Business trend report Activity still high. but oil policy on hold

Transcription

1 1 Business trend report 21 Activity still high but oil policy on hold

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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 38 This report is based on information available up to 25 October 21.

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5 5 Foreword The world economy has shown clear signs over the past year of getting back on its feet again after the deepest recession for several decades. Although the pace of growth has picked up, the problems are not over. Large budget deficits and sharply rising national debt are being followed by painful spending cuts in many OECD countries. Growth prospects for the world economy will therefore depend to a great extent on developments in Asia. A higher level of activity means that the global growth in energy demand is also picking up. Demand for oil could increase faster this year than at any time since 24, and the oil price has been fairly stable at a high level during 21. The most important changes for gas are on the supply side. US production of shale gas at competitive prices, combined with the increased availability of liquefied natural gas (LNG), has contributed to lower gas prices. This means mixed signals for a major energy exporter like Norway. The year s business trend report has been entitled Activity still high but oil policy on hold. The first part of this title reflects the fact that the consequences of the financial crisis for the NCS have been far less dramatic than previously expected. With a brighter outlook for the world economy and oil prices stable at a high level, the willingness of oil companies to sanction new projects appears markedly higher than was the case just a year ago. At the same time, the industry s biggest challenge is a Norwegian oil policy on hold. Production from Norway s continental shelf (NCS) is declining rapidly, and faster than the government has previously assumed. Oil output has already fallen by 4 per cent, and this autumn s national planning budget estimated that total petroleum production in 21 would be 1 per cent lower than forecast by the government in the national planning budget three years earlier. With exploration activity at a record level, new discoveries are constantly being made. But an exploration acreage which has not been enlarged since the mid-199s means that these finds remain generally small. At the same time, low gas prices and greater uncertainty over the future development of global gas markets represent a demanding introduction to Norway s forthcoming era as a gas nation. The petroleum business has grown in the space of four decades into Norway s most important industry. During this period, it has contributed gross revenues of more than NOK 8 billion at today s prices. More than 2 people currently derive all or part of their income from Norwegian petroleum operations. Net government cash flow from petroleum operations for 211 is estimated at NOK 288 billion. This corresponds to the amount to be appropriated for health and care services, transfers to local authorities and spending on regional policies in the same year. If value creation by the petroleum industry is to remain a cornerstone of Norwegian prosperity, new exploration acreage must be made available. The long-term directions of Norway s petroleum policy have been based on a commitment to producing all profitable resources on the NCS. A new petroleum White Paper is due in 211 well behind schedule after a gap of seven years since the previous policy document. The Norwegian petroleum sector expects to see an in-depth analysis of the industry s place in the national economy and the opportunities and challenges it faces. The time has come for courageous political decisions. «If value creation by the petroleum industry is to remain a cornerstone of Norwegian prosperity, new exploration acreage must be made available.»

6 6 «The world economy has shown clear signs over the past year of getting back on its feet again after the deepest recession for several decades.» Summary The OLF s business trend report for 21 addresses the latest developments in the world economy and the global energy market. It also presents the status of important priorities in the Norwegian petroleum industry the level of activity, the natural environment, health, safety and the working environment (HSWE), operations and working life. A demanding journey towards a brighter future The world economy has shown clear signs over the past year of recovering from its strongest downturn for many decades. Trends during the autumn months have nevertheless indicated that the financial crisis is not over, but has rather moved into a new phase. Challenges faced in the future relate to the fact that the forces driving the recent upturn have by and large been temporary in nature. The numerous fiscal crisis packages have contributed to major budget deficits and sharply rising government debt in many OECD countries. Nor will the inventory build-up which has followed the massive cuts made until the summer of 29 last for long. After strong progress during the early part of the year, the USA was clearly less expansionist in the second quarter. Growth forecasts have gradually been reduced during the autumn months, and 211 looks like being at best a moderately weaker year than 21. Patterns of European growth have been varied so far this year. While the countries in the north have been characterised by recovery, driven in particular by a strong German upturn, developments further south in Europe have been far less positive. Asia has so far made the strongest progress, but signs of a slowdown can also be seen there. Nevertheless, growth prospects for the world economy towards the end of 21 appear to depend increasingly on developments in Asia. Global economic growth could thereby decline to about 3.7 per cent next year before picking up again to roughly 4.5 per cent from 212. Increased demand for oil and a changing gas market Energy market developments in 29 were characterised by substantial regional variations and reflect the progress of the world economy. In the OECD area, where the economic recession was at its deepest, energy demand fell by no less than five per cent. The counterpoint is found in Asia, where energy demand generally rose in line with or faster than GDP growth. Preliminary calculations from the International Energy Agency (IEA) estimate that China has taken over the USA s role as the world s leading energy consumer during 21.

7 7 Variations in regional economic development are also reflected in the composition of energy demand. Broken down by the world s dominant energy sources, demand for oil, gas and nuclear power all declined in 29. Demand for coal was virtually unchanged, which helped last year to give this fuel its highest share of total energy consumption since 197. The capacity build-up for solar and wind power continued to show strong growth, supported by a combination of established national support schemes in many western industrial countries and by a number of fiscal crisis packages slanted towards promoting renewables. The IEA s oil market report for October 21 puts the overall rise in oil demand during the current year at 2.5 per cent, to reach almost 87 million barrels per day (b/d). If that forecast holds good, it would be the strongest annual growth in oil demand since 24. A scenario based on annual growth in the world economy remaining close to 4.5 per cent in could boost oil demand to almost 92 million b/d towards the end of the period. Gas was the energy source which experienced the sharpest decline in demand during 29, but the biggest changes in recent years have occurred on the supply side. Increased shale gas production has substantially reduced US gas import requirements, creating a surplus of liquefied natural gas (LNG) which it has proved only partly possible to redirect to other parts of the OECD and China. Shale gas is expected to account for about a quarter of overall US gas output by 22. It is uncertain how significant increased production of unconventional gas will be at the global level in the years to come. Gas will continue to account for a significant share of the world s energy supply for many decades to come, and will play an important role from an environmental perspective in the transition from fossil fuels to a carbon-free energy future. At the same time, uncertainty over gas market trends and the ambitious goals of many countries in developing renewables brings to the fore the question of what will replace old coalfired power stations as demand for energy recovers. Despite a number of years of high growth rates, the renewables industry (primarily wind, solar and geothermal energy) accounts today for less than two per cent of total global electricity output. It will take several decades before these sources can make an extensive contribution to world energy supplies. Nuclear power is likely to face a renaissance as a result of climate challenges, increasing energy requirements and the time it will take to replace fossil fuels. From oil to gas A high level of activity in the petroleum sector has been a stabilising factor in the Norwegian economy during the global economic problems of the past couple of years. The growth in investment witnessed since 24 seems set to continue, and the willingness of the oil companies to sanction new projects is markedly higher than was the case only a year ago. Investment is expected to rise steadily in coming years, from roughly NOK 142 billion in the present year to NOK 157 billion in 214, before falling back to NOK 145 billion in 215. The future rise in investment relates first and foremost to a higher pace of new field development. The petroleum sector could thereby continue to play its role as an engine for growth in the Norwegian economy. According to forecasts from the Norwegian Petroleum Directorate (NPD), Norway s oil production will continue to contract in coming years. Halfway through the next decade, average output is expected to be close to 1.5 million b/d. Rising gas production will probably continue to help limit the overall output drop initially, but the strong expansion seen in earlier years is showing clear signs of levelling off. As early as next year, more gas than oil will be produced from the NCS. Reduced revenues for the community From 2 until mid-28, steadily rising oil prices helped to camouflage the impact of declining crude output on the Norwegian economy. Net cash flow to the state from petroleum operations reached a record NOK 416 billion in 28. Lower oil prices at the beginning of 29 helped to reduce the cash flow to NOK 28 billion last year. It is likely to fall to NOK 265 million this year, before rising to NOK 288 billion in 211. The fiscal rule which regulates government spending of oil revenues will permit the allocation of ever-increasing sums earned from petroleum to the budget in coming years. At the same time, government revenues from NCS operations will continue to decline, and will be down to roughly NOK 2 billion by 22 measured in current prices. However, these earnings could fall faster than expected if gas prices remain low and new large discoveries are made on the NCS. Exploration activity high and remaining resources substantial The strong growth of recent years in offshore exploration continued in 29, when no less than 72 exploration wells were completed and resulted in 28 discoveries. The expectancy value of the recoverable resources in these finds is the highest since 2, but still lies clearly below production in the same year. Exploration activity has also been well maintained in 21, and will approach 5 wells. Interest in the awards in predefined areas (APA) has been high in recent years, particularly among the smaller companies. Applications received by the NPD in 21 were about 3 per cent up from previous years. The remaining resource base on the NCS is still substantial. Recoverable resources at 31 December 29 were estimated to total 84 billion boe (13.4 billion scm oe), of which 33 billion boe had been produced. Total remaining recoverable resources are put at 51 billion boe, with an uncertainty range of billion boe which particularly reflects the fact that knowledge of the resource base in large parts of the Barents and Norwegian Seas remains limited. The boundary solution agreed between Norway and Russia also opens future opportunities for increased oil and gas resources. A speedy start to more detailed surveying of resources on the Norwegian side of the boundary will accordingly be important. Good HSWE results offer no respite The Deepwater Horizon accident has made its mark on the Norwegian and global petroleum industry in 21. Eleven people died in the disaster, and the subsequent blowout released large volumes of oil into the sea. The scope of this incident underlined that the industry has a strong selfinterest in preventing accidents and undesirable incidents. As a result, the Norwegian oil and gas industry quickly established a company-run working party through the OLF to review the investigation reports emerging from the accident. Collaborating on such an assessment ensures that the whole industry draws systematic lessons from the incident in order to prevent anything similar happening on the NCS. Although the annual RNNP survey by the Petroleum Safety Authority Norway (PSA) on trends in risk level in the petroleum activity shows that the level of risk has declined in recent years, the industry is not satisfied. It has set ambitious goals for health, safety and the working environment (HSWE), and continues to work purposefully to become even better regardless of whether the curves are pointing in the right direction. Functional regulations crucial Ensuring that good resource management, financial and administrative consequences and operational requirements are taken into account when pursuing regulatory work and supervision is a crucial goal for the OLF. Health, safety and environmental (HSE) regulations for the industry must continue to be based on functional requirements and efficient use of cost-effective industrial norms such as standards and guidelines.

