry and very expansive fiscal and monetary policies in a number of countries, the indicators are once again pointing upwards. After four consecutive quarters of deep recession, figures for the gross domestic product (GDP) of many European countries showed a weak upturn in the second quarter. The USA also appears to be approaching the end of the recession, while the strongest recovery can so far be found in Asia. At the same time, the upturn is fragile and related to a great extent to transient demand factors. Nor has the full impact of the crisis ceased to be felt in the labour market, and the cost of an expansive financial policy is becoming increasingly difficult for many countries to bear. Although the global cyclical downturn now appears to have bottomed out, few signs suggest a rapid return to the high rates of growth witnessed before the crisis struck. The world s overall GDP is expected to fall by 1 ¼ per cent in 29, followed by an increase of 2 ¾ per cent next year. This means that 21 will also be a relatively weak year, and a global growth rate close to trend is unlikely before 211. Lower demand for oil heavy going for renewables The recession which has prevailed for just over a year helped to reduce demand for energy, and falling prices have hit capital spending on both fossil fuels and renewables. The International Energy Agency (IEA) estimated in May that 29 budgets for oil and gas investment would be cut by more than 2 per cent from the year before, corresponding to almost USD 1 billion. In the short term, the demand outlook for oil weakened substantially up to this summer. Despite more optimistic signals from the world economy in recent months, the IEA s oil market report for October puts the drop in global oil demand for 29 at two per cent. This is the steepest fall on an annual basis since the early 198s. After strong growth in recent years, investment in various types of renewable energy also looks likely to fall substantially during 29.

7 7 The decline partly reflects lower alternative prices for fossil energy, and partly the greater difficulty and cost of securing the necessary financing. Looking further ahead, the challenge facing the world will be to satisfy expectations of and demands for higher living standards among a large proportion of the global population while simultaneously achieving a sharp reduction in greenhouse gas emissions. New energy bearers, such as wind and sun, will gradually acquire a larger role, but fossil fuels must remain the principal cornerstone of overall global energy supply for the next few decades. Activity high, but more uncertainty A record level of activity on the NCS has helped to limit the downturn in the Norwegian economy during the world economic crisis. Part of the explanation lies in the long-term nature of the oil industry. Considerable time often elapses between an investment decision and project completion and, once initiated, developments will usually be completed even if oil prices decline. At the same time, the Norwegian oil industry so far appears to have been less influenced by the crisis than oil and gas provinces elsewhere in the world. The level of activity still looks likely to remain high. Capital spending could pass a peak of NOK 129 billion in 29 and remain in the region of NOK 1-12 billion during A decline in investment for 21 and 211 before spending recovers could nevertheless prove a challenge for the supplies industry. Uncertainty over phasing in future investment has also increased. A persistently weak trend for discoveries represents a substantial short- and long-term challenge. It seems reasonable to see this in relation to the fact that no new areas have been opened for petroleum activity on the NCS over the past 15 years. Oil price developments will be crucial in determining whether planned projects are implemented or postponed. Analysing possible scenarios for future cost trends is also important. For the first time, investment forecasts in this year s business trend report from the OLF are split between price and volume. The analyses presented show that the level of costs on the NCS rose by an estimated 8 per cent from 24 to 28. Scope exists for some decline in costs over the time to come, driven first and foremost by lower rig rates, cheaper raw materials and declining supplier margins. Towards lower government revenues The strong upward trend of oil prices more than compensated for declining production in recent years. Through direct and indirect taxes, the state s direct financial interest (SDFI) and dividend from Statoil, the Norwegian government sequestrates almost 9 per cent of the total value creation related to the oil and gas business. Net cash flow to the government from the petroleum sector totalled a record NOK 416 billion in 28. This is expected to decline to NOK 265 billion in 29. For 21, the government has assumed that the figure will be NOK 22 billion. The declining revenue flow to the government is being paralleled by a further rise in the use of oil revenue over the budget. In 21, the government plans to spend a record NOK billion in oil money. This is likely to be almost NOK 45 million above the government s fiscal rule for utilising petroleum revenues. Continued decline for oil more gas Forecasts from the NPD for the next few years show a continued decline in oil production to just over 1.6 million barrels per day (b/d) in 213. Annual output will then be almost half the 21 peak. Substantial uncertainty nevertheless attaches to this estimate and, based on experience from recent years, a weaker production trend cannot be excluded. The decline in oil output will be offset to a great extent by higher gas sales, which are expected to total about 112 billion cubic metres in 213. Sales of gas in could thereby be 25 per cent higher than in the previous five-year period. Flat production curve towards 22 According to long-term government forecasts, petroleum production is expected to remain at this level until around 22 and then to decline. Oil and gas output from the NCS over the next decade will continue to be dominated to a great extent by large discoveries made up to the end of the 198s, and finds from this period are expected to account for almost 35 per cent of production as late as 23. Official production forecasts are increasingly dependent after 22 on output from discoveries which have yet to be made. Finds made after 28 are expected to account for 42 per cent of production from the NCS in 23. Experience in these waters shows that the period from the award of new production licences until fields come on stream averages 15 years. If the government s long-term output forecasts are to be met, new and preferably large discoveries must be made quickly. Environmental status in the petroleum industry The Norwegian petroleum sector is an international leader for environment-friendly production of oil and gas. This is a position the industry aims to maintain through a continuous focus on the environment and improved environmental results. The global nature of the climate challenge is frequently forgotten in the Norwegian debate on this issue. Attention focuses too often exclusively on domestic emission reductions, even though bigger cuts and better environmental solutions could have been achieved by looking beyond the country s borders. Some people, for instance, call for reduced activity on the NCS even though the actual position is that exports of Norwegian gas play a key role from an environmental perspective in reducing the use of coal-fired power generation in Europe. Emissions per unit of energy produced from burning coal are twice as high as for gas. Substantial cuts, further potential Action taken on the NCS has made a significant contribution to Norway s position as a carbon-efficient producer of oil and gas. Roughly 13 measures adopted in have eliminated about 4 million tonnes of carbon emissions. The total effect over the collective life of these measures will be more than 13 million tonnes. In addition, the industry is in the process of implementing further energy efficiencies as well as power from shore and carbon capture measures which will have eliminated annual carbon emissions of 2.2 million tonnes by 213. The bulk of identified remaining measures in the petroleum industry is generally expensive to implement, and the action which should be taken in the future must be assessed from an overall perspective with the emphasis on cost efficiency. In this context, earmarking carbon tax from the petroleum industry could be a way of also realising socioeconomically positive measures in other sectors. Aiming to be an HSWE leader The Norwegian petroleum industry has set an ambitious target of being a leader for HSWE in the global petroleum business. This means that the sector will work purposefully and long-term on the basis of a philosophy of zero harm, accidents, occupational illness and undesirable incidents. Working for such a vision is demanding, given that the industry is generally pursued far out to sea and under demanding weather conditions, and involves operations with a high potential risk if they are not handled correctly. Nevertheless, the industry cannot set lower standards.

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9 9 Focus on balanced resource management All players, including the government, must manage resources in such a way that the whole community benefits. The industry has noted an unfortunate trend, both in work on revising the regulations and in connection with enforcement and supervision, towards paying insufficient attention to considerations of good resource management. A key concern for the oil and gas industry is that standards for a high and acceptable level of HSWE are also viewed in relation to the need for good resource management specified in the Petroleum Activities Act, as well as financial and administrative consequences, the special character of the industry, local conditions and operational requirements. The chapter on HSWE and operations on the NCS provides an account of industry measures, emergency response arrangements and regulations related to various types of undesirable incidents on the NCS, and measures for operational improvements and standardisation. Oil-related employment up The international recession has also weakened the Norwegian labour market, with registered unemployment almost doubled since the downturn began in May 28. Norway has nevertheless escaped fairly lightly from the recession, and a jobless proportion of roughly three per cent remains low in an international context. Direct employment in the petroleum sector, including the supplies industry, is estimated to be in the order of people, and has been clearly rising in recent years. In cooperation with the Ministry of Petroleum and Energy (MPE), the OLF requested that Statistics Norway (SSB) compile employment figures which can provide more detailed information about the industry s impact on the labour market. This report, first published in 28, builds on the definition of the petroleum industry in the national accounts and accordingly applies a conservative view of the scope of this sector in Norway. This year s report showed that people worked during the fourth quarter of 28 in oil and gas extraction, related services and pipeline transport. That represented an increase of people or eight per cent from 27. Since 25, the numbers employed in these sectors have risen by no less than 34 per cent. According to the SSB, the employees are spread over 413 of the country s 43 local authorities. The challenges ahead Although the level of activity in the petroleum industry remains high, concern over the order position is growing in the supplies industry. These challenges are set to increase in the short term. Nevertheless, the industry will continue to have a big demand for qualified personnel for many years to come. As a result, the OLF is pursuing a number of measures every year both on its own account and in cooperation with the government and other players directed at young people seeking an education. The number of applicants for higher education courses in Norway increased sharply this year, but the proportion choosing to study science and technology subjects remained low.

10 1 «After the deepest recession in the world economy since the Second World War, the indicators are once again pointing upwards. The recovery is fragile, however, and it will probably take time before the longer-term growth trend has been restored» Developments in the world economy and prospects for energy markets The deepest downturn in the global economy since the Second World War appears to have bottomed out. With extensive rescue packages for the financial services industry and very expansive fiscal and monetary policies in a number of countries, the indicators are once again pointing upwards. The recovery is fragile, however, and it will probably take time before the longer-term growth trend has been restored. Over little more than the past year, the crisis has reduced demand for energy while falling prices have hit investment in both fossil fuels and renewables. Looking further ahead, the challenge facing the world will be to satisfy expectations of and demands for higher living standards among a large proportion of the global population while simultaneously achieving a sharp reduction in greenhouse gas emissions. New energy bearers, such as wind and sun, will gradually acquire a larger role, but fossil fuels must remain the most important cornerstone of overall global energy supply for the next few decades. The international economy has been through its deepest recession for decades over the past year. Problems in the US economy, which began with toxic sub-prime loans in the summer of 27, were to a great extent globalised by the financial crisis which followed the collapse of Lehman Brothers in September 28. With Europe also experiencing an abrupt cyclical downturn, the basis for export-driven growth in Asia disappeared. Millions of workers have lost their jobs over the past year. Financial market problems and a world economy on the way into recession coloured the coverage of international markets in last year s business trend report. Like most other forecasts, however, this underestimated the severity of the downturn affecting the world economy. Light at the end of the tunnel The first signs of a brighter economic outlook have appeared in the autumn of 29. After four consecutive quarters of deep recession, GDP in many European countries staged a weak recovery during the second quarter. Growth in the European Union as a whole remained negative for this period, but the decline of.3 per cent was nevertheless significantly weaker than in the preceding quarters. The USA also appears to be approaching the end of the recession. A GDP decline of.2 per cent in the second quarter replaced negative growth rates of 1.5 per cent for the two previous three-month periods. The sharpest recovery has so far been seen in Asia. A growth rate of.6 per cent for Japan in the second quarter replaced a decline of no less than 3.3 per cent in January-March. At just over six per cent, Indian growth was higher than in the two preceding quarters. After a marked slowdown towards the end of last year and into 29, Chinese expansion recovered to almost eight per cent in the second quarter. Recent figures for the third quarter show that this growth has increased further to almost nine per cent.

11 11 Figure 1: Recession bottoming out Estimates of GDP growth for 29 made at different dates Per cent Jan mar may Jul Sep Nov Jan mar may Jul Sep Renewed inventory-building accordingly provides an important explanation for the signs of an improvement in manufacturing output during recent months. At the same time, such restocking reflects a reviving optimism in manufacturing companies and is supported by the stabilisation of world trade after two quarters of sharp contraction. Expectations have also improved recently in other parts of the business community and in households, while deep and coordinated cuts in base rates mean that the housing market recession experienced in many countries is showing signs of approaching its end. The sustainability of the global recovery nevertheless remains uncertain. Figure 3: Manufacturing output in the OECD area Seasonally adjusted index. 2 = USA euro zone Japan Source: Consensus Forecasts Strong measures work The recovery which now appears to be taking place in the world economy is closely related to the extensive and coordinated rescue packages for the financial services sector and the very expansive fiscal and monetary policies adopted in many countries. The global financial crisis has so far cost governments worldwide more than NOK 1 billion, split between the provision of state or hybrid capital to the banks, the takeover of important financial institutions, the purchase of loans issued by the business sector, and deposit guarantees and extensive injections of liquidity by central banks to normalise money markets. A good deal of this spending can probably be recovered when the financial markets are back to normal. Very expansive budgetary policies in many countries have also been important in fighting the recession. Fiscal policy packages have been broad in scope, and have also incorporated tax cuts to some extent. At the same time, the crisis has weakened the income side of government budgets. According to the International Monetary Fund (IMF), the overall result is that a number of OECD countries have incurred their biggest budget deficits since the Second World War. Official interest rates have also fallen to historically low levels in most of the important nations. Figure 2: Official interest rates at a historical low Per cent Source: reuters ecowin Normalisation could take time The full impact of the crisis on the labour market has still not been felt. Unemployment continued to rise in both Europe and the USA during the autumn months, and the OECD fears that the jobless total in the industrialised countries could reach 1 per cent of the workforce during 21. Without an improvement in the labour market, it is difficult to see how low interest rates alone could give the necessary boost to household demand. Substantial challenges also remain in the business sector. To be sure, various indicators for the tightness of the credit market show that it is again approaching pre-crisis levels. Nevertheless, the prospects for further bank losses suggest that the banking sector will continue to take a restrictive approach to lending. At the same time, the deep recession we have been through means that substantial spare capacity exists in the business sector. In many industries, it will accordingly take time before new investment is needed. Factors which could curtail growth in the world economy are also evident when viewing developments in a somewhat longer perspective. Governments in many countries will need to maintain an expansive fiscal policy and persistently low official interest rates during 21 in order to keep the wheels turning. However, the cost of this policy is becoming increasingly difficult to bear, and will eventually impose a tightening which reduces spending power for households and companies USA UK euro zone Sweden Japan Source: reuters ecowin Economic recovery remains fragile However, part of the recovery now under way and which appears to have strengthened towards the end of the year relates to transient factors. The sharp decline in manufacturing output which began last autumn has been reinforced by a substantial reduction in inventories.