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9 9 The industry is expectantly awaiting a White Paper on safety and the working environment in Norwegian economic life. The approach taken by the government means it will be easier to view working conditions as a whole, which is not least important in avoiding cost-enhancing regulations for the NCS. A key requirement for securing the best possible White Paper is that both sides in the workplace have opportunities to exert influence through genuine involvement. Climate a global challenge The oil and gas industry on the NCS has devoted great attention for many years to minimising its emissions to the air and discharges to the sea. Detailed annual environmental reporting shows that this work is bearing fruit. The Norwegian petroleum industry accordingly has the ambitious goal of becoming a world leader on the environment. The climate summit in Copenhagen during December 29 failed to provide the important road map for the world community s future work in this field which many had hoped to see. The next negotiating session is scheduled for Cancun in Mexico this December. After several preparatory meetings, however, no signs suggest that the international community will succeed in achieving a binding agreement there. Hopefully, the Cancun meeting could deliver a set of politically balanced decisions which prevents a gap opening up in the work after 212 and which ensures continuity in the market mechanism for carbon emissions. The global character of the climate challenges frequently gets forgotten in the Norwegian debate. Attention is too often focused exclusively on emission reductions at home, even though larger cuts and better environmental solutions could have been achieved by looking beyond the country s borders. It has been documented in detail that Norway s petroleum sector has long pursued measures to reduce its emissions. The outcome is an offshore industry which ranks as an international leader for energy-efficient production and low carbon emissions per unit produced. The Deepwater Horizon accident in perspective Analyses carried out by the PSA and Det Norske Veritas (DNV) show that measures implemented by the Norwegian petroleum industry have reduced the probability of acute discharges on the NCS. The DNV report documented that the likelihood of a blowout on the NCS has been reduced by more than 7 per cent over the past two decades. During the same 2-year period, 22 blowouts occurred in the Gulf of Mexico compared with just one in the North Sea (a high pressure and temperature [HPHT] well on the UK continental shelf in 1988) before special procedures and standards for this kind of operation were introduced. Based on the level of activity, DNV calculated that the probability for a blowout in the Gulf of Mexico was almost 1 times higher than on the NCS. The Deepwater Horizon incident affects neither the probability that a blowout will occur in the relevant areas off Lofoten or in the Barents Sea, nor the rate/duration calculations. It is also worth recalling the summing-up given by the NPD on 15 September concerning the petroleum-related differences between the Gulf of Mexico and the areas off Lofoten/Vesterålen. Assessments of spill size must be based on the best possible knowledge about local conditions, not on events in other parts of the world. Dawning labour market optimism A period of some uncertainty has passed, and the Norwegian petroleum sector is now seeing a slight growth in employment. Figures for 21 from Statistics Norway (SSB) estimate that roughly 26 people are employed by companies involved with Norway s petroleum industry. This figure is based on both direct and indirect employment. Employees in the petroleum industry were resident in no less than 415 of Norway s 43 local authorities in 29. A number of companies in the supplies sector were compelled to reduce their workforces in 29 through lay-offs, natural wastage and redundancies. This primarily affected companies working with new projects. The staffing position has stabilised to a great extent in 21. Although the outlook varies from segment to segment, signs of optimism can now be seen. International turnover by Norwegian suppliers/contractors in 29 came to NOK 118 billion, according to report no 9/21 compiled by Menon for the Ministry of Petroleum and Energy. Need for employee expertise People with scientific and technological expertise will be in great demand during the time to come. Many engineers are set to retire in coming years, while recruitment to engineering studies has been low over the past decade. Very few women are among the limited number of students who opt for scientific and technological subjects. The OLF s annual image survey reveals that 48 per cent of young Norwegian men in the age group could contemplate a job in the oil and gas industry. But only 17 per cent of young women in the same age group respond positively to that question. The OLF is pursuing a number of measures on its own account and in cooperation with other players to arouse the interest of young people in science and technology and, later, a job in the industry.

10 1 «Growth prospects for the world economy towards the end of 21 appear to depend increasingly on developments in Asia.» Developments in the world economy and prospects for energy markets As the end of 21 approaches, it seems steadily clearer that the global economic upturn after the recession is running out of steam. Large budget deficits and strong growth in sovereign debt are being followed by painful spending cuts in many OECD countries. Until help from the private sector reaches an adequate level, growth prospects for the global economy will depend to a great extent on developments in Asia. Trends so far do not suggest that the world faces a strong new downturn, but growth is unlikely to approach the precrisis level again until 212. A higher level of activity has also boosted growth in energy demand, and the rise for oil this year could be at its strongest since 24. The most important changes for gas are on the supply side. Production of shale gas at competitive prices has reduced US import requirements, creating a surplus of liquefied natural gas (LNG) which it has proved only partly possible to redirect to the rest of the OECD area and China. At the same time, lower prices have opened new markets in Asia, the Middle East and Latin America. Uncertainty over future trends for gas markets and the ambitious goals set by many countries for developing renewable energy also highlight the question of what will replace old coal-fired power stations as energy demand rises. The solution must be found at the interface between climate considerations and requirements for security of energy supplies. The world economy has shown clear signs over the past year or so of recovering from its strongest downturn for many decades. Well supported by fiscal crisis packages, a better-functioning banking sector and record low interest rates in many countries, the breadth of this recovery has widened. The turning point came first in Asia, and growth had resumed in the USA from the end of 29. Europe has also finally joined the rally, but with growth rates clearly higher in the north than in the south. Trends during the autumn months have nevertheless indicated that the financial crisis is not over, but has rather moved into a new phase. Growth forecasts for the US economy have been downgraded in recent months. In Europe, too, the last half-year looks like being weaker than the first six months. Unemployment has remained high in the OECD area, and proved difficult to reduce. Progress in private demand has so far been too weak for it to take over the role as a

11 11 growth engine, while fiscal policies under ever-increasing pressure desperately need replacing. At the same time, signs that Asia is also experiencing a slowdown are bad news for countries where export expansion has helped to boost the growth rate. Figure 1: Unemployment remains high in the OECD area Unemployed as a percentage of the labour force Source: Reuters EcoWin Temporary driving forces Challenges faced in the future relate to a great extent to the fact that the forces driving the recent upturn have by and large been temporary in nature. The numerous fiscal crisis packages have contributed to major budget deficits and sharply rising government debt in many OECD countries. Last spring s debt crises in several south European nations illustrate that fiscal opportunities for maintaining activity are reaching their limits in a number of nations. Painful spending cuts have already been or are about to be implemented, particularly in Europe. Another important but temporary factor underlying the upturn has been new inventory building, after the massive cuts made up to the summer of 29. This stimulation to activity will not last either. Maintaining low interest rates accordingly remains the most important political instrument in many countries. The world s attention has thereby been increasingly turned to Asia and the ability of that region to maintain the rate of growth in the global economy. Figure 2: The euro zone fiscal policy burdens Gross public debt and fiscal budget deficits as per cent of GDP Gross public debt Budget deficit (right-hand scale) Source: Eurostat USA short-term slowdown? After strong progress during the winter months, the US economy was clearly less expansionist in the second quarter. An underlying annual growth rate of 1.7 per cent was less than half the figure for the preceding quarter. A year after the recovery began, this reduction in growth can be attributed particularly to weaker exports and a slowdown in the positive effects of inventory building seen in previous quarters. At 7 per cent of GDP, private consumption is a key factor for the level of US economic activity. Retail sales grew well towards the end of 29, but developments so far this year have clearly been more moderate. Continued uncertainty related to price trends in the housing market and persistently high unemployment are helping to curb both the development of disposable real income and the expected growth in wealth. Bright spots include continued strong growth in industrial investment, stimulated by a sharp drop in the exchange rate for the US dollar over the past half-year. According to Consensus Forecasts, growth prospects for the US economy have gradually been reduced during the autumn months. The economy is nevertheless expected to be capable of growing by almost three per cent in 21. At the same time, uncertainty over 211 has increased. A more positive trend in the labour market will be crucial for boosting private consumption. In the longer term, the higher rate of saving over the past couple of years could also help to increase consumption. The US budget deficit has declined somewhat over the past year, but the government nevertheless expects it to exceed nine per cent of GDP for the fiscal year (which ends in October). With a weaker economic outlook, major spending cuts are likely to be put on hold despite the goal of cutting the deficit to three per cent by 212. Taken together, these considerations indicate that 211 could at best be moderately weaker than the present year. It is likely to be 212 before the private sector can again contribute to raising the rate of growth in the US economy above three per cent. Figure 3: Volume growth rates GDP development in the USA Growth from the same quarter of previous year Underlying annual growth based on seasonally adjusted figures Source: Reuters EcoWin Europe upturn in the north The European economy returned to strong expansion up to this summer. The underlying growth rate for the euro zone came to 3.9 per cent in the second quarter, compared with a more modest 1.3 per cent for the preceding three-month period. This trend primarily reflected a broad German recovery. With exports and investment as the most important drivers, Germany s second-quarter growth rate exceeded nine per cent the strongest quarterly performance since reunification in 199. Growth rates in the UK and Sweden were also far above their pre-crisis levels. Second-quarter progress in Finland and several of the EU s newest members was also clearly stronger in the second quarter than before. Time for spending cuts Further south in Europe, however, developments were far less positive. Debt crises have forced the government in both Greece and Spain to make tough spending cuts. The decline in Greek GDP during earlier three-month periods strengthened further in the second quarter, while underlying Spanish growth was a modest.8 per cent. The parallel need for a substantial tightening of fiscal policy in a number of other EU countries is expected to put a gradual

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13 13 brake on strong European progress. With the strengthening of the euro against the US dollar since 3 June, the growth in industrial production has also come to a halt and signals a weaker export performance. Some overhang from the good progress made in the second quarter means that the EU and the euro zone could both grow by some 1.7 per cent in 21. Uncertainty about 211 relates particularly to how fast it will be politically possible to implement very necessary spending cuts. Signals so far could suggest a GDP growth of less than 1.5 per cent before stronger private demand raises the figure to a forecast two per cent in Figure 4: Europe a disjointed growth picture Underlying annual growth in GDP. Per cent Greece Germany UK Sweden Spain Source: Reuters EcoWin Asia in a key role Like most of the OECD countries, China was also badly affected by the global recession. When reduced global demand hit its exportoriented activities towards the end of 28 and into 29, growth in the Chinese economy slowed towards six per cent. The national authorities reacted rapidly to this development. Both financial and monetary policies were shifted in an expansionist direction. A large share of the fiscal action packages was concentrated on infrastructure projects, and extensive credit was again offered through the state banks. This focus reflected the fact that the strong economic growth of recent years had been largely based on investment and exports, with the contribution of both private and public consumption clearly more limited. These measures contributed to a rapid recovery in the rate of Chinese growth to just over nine per cent for 29 as a whole. This strong trend continued into 21, and led to a solid 11 per cent expansion for the first half as a whole. But performance nevertheless declined somewhat from the first to the second quarters. Part of the explanation for this slowdown was that action packages were in their final phase and that industrial production had fallen owing to a renewed weakening of world economic growth. Politically, the choice is between continued stimulation of investment at a time of overcapacity in many sectors and a strong underlying need to create new jobs. On earlier occasions, the Chinese government has shown that it gives priority to the latter. Although growth could slow somewhat in the second half, Chinese GDP is expected to rise by almost 1 per cent for 21 as a whole. Uncertainty over developments in 211 is also high in China. Global trends are expected to remain a burden, while the government needs to avoid a housing and property bubble. Growth is nevertheless expected to remain at 8.5 to nine per cent, and will also probably lie at that level for the next few years. Figure 5: Can Asia s giants maintain growth? Growth in GDP from the same quarter of previous year. Per cent China India Source: Reuters EcoWin India has been less affected than China by the global recession, since exports account for only about 2 per cent of its GDP. While China has been regarded as the world s factory floor, the Indians have developed into its service centre. A large service sector accounts for more than half the value creation in their economy. The majority of Indian jobs are nevertheless found in agriculture. Growth in India s economy has increased during the course of 21, and amounted to 8.8 per cent in the second quarter. Progress for industrial production has nevertheless been weaker during recent months. At the same time, inflation and the growth in costs have been high and the Indian central bank has raised its base rate five times so far this year. The government nevertheless believes that its growth target of roughly per cent for 21 is within reach. Given the development phase currently occupied by the Indian economy, a growth rate at this level could also persist through Globally moving in the right direction Growth prospects for the world economy towards the end of 21 appear to depend increasingly on developments in Asia. The postrecession upturn in the OECD area is teetering, but global economic expansion could still exceed four per cent in 21 with Asian help. When forecasts for the next few years are assessed, 211 looks like being the most demanding. Global economic growth could thereby decline to about 3.7 per cent next year before picking up again to roughly 4.5 per cent from 212. Figure 6: The world economy on the right track Percentage GDP growth from previous year Sources: IMF and OLF (estimates)

14 14 «Gas will play an important role from an environmental perspective in the transition from fossil fuels to a carbon-free energy future.» ENERGY MARKETS Energy market developments reflect the substantial challenges which have characterised the world economy in recent years. A global GDP contraction of.6 per cent in 29 contributed to a 1.1 per cent fall in world primary energy demand. 1 This was the first decline since 1982 and the sharpest since 198. At the same time, last year s trend was characterised by substantial regional variations related both to economic development and energy demand. In the OECD area, where the economic recession was at its deepest, energy demand fell by no less than five per cent in 29. The latter decline was thereby clearly higher than the GDP reduction, and pushed demand to its lowest level for more than a decade. In Asia, the quickest region to reach the economic turning point, energy demand increased overall in line with or faster than GDP growth. Preliminary calculations from the International Energy Agency (IEA) estimate that China has taken over the USA s role as the world s leading energy consumer during 21. Variations in regional economic development are also reflected in the composition of energy demand. Broken down by the world s dominant energy sources, demand for oil, gas and nuclear power all declined in 29. Demand for coal was virtually unchanged, which helped last year to give this fuel its highest share of total energy consumption since 197. Demand for hydropower, which currently represent s the world s most important commercial renewable energy source, rose moderately in 29. Other renewables continued to show strong growth, supported by a combination of established national support schemes in many western industrial countries and by a number of fiscal crisis packages slanted towards promoting renewables. However, sun, wind and various types of bioenergy still represent a very limited share of the world s total energy supply. 1 BP Statistical Review of World Energy 21. Figure 7: Primary world energy consumption by source Percentage of total consumption* 5 Oil 45 4 Coal Gas 15 1 hydropower 5 Nuclear power All sources measured in oil equivalent. Source: BP * Total consumption is defined here as consumption of oil, gas, coal, hydropower and nuclear power. Oil reduced demand met by Opec cuts Fossil fuels continue to account for the dominant share (8 per cent) of the world s energy supply. Global daily demand fell last year by 1.2 million barrels to roughly 84 million barrels, down by 1.7 per cent from 28. This was the strongest contraction since Demand in the OECD area fell for the fourth year in a row. The decline last year totalled two million barrels per day (b/d), and was substantial both in North America and in Europe. Demand continued to grow outside the OECD area, but the rise of 86 b/d was nevertheless the weakest since 21. The increase in oil consumption was concentrated in its entirety in China, India and the Middle East. At the same time, global crude production fell faster than demand. An extension of Opec s production cut from the end of 28 contributed to a supply reduction of about 2.5 million b/d during 29. An increase in non-opec output, primarily in the USA, helped to hold the overall fall in production to just over two million b/d. The tightening in the market this produced helped the oil price, which stood at roughly USD 4 per barrel on 1 January, to almost double over the year.

15 15 Figure 8: Oil consumption in the OECD area Million barrels per day and percentage share of world consumption Million barrels per day Percentage of total world consumption (right-hand scale) Source: IEA Turbulent gas market With a fall of 2.1 per cent, gas accounted for the sharpest decline in global demand of any energy source last year. Demand fell in every region except the Middle East and south-east Asia. The fall in consumption was strongest in Russia, at 6.1 per cent, and also substantial at 3.1 per cent in the OECD countries. The reduction in demand coincided with a dramatic increase in supplies from unconventional sources shale gas in the USA as well as large quantities of LNG coming onto the world market from new production capacity in the Middle East, Africa and elsewhere. Taken together, these developments have contributed to a fall in spot prices for gas. That in turn has put pressure on existing oil-indexed contract prices. The picture is completed by lower exports of conventional gas from Russia to Europe and from Canada to the USA. A continued lack of market balance suggests that a larger proportion of gas volumes will be traded spot in the future, weakening the traditional link with oil prices. Uncertainty over future gas market trends will accordingly persist. China kept coal consumption up Coal consumption levelled off in 29 after a three-year period when it accounted for more than half the growth in world energy demand. The decline in consumption was largest in the OECD area and the former Soviet Union, at 1.4 and 13.3 per cent respectively, but fell generally in all areas except south-east Asia and the Middle East. China alone accounted for 95 per cent of the increase in consumption. Last year s halt to a sharply rising growth curve for coal consumption partly reflects the weak global economy and competition from gas selling at lower prices. Oil demand rising again The short-term demand outlook for oil has strengthened moderately over the past year in line with improved growth prospects for the world economy. The IEA s oil market report for October 21 puts the overall rise in oil demand during the current year at 2.5 per cent, up roughly.7 per cent from the initial 21 estimate in its report for July 29. If the forecast holds good, it would be the strongest annual growth in oil demand since 24. Uncertainty continues According to the analysis provided earlier in this chapter, global economic trends could indicate that the recovery is running out of steam before the world economy returns to a more long-term growth trend. Substantial regional variations in the future growth picture will also affect overall energy demand. Published in June, the IEA s mid-term oil market report for 21 presented the outlook for demand up to 215. The agency opted yet again to show two alternative trajectories for oil demand, based on various assumptions about future economic expansion. The common denominator for both trajectories is that growth will be driven in the time to come by countries outside the OECD area, and primarily by transport requirements. Without clear improvements to the energy utilisation factor and a more diversified range of fuels for motor vehicles, the oil market could tighten even if the overall picture for the world economy is one of moderate growth. Main scenario gives a tighter oil market. The IEA s main scenario builds on annual growth in the world economy remaining close to 4.5 per cent in the period. Prospects that oil prices will remain buoyant are expected to contribute to an annual improvement of three per cent in the energy utilisation factor. That could yield a rise in oil demand of 1.2 million b/d (1.4 per cent) per annum over the forecast period to almost 92 million b/d in 215. In this scenario, oil demand will return to its precrisis level as early as 21. With the picture for global petroleum investment rather brighter than in last year s report, overall oil supply is expected to increase by 5.5 million b/d up to 215. At the same time, an annual decline of 3.1 million b/d in production from mature fields is expected. This means that Opec s reserve capacity will start to fall from 211, and could be reduced to 3.6 million b/d by 215. Such a scenario might gradually help to push up oil prices, after a relatively stable trend over the past year. Figure 9: Million barrels per day Oil demand under alternative growth trajectories Oil demand, base growth trajectory Oil demand, low growth trajectory Source: IEA (MTOMR 21) Challenges not over In its low-growth scenario, the IEA assumes that it will take longer to restore the world economy to health. The substantial fiscal stimulations provided in the many OECD countries during the crisis must sooner or later be reversed and, with persistently strong growth in China and other emerging economies, the danger increases of overheating followed by a tightening of credit markets. This scenario expects global GDP grow of about three per cent per annum up to 215. A lower oil price trajectory is expected to cut the annual improvement in the energy utilisation factor to two per cent, which is in line with the trend over the past 15 years. The annual rise in oil demand is forecast to fall to 84 b/d, or one per cent, with the annual total reaching 9 million b/d by 215. A lower oil price trajectory would reduce incentives to invest in the petroleum sector viewed in isolation. The low-price scenario accordingly contains many of the same challenges as the main scenario, but may help to delay renewed pressure on the oil market to some extent.