12 12 Figure 4: Labour market crisis still not over Unemployment in the OECD as a percentage of the labour force, seasonally adjusted Per cent Source: reuters ecowin Asia leads the way... The turning point in the crisis appears on this occasion to have occurred first in Asia s emerging economies, with China as the most important driver. A sharp fall in exports towards the end of last year quickly called forth an extensive Chinese crisis package directed largely at infrastructure, while earlier restrictions in monetary and credit policy were somewhat relaxed. With more credit available, investment by stateowned companies in particular has revived. Manufacturing output has risen sharply, boosting prices for both metals and oil. The upturn is primarily attributable to domestic market growth, with exports continuing to show negative growth. Changes in private consumption have so far been small, which must be attributed to continued labour market weakness. This will probably mean that the Chinese authorities maintain their stimulation measures even at the risk of creating new financial bubbles. Growth this year is likely to reach the government target of eight per cent and to increase further in 21. Figure 5: GDP growth in China Volume growth from the same quarter of the year before 14 Per cent... but Japan is the region s weak link The sharp turnaround in Japan during the second quarter can be related not only to the extensive package of measures introduced in late March but also to an export industry which has benefited from the upturn in other parts of Asia. This improvement comes after a year in which most things have gone wrong in Japan. The export industry, which largely produces consumer durables, has been particularly hard hit by the crisis. Investment in the business sector has nose-dived, while falling pay rates and the weakest labour market for 2 years have discouraged private consumption. In cyclical terms, Japan accordingly ranks in the short term as one of the region s weakest cards. A decline of roughly six per cent in GDP this year could be replaced by weak growth during 21. USA close to the turning point After the deepest and longest recession in the USA for more than 6 years, a number of signs now suggest that the decline is bottoming out. The picture is nevertheless complex. Turnover and prices in the housing market have fortunately stabilised in recent months and improved slightly, while the market for commercial buildings is continuing to contract. Manufacturing output and exports have revived over the same period, but the decline in company investment appears to be continuing for the moment. The weakening of the labour market has also persisted during the autumn, contributing to weak consumer demand from householders. As expected, car sales suffered another setback when cash for clunkers the temporary support scheme to replace older and more polluting vehicles was terminated in August. Although the US economy now appears to recovering, it will still be some time before the private sector can take over again from fiscal policy as the main development driver. However, challenges are also faced here. Preliminary calculations by the US Treasury Department shows that the budget deficit for fiscal 29 reached no less than 9.9 per cent of GDP. America s GDP is expected to decline by 2 ¾ per cent this year, with a growth of 1 ½ per cent forecast for 21. Figure 6: USA big increase in budget deficit USD billion and percentage of GDP USD billion Percentage of GDP Source reuters ecowin Fiscal and monetary policy stimulation is also an important explanatory factor for India s increased growth rate. The government is running a budget deficit equivalent to almost seven per cent of GDP for 29, while the central bank has injected substantial funds in the banking sector. These measures have helped to raise the level of activity in both manufacturing and the service sector. However, a dry start to this year s monsoon season is expected to mean a return to somewhat slower growth through weaker earnings and buying power in the important agricultural sector. The government has assumed an overall increase of six per cent in GDP this year. Growth is expected to pick up even further next year, but this depends to some extent on continued fiscal stimulus. US budget deficit US budget deficit as percentage of GDP Source: reuters ecowin Europe will continue to struggle An overall fall of more than four per cent in the level of activity for the EU member states during the last quarter of 28 and the first three months of this year was replaced a flattening out in the second quarter. Differences between the various countries were nevertheless substantial, with a weak upturn in major economies such as Germany, France and Poland as well as in other nations. At the other end of the scale are the Baltic states, where the GDP decline of the four last quarters has strengthened and now amounts to 16-2 per cent. Better economic prospects relate primarily to massive crisis packages in many countries, and increased public-sector investment is expected to provide addi-

13 13 tional stimulation during the second half. Exports have also begun to recover, and could be boosted by a quickening pace of growth in world trade. A sharp increase in scrappage subsidies for older cars in Germany, France and Italy has boosted sales of new vehicles and provided crisis support for the important motor industry. Manufacturing in general is involved at the same time in a new period of inventory building, but both these factors are by nature transient. Prospects for a continued rise in unemployment and a pressing need in many countries to tighten fiscal policy are both weighty considerations which virtually exclude the possibility of a rapid recovery in the EU. This report therefore assumes that overall GDP for EU member states will fall by four per cent this year, and increase only weakly by ½ per cent in 21. Figure 7: GDP development for EU member states Volume growth rates 5. Per cent Growth from the same quarter of the year before Underlying annual growth based on seasonally adjusted figures Source: reuters ecowin Unlikely to be back on track before 211 Although the global recession now appears to have bottomed out, little accordingly suggests a rapid return to the high growth rates experienced before the crisis began. While the world economy expanded by three per cent in 28, it could contract by 1 ¼ per cent this year. With world GDP growing by an expected 2 ¾ per cent, 21 could also be a relatively weak year and a global growth close to trend is unlikely to be seen before 211. Figure 8: World economy moving out of recession Percentage GDP growth from the year before 6 Per cent Sources: ImF and OlF (estimates)

14 14 «28: For the first time ever, primary energy consumtion in the OECD area was lower than among non-members» ENERGY MARKETS Not unexpectedly, energy market developments have conformed to the general trends in the world economy, and overall growth in the consumption of market-traded types of energy declined in 28 to its lowest level since 21. Generally speaking, prices for most energy types appear to have peaked in the summer of 28 and then fallen sharply towards the end of the year. Nevertheless, energy prices for 28 as a whole were clearly higher than the year before. That has also helped to curb demand growth. Figure 9: Oil price developments Brent. USD per barrel. Annual average Dollar/fat Source: Reuters EcoWin Slower growth in energy consumption during 28 According the BP Statistical Review of World Energy for 29, world demand for primary energy (oil, gas, coal, nuclear and hydropower) rose by 1.4 per cent last year. At the same time, developments in energy consumption were characterised by substantial regional differences. Asia accounted for the bulk of demand growth during 28, led by China with a growth rate of no less than 7.2 per cent. In the USA, for its part, the economic crisis prompted a decline of 2.8 per cent in primary energy consumption. For the first time ever, primary energy consumption in the OECD area was lower than among non-members. Coal still dominates demand Regional variations remained important in 28 for describing trends in the composition of energy demand. For the third year in a row, coal accounted for more than half the increase in world energy demand, with China again the dominant player. Despite a slowdown in the growth rate from the year before, higher demand for gas again made an important contribution to the rise in global energy consumption during 28. Demand for oil, on the other hand, declined by.6 per cent or 42 b/d in 28. This represented the first drop in annual oil consumption since 1993, and can be attributed in its entirety to a decline of 1.5 million b/d in demand from the OECD area. Figure 1: World energy consumption by source Shares as a percentage of total consumption 1 Per cent 5 Oil 45 4 Coal Gas 15 1 hydropower 5 Nuclear Source: bp 1 Total consumption is defined here as consumption of oil, gas, coal, hydropower and nuclear. All sources are measured in oil equivalent. Stronger commitment to renewable energy... It has traditionally been more difficult to find good documentation for developments in the overall consumption of renewable energy, not least because parts of this output are not traded in ordinary markets. With a steadily stronger commitment to renewables driven by the climate challenge, it is nevertheless important to acquire the broadest possible understanding of trends for this energy sector. BP has widened the perspective of its analysis to look at capacity changes for important renewable sources such as geothermal, solar, wind and ethanol. Developments here suggest that the strong growth of recent years in the global renewables industry continued with undiminished vigour during 28. With extensive support schemes, Europe and Japan have traditionally been the leaders here. But the USA and China have recently also become much more strongly involved.

15 15... but capacity build-up takes time Geothermal energy represents the most mature type of renewable among those mentioned above, but showed the lowest growth in this group in 28 with capacity up by 4.2 per cent to 1.4 gigawatts (GW). The USA has by far the largest geothermal capacity, but last year s increase was broadly spread across the globe. Capacity expansion for wind power is estimated to have reached 3 per cent in 28, to just over 12 GW, making this the fifth year with accelerating growth. The USA and China accounted for more than half of last year s rise, allowing America to take over the capacity lead from Germany. With the USA in the driving seat, global production of ethanol has also accelerated in recent years. The 28 increase is put at 31 per cent, to 1.2 million b/d. America and Brazil account for almost 9 per cent of this output. Solar power achieved the strongest growth among renewables last year. Capacity expanded by 69 per cent to 13.4 GW, and has doubled on average every other year since Spain and Germany accounted for more than 75 per cent of the capacity increase in 28, which is closely related to extensive national support schemes. Despite high grow rates, renewables still have a long way to go before they reach a dominant position in the world s overall energy consumption. Taken together, for instance, geothermal, wind and solar energy still account for only about 1 ½ per cent of global electricity generation. Sharp fall in oil demand this year Short-term demand prospects for oil have weakened markedly over the past year in the shadow of the crisis-hit world economy. As recently as the presentation of last year s OLF business trend report, the IEA was expecting low growth in global oil consumption in both 28 and 29. However, the estimate for the present year has been sharply reduced in subsequent monthly reports, and bottomed out in May with a forecast decline of no less than three per cent. Rather more optimistic signals have subsequently helped to boost the estimate. Nevertheless, the IEA s oil market report for October puts the drop in 29 at two per cent. This decline in oil demand is the strongest on an annual basis since the early 198s. Figure 11: Rate of growth in world oil demandl Estimates of annual growth at different dates Per cent Forecasts coloured by uncertainty According to the analysis earlier in this chapter, trends in the world economy suggest that the recession has bottomed out for many countries and is already over in some cases. Great uncertainty nevertheless prevails about when the pace of global economic growth could once again return to a more normal level. Given the close relationship between world economic growth and the development of energy consumption, much of the same uncertainty must colour forecasts for oil demand. Two alternative trajectories from the IEA This uncertainty means that the IEA s medium-term oil market report for 29, presented in June, provides two alternative trajectories for energy demand over the next few years. These reflect high and low global growth scenarios. However, the IEA has assumed that nominal oil prices will remain around USD 7 per barrel for both trajectories. Speedy normalisation or lasting downturn? The high alternative builds on the April issue of the IMF s World Economic Outlook, which predicted a gradual recovery in the global economy during 21 and a return to annual growth of almost five per cent from 212 to the end of the forecast period in 214. The assumption in the low alternative is that the transition to higher growth rates will take longer and that GDP will rise by about three per cent in 212. Growth is also expected to remain at that level in 213 and 214. Estimates suggest that a relatively rapid return to strong rates of world economic growth, as in the high alternative, could yield an average annual increase of 1.4 per cent in world oil consumption in This is on a par with the historical growth in consumption over the past five-year period. The increase is expected to come in its entirety from countries outside the OECD area (3.2 per cent annually), and is related primarily to a persistently strong rise in consumption in Asia, the Middle East and Latin America. For its part, the OECD area is expected to experience a weak decline of.3 per cent in oil demand on an annual basis throughout the period. Overall oil demand will be higher outside the OECD area than inside it by 214. The low alternative expects average annual growth in global oil demand to fall to a modest.4 per cent in Demand growth outside the OECD area is expected to fall back to an annual average of 1.8 per cent, almost half the level with the high alternative. A decline will also be experienced in the OECD area, with negative growth of.8 per cent on an annual basis. The low alternative means that oil demand in the OECD area at the end of the forecast period will continue to exceed overall demand in the rest of the world Figure 12: Oil demand under alternative growth trajectories Million barrels per day Jan mar Jul Aug Sep Nov Jan mar Jul Aug Sep Nov Source: IeA Oil demand, low growth trajectory Oil demand, high growth trajectory 214 Source: IeA (mtomr 29)

16 16 Towards a less tight oil market? The two alternatives for world economic growth could clearly yield very different perspectives for oil demand in coming years. Based on the review of international cyclical trends earlier in this chapter, the low scenario is likely to be too pessimistic. But approaching the high alternative will equally be difficult. In any event, the scenarios have a number of common denominators. In both cases, demand for oil will be driven by countries outside the OECD area while the trend of recent years towards a decline in demand in the OECD continues. Transport will be the most important driver for demand growth in both regions. By the end of the forecast period in 214, the difference in global oil consumption between the two scenarios could be more than four million b/d. A new tightening in the oil market would thereby be postponed. Recession also affecting supply While the world economic crisis has had an obvious impact on global demand since the end of last year, lower energy prices, greater uncertainty over future price trends and increased financing problems have collectively contributed to a clear reduction in capital spending on new energy capacity. At the same time, prospects for lower energy investment vary from region to region in line with such factors as risk, local market conditions, debt-equity ratios and ownership structures. Problems related to project finance represent an important factor for shelved/postponed projects in the electricity sector, while lower oil prices have been the most important driver behind reduced investment in the global petroleum industry. Global oil industry anticipates cost cuts In its May report on the impact of the financial and economic crisis on global energy investment, the IEA estimated that budgets for global oil and gas investment in 29 would be reduced by more than 2 per cent from the year before. That corresponds to almost USD 1 billion. Generally speaking, the cuts seem to be larger for small companies than for big ones, reflecting the extent to which the petroleum industry selffinances its capital spending and the fact that the major companies in particular have a low debt-equity ratio. Substantial regional differences also exist. Prospects for higher investment remain in both Mexico and China, while oil sand projects in Canada seem to have been particularly hit by the fall in oil prices. Generally speaking, projects already under way appear to be continuing while new developments are being assessed on the basis of lower oil prices. Postponements seem to be related only marginally to financing problems and more to uncertainty over future oil price trends and expectations of lower costs in the time to come. Reduced power consumption hits coal mining The IEA estimates that capital spending in global coal mining could fall by no less than 4 per cent from 28 to 29. However, this decline follows very high investment levels in both 27 and 28, which were very good years for the industry in financial terms. The investment cuts seem to be particularly concentrated among high-cost producers such as the USA and Russia, while the industry in general is affected by lower demand for electricity. Based on the IMF s growth forecasts for the world economy, the IEA estimates that global power consumption could fall by no less than 3.5 per cent in 29. In the event, that would be the first drop in world electricity use since the Second World War. As with oil investment, existing capital projects in the power sector seem largely to be continuing. Major equipment suppliers nevertheless expect a decline of about 3 per cent in their deliveries from 28 to 29. Heavy going also for renewables After strong growth in recent years, investment in various types of renewable energy also looks like falling substantially during 29. The IEA estimates the overall decline at 38 per cent, prompted partly by lower alternative prices for fossil energy and partly by the greater difficulty and cost of securing the necessary financing. The latter consideration applies not least to many wind power projects, which depend heavily on financing opportunities. New orders for wind turbines amounted globally to only four GW during the first quarter of 29, a quarter of the level in the second quarter of last year. Investment in solar power has declined markedly since 31 December 28, with cuts to Spain s official support schemes as a major contributory factor. The new governing coalition in Germany has announced reductions in subsidies for solar power in 21. Stimulation packages adopted in a number of countries to counter the recession have been aimed to some extent at enhancing energy efficiency and developing renewable energy sources, but a number of cases can also be found where the crisis has pushed the fight against climate change more into the background. A double challenge Despite the global recession of the past year, most forecasts indicate that the level of activity in the global economy will be three-four times higher than today in 25. Expectations of and demands for higher living standards among large parts of the world population must be met through higher energy production at the same time as greenhouse gas emissions are sharply reduced. Measures to curb such emissions must accordingly be balanced against the need to secure the necessary supplies of energy at an acceptable price. Major improvements to energy efficiency represent the primary way in which this double challenge could be tackled in the short and medium term. Renewable energy from new sources will gradually play a larger role, but fossil fuels must continue to be the most important cornerstone in world energy supply over the next few decades. That will make speeding up the development of technology for carbon capture and storage (CCS) one of the most important climate measures in the time to come. At the same time, oil and gas are limited resources. Calculations by the IEA, based on the 8 largest producing oil fields, indicate an annual decline of 6.7 per cent in their output. The increase in global production of conventional oil could reach a plateau by 22. As Fatih Birol, the IEA s chief economist, has fairly aptly remarked in this context: It s important that we leave oil before it leaves us. Coupled with ever more ambitious climate targets, the unavoidable reality is that world energy consumption must be shifted from fossil fuels to other sources in the longer term. However, the road to a decarbonisation of global energy supply is long. It is important that ambitions reflect realistic expectations and are based on cost efficiency. New energy bearers advancing Renewable energy output remains dominated by old sources such as hydropower and traditional biomass, which are collectively estimated to meet about 15 per cent of global demand. Wind power, various forms of solar energy and other newer sources are starting with far more modest market shares, but are expected to play an important role in future solutions. This energy must also be introduced in a way which maintains security of supply and will, as its significance in overall energy supply increases, face reductions in support schemes and tougher production-related profitability requirements. Wind: 1-12 per cent of power supply by 22 The world s wind resources basically represent a huge potential. However, global utilisation of this energy to generate electricity has occurred almost entirely since 199. Total wind power capacity was just over 12 megawatts (MW) 1 at 31 December 28, with the USA accounting for 2.8 per cent, Germany close on its heels at 19.8 per cent and Spain in third place with 13.9 per cent. Virtually all this capacity has been land-based so far, but offshore-based solutions are expected to become more important in the time to come. Costs related to wind 1 Global Wind 28 Report, GWEC

17 17 power generation have declined significantly over the past couple of decades, but remain to some degree clearly higher than electricity based on other sources such as hydropower and traditional fossil fuels. The likelihood of rising carbon taxes will gradually help to narrow this gap, while a bigger element of more expensive offshore-based wind power could pull in the opposite direction. Many countries have ambitions of achieving a clear increase in the contribution of renewables to their energy supplies. This has found its clearest expression through the EU s renewables directive, where the goal is for 2 per cent of the region s energy to come from such sources by 22. The Global Wind Energy Council (GWEC) has based its forecasts on the assumption that 1-12 per cent of world electricity demand could be met with the aid of wind power by 22. Achieving such an increase would require substantial subsidies to continue for many years. Wind is a free energy source, but variable in its nature. Without good solutions for intermediate storage of this energy, its share of total global supply will probably remain limited in the future. Expensive jobs? The commitment to wind power has so far yielded about 11 jobs in the EU member states (particularly in Germany, Denmark and Spain), and this is used by many people as an independent argument for continued support. However, a study from the Rey Juan Carlos University in Madrid concludes that Spain s commitment to renewable energy has eliminated more jobs than it has created. According to the study, each MW of wind power costs four jobs in the general economy because this expensive/subsidised output (both at the power point and via the tax bill) reduces Spanish purchasing power, and because companies move production to countries with cheaper electricity. The methodology used for this study has been criticised by other specialists. However, substantial international differences in frame conditions for establishing energy projects might have unintended side effects which could be worth investigating more closely. Figure 13: Top 1 countries for installed wind power capacity 28 Percentages of 14.1 GW of world s total 12.8 GW rest of the world Portugal Denmark UK France Italy India China Spain USA Germany Source: GWeC Solar power still a development potential The wind power industry is meeting strong competition from solar energy. Since the dawn of time, the sun has provided energy through its contribution to creating biomass and food. It is tapped today for direct electricity generation by solar panels and for direct heating and power output via thermal installations. Both these technologies will live side by side, but solar cells are likely to continue to dominate developments in coming years. Such units typically have an efficiency in the 1-2 per cent range in other words, 1-2 per cent of the energy from the sun can be utilised to generate electricity. The laws of physics set limits for how high this efficiency can become, at around 6 per cent, but it is difficult to see in the longer term how mass-produced solar cells which are also cheap enough to be adopted on a large scale can achieve a performance much higher than 3 per cent. Subsidies are critical According to the European Photovoltaic Industry Association (EPIA) 2, a total of 13.8 GW of solar cell capacity has been installed worldwide over the past decade. Of this, no less than 4 per cent was put in place during 28. Developments have been closely related to the introduction of national support schemes in Europe, which has been the leading market for solar cells since 24. Last year s strong expansion particularly reflected an almost fivefold increase of Spanish capacity from the year before, to 2.5 GW. Germany installed 1.5 GW, while the rest of Europe contributed.5 GW. In second place comes the USA with 342 MW, followed by Japan with 23 MW. However, subsidies have been sharply reduced in Spain following the financial crisis, and an annual upper limit of 5 MW has been imposed on support for new projects. The solar power companies have nevertheless continued to build up production capacity, and analyst isupply estimates that almost twice as many solar panels will be manufactured in 29 as the market has plans to install. Figure 14: Annual growth in installed solar cell capacity Megawatts Japan USA Spain Germany rest of europe rest of world Source: epia Ambitious solar power scenarios The EU s renewables directive has also been well received by the solar cell industry. In its Set for 22 report, the EPIA assumes that solar cells can meet up to 12 per cent of EU electricity requirements by 22 compared with less than one per cent today. Cost reductions are an important condition for this estimate. Experience from earlier years suggests that the level of costs could be halved every eight years. Given the substantial surplus capacity being built up by the cell manufacturers, the demand side will also help to push down prices. However, the market outlook for solar cells is not the only important factor for future development. An expansion up to 22 of the kind forecast by the EPIA would also call for adjustments to and a major strengthening of the European electricity supply system as well as extensive access to storage opportunities. Continued political willingness and ability to support the industry through the use of feed-in tariffs and investment support must also be regarded as a necessary condition. The solar cell industry represents energy solutions with a broad range of applications suitable for both large- and small-scale installations. However, the road ahead looks as if it could be rather bumpier than the one already travelled. 2 EPIA, Global Market Outlook 213

18 18 Tomorrow s energy mix Even with relatively optimistic forecasts for wind and solar power in the years to come, the need for new energy will remain substantial if the goal of reducing greenhouse gas emissions by phasing out fossil fuels is to be met. A number of additional renewable sources, such as biofuels, biomass and hydropower, could contribute varying degrees of extra energy in the future. Development of other sources (wave and salt energy, algae and so forth) has so far made less progress, and when these could be phased in and their potential contribution to tomorrow s energy supply remains unclear. With the prospect of continued growth in global energy demand, it seems likely that nuclear power must acquire a greater role in the overall supply picture during the next few decades. Nuclear: Asia in the lead Combined with the strong increase in energy prices during recent years, the climate challenge has contributed to renewed interest in nuclear power as an energy source. Nevertheless, 28 was a paradoxical year in that no new nuclear capacity was connected to the power grid for the first time since But the International Atomic Energy Agency (IAEA) reports that work started last year on 1 new reactors the highest number since France is currently the country which meets the largest proportion (4 per cent) of its energy requirements from nuclear power, but this source also makes a substantial contribution in a number of other countries Sweden, Lithuania, Switzerland, Bulgaria, Belgium, Slovakia and Slovenia. The bulk of development work on new and future nuclear power stations is concentrated in Asia, where 28 of the 39 most recently completed reactors connected to the grid are located. So were 28 of the 44 units under construction last year. Eight of the 1 new reactor developments launched in 28 were in Asia. A total of 438 reactors were operational at 31 December last year, of which 345 lie in the OECD area. These accounted for about 14 per cent of the world s total electricity consumption. Unlikely to manage without Interest in nuclear power continues to increase sharply, and more than 5 member countries in the IAEA have indicated a desire to adopt this energy form. One tonne of uranium can generate the same amount of energy as 1-16 tonnes of oil, depending on the area of application. Viewed in isolation, this makes nuclear power an attractive source from a climate perspective. Forecasts from the IAEA indicate that nuclear power stations could deliver 511 (low estimate) to 87 GW in 23, which is more than double today s capacity. Opposition to nuclear power remains strong in a number of countries. This relates both to past accidents and to problems with waste treatment. Modern reactors are regarded as extremely safe, however, and the gas-cooled versions expected to be commercial around 22 could achieve a temperature sufficiently high to produce hydrogen for transport purposes. Possibly able to take over from around 23, fourth-generation reactors could utilise a larger proportion of the uranium as well as waste from older units while producing residual materials which can reach a harmless level of radiation after storage for a few hundred years. As the proportion of new sources such as wind and solar power in the overall global energy mix increases, a need will also exist for sources which can even out natural fluctuations in deliveries. Nuclear power has the weight required to play such a role. Norway s future energy role Norway has been generously endowed by nature with energy resources. Its substantial output of hydropower means that renewables form a very high proportion more than 6 per cent of the country s national energy consumption. Oil and gas production on the NCS nevertheless represents more than 9 per cent of Norway s primary energy output, and exporting this petroleum makes it a substantial supplier to the world energy market. Oil and gas will remain an important part of the world s energy supply over the next few decades. Many people have nevertheless maintained that Norway should exit rapidly from the oil age and convert instead to being a big supplier of renewable energy to

19 19 Europe. Wind power in particular is promoted in this Norwegian debate as a candidate to replace oil. Both land-based and offshore wind farms are specified priority areas. The calculations below illustrate what would be required for Norway to become as significant a supplier of renewable energy in the future as it is of petroleum today. Transition to renewable output Production of oil and gas from the NCS totalled 1.5 billion barrels of oil equivalent (boe) or 242 million standard cubic metres (scm oe) in 28. That converts to terawatt-hours (TWh) of electrical energy, or almost 2 times Norwegian hydropower output in a year with normal precipitation. Enova s first invitation to bid for wind power projects in 29 attracted nine applications. Their capital cost varied from just under NOK 13 million to almost NOK 16 million per MW of turbine output. Assuming a land-based wind turbine with an output of three MW and 2 5 hours of full operation per year 3 (estimates from Denmark indicate 2 3 hours per year), Norway would need 319 such units to generate the amount of energy delivered from the NCS in 28. Their capital cost alone, at NOK 14 million per MW, would exceed NOK 13 billion. The capital cost per turbine is likely to decline over time, but it is nevertheless worth noting that such an investment today would require more than five times the value of Norway s Government Pension Fund Global (the oil fund). What about offshore wind farms? So what would be the outcome if the turbines were placed offshore instead? The positive aspect is that wind availability would be better at sea, but much higher estimates for capital expenditure pull in the opposite direction. The Norwegian Directorate of Water Resources and Energy (NVE) has estimated 4 that the current capital cost of fixed wind farms off Norway could vary between NOK million per MW for facilities close to land and almost NOK 33 million further out to sea, in water depths up to 6 metres. Based on experience, the UK Department of Trade and Industry (DTI) has estimated a level of investment in the order of NOK 2-22 million per MW in coming years for offshore wind farms in water depths up to 3 metres. Offshore wind turbines will normally have higher outputs than those on land. Assuming the use of five-mw turbines and 2 5 full operating hours, replacing NCS oil and gas output would call for 114 offshore units. At an average capital cost of NOK 25 million per MW, the overall investment required would exceed NOK 14 billion. That again excludes the cost of operation and maintenance, which is expected to reach substantial levels. Wind turbines versus petroleum So what is the point of such an extreme calculation? To start with, it illustrates that possible ambitions to make Norway as significant an international supplier of renewable energy as it currently is of oil and gas would be expensive. Through more than 35 years of production, the oil and gas industry has provided almost NOK 4 billion in net government revenues measured in money of the day. Of this, a substantial proportion represents economic rent. Wind power contains no such element. On the contrary, it would need to be subsidised for many years to come. 3 Wind strength will typically vary, and is converted to hours in which the turbine operates at full output 4 Proposition no 17 (28-29) to the Odelsting, chapter 4.4.2, Offshore wind power

20 2 «While the level of activity on the NCS looks like remaining high, uncertainty related to phasing in future projects has increased» Activity on the NCS Record activity on the NCS has helped to reduce the downturn in the Norwegian economy during what must be categorised as an annus horribilis for the overall world economy. While the level of activity on the NCS looks like remaining high, uncertainty related to phasing in future projects has increased. A persistently weak trend for discoveries represents a substantial challenge both in the short term and in a longer perspective. It is reasonable to relate this to the fact that no new areas have been opened for petroleum activity on the NCS for 15 years. The petroleum industry has become an increasingly important engine in the Norwegian economy during recent years. Activity has been maintained at a good level over the past year, despite markedly lower oil prices and a sharp downturn in the world economy. Part of the explanation lies in the long-term nature of the oil industry. Considerable time often elapses between an investment decision and project completion and, once initiated, developments will usually be completed even if oil prices decline. At the same time, the Norwegian oil industry appears so far to have been less influenced by the crisis than in oil and gas provinces elsewhere in the world. Oil industry faces demanding time Despite a recovery in oil prices during recent months, the signs are that the Norwegian petroleum industry as a whole is entering a more demanding phase. After several years with high oil prices, the level of costs on the NCS has increased substantially. Projects which were economically robust with a high oil price are being reassessed after prices have halved since the summer of 28. The industry also looks like having to live for a time with a considerable downside risk related to price developments for oil and gas and a moderate trend for global energy demand. Projects on the NCS could thereby risk being postponed, and the supplies industry is reporting thin order books and the prospect of many idle hands in the second half of 21 following a number of years with a high level of activity and a substantial growth in employment. Figure 15: Oil price developments in recent years USD per barrel. Brent Blend. Day-end spot Source: reuters ecowin Activity remains high, but uncertainty greater The analysis of investment trends presented in this chapter reveals a continued high level of activity on the NCS over the next few years, but with an anticipated decline from 29. At the same time, the degree of uncertainty in the estimates has increased and relates to a great extent to international conditions. Oil price trends will be crucial for whether planned projects are implemented or postponed. Analysing possible scenarios for future cost developments is also important. For the first time, investment forecasts in this year s OLF business trend report have been split between price and volume in this case up to 213.