16 16 Oil demand, living standards and subsidies The IEA s scenarios serve primarily to illustrate the impact of alternative growth trajectories on the world economy, with the main scenario closest to the analysis provided earlier in this chapter. At the same time, discussions on global growth prospects are overshadowed to a great extent by the fact that the bulk of expansion in oil demand over coming years will occur in emerging economies. Asia will be a dominant player in demand for oil products, with the Middle East and Latin America following swiftly in its footsteps. By 215, countries outside the OECD are expected to consume more than half of all oil products. Improved living standards have traditionally been the most important explanatory factor for the rise in global oil consumption. When emerging from poverty, locally collected biofuel is gradually replaced by petroleum products and electricity. Experience shows that this transition speeds up once a country s average per capita annual income exceeds USD 3-4. Statistics from the World Bank for 29 show that China now falls within this income belt, while India is moving steadily towards it. Covering no less than 213 countries, these figures also show that residents in 8 nations still have an average per capita annual income below USD 3. The lowest per capita incomes are found in southern parts of Asia and sub-saharan Africa. These are populous regions which would demand more oil, gas and electricity if their living standards were higher. According to the IEA, almost 2.5 billion people use energy from traditional biomass for cooking and heating. Close to 1.5 billion still lack access to electricity and, without a more systematic and coordinated policy for overcoming the problem, 1.2 billion are still expected to be without such access in 23. Given the close relationship between energy consumption and the development of prosperity/reduction in poverty, many countries have wanted to speed up the transition to a more modern energy supply. Various forms of subsidy for energy end-users are found particularly in developing and emerging economies, as well as in more prosperous parts of the world. According to the IEA, overall subsidies for end users of fossil energy totalled USD 557 billion in 28. That includes the burning of such fuels to generate electricity. The combination of prospects for persistently strong growth in energy demand in non-oecd countries and a general goal of more efficient use of energy resources suggests that these subsidies should be discontinued. Calculations from the IEA which assume that subsidy payments cease by 22 indicate that this could reduce primary global energy consumption by 5.8 per cent compared with a continuation of the present regime. Figure 1: People without access to electricity and the use of biomass as a source of heat for cooking Latin America Africa Asia million No access to electricity Dependent on biomass for cooking Sources: OECD/IEA Changing gas markets Gas was the energy source which experienced the sharpest decline in demand during 29, but the biggest changes in recent years have occurred on the supply side. During the decade from the mid-199s, global trade in LNG expanded more strongly than for any other carbon-based energy form. The background for that trend was to be found in the USA, where the energy supply position and the level of self-sufficiency were under pressure and the need for imported gas rose sharply. As late as 2, the US government believed that national gas production was in decline and that substantial imports were required. This demand was met with a considerable build-up of gas liquefaction capacity in the Middle East and Africa. Sales to the US market were also an important factor in the creation of the liquefaction plant at Melkøya outside Hammerfest in northern Norway. These developments had yielded a total of 6 billion cubic metres (bcm) in new capacity by 31 December 29, followed by a further 2 bcm in the first half of 21. Combined with progress in drilling technology and big discoveries of shale gas in North America from 26-7, this expanded liquefaction capacity has contributed to changing the picture of the USA s future gas import needs. Shale gas helped the USA to outstrip Russia as the world s largest gas producer in 29, and the decline in the nation s estimated gas reserves has been reversed for the first time since the early 197s. While the IEA s World Energy Outlook in 25 estimated US LNG import requirements at 5 bcm in both 28 and 29, the actual level of foreign purchases was nine and 13 bcm respectively. Buyer s market, but for how long? Reduced demand for imported gas in the USA has resulted in a surplus of LNG, and redirecting these supplies to other parts of the OECD area and China has proved only partly possible. Lower prices have simultaneously opened new markets in other parts of Asia, the Middle East and Latin America. The price of gas for immediate delivery appears to have bottomed out in 29, and has risen more strongly in Europe than in the USA during 21. Partial explanations for this development are that Europe experienced a cold start to the year and that the LNG boom remains far from over. The IEA expects total gas liquefaction capacity to rise by 5 per cent in But how far a surplus of gas will affect the market depends on a number of factors. Demand trends will vary between regions and areas of utilisation, with price developments also playing a significant part because of regional variations in the link with oil prices. Gas consumption for power generation is expected to rise in all regions, while utilisation by households and the service sector will probably display a flat trend. Demand for gas by industry continues to decline, and is not expected to be back to its 28 level until 213. In the OECD area, Europe in particular will lag behind and will only have returned to its 27 level by 213. Gas demand is generally expected to hold up better outside the OECD area. China will be a persistent driving force in demand, after starting to import LNG as late as 26. Two new receiving terminals became operational in 29 at Fujihan and Shanghai, which supports the likelihood that annual growth in demand will remain over 1 per cent. India and new markets in Latin America and the Middle East are also expected to make an increasing contribution to maintaining demand. What role will shale gas play? Production of shale gas at competitive prices has swiftly changed expectations for future American gas imports. While the potential remains unclear for the moment, the US Department of Energy feels such output could as much as double by 23. However, shale gas

17 17 availability may be substantial on a global basis, and other countries are consequently showing great interest in copying the American success. But a number of hurdles need to be overcome. As with other energy production, the cost aspect will be important. Today s breakeven price for US fields is USD 3-5 per million British thermal units (MMBtu the standard measurement unit for European gas), assuming a 1 per cent return on capital. The long-term cost picture for shale gas is presently unclear. Initial costs are much lower than for conventional gas discoveries, but output from a shale-gas well can decline by 6 per cent during its first six months on stream. An important question is accordingly how large a proportion of the shale gas in place can be recovered at a competitive price. number of years of high growth rates, geothermal, wind and solar energy account today for a modest 1.7 per cent of total global electricity output. It should therefore be emphasised that, even with a continued strong commitment to renewable energy sources, it will take several decades before they can make an extensive contribution to world energy supplies. Figure 11: EU capacity increase for electricity generation in 29 fuel oil 2% Natural gas 26% Shale gas production in the USA has aroused growing environmental concerns. The discussion focuses primarily on the use of chemicals in combination with large volumes of water, and a possible negative impact on groundwater quality. Most American shale gas output takes place in thinly populated areas, and is encouraged by the fact that landowners receive financial compensation for the use of their acreage. Environmental considerations will therefore probably be far greater in more densely populated areas such as Europe and Asia. A general element of public ownership of the sub-surface in Europe also removes some of the economic incentives for private interests to encourage shale gas exploitation. Shale gas is expected to account for about a quarter of overall US gas output by 22. How significant increased production of unconventional gas might be in other parts of the world is uncertain at the moment, but such expansion is likely to take longer to emerge. The decline in production from existing conventional gas fields amounts globally to more than five per cent per annum. Combined with the outlook for gas demand, the IEA forecasts that no less than 7 per cent of production must come from new fields within 2 years. That corresponds to 3 times America s shale gas output. Both gas and renewables Gas will have to continue providing a significant share of the world s energy supply for many decades, and will play an important role from an environmental perspective in the transition from fossil fuels to a carbon-free energy future. With the fall in prices over the past couple of years, gas has seen its role in the energy sector rising and has primarily taken market shares from coal. Combined with increased supplies, today s price level helps to strengthen the competiveness of gas for electricity generation in the short term. At the same time, lack of clarity over future gas market trends and the ambitious goals of many countries in developing renewables create uncertainty about what will replace old coal-fired power stations as demand for energy recovers. The solution must be found at the interface between climate concerns and requirements for the security for energy supplies. Strong renewables growth but significance still marginal Investment activity and capacity expansion in what can be called the renewables industry (primarily wind, solar and geothermal energy) remained strong in 29 despite tight capital markets and weak trends in the world economy. Reliable statistics on the development of installed capacity are primarily available for commercially traded energy sources, while figures for various forms of biomass must rest on much more uncertain estimates. Generous state subsidies have helped to make Europe and Japan the leaders in developing renewable energy markets, but substantial wind-power investments were made in both the USA and China during 29. Despite a Coal 9% Nuclear power 2% Concentrated solar power 1% Waste 2% Biomass 2% Photovoltaic 16% Wind 4% Source: EWEA Geothermal smallest, but effective Exploiting the Earth s subterranean heat to generate geothermal power represents a well-established and mature form of energy with a long history. But it has nevertheless displayed growth rates above the long-term trend since 2. Measured by installed capacity, geothermal energy has long been overtaken by wind power and also, during the past couple of years, by solar power. However, the advantage of this source is that, over time, it delivers more energy per unit of installed capacity than either solar or wind. At 3.8 per cent, geothermal energy had the lowest capacity growth of any of the above-mentioned sources in 29. Most of this increase occurred in the USA and Indonesia, which accounted jointly for 79 per cent of the rise. Of a capacity totalling 1.7 gigawatts (GW) at 31 December 29, the USA led the field with three GW followed by the Philippines with 1.9 GW and Indonesia with 1.2 GW. Geothermal energy is exploited commercially today in more than 7 countries, although only about a third use it to generate electricity. However, interest in such utilisation is rising sharply in many nations. China also gave wind power a boost Like many other capital-intensive industries, the wind power sector was hard hit in early 29 by the world economic crisis and the consequent tightening in capital markets. According to the Global Wind Energy Council (GWEC), the result for the year was nevertheless a capacity expansion of 32 per cent or 38 GW to reach a total of GW. An important reason for the sharp increase during 29 can be found in China, which more than doubled its wind power capacity to 25.8 GW. This expansion surpassed that in the USA, making Asia for the first time the world s largest regional growth market for wind power with 15.4 GW in new capacity. Led by Germany and Spain, Europe nevertheless represents the largest regional market for wind power capacity, with 77 GW installed at 31 December 29. State subsidies remain the most important single factor behind the strong growth in wind power capacity. Wind power is currently most important in Denmark, where it accounts for 2 per cent of electricity output. At just over 12 per cent in Spain, it has outstripped hydropower there. Germany is in third place, with roughly six per cent of its electricity generated

18 18 from wind. Interest in offshore wind power is rising sharply, with a number of big installations at the planning stage. However, installed offshore capacity last year was a modest 7 megawatts (MW). The GWEC estimates that Asia will remain by far the fastest-growing market for wind power. China, which recently introduced feed-in tariffs, is forecast to lead the trend towards a global capacity of some 49 GW in 214. Capacity development in the USA is likely to stagnate over the next couple of years before returning to growth. Europe is expected to have the highest installed capacity base until 213, with Asia taking over that position from 214. Figure 12: Development of global wind power capacity Cumulative gigawatts. Historical development and forecast Source: Global Wind Energy Council (GWEC) When the wind is not blowing Wind power has so far played the lead role in the global commitment to renewable energy. As installed capacity steadily increases, the need for necessary back-up from conventional power stations will become more evident. When no wind is blowing, other generating sources must take over. These will in most cases be coal- or gas-fired power stations. De Groot/Le Pair 2 have analysed the German wind power system, and found that it delivered an average of 17.5 per cent of its dimensioned capacity in 2-7. Figures for 24 from German energy company E.ON show a spread of.2 to 38 per cent in the capacity utilisation factor at its wind farms. With limited opportunities to develop new hydropower and being otherwise unable to store electricity extensively, gas-fired power stations look a good alternative in climate terms. However, all conventional power stations based on fossil fuels have a specific optimum capacity in their operating cycle. Departing from this undermines efficiency. More fuel is consumed, and carbon emissions per unit of energy increase reducing the initial climate benefit of wind power. De Groot/Le Pair suggest that this swing generator role for coal- and gas-fired power stations in the German system helps to eliminate the climate benefit of wind power. Another consideration is the profitability of swing generation by coaland gas-fired power stations. According to information acquired by the IEA from the gas-to-electricity industry, most European gas-fired power stations must have an annual running time of at least 5 hours to cover their fixed costs. Examples can already be found in which swing generation for wind power has reduced operation to less than half that time. Increased greenhouse gas emissions related to sub-optimum running of conventional power stations in combination with wind energy and the competitive position of gas-fired power stations as wind back-up are both factors which need closer study. Solar power Germany leads the way Industrial utilisation of the sun s energy is based on direct generation of electricity from solar panels and on thermal installations providing both direct heating and power output. Solar cell production currently represents the dominant element in this industry. Capacity measured by installed solar panels rose by 47 per cent or 7.3 GW in 29 to reach 23 GW. This was below the record growth of 7 per cent in 28, but nevertheless sufficient to increase capacity more than twofold between 31 December 27 and the end of 29. While the financial crisis has also cast its shadow over the solar cell industry, the most important reason for lower growth last year was cuts to the Spanish subsidy regime. From NOK 2.7 GW in 28, Spanish installation grants were reduced to less than.1 GW in 29. The Germans maintained generous subsidies to take the lead last year with 3.8 GW in new capacity. That was five times the level in Italy, which held second place in this ranking. With.5 GW, the USA came third for installed capacity in 29. About 7 per cent or 16 GW of solar panel capacity is currently found in Europe, with Germany s 9.7 GW making it the front runner. The Germans are expected to remain the leading market despite a planned 13 per cent reduction in feed-in tariffs from 1 January 211. Outside Europe, Japan represents the largest market with 12.6 GW installed, followed by the USA with 1.6 GW in third place. China also entered the top 1 for installed solar cell capacity during Kees De Groot/Cornelis le Pair: The hidden fuel cost of wind

19 19 Figure 13: Development of global solar cell capacity Megawatts (cumulative) in 1979 and 1986 respectively, eastern Europe and Asia have increasingly taken over new development. The share of nuclear power in global electricity output has thereby remained a constant 16 per cent since the mid-198s. Some 44 reactors are currently being operated in 3 countries, with a total capacity of 376 GW, Sixty-one new reactors with a combined capacity of 59 GW were under construction at 3 June this year, with China, Russia and South Korea as the most important countries. 1 Figure 14: Nuclear reactors under construction China USA rest of the world japan EU Source: EPIA Ambitious solar energy plans The European Photovoltaic Industry Association (EPIA) estimates in its Set for 22 study that solar panels could meet up to 12 per cent of EU electricity requirements by that year. It also emphasises that, to achieve these goals, the solar cell industry is dependent on the continuance of good national subsidy schemes and enhanced cost efficiency. The IEA s Technology Roadmap forecasts that solar energy will play an important role for future power supplies, with a substantial potential in virtually all regions of the world. In its analysis, the agency estimates that solar panels could account for roughly 11 per cent of global electricity output in 25. A corresponding proportion could be generated from thermal installations. Where the latter are concerned, heat storage may provide greater flexibility in the future. But virtually all the large facilities built so far involve back-up based on fossil fuels. This shows that extensive use of solar power will also involve a growing need for such reserve capacity. Renaissance for nuclear? The climate challenge, increasing energy requirements and the fact that it will take time to replace fossil fuels in the global energy mix have stimulated fresh interest in nuclear power. While this energy source was hit by the Three Mile Island and Chernobyl accidents China russia South Korea India Bulgaria Slovakia Taiwan Ukraine Argentina Brazil finland france Iran japan Pakistan USA Source: European Nuclear Society While the pace of new construction in western nations has been low, a substantial increase in capacity has been achieved by upgrading existing nuclear power stations. A number of countries are also making efforts to expand operating time for their reactors. While the Swedish Riksdag (parliament) resolved after a referendum in 198 to phase out nuclear energy by 21, the government opened the way in 29 for an extension and for opportunities to build new reactors at existing stations. In Germany, the leaders of the ruling coalition parties reached agreement in September on an average extension of 12 years to the operating life of the country s nuclear power stations, which means that some of them will remain in use into the 23s. Based on plans from a number of countries related to new construction and the upgrading of older generating capacity, the International Atomic Energy Agency (IAEA) estimates that at least 73 GW of new capacity will be added by 22, while nuclear power stations are expected to be able to deliver 87 GW by

20 2 «The greatest uncertainty is presented by the lack of expressed political support for a historical petroleum policy.» Level of activity on the Norwegian continental shelf (NCS) A persistently high level of activity means that the petroleum sector has been a stabilising factor in the Norwegian economy during the global economic crisis of the past couple of years. With a brighter outlook for the international economy and oil prices high and stable, the willingness of the oil companies to undertake new investment has become markedly higher than expected a year ago. The petroleum sector could thereby continue to play its role as an engine for growth in the Norwegian economy. However, this does not mean any shortage of challenges. Norwegian oil production will soon have halved from its peak, and is declining faster than the government predicted earlier. With exploration activity at record levels, new discoveries continue to be made. But the failure to expand exploration acreage since the mid-199s means that these finds are generally small. If value creation by the petroleum sector is to remain a cornerstone of Norwegian prosperity, new areas must be opened to exploration. The industry has been waiting for a new petroleum White Paper for almost seven years. The time has now come for courageous political decisions. The petroleum business has grown in the space of four decades into Norway s most important industry. During this period, it has contributed gross revenues of more than NOK 8 billion at today s prices, and has accounted alone for a quarter of total Norwegian value creation over the past few years. A high level of activity on the NCS in recent years has helped to ensure that more than 2 people derive all or part of their income from Norwegian petroleum operations. Combined with the substantial oil and gas revenues paid to the government, this has contributed to reducing the impact of the global economic crisis on Norway s national economy. Figure 15: Oil operations Norway s most important industry Value creation (gross product) by various industries in per cent of total GDP Private business services Manufacturing and mining Petroleum fishing and fish farming 29 1 Includes retailing, etc, hotels and restaurants, financial and business services Source: SSB