21 21 What became of oil policy? A number of discoveries are still being made on the NCS, but they are generally small. It is reasonable to relate this trend to the fact that no new areas have been opened for petroleum activity on the NCS for 15 years. At the same time, a steady rise in oil prices during recent years helped to boost the flow of income to the community and thereby diverted attention from the sharp decline in NCS production. Perhaps the most ominous feature of the past few years has nevertheless been the lack of an oil policy and clear political signals. Predictability in petroleum policy has been a key consideration for the players on the NCS since this business began 4 years ago. Changing governments have spelt out the terms for the oil industry s development through petroleum White Papers to the Storting (parliament), usually at intervals of a couple of years. However, no less than six years have passed since the second Bondevik coalition became the last government to present a petroleum policy document. This has made it difficult for the industry to preserve and continue developing perhaps the world s leading technological community for offshore oil production. New government platform In its discussion of energy policy, the new political platform for the second Stoltenberg government known as Soria Moria II gives weight to maintaining a high level of value creation, employment and expertise in the petroleum sector. It also notes that the industry must secure access to interesting exploration acreage. With a view to safeguarding the government s revenue base, employment and sustainable development, and to contributing to Europe s energy security, the platform promises a review of petroleum policy in a dedicated White Paper. The OLF is looking forward to seeing oil policy placed once again on the political agenda. The overall signals given on energy policy in Soria Moria II nevertheless contribute to continued uncertainty about future petroleum policy when they refer to energy policy in Norway being about both prosperity and climate. At the same time, they indicate that the scale of production under the government s energy policy will be based on its environmental and climate goals. The government s only specific decisions concerning petroleum relate to its opposition to opening the waters off Lofoten and Vesterålen in northern Norway to oil and gas activity during the four-year life of this Storting. It is also due to decide whether an impact assessment of petroleum operations in these waters should be conducted in connection with the revision of the integrated management plan in 21. STATUS AND PROSPECTS FOR THE NEXT FEW YEARS After steady growth over more than three decades, overall production from the NCS peaked in 24. Oil output reached the turning point as early as 21, and has since declined from an average of 3.1 million b/d to the present level of 1.9 million b/d. For its part, gas production has more than doubled over the past decade and is expected to approach 13 billion cubic metres in the present year. In its national planning budget for 21, the government estimates a total petroleum output of 1.47 billion boe (235.5 million scm oe) for 29. This represents a reduction of about 11 per cent from 24. Towards lower government revenues The strong upward trend for oil prices more than compensated for declining production in recent years. Through direct and indirect taxes, the state s direct financial interest (SDFI) and dividend from Statoil, the Norwegian government sequestrates almost 9 per cent of total value creation related to the oil and gas business. Net cash flow to the government from the petroleum sector totalled a record NOK 416 billion in 28, and accordingly accounted for every third krone on the budget s income side. Both production trends and oil prices have pulled in the same direction during 29, however, and cash flow is expected to fall to NOK 265 billion. By comparison, the government is spending NOK 13 billion in oil revenues under its 29 budget. The government s national planning budget for 21 assumes an average crude oil price of NOK 425 per barrel for next year and a net cash flow of NOK 22 billion from petroleum operations. While the income flow to the state continues to decline, the amount of petroleum revenue being spent in the budget is set to rise further. The government plans to use a record NOK billion in oil money for 21. This will be almost NOK 45 billion higher than the return on the Government Pension Fund Global, which is estimated at four per cent of the capital at the start of the budget year. The way ahead The NPD s estimated future trajectory for oil and gas production rests on the basic assumption that the industry gets access to explore where the resources might be found, and that the companies decide to produce what they discover. This production curve also underlies the government s calculations for net cash flow to the Treasury from the petroleum business. A continuing trend characterised by small discoveries would result over time in a lower trajectory for value creation than the one in use today, based on existing reserves, contingent resources and measures for improved recovery. Lack of access to acreage would accordingly require tougher policy judgements related to national prosperity over the next couple of decades. In a much shorter time frame, however, lack of major development projects on the NCS could force the industry to scale down capacity rapidly and allow its knowledge base to deteriorate. How quickly such a transformation might occur in today s circumstances is a political choice. The NPD estimates total recoverable resources on the NCS at 84 billion boe (13.4 billion scm oe). About 21 billion of these barrels represent undiscovered resources, of which a substantial proportion lie in areas currently closed to petroleum operations.

22 22 Figure 16: Net cash flow to government from petroleum operations, use of oil revenues in the budget and the fiscal rule Figure 17: Production forecast for the NCS by year of discovery for the resources 4 NOK billion in 21 value 25 million scm oe After before 1979 Source: ministry of Financev Oil still declining gas growing Forecasts from the NPD for the next few years show a continued decline in average daily oil production to just over 1.6 million b/d in 213. Output will then be back at the 199 level. But uncertainty in this estimate is substantial and, based on experience from recent years, an even stronger decline cannot be excluded. The fall in oil production will be offset to a great extent by higher gas sales, which are expected to total about 112 billion cubic metres in 213. Such sales could thereby increase by about 25 per cent in 29-13, compared with the previous five-year period. Flat production curve towards 22 According to long-term government forecasts, petroleum production is expected to remain at this level until around 22 and then to decline. Oil and gas output from the NCS will continue to be dominated to a great extent over the next decade by large discoveries made up to the end of the 198s, with finds from this period expected to account for almost 35 per cent of production as late as 23. A substantial decline in the size of discoveries has been experienced since 1989, and such finds currently account for 32 per cent of output. Official production forecasts, which also represents an important parameter for predicting government revenues from the petroleum sector, therefore depend increasingly after 22 on discoveries which have yet to be made. Finds after 28 are expected to account for 42 per cent of output from the NCS in 23. Experience in these waters shows that the period from the award of new production licences until fields come on stream averages 15 years. If the government s long-term output forecasts are to be met, new and preferably large discoveries must be made quickly. Source: NPD Record number of exploration wells Exploration activity on the NCS has expanded sharply in recent years. A persistently high oil price, many new companies and tax changes which mean that the government pays out the tax value of exploration losses have all been important driving forces behind this development. Fortynine exploration wells (36 wildcat and 13 appraisal) were completed during 28, the highest number on the NCS in a single year. Despite the fall in oil prices, exploration drilling increased further during 29. At 26 October, when data gathering for this report concluded, 61 wells had been completed and eight were in progress. Figure 18: Completed exploration wells on the NCS Number Appraisal wells Wildcats Wells being drilled Wells completed so far this year Source: NPD Weak results from drilling The strong growth in exploration activity has so far yielded limited returns in the form of new commercial discoveries. The finding rate on the NCS has generally been high, with hydrocarbons found in more than half the exploration wells drilled over the past decade. But the average size of these finds has steadily declined, and was just 37.5 million boe (six million scm oe) in This meant that the replacement rate for resources produced during this period was just under 29 per cent.

23 23 Figure 19: Development of average discovery size and finding rate on the NCS million scm oe Discovery size Finding rate in per cent Per cent Source: NPD Interest in APA remains high In an estimate made at the end of 28, the NPD put total recoverable resources on the NCS at 84 billion boe (13.4 billion scm oe). Of this, 31 billion boe had been produced and about a quarter remained to be discovered. The remaining potential in the North and southern Norwegian Seas lies in known petroleum provinces close to existing infrastructure, while the maturity of resources and access to infrastructure generally declines the further north one goes. The awards in predefined areas (APA) rounds have been an important instrument in ensuring that resources are recovered within the economic lifetime of the infrastructure. They have also been important as a route onto the NCS for new companies. Six APA rounds have taken place since the system began in 23. For this year s awards, it was decided not to expand the acreage on offer (215 full or part blocks were made available in 28). At the 15 September deadline, the MPE had received applications from 44 companies compared with 47 the year before. Interest in the system must accordingly be described as still high. Figure 2: APA rounds on the NCS Recovery factor unchanged in recent years In addition to exploring areas close to existing fields and thereby identifying additional reserves, licensees are working ceaselessly on measures to improve the recovery factor. Fields on the NCS have an average recovery factor of 46 per cent for oil, which is high compared with oil provinces elsewhere in the world. However, this proportion has remained constant in recent years. The NPD set a target in 25 of achieving a gross growth of five billion barrels (8 million scm) in oil reserves between 25 and 215. Progress so far suggests that it could be difficult to reach that goal. Uncertain potential in Norwegian and Barents Seas Exploration wells drilled in areas without infrastructure have not lived up to government and operator expectations in recent years. That applies not least to the deepwater areas of the Norwegian Sea. The NPD updated its estimate for undiscovered resources in the Barents Sea this year. Exploration activity has been high since 26, with a number of finds made. But several of these discoveries have turned out to be substantially smaller than was expected before drilling began. Based on drilling results and new surveys, however, expectations for the volume of undiscovered resources are higher than before. A reduction in earlier forecasts for the recovery factor nevertheless helps to cut estimated recoverable resources in the Barents Sea. Taken together, this underlines the importance of a future opening of the sea areas off Lofoten and Vesterålen to petroleum activity. Investment outlook Capital spending on the NCS has been rising for many years, and 28 exceeded all earlier records with an investment of almost NOK 124 billion. The primary reason for this increase was the growth in costs since the end of 23. Although the number of projects on the NCS increased in 24-8, these have individually been much smaller than in the earlier period dominated by the development of large fields. Figure 21: SSB investment statistics for the oil industry Estimates provided by the oil companies at different dates 16 NOK billion 25 blocks offered Applicant companies may Aug Nov Feb may Aug Nov Actual spending estimate in year before investment year estimate in investment year Source: SSb APA blocks offered Applicant companies Source: mpe High investment estimate from the SSB The SSB s investment statistics for the oil industry in the third quarter of 29 indicate that capital spending in the present year will total about NOK 143 billion. This is based on figures reported by the oil companies (August estimate). If the estimate proves well-founded, it will represent a historical rise in investment on a par with the increase from 1997 to 1998 or 24 to 25. However, a number of factors may mean that capital spending falls short of the forecast.

24 24 The OLF has published investment estimates in its business trend survey since 26. Its first forecast was in line with the SSB s August estimate. In 27 and 28, however, oil company reporting to the SSB survey considerably exceeded the actual amount spent. Table 2 compares the OLF s estimate with the SSB s August estimate and the actual amount spent according to the investment statistics. The OLF s figures are produced by Econ Pöyry in August-September and reveal investment reporting below the SSB s August estimate and more in line with the actual figures for capital spending on the NCS. The way exploration costs are estimated means that distortions between exploration and production drilling could lead to deviations of several billion kroner in individual categories, while the overall level remains more or less correct. The analysis in the business trend report incorporates all cost categories not related to operating expenses in the production phase, as well as exploration spending and investment in fields under development. Investment forecasts for the oil industry often exclude removal costs, but these will absorb capacity in the same supplier categories involved in development and modification projects. These costs have accordingly been included in the investment overview in order to provide a complete picture of production-independent activity on the NCS. Table 1 shows the differences in the methodology of various publicly available estimates. The principal difference between the OLF and the others is that the SSB does not group removal costs with capital spending, and the NPD does not publish estimates for exploration investment. However, methodological variations in data collection may also mean differences between the various categories with regard to the different estimates. That applies particularly between wells drilled as part of exploration activity and on producing fields, and to investment related to fields under development and in production. Table 1: Methodology for reporting investment costs SSB NPD OLF 2 years 5 years 5 years Exploration activity Yes No Yes Fields under development Yes Yes Yes Producing fields Yes Yes Yes Pipelines Yes Yes Yes Terminals Yes Yes Yes Removal No Yes Yes Investment high, but greater uncertainty Estimates in the business trend report indicate that activity on the NCS will remain high over the next few years, but is nevertheless likely to decline from 29. The biggest source of uncertainty is the extent to which planned projects will be implemented or postponed. While the OLF also expects 29 to be a record year for capital spending, at NOK 129 billion, its assessment is significantly below the figures reported by the oil companies to the SSB for the August estimate. This is most probably because Econ Pöyry has calculated lower price inflation than the companies have reported, and because the OLF s estimates assume that part of the investment will be displaced in relation to the original oil company estimates. Table 3: Total level of investment, NOK million in 29 value Total investment Exploration Development Production investment Pipelines/land plants Removal Source: Econ Pöyry/OLF The estimated level of investment is presented in Table 3 by the types of activities which give rise to capital spending and in figure 22 by the types of costs to be incurred. All costs are in fixed 29 prices. Figure 22: Investment forecast for the NCS by types of costs incurred NOK billion in 29 value exploration activity Other removal Pipelines/land plants Process plants Surface installations Subsea installations Wells Oil investment a stabilising factor in 29 Capital spending has remained high in 29 even though a number of projects have either been cancelled or postponed, including the Ekofisk hotel platform and Frøy redevelopment. The financial crisis has accordingly failed to produce any substantial moderation in the short-term level of investment, which largely reflects contracts already awarded before the crisis hit. This undoubtedly means that investment in 29 has been higher than the oil companies would strictly speaking have preferred it to be. At the same, the high level of capital spending during the year has had a stabilising effect on the Norwegian economy during a period of great turbulence in other markets. As these contracts are completed, uncertainty over which new projects are to be pursued will increase. The market has a clear expectation that prices will eventually fall as a consequence of the oil price decline, which makes it possible that the oil companies may sit on the fence until this reduction materialises. Last year s investment estimate already indicated that 29 would see record capital spending, followed by a decline as developments were completed without new projects to take their place. Since then, the oil companies have sharply reduced their expectations of Table 2: Comparison of historical estimates and final figures for level of investment, NOK million OLF SSB OLF SSB OLF SSB Business trend report estimate Final August estimate Business trend report estimate Final August estimate Business trend report estimate Exploration Development, modifications, pipelines and terminals Final August estimate Removal Total investment Sources: SSB and Econ Pöyry/OLF