21 21 Challenges at a crossroads Norwegian economic activity is recovering towards the end of 21. Prospects for the global economy are gradually brightening, while oil prices appear to have stabilised at a relatively high level. Realising the potential for future value creation and activity on the NCS nevertheless faces substantial challenges. National oil production will soon be half its peak level, and shows signs of declining faster than the government has previously assumed. At the same time, lower gas prices and greater uncertainty over the future development of global gas markets represent a demanding start to Norway s future era as a gas nation. The greatest uncertainty is nevertheless presented by the lack of expressed political support for a historical petroleum policy which has been directed over the years at systematic and long-term exploitation of the resource potential on the NCS. The industry is ready for new challenges. The question is whether the Storting (parliament) shares that readiness. A new petroleum policy in the melting pot? The predictability of Norway s petroleum policy has been a key factor for players on the NCS since operations began there more than 4 years ago. The long-term directions of this policy were last identified in White Paper no 38 (23-4). As with the previous oil policy document two years earlier, the focus was on opportunities for achieving the long-term development trajectory for the NCS. Realising this trajectory, which is based on resource estimates from the Norwegian Petroleum Directorate (NPD), demands in part that all profitable petroleum resources on the NCS are produced. The political platform for the second Stoltenberg coalition government (the Soria Moria II declaration) in 29 also emphasised the need to maintain a high level of value creation, employment and expertise in the petroleum sector. How this was to be achieved remained simultaneously unclear. If the industry is to continue to develop, it must be given fresh challenges. That calls in turn for new and larger discoveries which provide the basis for technological breakthroughs. In such a context, the proposal in the government s budget to appropriate NOK 1 million for continued work on opening the continental shelf around Jan Mayen is the wrong response to an important challenge. A new petroleum White Paper is due in 211 well behind schedule after a gap of seven years from the previous policy document. The Norwegian petroleum sector expects to see an in-depth analysis of the industry s place in the national economy and the opportunities and challenges it faces. It needs clear signals of a future on the NCS. The time has come for courageous political decisions. STATUS AND PROSPECTS FOR THE NEXT FEW YEARS Norwegian oil production has declined substantially over the past decade. While average output amounted to 3.1 million b/d in 2-1, it was 1.8 million b/d for the eight months to 31 August 21. Gas production has more than doubled over the same period, reaching 13.5 billion standard cubic metres per year (scm/y) in 29. From mid-decade, however, the rise in gas output has not been sufficient to prevent an overall fall in Norway s petroleum production. The government s forecast for 21, presented in the 211 national planning budget, puts total daily petroleum output at 1 46 million barrels of oil equivalent (boe), equivalent to million scm oe. That represents a decline of 2.4 per cent from 29, and an overall fall of just over 11 per cent since 24. Gas will soon dominate According to forecasts from the NPD, Norwegian oil production will continue to contract in coming years. Halfway through the next decade, average output is expected to be close to 1.5 million b/d. Rising gas production will probably continue to help limit the overall output drop initially, but the strong expansion seen in earlier years is showing clear signs of levelling off. As early as next year, more gas than oil will be produced from the NCS. And by mid-decade, gas production is also set to exceed overall liquids output (oil, natural gas liquids NGL and condensate). Norway s role in the global supply of energy will gradually shift thereafter from oil to gas deliveries. Figure 16: Scm oe Gas will soon dominate NCS production Production of liquids Production of gas Source: NPD Big revenues on the wane From 2 until mid-28, steadily rising oil prices helped to camouflage the impact of declining crude output on the government s petroleum revenues. Net cash flow to the state from this sector reached a record NOK 416 billion in 28. Lower oil prices at the beginning of 29 helped to reduce this cash flow to NOK 28 billion last year. Official estimates in the 211 national planning budget are based on average prices of NOK 475 per barrel for 21 and of NOK 485 next year with the latter unchanged from this year in real terms. The average export price for gas is estimated at NOK 1.75 per scm (in fixed 211 money) for both 21 and 211. On that basis, net cash flow to the government from the petroleum sector is put at NOK 265 billion in 21 and NOK 288 billion next year. This means that every fourth krone on the income side of the government budget will derive from the industry in both years. Through the estimated return on the government pension fund global, NOK 128 billion in oil money will be devoted to the budget s many purposes in 211. That underlines the important role played by the petroleum sector in the development of Norwegian prosperity. Figure 17: NOK billion in 211 prices Net cash flow to the government from petroleum operations Source: Ministry of Finance The fiscal rule which regulates government spending of oil revenues will permit the allocation of ever-increasing sums earned from petroleum to

22 22 the budget in coming years. At the same time, government revenues from NCS operations will continue to decline. According to estimates by the Ministry of Finance, they should be down to roughly NOK 2 billion by 22 measured in current prices. A steadily growing share of this income will derive from gas, where uncertainty over future price developments has risen as a result of increased US shale gas production and a growing supply of LNG in an ever-more globalised market. In line with long-term estimates presented in the 29 White Paper on perspectives for the Norwegian economy, the government has assumed that Norwegian gas exports could total billion scm/y in 22. The NPD, for its part, expects gas sales to reach billion scm/y during the coming decade. Unless new and preferably large discoveries are made on the NCS, the government s petroleum revenues will thereby decline more rapidly than it has assumed. Figure 18: Average export price for Norwegian gas Quarterly figures. NOK per scm 3. Interest in APA remains high While no new parts of the NCS have been opened since the mid-199s, interest in exploring its mature areas is still very high. At the same time, a short remaining commercial life for some of the infrastructure means a limited time frame for finding and exploiting resources. A total of 14 installations are due to be decommissioned in 21-15, with the number in the subsequent five-year period put at 18. The awards in predefined areas (APA) have been an important instrument since 23 for ensuring that resources are not lost. Interest in mature areas of the NCS has been particularly high among smaller companies during recent years. A preliminary count shows that 41 companies applied for acreage in this year s APA round. Although that was three fewer than in 29, the number of applications received by the NPD rose simultaneously by some 3 per cent. It was possible to apply for 32 full or part blocks this year, an increase of 63 from 29. The predefined areas were expanded by 43 full/part blocks in the Norwegian Sea and 2 in the Barents Sea. Exploration acreage now being put on offer primarily comprises relinquished blocks where petroleum activity has taken place earlier Figure 2: APA rounds on the NCS Blocks offered 35 Applicant companies Sources: SSB and Statoil from Q2 27 Record exploration activity The strong growth of recent years in offshore exploration continued in 29, when no less than 72 exploration wells 47 wildcats and 25 appraisals were completed compared with 49 the year before. This resulted overall in 28 discoveries, including 21 in the North Sea and seven in the Norwegian Sea. According to preliminary assessments by the NPD, the expectancy value of recoverable resources in these finds is 388 million barrels (62 million scm) of oil and 83 billion scm of gas. Recoverable resources in last year s discoveries are accordingly the highest since 2, but remained clearly below production in the same year. Exploration activity has also been well maintained in 21. At 25 October, when information-gathering for this report was completed, 35 exploration wells were registered as completed with a further seven in progress. Figure 19: Number Completed exploration wells on the NCS APA full/part blocks on offer Applicant companies (right-hand scale) Source: Ministry of Petroleum and Energy Resources still substantial The remaining resource base on the NCS is still substantial. Recoverable resources at 31 December 29 were estimated to total 84 billion boe (13.4 billion scm oe), of which 33 billion boe had been produced. Total remaining recoverable resources are put at 51 billion boe, with an uncertainty range of billion boe which particularly reflects the fact that knowledge of the resource base in large parts of the Barents and Norwegian Seas remains limited. At some 21 billion boe, the point estimate for resources so far undiscovered is divided fairly evenly between the North, Norwegian and Barents Seas. Figure 21: Petroleum resources on the NCS Produced and remaining, million scm oe Appraisal wells Wildcats Wells being drilled Wells completed so far this year Source: NPD Estimated undiscovered resources Proven reserves Produced resources 29 Source: NPD

23 23 Figure 22: Barents Sea boundary line agreed after 4 years Boundary resolution opens opportunities Russia and Norway reached agreement in 21 on the boundary line between their continental shelves in the disputed area of the Barents Sea and Arctic Ocean. The treaty signed in Murmansk on 15 September marks the termination of a process which began in 197. It must be formally approved by the Storting and Russia s Duma. Agreement has prevailed between the Norwegian and Russian governments since the 198s that no exploration for or production of petroleum would take place in the area of overlapping claims. That moratorium will end when the treaty comes into force. Covering 175 square kilometres, the previously disputed area divides about equally between the two countries. The petroleum industry expects it to have a good potential for oil and gas deposits. A speedy start to more detailed surveying of resources on the Norwegian side of the boundary will accordingly be important. An impact assessment must then be prepared as the basis for a possible Storting decision to permit petroleum activity. Lack of infrastructure is another factor which means it will take time before production can be expected from this area. The petroleum industry takes a very positive view of the boundary line agreement. In the longer term, this will lay the basis for increased petroleum activity in the far north while opening the way to wider technological cooperation with Russia to ensure that production is as environment-friendly as possible. Report on improving recovery The Ministry of Petroleum and Energy appointed a committee on 5 February 21 to propose measures for improving recovery of petroleum resources from existing fields on the NCS. Published on 22 September, the report from this body (known as the Åm committee) presented a broad package of measures embracing 44 regulatory, technological and financial proposals. These will need to be followed up both by the government and by the petroleum industry. Historically, recovery factors on the NCS have improved in line with technological progress and the build-up of expertise. With today s approved plans, the average recovery factor is 46 per cent for oil and 7 per cent for gas. The committee has a vision that close to 16 billion barrels of additional oil can be recovered from Norwegian fields. This could be very challenging, given that Norway s average recovery factor is already among the highest in the world. Put broadly, how much of the potential can actually be realised depends on the extent to which the proposed measures succeed in encouraging further technology development and implementation, and on the future relationship between oil prices and cost trends on the NCS. Further dialogue will be needed with the government over the Åm committee s proposals. With a high level of costs on the NCS, technological progress must remain a cornerstone of efforts to improve recovery factors. In this context, the OLF is disappointed that the government has opted to reduce appropriations for petroleum research in its proposed 211 budget when the opposite should be the case. The oil which costs least to produce has also already been recovered, and a relationship will normally exist between a high recovery factor and large costs. With the aid of tax incentives, the government has succeeded during recent years in its goal of boosting exploration drilling. It should also be possible to utilise the tax system to encourage otherwise marginal projects for improved oil recovery (IOR). Investment forecasts upgraded The investment analysis presented in this chapter paints a clearly more robust picture than the forecasts in last year s business trend report. With brighter prospects for the world economy and oil prices stable at a high level, the willingness to sanction new projects on the NCS appears to have increased significantly over the past year. Annual capital spending is now expected to rise from roughly NOK 142 billion in the present year to NOK 157 billion in 214, before probably experiencing a renewed decline. In today s conditions, plans currently exist for developing virtually all the significant discoveries on the NCS during the coming decade. The challenge This represents perhaps the biggest challenge for the Norwegian petroleum business, including an ever more wide-ranging supplies industry. If only small discoveries continue to be made, the sector will face extensive cutbacks towards the end of the decade. At the same time, the community could lose substantial revenues which might derive from those parts of the NCS which remain closed to petroleum operations. Low profitability and the prospect of a lasting and substantial need for government support to maintain a commitment to renewables make it simultaneously unlikely that this capacity can be sustained by new forms of energy. With its high-tech products, the Norwegian oil supplies industry is also highly competitive today in other

24 24 petroleum provinces. Its international turnover in 29 was no less than NOK 118 billion, making this the country s biggest export sector after oil and gas sales. Deliveries to the international petroleum industry are accordingly likely to provide Norwegian suppliers with their real alternative market for a long time to come. Figure 23: International turnover for the petroleum supplies industry NOK billion Source: Menon Business Economics Investment outlook The growth in capital spending observed since 24 appears to be continuing in 21. Last year s business trend report expected that the scale of the financial crisis might cause a decline in investment from 21 and beyond, and that 29 might therefore represent a peak for the NCS. That this no longer appears to be the case reflects the fact that the impact of the financial crisis on the NCS has been much less dramatic than expected. With oil prices returning relatively fast to USD 7-8 per barrel, the willingness to sanction new projects is clearly much greater than was the case only a year ago. The most specific reflection of this development is the number of projects postponed last year which are now back on track, primarily Statoil s Gudrun and Valemon fields, Det Norske s Frøy and the Ekofisk hotel platform. The last of these is an important condition for the major investments planned to develop the Greater Ekofisk area. Table: Investment forecast for by activity NOK billion in 21 prices Total investment Exploration Development Fields on stream Pipelines and land-based plants Removal Source: Econ Pöyry/OLF As the table illustrates, this year s forecast indicates that capital spending will rise steadily in coming years from around NOK 142 billion today to NOK 157 billion in 214. Investment is then expected to fall back to NOK 145 billion in 215. According to estimates given below, costs on the NCS are expected to rise by three-four per cent annually over the same period. Capital spending in the peak year of 214 could accordingly approach a nominal level of NOK 18 billion. Figure 24 breaks down costs in the table by type. This shows that wellrelated activity will account for a significant share of future investment, with platforms and processing facilities still accounting for a substantially larger proportion than subsea installations. Figure 24: Investment forecast for the NCS by type of cost incurred NOK billion in 21 prices Exploration Other removal Pipelines and land-based plants Processing plants Platforms Subsea installations Wells Source: Wood Mackenzie/Econ Pöyry Investment in new fields The future rise in investment relates first and foremost to a higher pace of new field development. Heading the queue are initiated and approved projects such as Goliat and Gudrun. These are followed by Valemon, where a plan for development and operation (PDO) was submitted on 21 October, and Frøy, where a PDO is expected in the near future. Furthermore, work is under way on preparing a long series of developments with a start-up date of 215 at the latest Jordbær, Dagny, Luno, Draupne and Grosbeak are all now on company drawing boards, and collectively represent at least NOK 6 billion in investment over the coming five-year period. A number of smaller discoveries are also due to be developed, many of them by Statoil. The latter s fast-track concept for bringing subsea tiebacks rapidly on stream is becoming established as a standard, and could contribute in coming years to quick development of many small resources close to existing production. Further investment in new fields is also possible during the period. A number of discoveries which are probably commercial have been made on the NCS during 21, but it remains too early to say anything about development timetables for these. They include Petro-Canada s Beta Brent find, Wintershall s Maria, RWA-Dea s Zidane and Centrica s Fogelberg. In addition comes the largest discovery probably made this year, Lundin s Avaldsnes, which could influence how the Luno area is developed. These new discoveries have not been taken into account in this year s investment estimate. Their development is expected to start in 215 at the earliest. Fields in production Capital spending on producing fields is expected to lie at a high and stable level of roughly NOK 7 billion per annum over the next few years. The bulk of this outlay will occur on the biggest fields, with Ekofisk, Troll, Snorre, Ormen Lange, Gullfaks, Statfjord and Oseberg all facing more or less steady investment activity in the time to come. Spending is in decline on Valhall as its redevelopment approaches completion. Activity on Åsgard is rising in connection with the minimum flow project, with the compression solution due to start up in 214. A reduction in spending on Valhall and Åsgard (from 214) will be more than offset when development of the Greater Ekofisk area gets seriously off the ground around 214. Were this project to be delayed, it would also have a big impact on the total level of activity in each year of the period. Exploration and production drilling Jack-up rigs are primarily used in the southern part of Norway s North Sea sector, including the Ekofisk and Valhall areas. The redevelopment of Valhall is approaching completion, with drilling on the field in Ekofisk is set to take over from 214, with drilling more than doubling

25 25 in the period. Development of and drilling on Ekofisk represent about NOK 5 billion in the investment estimate for , with drilling accounting for roughly NOK 2 billion. Semi-submersible rigs are primarily used on the NCS outside its southernmost area. Rates for these vessels, which account for the majority of drilling units off Norway, are significantly higher than for jack-ups. Figure 25 presents an overview of actual and estimated rates in order to illustrate how well-related costs could develop. Costs on the NCS are a function of the day rate for the rig, charges for drilling equipment and well services, the number of wells and how long it takes to drill each of them. Figure 25: Average day rate in USD for semi-submersible rigs actual and estimated USD faktisk Actual Estimated Source: Econ Pöyry Looking only at contracts entered into, these show a sharply rising curve from 23 to 29 followed by a levelling-off and a weak increase for the period from 21 (solid line). If estimates for new contracts (dotted line) are included at lower prices as indicated by the market, however, the forecast trend for rates in can be seen to decline weakly towards USD 4 per day. But the expectation in the investment estimate is that separate markets will develop for exploration and production drilling rigs. Day rates for production drilling are expected to be driven down towards USD 3 after 213, primarily by using simpler units for such work. The fifth- and sixth-generation rigs will be employed primarily for exploration wells at rates lying mainly about USD 45 per day, depending on how the market for such drilling develops. Production drilling related to new and existing fields is estimated in the investment forecast to be worth some NOK 5 billion per year throughout the period, up from NOK 3-4 billion in This rise reflects the fact that many of the rigs used to drill producers have ceased to operate under old rates, that more charters are being awarded to rigs working exclusively on production drilling, and that a lack of rig capacity and accommodation on fixed installations will eventually be overcome. Drilling production wells has become a challenging job as output from each well declines and the need for injectors grows. Well slots have been used up on certain platforms, which means that additional templates must potentially be installed to increase production drilling. Little account has so far been taken of the need for more templates, and the investment forecast could therefore have underestimated costs related to this in Exploration drilling is expected to peak in at NOK billion per annum. From 212, rates for exploration units will be affected by the growing availability of more rigs and intervention vessels for dedicated production drilling and well workovers. As a result, exploration drilling work is forecast to fall below NOK 25 billion per annum from 212. Expected to total close to 5 in 21, exploration wells required annually are expected to remain around this figure if the NCS is to be explored at a timely pace for new resources to be tied back to existing infrastructure. Pipelines and land-based plants Major developments are currently under way on shared facilities in other words, the Gassled pipelines and associated infrastructure as well as the land-based Kårstø, Kollsnes, Sture, Mongstad, Tjeldbergodden, Nyhamna and Melkøya plants. The Snøhvit improvement project is under way in 21-11, with a plant shutdown planned for next spring. In addition, the concept for a second train at the Melkøya gas liquefaction plant is due to be chosen in December. Spending on the latter facility has not been included in this year s investment forecast. The Kårstø expansion project (KEP21), which covers upgrading and instrumentation, is approaching completion, and the next project at this plant will probably be modifications for landing Gudrun gas in 213. A number of minor jobs will be seen at both Kårstø and Kollsnes in Investment in pipeline systems and land-based plants which are not field-specific is estimated at NOK 6 billion per annum in 21-15, peaking at more than NOK 7 billion in 21 before declining to NOK 5 billion by 215. However, the great bulk of capital spending on pipelines is field-specific. The Troll area will be provided with a number of infield flowlines in 21-11, as will the Ekofisk area in The new Astero, Dagny, Gudrun, Hild, Jordbær, Peon, Trestakk and Valemon developments call for a total investment of NOK.5-2 billion each for tie-backs to existing infrastructure. With the exception of Luva, other fields are likely to see only minor spending on pipelines during the period. The bulk of investment on Luva will be made in and the pipeline part of this project amounts to some NOK 1 billion, with roughly NOK 1 billion expected to fall in 215. That assumes Luva gas is landed at Nyhamna. Overall annual spending on field-specific pipelines is estimated at NOK 3 billion in 21-13, rising to NOK 6 billion in Comparison with SSB estimate Investment figures from Statistics Norway (SSB) for the third quarter of 21 estimate that capital spending by the petroleum sector in the present year will total some NOK 139 billion. Representing a rise of just over NOK 3 billion from 29, this forecast is based on figures reported by the oil companies to the SSB. It is not directly comparable with the OLF s estimate, which also includes field cessation costs. Allowing for this difference, a good correspondence exists between the OLF and SSB forecasts for 21. Both the SSB s adjusted estimate and the OLF s prediction amount to NOK 142 billion. The differential was much greater last year. While the SSB s third-quarter estimate assumed NOK 145 billion in capital spending, the actual amount invested was only NOK 136 billion. By comparison, the OLF forecast in last year s business trend report was NOK 129 billion (NOK 127 billion when cessation costs were excluded). The actual figure accordingly ended up roughly midway between the OLF and SSB estimates compiled in the third quarter of last year. Much of the difference between the OLF s forecast and actual investment recorded by the SSB reflects an underestimate of exploration costs, which amounted to no less than NOK 28 billion in 29. The remaining differential of about NOK 6 billion was spread over a large number of fields. This could indicate that a cost increase occurred in 29 which was not reflected in the OLF s figures.