25 25 future oil prices. The investment estimates in this report are based on an oil price of roughly USD 7 per barrel. A considerably higher or lower figure could have a substantial impact on the forecasts. The downward trend could be heavily reinforced if the oil companies assess relevant projects as unprofitable and therefore postpone or cancel them. The estimate above reckons with a number of delays and cancellations, which will help to reduce capital spending in 21 and 211. Nevertheless, the period shows a surprisingly stable picture, with total annual investment expected to lie at NOK 1-12 billion throughout. One factor here is that a substantial proportion of the cost increases which occurred in 24-8 are to some extent irreversible, so that costs are unlikely to fall much even if they are no longer rising. Investment in Trym and Oselvar is expected to be completed as early as 212, with only residual spending remaining on Skarv. New investment in 212 will accordingly be dominated by a couple of substantial projects (Goliat and Gudrun) and the development of a number of small or medium-sized discoveries (Astero, Dagny, Fram, Luno and Marulk). Modifications and production drilling will also continue throughout the period, providing oil prices remain at a level of about USD 7 per barrel. Important modification projects Investment in producing fields has increased sharply in recent years. Major drilling programmes and/or investment projects are currently under way on all the biggest fields, such as Troll, Ekofisk, Statfjord, Valhall, Gullfaks, Snorre and Oseberg. They all aim to facilitate long-term production and thereby to maximise recovery from these fields. Running in parallel with the development of a number of mediumsized fields, primarily Skarv, Tyrihans and Gjøa/Vega, these modification projects have made a substantial contribution to the high level of investment in recent years. Taken together, the developments mentioned above involve roughly NOK 9 billion in capital spending, with the bulk falling in While Tyrihans came on stream in 29, Gjøa will be completed in 21 and Skarv in 211. Modifications on producing fields will continue to represent a substantial share of total investment in the next few years. The big modification projects are expected to continue right up to in order to secure their optimum effect. Combined with exploration spending and new field developments to find and harness new resources. as well as extensive drilling activity to recover remaining resources in producing fields, this will mean that the level of investment must remain high during the same period. This year s approved plans for development and operation (PDOs) of Goliat and Oselvar, with a combined expenditure of roughly NOK 3 billion in 21-13, and residual investment on Skarv in 211 will make a substantial contribution to moderating a fall in capital spending on new fields after 21. Stable or falling exploration costs Exploration spending depends on earlier finding success, oil price trends, rig availability, existing rig charters, how the companies prioritise the use of these rigs for exploration or production, and the ability of the companies to finance the investment. More spare rigs from 21 In practice, minimal changes have occurred in rig charters over the past year. This means that the number of unemployed units is set to rise from early 21. Rigs with an acknowledgement of compliance (AoC) can accordingly no longer be regarded as a constraining factor on the NCS. Oil prices, financial market developments and access to prospects will be the dominant factors in determining whether exploration activity remains relatively high or declines sharply over the next few years. Since many rigs will still be on charter both in 21 and beyond, however, total exploration costs may not decline as much as many people perhaps expect. Figure 23: Average day rates for semi-sub rigs working on the NCS USD Figure 23 summarises average historical and estimated rates for rigs under charters whose rates have been made public. Providing the rig contractors are not giving the oil companies discounts on the charter rate, reasonably reliable information on average rates is available to the end of 21. This estimate is also reasonably reliable if no new rig charters are fixed in 211, but the level could be pulled down to some extent by new charters concluded at lower rates. No reliable data are available at present for estimating average day rates beyond 212. Alternative trajectories for exploration costs were presented in the 28 business trend report. Uncertainties over new fields In today s circumstances, with the companies unsure of their future cash flows, fields where development is planned but not sanctioned represent one of the biggest sources of uncertainty. To maintain the level of investment in new fields beyond , it is important that more discoveries are matured and sanctioned for the submission of a PDO. The queue of potential developments is headed by Gudrun, with an estimated cost close to NOK 2 billion. Statoil is planning to submit a PDO for this field during the first half of 21, but has postponed a final development decision until after the New Year. Other discoveries which could soon be developed are Dagny and Luno.

26 26 Table 4: Alternative trajectories for exploration costs, OLF business trend report 28 NOK million Low Medium High Source: Econ Pöyry/OLF It is interesting to see how this year s estimates compare with those made last year. More rigs were used for exploration drilling in 28 than had been forecast the year before, and the SSB puts the final investment figure at NOK 24.4 billion. By comparison, Econ Pöyry s estimate was NOK 19.2 billion. However, production drilling declined by a corresponding amount, and the overall investment level was not noticeably affected. Econ Pöyry expects spending in 29 to lie just above the high estimate, at about NOK 25 billion. The SSB s investment statistics for the third quarter indicate NOK 29.4 billion, but this seems to be a little excessive. A decline in the annual number of exploration wells from over 4 to less than 3 in and a gradual decline in the average level of rig charter rates will most probably lead to a fall in exploration investment towards NOK 2 billion in 21 and 211, and to below that figure in 212 and 213. Fewer exploration wells are expected to be offset by an expansion in production and injection drilling, and are accordingly expected to have no effect on the overall level of spending. Limited contribution from new but not approved discoveries Discoveries where a development is likely but has yet to be approved (NPD resource class 5) are expected to have virtually no effect on the level of investment up to 213. Even if the oil price were to be maintained in the years to come, further investment in the period would be strongly influenced by the present conditions of financial market uncertainty and oil prices at around USD 7 per barrel. This is because projects in RC 5 under current conditions could be delayed by threefour years should the industry enter a lengthy period of pessimism. Projects not already at the planning stage (RC 5 or above) are therefore unlikely to experience any investment of significance other than exploration spending up to 213. As a result of the financial crisis and the deep recession in the world economy, prices for metals and other raw materials have dropped sharply. Rig rates are also likely to fall back a good deal because of lower oil prices. Scope for some cost reduction Viewed overall, scope is expected to exist for some reduction in costs on the NCS. This will be driven primarily by lower rig rates, cheaper raw materials and declining supplier margins. But these expectations of lower prices are not reflected in the investment estimate above, which is specified for future years in fixed 29 prices. In order to be in a better position to estimate future spending in nominal value and how this could be affected by different price trajectories for oil, this year s estimate utilises a methodology for analysing cost trends for various types of investment on the NCS. Developed by Econ Pöyry on behalf of the OLF, this method builds on a correlation analysis between historical price increases and overall indicators such as oil prices, the growth in global GDP and national pay inflation. The main purpose of this adjustment is to permit the trend in the level of costs on the NCS to be estimated for coming years. This method could also be used to calculate whether the growth in offshore investment during recent years primarily reflects higher prices or increased activity. For individual projects, it can be used to analyse how large a proportion of the historical rise in costs is attributable to price inflation or to project changes during the construction period. Description of the model Cost adjustments will take the form of a weighted price index and be based on a breakdown of development costs into different categories. The latter include wells, subsea systems, platforms, processing facilities, pipelines and terminals, and so forth. Each of these categories is then broken down further into a small number of input factors which are expected to experience differing cost rises. For simplicity s sake, only four input factors are considered: labour, metals, materials/equipment and rig day rates. The estimated historical cost increase for each of these factors will be correlated with three indicators: oil prices, growth in global GDP and the development of Norwegian pay rates (the SSB s pay index). Future cost trends for different types of investment are then modelled on the basis of the breakdown into cost categories and input factors, the historical correlation and an estimated future trajectory for these indicators. Insignificant infrastructure investment Norwegian spending on gas infrastructure will be governed partly by the development potential on the Halten Bank in the Norwegian Sea. The Victoria discovery has been significantly downgraded after the latest appraisal well. A possible new southbound gas pipeline accordingly looks likely to be put in place after 213. Last year s estimate included about NOK 1 billion for investment in a Skanled pipeline, but this has been removed from the figures presented here. Total spending on pipelines and terminals is thereby expected to be completely marginal in the investment period. Cost trends Costs on the NCS rose rapidly during 24-8 in line with an accelerating oil price and a historic boom in virtually all segments of the world economy. While production expenses per barrel more than doubled in this period, annual cost increases of 15-2 per cent for new field developments were not unusual. Cost growth was driven primarily by galloping rig rates and higher prices for steel and other imported commodities, but rising payroll costs and higher operating margins in the supplies industry also made significant contributions. While the breakdown into investment categories is based on figures from Wood Mackenzie corrected by Econ Pöyry, the further division into input factors and the correlation analysis have been carried out by the latter. The model assumes that rig rates primarily depend on oil prices, metal and material/equipment prices on the growth of the world economy, and payroll costs on the pay index. It has nevertheless been assumed that each input factor is influenced by a number of indicators. Equipment and metal costs, for instance, are also likely to depend on oil prices particularly in the case of special steels while payroll expenses in the oil business rise by more than the general Norwegian pay index when oil prices go up. Moreover, a time-lag component of one-three years has been incorporated in order to take account of the remaining life of existing contracts. This means that a change in the price of oil, for example, will take some time to be reflected in costs. The analysis has been based on three different estimates for per-barrel oil prices in 213 a low of USD 5, an expected of USD 75 and a high of USD 11. For global GDP, the IMF s latest growth estimate of October 29 has been taken as the expected trajectory. The high and low estimates are one percentage point higher and lower respectively. An annual normal growth rate of three per cent

27 27 has also been deducted. At this rate of GDP growth, prices in the world market are expected to remain constant. Payroll costs are based on the SSB s estimate of September 29 for Norwegian pay growth, with the high and low alternatives again one percentage point higher/lower. Cost indices results Figure 24 presents a calculated index for the level of costs on the NCS from 24 to 213. While the historical index is based on nominal values, the projected index is in fixed 29 kroner. It emerges that the level of costs on the NCS rose by an estimated 8 per cent from 24 to 28. Costs are expected to decline somewhat from 28 to 29, and then rise weakly towards 213. As described above, the expected trajectory assumes an oil price of NOK 75 per barrel in 213, as well as the IMF and SSB estimates for future growth in global GDP and Norwegian payroll expenses respectively. The figure also shows the modelled cost index for the high and low trajectories as described above. Along the low trajectory, costs decline by 15-2 per cent up to 213. They would return to the 28 level as early as 21 along the high trajectory, and rise by about 2 per cent up to 213. Figure 24: Cost index for the NCS ( 28 = 1 ) 12 As figure 26 indicates, investment in 213 is expected to be NOK billion in current money. The conversion from fixed to current value has been made by adjusting investment for costs and inflation from 21. This adjustment has only been made with respect to prices, and no account has been taken of possible postponement or speed-up of fields and projects as a result of low or high oil prices. The difference in the level of investment between the high and low trajectories is accordingly likely to be substantially greater than shown in the figure. Figure 26: Anticipated investment on the NCS NOK billion, nominal value high trajectory expected trajectory low trajectory Source high trajectory expected trajectory low trajectory Although nominal costs have risen sharply, figure 27 indicates that the real level of investment has remained fairly constant since 25. Real investments are shown in the figure in fixed 29 kroner, while future nominal investment is based on the expected trajectory. Real costs are likely to decline in 21 and 211, primarily because of reduced activity in new field developments. The decline in the level of costs from 28 to 29 mainly reflects a sharp drop in metal prices, as figure 25 shows. These prices are expected to rise from 21 in line with the recovery of the world economy. Materials/ equipment have also fallen, but not quite as quickly. For rigs, where a time lag of three years has been assumed, the economic recovery will overtake the price decline. This means that average market prices will not decline by much. The cost of labour will rise weakly in line with the increase in real pay. Figure 25: Price index for input factors Expected trajectory (28 = 1) Figure 27: Development of NCS investment in fixed and current value NOK billion Nominal prices Fixed 29 prices Source labour materials and equipment rig rates metals Source

28 28 «Exports of Norwegian gas play a key role from an environmetal perspective in terms of reducing the use of coal-fired power generation in Europe» Environmental status in the petroleum industry The Norwegian petroleum sector is an international leader for environment-friendly production of oil and gas. This is a position the industry aims to maintain through a continuous focus on the environment and improved environmental results. Reducing carbon emissions has been on the Norwegian political agenda since the late 198s. Norway is committed to ambitious climate goals through national and international agreements, with carbon emissions due to rise by no more than one per cent from their 199 level in the period. This commitment under the Kyoto protocol can be attained through a combination of measures both at home and abroad. The climate summit in Copenhagen during December 29 could provide important guidance for the world community s continued work on the climate. Apart from its Kyoto commitments, Norway has ambitious goals for further emission reductions. The target set by the Storting is to cut annual Norwegian greenhouse gas emissions by million tonnes of carbon equivalent (tce) by 22. A number of alliances have emerged in the Norwegian climate debate during the run-up to the Copenhagen summit. These have launched a variety of proposals for goals and instruments in work on the climate. A common denominator for most of the alliances is that they identify what they regard as appropriate measures in the oil and gas industry, often without considering costs, technological constraints or feasibility. Work on KonKraft report number 5 concerning the petroleum industry and the climate issue has played a key role in efforts to obtain a more realistic picture of action taken by the oil and gas sector and opportunities available in the future. The measures taken, emission reductions achieved and possible further action described later in this chapter derive primarily from that document. The global nature of the climate challenge is often forgotten in the Norwegian debate on this issue. Unfortunately, attention is often focused exclusively on domestic emission reductions, even though bigger cuts and better environmental solutions could have been achieved by looking beyond the country s borders. Some people, for instance, call for reduced activity on the NCS even though the actual position is that exports of Norwegian gas play a key role from an environmental perspective in reducing the use of coal-fired power generation in Europe. Emissions per unit of energy produced from burning coal are twice as high as for gas. Norway a carbon-efficient producer The Norwegian petroleum industry acknowledges the climate challenge and has long worked to reduce its emissions. The bulk of identified remaining measures in the petroleum industry are generally expensive, and the action which should be taken in the future must be assessed from an overall perspective with the emphasis on cost efficiency. In this context, earmarking carbon tax from the petroleum industry could be a way of also realising socio-economically positive measures in other sectors. The oil and gas sector accounts for about a quarter of Norway s greenhouse gas emissions, while its share of national value creation measured by GDP is in the same order. A number of instruments are already deployed by the government to regulate emissions from petroleum operations. The most important of these are the Emission Trading Act, flaring provisions in the Petroleum Activities Act, the requirement to assess power from shore when planning developments, emission permits and the demand that best available technology be used. Norwegian carbon emissions have increased by about six per cent since 199. In 28, all greenhouse gases released by the country totalled 53.8 million tce. The petroleum industry accounted for 14.2 million tce of this.

29 29 Figure 28: Carbon emissions from the NCS Actual trend and projection million tonnes measures will be more than 13 million tonnes. They include enhancing energy efficiency, reducing flaring, transmitting power from shore and injecting carbon dioxide stripped from natural gas. In addition, the industry is in the process of implementing power from shore and carbon capture measures which will avoid annual carbon emissions of 2.2 million tonnes by 213 when further energy efficiencies are included. Figure 3: Action taken has yielded significant annual reductions Million tonnes CO 2 per annum CO 2 reductions are a result of action taken during CO 2 reductions from action taken Actual CO 2 emissions from the oil and gas industry Sources: revised national budget 28, DNv, OlF, Statoil, Shell, bp, ConocoPhillips, exxonmobil, Talisman and project group v CO2 emissions from oil operations emissions corrected for the development of petroleum production Source: environment web/npd Carbon emissions per unit of oil and gas produced from the NCS were low as early as 199, primarily because of very limited flaring. Technology has improved across the board since then, and a number of emissionreducing measures have been adopted. The amount of carbon dioxide released by the industry has accordingly increased more slowly than production, and emissions per unit produced were declining until the past two years. Greenhouse gas emissions per unit of oil and gas produced vary considerably around the world within a range of nine to 38 kilograms per boe. Norway releases on average about nine kilograms per boe. The high values in other parts of the world partly reflect widespread flaring of associated gas during oil production. Europe has a well-developed infrastructure for carrying gas from field to market, and Norway has a well-functioning transport network with high regularity and no leaks. Figure 29: Norwegian oil and gas production is climate-efficient Emissions in Kg CO 2 equivalent per unit of energy produced Norway europe middle east russia South America Asia/ North America Australasia 38.3 Africa Source: OGP and OlF Substantial commitment Action taken on the NCS has made a significant contribution to Norway s position as a carbon-efficient producer of oil and gas. Roughly 13 measures adopted in have eliminated about 4 million tonnes of carbon emissions. The total effect over the collective life of these The maturing of the NCS, the shift from oil to gas production, the northward move of operations and longer distances for gas transport will have the effect of boosting carbon emissions per unit produced towards 22. Over the next few years, the petroleum industry will emit around 14 million tonnes of carbon dioxide per annum. Given forecast production developments, the industry s emissions will remain at today s level in 22 without further new measures. But they are expected to fall sharply towards 23 as a result of declining production. Focus on energy efficiency The most power-intensive processes on an offshore installation are gas compression related to transport, water injection and gas compression for pressure support, and pumping of oil/condensate. Power for these applications comes primarily from gas turbines and engines. Roughly 75 per cent of current emissions from the petroleum sector derive from gas turbines for electricity or mechanical power. As a result, measures aimed at enhancing the efficiency of energy production relate largely to the use and optimum operation of turbines. Enhancing energy efficiency offshore is a matter of many relatively small measures. Which of these are implemented, and where and when, depends on such factors as the age of the installation, its mode of operation, installed equipment and processes, and available implementation capacity. This makes it difficult to predict which measures will be relevant on any installation more than three-five years ahead. New field developments provide better opportunities for energy-efficient solutions because they offer greater freedom in choosing design and technology. Operators on the NCS have identified about 4 specific measures or packages of measures during 29 with a total carbon reduction potential of 8 tonnes per annum in 213. That corresponds to about six per cent of total emissions, and is in line with the MPE s presumption enshrined in the government s official emission forecasts that the energy-efficiency potential is five to 1 per cent within five to 1 years. Power from shore Supplying offshore installations with power from shore is a much-discussed issue. It has already been or will be done on several fields where conditions are suitable. Ormen Lange and Troll A are powered from shore today, Valhall will be in 21, and Gjøa and Goliat are due to be partly supplied in this way from 21 and 213 respectively. Power from shore will be assessed for all new developments and major modifications on the NCS.

30 3 Examples of implemented efficiency improvements Ekofisk II Balder Åsgard B Valhall 1998: Changes made in the Ekofisk II development, including turbine upgrades 2: Improved compressor regularity and flaring procedures 27: Compressor efficiency enhanced 23: New turbines for power generation Annual reduction: 98 tonnes of CO 2 Annual reduction: 1 tonnes of CO 2 Annual reduction: 3 tonnes of CO 2 Annual reduction: 12 tonnes of CO 2 This process involves replacing turbines offshore with electricity transmitted from land. Full power from shore means that all primary electricity requirements on the installation are met in this way, while partial supply will reduce turbine emissions by about 45 per cent on average. The proportion varies considerably from field to field. Partial power from shore will be the only realistic alternative on existing installations because of less extensive conversion and fewer power transfer systems. For new installations, however, full power from shore would be an option if the design can be optimised for this approach from the start. That also requires no additional costs related to production shutdowns, conversion and replacement of existing equipment. Analyses show that supplying partial power from shore to installations is an expensive solution, with a typical price tag well over three times today s carbon costs. The total investment requirement is put at NOK 33-5 billion. As a result, it is unlikely that large-scale partial supply of power from shore to existing installations could be implemented with today s frame conditions. Carbon capture and storage (CCS) Norway was an early adopter of CCS, and is making an active commitment today through a collaboration between the industry and the government. The world s first large-scale CCS project was on Sleipner East and is one of two such facilities currently operational off Norway the other being Snøhvit for carbon dioxide separated from natural gas. Norway has developed a very robust CCS cluster and is a world leader with this technology. Expertise and experience have been acquired primarily through the Norwegian oil and gas industry and a long-standing commitment to relevant research. That has also strengthened the supplies industry in this area. However, CCS is an immature commercial concept and cannot be realised without substantial government subsidies and a well-developed collaboration between industry and government. The legal and financial framework must be put in place and technology development accelerated in order to reduce carbon capture costs. Extensive work is being pursued in large parts of the world to make CCS commercial in the 22-3 time frame. Capturing carbon emissions from offshore installations is basically very demanding. Each turbine is small, while installations face space and weight constraints. Extensive studies of carbon capture on installations in the late 199s found that it would be very difficult in technical terms and highly expensive. The status of CCS technology for this application is about the same today as it was then, while the relevant offshore installations are a decade older. CCS on land is still immature, and no tests have been conducted offshore with CCS from flue gases. A possible offshore application lies well into the future. The need to store European carbon emissions is expected to increase, and storage on the NCS has been identified as a possible contribution to reducing carbon emissions for countries in Europe which buy Norwegian oil and gas. But the scope of CCS in the EU over coming decades and the storage capacity which will have been matured are very uncertain. Rough estimates indicate that Norway could provide substantial storage capacity. The scale, time and cost of exploration and verification activities to mature carbon storage in geological formations has so far been underestimated. At the same time, it is worth noting that work is under way to identify suitable storage sites. This is also being pursued in cooperation with the UK government. The oil and gas industry is not only part of the European emission trading system from 28, buying allowances for all its emissions, but also pays carbon tax in Norway. It has called for the creation of a climate fund financed by these tax payments, which currently go directly to the Norwegian Treasury. Earmarking carbon tax from the petroleum industry, which totals some NOK 2 billion per annum, could be a mechanism for also realising socio-economically beneficial measures in other sectors. This would allow the money to be spent where it yields the best environmental results. Fund offers big environmental benefit The environmental agreement between 14 industry associations and the Ministry of the Environment to create a nitrogen oxide fund came into effect on 1 January 28. At the time of writing, 542 enterprises representing about 95 per cent of taxable nitrogen oxide emissions had signed up to the deal. That includes all the operators on the NCS.

31 31 An action plan has been developed The industry is actively pursuing further reductions in greenhouse gas emissions through improved energy efficiency, power from shore, renewable energy and development of CCS. Measures for the next three-five years will also be reviewed and firmed up by the industry on an annual basis. Through its KonKraft collaboration, the petroleum industry has developed an action plan during 29 for reducing carbon emissions from its operations. In the short term: Power from shore for Valhall and Gjøa (.55 million tonnes of carbon dioxide per year) with effect from 21, and Goliat (.15 million tonnes) by 213. CCS from natural gas on Snøhvit (.7 million tonnes) by 21. Forty identified energy efficiency improvements, including reduced flaring (.8 million tonnes) by 213. In the medium term (to 22): The industry will continue working on efficient energy management and the identification of new energy efficiencies. It will undertake to conduct annual reviews to determine priority measures in a time frame of three-five years. The industry will work closely with suppliers to qualify new and existing technology which can lead to more energyefficient solutions offshore. The industry will carry out a thorough assessment of opportunities for power from shore in connection with new stand-alone field developments (potential million tonnes) and major conversions and expansions (potential not identified). The industry will implement full or partial supply of power from shore where this is cost-effective. Together with other players in the Norwegian energy cluster, the industry will contribute to technology development and capacity expansion for renewable energy. In particular, the industry will apply its expertise to the construction and operation of installations at sea to help develop offshore wind power as a possible future source of electricity for facilities on the NCS. The industry wants to play a key role in an integrated coordinated development process for CCS technology together with the government and key players in the supplies sector. During 28-1, the fund will have some NOK 1.8 billion at its disposal for implementing measures by 211. Its biggest contributor is the oil and gas industry, which accounts for about two-thirds of the money. So far, the fund has approved applications for support from a total of 435 projects with an overall price tag of NOK 1.6 billion. The expected reduction in nitrogen oxides is about 24 tonnes. Based on cost-efficiency considerations, the grants have primarily gone to the shipping and fishing sectors. Measures in the oil and gas industry are generally more expensive. If all the measures approved are implemented as planned, the industry associations will very probably meet their overall emission reduction commitment of 3 tonnes by 31 December 211 (account has then been taken of reductions achieved through changing flare factors on the NCS by 4 3 tonnes). According to the environmental agreement, annual emissions of nitrogen oxides were to be reduced by 2 tonnes in 28. These measures had been implemented by 31 March 29. The Norwegian Pollution Control Authority (SFT) has notified the nitrogen oxide fund that this commitment was met. Calculations show that the overall reduction attributable to the agreement in 28 could be as much as tonnes. Measures approved for 28 and 29 correspond to a reduction of more than 13 tonnes, while the commitment is 6 tonnes. The fund has 5 applications in reserve, offering an overall reduction potential of 3 2 tonnes within the framework of a further NOK 2 million in support. Figure 31: Commitments and emission cuts reported to the NO fund x Based on 435 applications at 25 September Tonnes Commitment emission cuts/applications efforts in 26 and 27 credited within the framework of the environmental agreement on NO x emission cuts after 211 as a result of measures adopted Source: business Sector s NO x Fund This successful start for the nitrogen oxide fund shows that the approach could be an efficient and cost-effective way of reducing national emissions to the air. In other words, it could serve as a good model for establishing a climate fund.

32 32 Focus on the marine environment Environmental monitoring The oil and gas industry pursues extensive environmental monitoring to investigate possible effects of its discharges to the sea. This work is done by independent scientists in accordance with government guidelines, and quality-controlled by an independent panel of experts appointed by the SFT. The monitoring takes the form of systematic data gathering using verifiable methods to document the condition of the environment and its development in time and space. All results are stored in a central database, which today contains long time series dating back to the 197s for a large number of fixed measurement points from the Barents Sea in the north to the North Sea in the south. This database accordingly represents a unique resource which is openly available to other interested scientists, regardless of industry and government. The University of Oslo has used the material in a series of doctoral theses, for instance, and a number of these have led to suggestions for further improvements to monitoring. The most significant effects identified derive from earlier discharges of oil-based drilling mud and oily drill cuttings. These were halted in 1993, and the effects of today s discharges of water-based mud and cuttings cannot be identified beyond a few hundred metres from the installations. On new developments, effects can only be observed in the immediate vicinity of the installations and are often indistinguishable from the impact of the installation itself. According to the SFT s panel of experts, current monitoring of the water column has identified no significant effects. However, the oil and gas industry is contributing to further research in order to refine surveillance methods. Discharges to the sea The largest remaining discharge to the sea on the NCS is produced water fossil liquid which accompanies the oil up from the reservoir. Discharges in 28 totalled 93 million barrels (149 million cubic metres), down by about eight per cent from 27. The produced water contains oil residues, which are separated out before discharge. Today s maximum concentration in discharges permitted by the SFT is 3 milligrams dispersed oil per litre of water. The average figure for 28 was 9.5 milligrams per litre, and the total volume of oil discharged was about 1 4 tonnes. Figure 32: Forecast for production and discharge of produced water million cubic metres Produced water Discharges Source: mpe/npd Operators must apply to the pollution control authorities for permits before discharging any chemicals. The SFT has divided such substances into four groups black, red, yellow and green on the basis of their environmental properties. A great deal of work has been devoted by the operators to replacing chemicals with poor environmental properties. More than 99 per cent of the chemicals in the red and black groups have thereby been phased out. White Paper no 26 (26-7) on the government s environmental policy and the nation s environmental status declared that the goal of zero discharges for chemical additives with poor environmental properties had been met. Efforts to reduce discharges are nevertheless continuing, in part by looking at injection opportunities for produced water and drill cuttings. At the same time, work on substituting chemical additives is continuing as before. The government has concluded that the oil and gas industry releases less than three per cent of the prioritised environmental toxins in Norwegian sea areas.

33 33 The Bellona environmental foundation alleged in the media during September 29 that extensive manipulation takes place with the chemicals used in oil and gas production. This was said to have been done by increasing the molecule size so that the substances concerned can be classified as more environment-friendly. After a detailed investigation of Bellona s claims, the SFT concluded that they were unfounded. The oil industry expected nothing less. Figure 33: Historical development of chemical discharges, tonnes Green chemicals Red chemicals Yellow chemicals Black chemicals Source: OLF Acute discharges are defined as significant unplanned pollution, which occurs suddenly and is illegal. The number of discharges with an oil volume above 5 litres has fallen by more than 65 per cent over the past decade. A total of 173 incidents occurred in 28, of which nine exceeded one cubic metre. No significant environmental effects have been identified from the acute discharges. Debate on oil spill response Oil spill response has been a hot topic over the past year. The wreck of Full City off Langesund this summer sparked a debate about Norwegian spill response which was to some extent useful and constructive, but which also produced a number of misunderstandings and inaccurate allegations related to the response. These included the wave heights in which the oil industry s clean-up equipment can operate. The correct figure is six-seven metres. Another was the weather constraints on activities off northern Norway, where the truth is that waves on Statfjord are higher than either off Lofoten/Vesterålen or in the Barents Sea. Claims that oil clean-up systems have not improved for 3 years are rebutted in detail below. Oil spill response both by operators and the government is important for Norway as a coastal nation. Big commitment to oil spill response Oil spill response by operators on the NCS is the responsibility of the Norwegian Clean Seas Association for Operating Companies (Nofo). Over the past five years, this organisation has invested some NOK 3 million in new and improved clean-up equipment. In addition, the industry has challenged technology specialists worldwide to come up with new ideas in this area through its Oil Spill Response 21 programme. More than 12 companies from Norway and abroad expressed interest, and over 17 project ideas were submitted. The first development contracts were signed in the autumn of 29. fully developed, commercially available product. Nofo initially expects to spend NOK 3-4 million via the programme, which is being pursued in cooperation with the Norwegian Coastal Administration. Safeguarding coast and shore The oil industry has increased its annual financial support to local authority oil spill response by more than 5 per cent over the past year. That has been accompanied by clearer standards for quality of deliveries and shorter response times from local authority emergency organisations. This puts in place a key element in the work of ensuring the best possible oil spill response in the coastal and shore zone. All told, it represents an annual investment of more than NOK 4 million in coastal and shore protection more than three times the level of earlier years. A new special team for oil spill response in the coastal and shore zone was also established by the oil and gas industry during the autumn of 29. Its 5 specially trained personnel are ready to mobilise nationwide at short notice. With long experience in coastal and shore protection, team members have received training in how to handle all operational aspects associated with oil slicks close to land. Should an accident occur, Nofo can have specialists and operational leadership in place within 24 hours. The special team represents the most important reinforcement of coastal and shore zone response in Norway for many years. It supplements the oil and gas industry s existing response arrangements and will also be at the disposal of the Coastal Administration and the joint local government committees for combating acute pollution. This will make the team significant for the nation s total oil spill response. Nofo has also concluded an agreement with Seaworks AS in Harstad covering three special ships for use in the shore zone along the whole Norwegian coast. The availability of such vessels is important for the oil industry s commitment to coast and shore zone response. Access can often be difficult at many points along the Norwegian coast, far from roads and without suitable harbours. The special ships will be very useful in such conditions. They can be used to transport personnel and equipment, and to serve as a work platform during clean-up operations in the shore zone. Nofo has had the three vessels on standby over the past three years during exploration drilling close to land along the length of the NCS. This has represented an investment of NOK million per year, depending on the level of drilling activity. Aircraft and towing contracts Nofo has a contract with the Norwegian Society for Sea Rescue on using rescue craft in oil spill response. This helps to increase towing capacity on the NCS, while these vessels also have a high service speed and can be mobilised rapidly. The deal initially covers six craft stationed along the whole Norwegian coast, from Honningsvåg in the north to Egersund in the south. Agreement has also been reached with Britain s Oil Spill Response on using Hercules planes to combat oil slicks. The contract covers round-theclock response with aircraft which can transport and apply dispergents to break up large slicks. That helps to increase the robustness and strength of oil spill response on the NCS. Nofo is offering very attractive deals in this technology programme. In addition to receiving substantial financial support, suppliers retain patents and rights while Nofo undertakes to buy the first examples of a

34 34 «The Norwegian petroleum industry will be a leader for HSWE in the global petroleum business» Health, safety, the working environment and operations on the NCS The Norwegian petroleum industry has set itself an ambitious target to be a leader for HSWE in the global petroleum business. This means that the sector will work purposefully and long-term on the basis of a philosophy of zero harm, accidents, occupational illness and undesirable incidents. Working towards such a goal is demanding, given that the industry is generally pursued far out to sea and under demanding weather conditions, and involves operations with a high potential risk if they are not handled correctly. Nevertheless, the industry cannot set lower standards. Ensuring that those employed in the petroleum sector do not suffer harm at work has an intrinsic value. In addition, the industry has a strong self-interest in avoiding undesirable incidents and accidents. From an employer perspective, safeguarding each employee from both acute injury and long-term negative health effects is important. Serious incidents can also threaten major material assets for both companies and society. Goals must accordingly be ambitious. Cost picture and regulatory development The zero philosophy does not mean that the industry is absolved from the need to make cost-benefit assessments of its HSWE efforts. Such evaluations are also a key requirement for work on statutory regulations governing this area. All players, including the government, must manage resources in such a way that the whole community benefits. The industry has noted an unfortunate trend, both in work on revising the regulations and in connection with enforcement and supervision, towards paying insufficient attention to requirements for good resource management. A key OLF concern is that standards for a high and acceptable level of HSWE are also viewed in relation to the need for good resource management specified in the Petroleum Activities Act as well as to financial and administrative consequences, the special character of the industry, local conditions and operational requirements. These considerations have been conveyed to the authorities in connection with the public consultation on new health, safety and environmental (HSE) regulations for the petroleum industry. The OLF has also maintained in its consultation response that an appropriate interaction between resource management and a high level of HSE is best ensured through a regulatory regime based on functional requirements. Such regulations give the industry an opportunity to meet the standards with the necessary flexibility and cost efficiency. Good judgement and orderly procedures in all phases of dealing with an issue are also crucial for all players when functional regulations are used.

35 35 Major accident risk reduced In cooperation with companies, unions and other government agencies involved in the industry, the Petroleum Safety Authority Norway (PSA) publishes an annual report on trends in risk level in the petroleum activity. This RNNP document has recorded a declining overall level of risk in recent years. Although the trend is positive, the industry is keeping up the pressure to achieve further improvements. Figure 34: Overall level of risk on the NCS Relative risk indicator. Three-year rolling average. 2 = involvement has accordingly increased in the companies, with greater attention and awareness. A new industry standard for personnel working with pressurised equipment was adopted on 1 January 28. Coming into force on 1 January 211, this requires documented expertise for employees and is expected to contribute to a further decline in the number of gas leaks on the NCS. Well incidents Great attention is still paid in the OLF s HSWE work to well incidents, which have been in decline since 24. By far the majority involve a low potential for accidents. That was the case for all such incidents in 28. Figure 36: Well incidents per 1 wells Source: PSA/rNNP Number This work extends along three axes: reducing the threat of major accidents, cutting serious personal injuries, and reducing negative long-term effects attributable to the working environment. On the basis of the RNNP and its own experience, the industry has defined three priority areas through the OLF for reducing the risk of major accidents. These are gas leaks, wellhead incidents and ships on a collision course. Gas leaks The OLF s gas leak reduction project has demonstrated over a number of years that purposeful efforts pay off. Its goal of cutting leaks to less than 2 per year was achieved in 25. The industry then set an ambitious new target of reducing the annual incidence of large leaks to less than 1 by 28. That goal was reached in 27. The project received the PSA s HSE prize in 28 for its good results. Figure 35: Development in gas leaks on the NCS Leaks larger than.1 kg/sec 45 Number exploration drilling Production drilling Source: PSA/rNNP The attention given to well incidents through the work of the Well Integrity Forum has resulted in guidelines for training, handover documentation and standardised barrier drawings. A reporting basis for well integrity has also been established through a common template for categorising wells. This was used as the indicator for well integrity in the 28 RNNP report. Reporting has been evaluated and improved in 29, and will be reflected in an additional chapter in the OLF s well integrity guidelines. This will be used for RNNP reporting in 29. Cutting well incidents and a focus on well integrity are significant for reducing the risk of major accidents on the NCS, lost production and costs. 3 reduction goal by 31 Dec Source: PSA/rNNP Analyses have identified poor leadership and inadequate expertise as contributory factors in the bulk of hydrocarbon leaks. Management «After more than 4 years on the NCS, the petroleum industry has built up a very high level of expertise in operating safely and securely in challenging seas»

36 36 Ships on a collision course A ship colliding with an installation could have serious consequences. The industry accordingly works purposefully to prevent such incidents. Since 2, a clear reduction has been recorded in vessels on a collision course with installations. This decline is not least the result of safety guidelines from the OLF and the Norwegian Shipowners Association on interaction between installation, base and offshore service ship. A working party drawn from employers, unions and government under the Working Together for Safety (SfS) collaboration has also developed the draft of a common checklist for offshore service ships entering a 5-metre safety zone. In addition, the industry has also put in place a system to monitor sea areas in which it is working. Although the trend has been positive, the industry will continue to work to reduce the number of incidents. Figure 37: Ships on a collision course Number Lifeboat project Since faults were discovered in freefall lifeboats on the NCS in 25, the industry has worked purposefully through the OLF s lifeboat project to correct shortcomings and make such craft secure. It became clear at an early stage, not least thanks to comments from users, that the original regulations based on references to international standards fell short of the industry s safety requirements. The work has made freefall lifeboats on the NCS considerably safer through structural improvements, enhanced passenger safety and a new standard for future craft of this type. The freefall part of the lifeboat project was formally completed in the autumn of 29. The operators are continuing to adapt its findings to every individual boat on each installation. Some studies also remain to be carried out on conventional lifeboats and launch arrangements. Personal injuries A further reduction in serious personal injuries was achieved on the NCS in 28. This trend is naturally welcome. With a goal of zero accidents, however, the industry is continuing its efforts to cut injuries even more. Instruments for reducing injury frequency include work on experience transfer between companies through the OLF and SfS. Figure 38: Serious personal injuries on the NCS Per million working hours Source: PSA/rNNP Helicopter safety A number of helicopter accidents have occurred internationally over the past year in connection with the oil and gas industry. Nineteen people died off Newfoundland in Canada, while 16 were killed north of Peterhead in the UK. An emergency landing also had to be made in the sea off Aberdeen. The helicopter models involved are all in use on the NCS. These incidents were followed up in detail and measures taken where necessary. The safety of this form of transport is very important for the several thousand employees carried by helicopter to and from installations on the NCS every year. Eight operators took the initiative in 28 on a third major helicopter safety study on the NCS. The first covered and the second 199 to Covering the 2-1 period, the latest project wants its report to establish a reference standard for the methodology to be applied when analysing accident risk and in identifying and assessing risk-reduction measures. Using helicopters for passenger transport on the NCS will be safer than anywhere else where these machines are used for this purpose Source: PSA/rNNP Fatal accidents A person was killed while working on Oseberg B in May 29. Fatal accidents are always a blow to people, the company concerned and the whole industry. Every time a life is lost, a thorough investigation is launched to prevent a repetition. The petroleum industry s commitment to preventing such accidents has again yielded results over time. Compared with other sectors, the number of fatalities in the Norwegian oil and gas business is fortunately low.

37 37 Dropped objects Whether they involve a spanner or a heavy pipe, dropped objects have the potential to injure people and damage equipment. Such accidents are a significant cause of personal injury on installations. Unfortunately, the trend is unsatisfactory and close attention needs to be maintained. The OLF s statement of goals includes a 5 per cent reduction in the number of dropped objects by 21l, compared with the figure for 28. Figure 39: Dropped objects Number Source: PSA/rNNP Work is already under way, not least through experience transfer, to cut the incidence of such accidents. Chemical exposure Major improvements have occurred in the physical working environment since operations began on the NCS. Such gains are not least important for avoiding long-term health damage from exposure to chemicals. The PSA published a report on the chemical working environment offshore in the summer of 27. This concluded that it would be necessary to identify and enhance knowledge about chemical exposure in the industry. At the same time, it found that the industry in general has a high level of technical expertise in this area and that managements and workers understand the hazards associated with using chemicals. As a result of the PSA report and contact with the Ministry of Labour and Social Inclusion, a far-reaching project on chemical exposure in the industry was launched in the autumn of 27. The OLF is collaborating here with the Federation of Norwegian Industries, the Norwegian Shipowners Association and the unions to eliminate deficiencies and close knowledge gaps in this area. Noise A number of workers have reported hearing damage in recent years, and the industry is working purposefully to avoid this type of injury. Guidelines have been produced to systematise practice in Norwegian oil companies for dealing with levels of noise which can damage hearing. An electronic support tool called NoiseRisk has also been developed for assessing hearing risk. A key job in the future will be to make the guidelines even better known in the industry. Operational improvements Good HSWE results are closely related to the way operations are conducted. Extending the producing life of aging installations represents one area in which much work is being done. As infrastructure and installations on the NCS approach the end of their design life, having systems in place which ensure high HSE standards is important. The OLF s producing life project has developed guidelines to specify measures which should be implemented by the operators to ensure that installations maintain an acceptable standard beyond their design life. In this context, the project has established standards and checklists for use in the assessments and analyses which ought to be carried out ahead of a producing life extension. The use of new technology and modes of collaboration integrated operation is also a focus of attention at the OLF. One challenge is to ensuring that different information and communication technology (ICT) systems communicate with each other as efficiently as possible. Such communication is essential for getting the most out of new work processes, which in turn provide faster, better and safer operation. Standardisation Standardisation is the industry s own tool for supplementing functionally based regulations. The development of international standards, in part through the International Organisation for Standards (ISO), is crucial to enhancing cost efficiency in the industry. Establishing standardised solutions in such areas as work processes and technical solutions is another very important aspect of HSWE work. The strong international position of the Norwegian petroleum industry helps to ensure that standards developed in Norway are also adopted internationally. At the same time, participation in international fora means that the country s petroleum cluster can learn from oil and gas activities in other nations. The overall goal for the project is to ensure that risks related to chemical usage in the oil and gas industry, offshore and on land, are identified, assessed and controlled. A number of research activities have been initiated in such areas as biomonitoring (measuring how chemicals affect organisms), current chemical exposure in the oil and gas industry, creation of a literature database, a review of historical exposures, and health outcomes from the chemical working environment. A series of specialist meetings is being organised on relevant issues.

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39 39 Night work and shared sleeping quarters The industry has worked purposefully for many years to minimise the amount of night work on the NCS. New adjustments to the regulations on this issue will accordingly have only limited impact. At the same time, the OLF would emphasise the importance of allowing the operator to determine whether night work is to be used on the basis of the terms and frameworks specified in the regulations and on the basis of the operator s responsibility for maintaining acceptable HSWE conditions. A tightening of the regulations governing shared sleeping quarters has been announced by the authorities. The possibility that personnel on the same shift may be required to share cabins for short periods during work peaks is far smaller on fixed installations than was the case a few years ago. None of the operators appear to require any workers to share cabins during normal operation. However, berth capacity on a number of installations with double cabins calls for sharing during periods of peak work. Today s opportunity to utilise cabin sharing provides flexibility for efficient operation and maintenance. It is usually required during work peaks created by installation, modification, repair and upgrading jobs or during maintenance shutdowns. The same issue arises to some extent in connection with extraordinary accommodation when employees on different shifts during work peaks must share both a cabin and a berth (hot bedding). During planned turnarounds when production has been shut down, berth capacity on the installation will normally be used to the full. Any increase in the duration of a turnaround has substantial financial and resource-related consequences. The financial effects could reach several hundred million kroner in individual cases. An example can be provided here. The gross revenue loss from one day s production of roughly 1 barrels of crude, at an oil price of USD 7 per barrel and a USD exchange rate of NOK 6., will be about NOK 42 million. Should a ban on cabin sharing extend a shutdown by 1 days, the gross loss of revenue would total NOK 42 million. That would be repeated year after year. It is very important from both HSWE and production perspectives that operators have the opportunity to continue cabin sharing and hot bedding during turnarounds. This must be clearly stated in the guidelines to the activities regulations, so that the industry avoids having to treat cabin sharing as exceptional. Operations in the far north After more than 4 years on the NCS, the petroleum industry has built up a very high level of expertise in operating safely and securely in challenging seas. In the Norwegian debate on opening the NCS off Lofoten and Vesterålen to petroleum activity, it is worth noting that the waters in question are no more difficult than the ones in which the industry has worked for more than four decades. Data from the Norwegian Meteorological Institute show that weather, wind or temperature are no harder to handle than elsewhere on the NCS. At the same time, a key issue for the industry is to be as well prepared as possible for the northward shift of activity. In addition to drawing on experience from petroleum operations in cold regions elsewhere, such as Canada and Siberia, it has initiated a project involving companies, unions and the government to look in greater detail at HSE challenges posed by operations further north. This work will consider the requirements which should be set for such aspects as installation design and safety-critical equipment, as well as working environment and emergency response challenges. The Norwegian petroleum industry has demonstrated over the years a growing competence in operating safely and securely, without harm to people, the environment or technical equipment. It has also shown that HSWE work is its top priority. That will remain the case in the years to come.

40 4 «Although activity remains high in the petroleum sector, concern over the order position is growing in parts of the supply industry» Working life and expertise in the petroleum industry The Norwegian labour market is not as tight as it was a year ago. Activity remains high in the petroleum sector, but concern over the order position and jobs is growing in the supplies industry. These challenges are set to increase in the short term. Nevertheless, qualified personnel will remain in great demand for many years to The international recession has also weakened the Norwegian labour market, with registered unemployment almost doubled since the downturn began in May 28. It stood at 2.7 per cent of the labour force in September, but the rise in the jobless total has shown signs of flattening out in recent months. This means that Norway has nevertheless escaped fairly lightly from the recession compared with other industrial countries. In many cases, unemployment among its trading partners is three times higher and the outlook for jobs remains bleak. The moderate Norwegian unemployment figures conceal substantial sectoral differences. Job losses are concentrated to a great extent in the private sector, and particularly in construction and manufacturing. Employment in these two industries was down by 2 in the second quarter compared with the same period of last year. A relatively sharp increase has also been seen in joblessness among unskilled workers, managers, and people from the stockbroking and consultancy sectors. About a fifth of the unemployment growth over the past year reflects increased use of lay-offs. During this period, the Norwegian labour market has divided to a great extent into two camps while unemployment has risen strongly in the private sector, public sector employees have increased by 19 overall. come. As a result, the OLF is pursuing a number of measures every year both on its own account and in cooperation with the government and other players directed at young people making educational choices. Applicants for higher education courses in Norway increased sharply this year, but the proportion choosing to study science and Figure 4: Developments in the Norwegian labour market Percentage Number of people technology subjects remained low Unemployed, labour force survey (seasonally adjusted) Unemployed, per cent of total workforce Unemployed, registered, NAv (seasonally adjusted) 6 4 Source: SSb and the Norwegian labour and Welfare Administration (NAv)

41 41 Immigrant groups hard hit While the number of registered unemployed has continued to rise during 29, jobless figures in the SSB s labour force survey (LFS) have been more stable. That could be partly because the LFS is not as good at picking up the growth in unemployment among new groups of immigrants. At 3 September, 3 8 people from new EU members were registered as wholly unemployed. Poles are the largest group in this category, followed by Lithuanians and Latvians. The great majority have been employed in construction or manufacturing. After making a big contribution to relieving labour shortages in Norway during recent years, these groups appear to have been particularly hard-hit. Figure 41: Employees in the oil industry Quarterly figures, seasonally adjusted Number of people (1 s) Oil and gas extraction Optimistic NAV forecasts In its latest forecasts, the Employment and Welfare Administration (NAV) expects employment to decline marginally in 29 and 21. As in previous recessions, participation in the labour market is expected to decline next year, partly because more young people opt for education and partly because more older people withdraw. Given population trends, however, the labour force will nevertheless increase by 14 in 29 and 1 in 21. The level of activity in the Norwegian economy is expected to recover through the second half of this year and during 21. Unemployment will continue to grow, but at a slower pace. The NAV estimates that unemployment will average 71 in 29 and 8 in 21, which corresponds to 2.7 and 3.1 per cent respectively. At peak, the NAV expects the number of people wholly out of work to reach 85-9 in 21. That is 3 lower than previously forecast. Petroleum industry employment still high Direct employment in the petroleum sector, including the supplies industry, is estimated to be in the order of people. Until 23, the former Aetat state labour exchange (now part of NAV) prepared annual employment statistics for petroleum-related activity with a considerable information value. After these ceased to be issued, the OLF joined with the MPE to request that the SSB compile employment figures which provide more detailed information about developments than can be found in the national accounts. This report was first published in 28. As was the case last year, these statistics are confined to the SSB s standard industrial categories and the petroleum industry s core activities production of crude oil and natural gas, related services and pipeline transport. They accordingly reflect a conservative view of what constitutes the petroleum sector in Norway. The period covered extends from 2 to 28. The report shows continued growth in the number of people employed by petroleum-related industry. A total of people worked in these sectors during the fourth quarter of 28, up by or eight per cent from 27. Employment has risen by no less than 34.1 per cent since 25. Greater uncertainty about the oil industry According to Norway s quarterly national accounts, direct employment in the oil industry (in other words, oil and gas extraction, related services and pipeline transport) totalled about 43 people in the second quarter of 29. The record level of activity in this sector during recent years has also created 8-1 more jobs in the engineering industry. Petroleumrelated operations have thereby helped to moderate the recession in the Norwegian economy, and the NAV has assumed that activity in this sector could remain high throughout the period covered by its forecasts. However, uncertainty over the development of the petroleum sector has increased, with the supplies industry currently reporting declining new orders as well as redundancies and lay-offs. This suggests that the oil industry s contribution to sustaining the labour market may prove weaker than the NAV has assumed Services related to oil and gas extraction Pipeline transport Source: SSb Supplies industry orders cause concern A number of companies in the supplies sector have found themselves compelled during 29 to adjust their workforces through lay-offs, natural wastage and redundancies. This has primarily affected that part of the industry which works on new projects. Although the level of investment in the petroleum business is high, a large part of the spending is directed at exploration, maintenance and work on existing fields. Projects which have been shelved are primarily new developments which require a persistently high oil price to be profitable. The Federation of Norwegian Industries has produced forecasts based on information from the 11 largest companies in that part of the engineering sector which delivers to the oil and gas business. These show an expected workload for 21 which lies below 5 per cent of capacity. The position is somewhat better for the largest engineering and technology companies, but these are also expected to experience a decline in workload during 21. Fewer reports of downsizing have been received so far in 29 from supplier companies which belong to the OLF. The exception is the subsea contractors, where examples of downsizing have been seen. But some companies, including ones involved in well service, are expanding their workforces. From most local authorities Many members of the petroleum workforce are employed offshore and have long periods of time off. This makes the industry very suitable for long-distance commuting. The SSB report s survey of where personnel are resident shows that the great majority of the country s local authorities are represented. Employees were spread over 47 of Norway s 43 local authorities in 27, and this figure rose last year by a further six to no less than 413. The largest number of petroleum workers live in the west-coast counties of Hordaland and Rogaland, which were home to 64 per cent of employees in 28. That was unchanged from 27. Rogaland experienced a decline of 1.5 percentage points over the past year, while increases continued in both Oslo/Akershus and northern Norway. According to the absolute figures, the number of residents working in the petroleum sector rose in every county with the exception of Sør-Trøndelag, which experienced a decline of 335. As in 28, Sola is the local authority with the largest proportion of residents employed in the petroleum industry.

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43 43 Figure 42: Petroleum industry employees resident in Norway, by region Telemark and the Agder counties The picture for the oil sector is by and large the same as for industry on land. Oil prices have dropped sharply in connection with the financial crisis, and crude production has continued to decline. At the same time, costs have remained high. This presents the industry with substantial challenges. Payroll costs are no exception in that respect, and putting a brake on this trend will accordingly be a major challenge in coming pay negotiations. Oslo and Akershus Northern Norway rest of the country Figure 43: Manufacturing labour costs in Norway compared with its trading partners Index Norway s trade partners = 1 15 % 1% 2% 3% 4% 5% Source: Statistics Norway 14 Continued pay growth The pay settlement for 29 was an intermediate agreement negotiated between the national employer organisations and unions. These talks resulted in a general increase of NOK 1 per hour. A further NOK 1 was also provided under a number of agreements with relatively low average pay rates. Negotiations were also conducted by the OLF in May on increments under the offshore agreements (oil companies, drilling contractors and catering companies) and the oil service agreement. The offshore agreements cover members of the Industry Energy union, the Norwegian Union of Energy Workers (Safe) and the Norwegian Association for Supervisors. Industry Energy is the counterparty to the oil service agreement. During the talks, only the Association for Supervisors had the right to strike, since Industry Energy is part of the Norwegian Confederation of Trade Unions (LO) and the right to strike at Safe, which belongs to the Confederation of Vocational Unions (YS), related to the central settlement between the national organisations. The outcome was that pay rates under the offshore agreements were increased by NOK 7 per year, including the rise agreed centrally. In addition, rates for drilling and catering workers were increased by NOK 11 9 on an annual basis as a deferred rise from the year before. Rates under the oil service agreement, including the central pay rise, increased by 1.1 per cent. The tight labour market of the past couple of years led to relatively strong pay growth in the industry. Statistics from the Confederation of Norwegian Enterprise (NHO) for 28 show that pay rises in the oil and gas sector were more in line with the rest of industry. Preliminary figures possessed by the OLF show that this trend continued during 29. Variations between companies are greater than before, however, which probably reflects big differences in levels of activity. Norway has experienced a general labour shortage in recent years. As a result, the increase in pay rates over the same period has been relatively strong and substantially higher than in the country s trading partners. Although growth has slackened this year, Norway s overall competitiveness has declined Sources: Technical reporting committee on income settlements, NHO and Ministry of Finance Estimates for 29 and 21 from the 21 national planning budget. Need for personnel The oil and gas industry will depend on a qualified workforce in the years to come. It has been through a period with a very high level of activity, which resulted in a tougher fight over qualified personnel. Activity remains high, but the financial crisis and a sharply fluctuating oil price have somewhat eased the supply of labour. To identify the future employment position and personnel requirements, the OLF conducted a survey among its members in the early summer of 29. This focused on the availability of personnel for the companies, their labour requirements and their activities directed at schools and universities. The survey showed that recruitment has become somewhat easier, and that optimism still prevails in the industry. Seventy per cent of the companies which responded reported that they intended to recruit as many employees or more as in 28. Growth will occur in a number of categories covering both blue- and white-collar personnel. A supply of competent personnel will also be required in coming years. One way to meet the requirement for skilled workers is through the apprenticeship system. Asked about their future intake of apprentices, 8 per cent of respondents said they would maintain or increase today s level in coming years. A large proportion also thought that their need for science graduates and engineers would rise. Seventy per cent reported that they intended to increase the number of employees in this group in the years to come. Although the survey was confined to members of the OLF, it nevertheless reveals a conviction among the companies that they will need skilled workers and apprentices in the time ahead.

44 44 Figure 44: Expected future intake of apprentices Percentage, answers 8% 6% 4% 2% % Fewer Unchanged more Source: OLF s human resources survey 29 Labour market expertise requirements and educational choices by young people The oil and gas sector depends on qualified personnel to continue its development nationally and to compete internationally. Companies in this industry have been regarded as popular places to work for a number of years, and many students report that they want to find a job in the business. It has a reputation for being technologically innovative, professionally interesting and international. Jobs there are also regarded as long-term and secure, with good pay and development opportunities. A survey of 5 58 students of economics, law, computing and technology conducted by Universum places the petroleum and supplies industry high on the list of coveted jobs. Statoil ranks top among both economics and technology students. But a number of other petroleum and supplier companies also appear. No less than 15 suppliers are among the 1 most attractive companies to work for, with most of them located in the upper half of the list. The OLF commissions an annual image survey to establish what young Norwegians know about the oil and gas industry. Conducted by Synovate, this poll tests people aged on their knowledge of and attitudes towards the petroleum sector. The results show that the general image of the industry is good. No less than 84 per cent of young people say they have a fairly or very good impression of the oil and gas sector in Norway. Most respondents also believe that petroleum is the industry where Norway ranks among the world leaders. Almost 75 per cent place this sector in first place here. At the same time, the survey reveals that young people know little about the industry. They are particularly ignorant about the qualifications required to work in this sector. Almost 8 per cent are unable to name a single vocational education which leads to a job in the oil and gas industry. More than 7 per cent cannot identify a single higher education course with the same outcome. The OLF accordingly pursues a number of activities every year to increase knowledge of industry-related subjects and this sector s importance for the community. It also collaborates with others to boost interest in science subjects, particularly those relevant to the oil and gas industry. Rising level of education The SSB report reveals that the level of education in the petroleum sector has risen since 2, although the increase flattened out to some extent from 27 to 28. That slowdown could reflect some deficiencies in the underlying data which have been collected most recently. There was a weak decline for men, while women showed the opposite trend. Fewer employees cite secondary/further education as their highest completed level, and more say they have pursued university studies of varying length. Few women The petroleum sector has always been male dominated. However, some gender equalisation has occurred since 25 and that trend continued in 28. According to the SSB, women currently account for 2.5 per cent of employees compared with 19 per cent in 2. A correlation exists between the rising proportion of women and the increase in the level of education, since women are generally more highly educated than men. The OLF pursues measures every year to help improve the gender balance in the industry. These include information and recruitment activities aimed at schoolchildren and students, as well as efforts to assist the advancement of young women already in the industry. An example of the latter is the OLF s Female Future management development programme for women working in the oil and gas business. Figure 45: Petroleum industry employees resident in Norway, by gender Number men Women Total Source: SSb Younger workforce The rising average age of its workforce has been a challenge for the petroleum sector. While the proportion of employees aged 5-62 increased from 2 to 27, the share of those in the 4-49 and 3-39 age groups declined. This trend now appears to have reversed. The proportion in the oldest age group fell somewhat from 27 to 28, while the share of those in the youngest group aged increased. This provides an indication that recruitment is good and that young Norwegians regard the petroleum industry as an attractive career choice. Big interest in well technology Drilling and well technology represents a specialised technical education focused directly on a job in the oil and gas industry. Students applying to study this subject do so with a clear desire for and expectation of work offshore. First offered 1 years ago, such courses have become steadily more popular. Applications are increasing year by year, more or less independently of economic conditions. A number of courses have two-three times as many applicants as there are places. The well technology course at the Stavanger Offshore Technical College had 182 applications for 6 places in 29. In addition to schools in Hordaland and Rogaland, educational institutions in Møre og Romsdal, Nordland and Troms counties have started to offer this subject in recent years. A total of 148 students secured apprenticeships this autumn, compared with 151 in 28. The peak year was 27, when 16 apprentices were taken on in this subject. The combination of more students and fewer apprenticeships in recent years has meant that insufficient places are available for practical training this year.

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