26 26 Figure 26: Investment statistics for the oil industry Oil company estimates at various dates. NOK billion May Aug Nov feb May Aug Nov Estimated in year before investment year 21 Estimated in investment year Actual spending Source: SSB Estimates from the SSB and the OLF for 211 appear to be relatively well-matched. Adjusted for cessation costs, the SSB forecast is now about NOK 152 billion as against the OLF figure of NOK 149 billion. This differential can largely be explained by the fact that the SSB s estimate for 211 is calculated in nominal value while the OLF total is in fixed 21 kroner. New forecast compared with the OLF s 29 estimate Last year s estimates by the OLF for 21 and 211 were significantly lower than the current forecast, which has risen from NOK 118 billion in 29 to NOK 142 billion. Roughly half of this increase can be explained, as in 29, by higher exploration spending and overall costs. The remaining NOK 1 billion is largely attributable to a strong surge in drilling expenditure which was not foreseen in 29. A further factor is that several projects put on hold last year primarily Gudrun are already starting to contribute to investment this year. The difference is even greater for 211, with the gap between the 29 forecast and this year s estimate no less than NOK 4 billion. That provides a dramatic illustration of the sharp change in mood which has occurred in the industry over the past year. From being the ultimate crisis period, 211 has become a year of anticipated growth in NCS activity. While the crisis in the fabrication industry peaked with the award of the Goliat floater to Korea, the yards with a few exceptions now have enough to do. Order books which had previously contracted month by month have begun to stabilise or expand slowly but surely as new projects move into the contract phase. Apart from the effects mentioned above, investment in 211 will primarily be boosted by new field developments. Gudrun and Valemon alone will contribute well over NOK 1 billion in capital spending for the year. Statoil s fast-track projects are also set to help raise 211 investment substantially above last year s forecast. The list of potential developments up to 215 includes a large element of such small subsea projects. As a result, the position looks particularly bright for suppliers of seabed equipment and services. After a couple of lean years, they should have good opportunities to get their heads literally above water. That accords well with earlier trend analyses, which identified subsea products and services as growth areas from as early as 212. Other significant contributors to higher investment in 211 are the Ekofisk hotel platform and Åsgard minimum flow, which were also excluded from last year s estimates. Cost trends Costs rose sharply in 25-8 both on the NCS and internationally. This trend reversed abruptly when the financial crisis caused oil prices to collapse and, according to the highly reputable Cera index, field development costs fell globally by some 1 per cent during 29. Nevertheless, the signs are that costs have not declined by the same amount on the NCS. Based on an analysis of NCS cost trends presented in last year s business trend report, Econ Pöyry concluded that there was also room for some decline in investment costs in these waters driven primarily by lower steel prices and reduced margins for suppliers. Since the bulk of costs on the NCS are related to pay rates in Norway and accordingly difficult to reverse, the decline was nevertheless expected to be moderate. It was also concluded that a lasting reduction in costs would require long-term low oil prices with an associated mood of crisis in the industry. Estimating cost developments for petroleum investment during a single year is difficult. Little price information is available to serve as a benchmark for such analyses in the form, for instance, of costs for relatively standardised projects. Most development projects involve multi-year contracts, and costs associated with these will be very dependent in part on when and on what terms they were awarded. More indirect indicators must accordingly be used to estimate trends, with developments preferably assessed over several years. Two indicators have been used in estimating cost movements during 29 Econ Pöyry s cost index for field developments and an index showing the rise in per-barrel production costs. Figure 27 illustrates how these indices have developed since 24, a period when the level of costs measured in nominal value has roughly doubled. Figure 27: Estimated trends for field development and production costs on the NCS (24=1) Index Indeks for for production produksjonskostnader costs per barrel per fat Cost Kostnadsindeks index for field for development feltutbygging Sources: NPD/Econ Pöyry Utilising the NPD s estimate of incurred and total investment costs per field, the index for field development costs is calculated in a way which shows how the bill for completing a group of field projects changes from year to year. This year s update is based on the Skarv, Tyrihans, Gjøa, Vega, Vega South and Volund fields. The figure shows that this index, which climbed by 15 per cent annually in 25-8, also continued rather unexpectedly to rise last year. As a result, the cost of completing the relevant projects increased by 12.5 per cent during 29. Nevertheless, it remains unclear how much of the index growth was attributable to rising costs in 29 and how much could be caused by such factors as price lags from the year before. The cost increase may also reflect causes other than price rises, such as a project proving more complex than earlier expected. The index for per-barrel production costs shows how the nominal cost of producing one boe on the NCS has changed from one year to the next. Underlying data for the index have been taken from the accounts of selected oil companies on the NCS, primarily Petoro, Statoil and Total.

27 27 These companies all have a very broad NCS portfolio, and their reported costs are therefore very suitable for such an index. The figure reveals that, while production costs rose sharply in 24-8, they then levelled off in 29. Since the index is also affected by the decline in field output, these figures in reality involve a fall of a couple of percentage points in overall operating costs. This could indicate in turn that the level of costs has also declined somewhat. Trends in operating expenses are not directly representative for the development of investment costs, but nevertheless indicate that parts of the industry, at least, experienced a small decline in costs from 28 to 29. Future cost developments Figure 28 presents a calculated weighted cost index for future investment on the NCS, excluding exploration expenses. This index has been developed with the aid of a model for cost developments created by Econ Pöyry on behalf of the OLF in 29. Presented in more detail in last year s business trend report, the model builds on a breakdown of investment costs into various categories. The historical trend for each of the latter is correlated with fundamental historical indices such as oil prices and global GDP developments. Based on estimated projections of these indicators, an anticipated future cost increase is then calculated for each of the cost categories and for offshore investment as a whole. The index has been calculated on the basis of three different estimates for oil prices and economic growth, with the expected trajectory assuming an oil price of USD 8 per barrel in 215 as well as the latest estimate for global economic growth from the International Monetary Fund (IMF). The low and high estimates are based on oil price expectations of USD 6 and USD 1 per barrel respectively as well as rather lower/higher global growth. As the figure shows, the cost estimate looks likely to rise by three-four per cent annually during the forecasting period. Figure 29 shows historical and modelled expectations of future price developments for four key input factors in the model. While these factors have displayed very different cost trends in recent years, it can be seen that costs are expected to rise moderately in the time to come. This can be interpreted as an indication that the world economy is slowly recovering and that prices will gradually return to a natural long-term path. Figure 28: Calculated cost index for investment on the NCS Alternative trajectories (29=1) high trajectory Expected trajectory Low trajectory Figure 29: Price index for important input factors on the NCS Historical development and expected trajectory (29=1) Source: Econ Pöyry Labour Metals Materials and equipment rig rates Source: Econ Pöyry

28 28 «The likelihood of a blowout on the NCS has been reduced by more than 7 per cent over the past two decades.» Environmental status in the petroleum industry The oil and gas industry on the NCS has devoted great attention for many years to minimising its emissions to the air and discharges to the sea. Detailed annual environmental reporting shows that this work is bearing fruit. At the same time, further progress will be possible in certain areas. The Norwegian petroleum industry accordingly has the ambitious goal of becoming a world leader on the environment while working for continuous improvements to its environmental results. Global climate challenge The climate summit in Copenhagen during December 29 failed to provide the important road map for the world community s future work in this field which many had hoped to see. No accord was reached on reducing greenhouse gas emissions, but the parties agreed to continue a step-by-step process. The next negotiating session is scheduled for Cancun in Mexico this December. After several preparatory meetings, however, no signs suggest that the international community will succeed in achieving a binding agreement there. The main challenges relate to geographical and financial responsibilities and distribution formulae, ethics and reasonableness criteria. In addition, the standstill in the climate talks also reflect the very different views of the two largest emitters, China and the USA, on how the bill for emission cuts should be divided up. Hopefully, the Cancun meeting could deliver a set of politically balanced decisions which prevents a gap opening up in the work after 212 and which ensures continuity in the market mechanism for carbon emissions. In a European context, a strengthening of the EU emission trading scheme (ETS) is regarded as the best guarantee for international credits after the Kyoto period. An international pricing of carbon emissions will be crucial for mobilising the private sector to finance measures. Ambitious national goals Reducing carbon emissions has been on the Norwegian political agenda since the late 198s, and Norway is committed to ambitious climate goals. Its Kyoto commitment is that carbon emissions will not increase by more than one per cent from the 199 level in the period. This can be achieved through a combination

29 29 of measures both at home and internationally. Beyond its Kyoto obligations, Norway has set ambitious goals for further emission reductions. Through its climate compromise, the Storting has decided that annual Norwegian greenhouse gas emissions are to be cut by million tonnes of carbon equivalent up to 22. The global character of the climate challenges frequently gets forgotten in the Norwegian debate. Attention is too often focused exclusively on emission reductions at home, even though larger cuts and better environmental solutions could have been achieved by looking beyond the country s borders. Some call, for instance, for lower activity on the NCS in order to cut national greenhouse emissions, while it is actually the case that Norwegian gas exports are crucial to the EU s strategy for reducing its carbon emissions through reduced use of coal-fired electricity. And it is worth remembering that coal-fired power stations, depending on the technology employed, have twice the carbon emissions per unit of energy generated as gas-fired facilities. Through broad assessments during 29, the Konkraft 5 report and the climate action plan for Norwegian industry documented in detail that Norway s petroleum sector has long pursued measures to reduce its emissions. The outcome is an offshore industry which ranks as an international leader for energy-efficient production and low carbon emissions per unit produced. Buying allowances and paying tax The oil and gas sector accounts for about a quarter of Norway s carbon emissions. Its share of national value creation, measured by GDP, is in the same order. This industry accordingly represents an important part of the climate solution. A number of measures have already been adopted by the government to regulate emissions from the oil and gas sector. The most important are the carbon tax, the Emission Trading Act, provisions on flaring in the Petroleum Activities Act, the obligation to consider power from shore in development plans, emission permits and the requirement to use the best available technology. This industry is subject to double regulation in that it both pays tax and buys allowances for its emission. It has accordingly been subject to the strongest controls in the climate area since The cheapest reduction measures have therefore already been implemented, and further action will generally carry a high cost. Detailed documentation of the offshore industry s position was provided by the Climate Cure report in February 21. This document contains an updated assessment from the relevant government agencies of the overall national potential and costs for meeting the goals of the climate compromise. This analysis shows that the bill for achieving these ambitions will be close to NOK 1 5 per tonne of carbon equivalent. This is an order of magnitude which has not been discussed so far, and lies far above the allowance price of NOK 35 considered realistic for 22 by the Climate Cure report. The Climate Cure analysis of the offshore sector coincides moreover with the industry s own assessments, as presented in Konkraft 5 and the industrial climate action plan, of relevant opportunities for action, the potential for emission reductions and cost estimates for these measures. The Climate Cure s costings for measures are generally higher than earlier estimates. That also applies to power from shore, a potential reduction measure which has attracted great attention from many people. The cost of transmitting electricity to individual fields is calculated at NOK 1-4 per tonne of carbon equivalent. Power from shore, capture and storage Transmitting electricity from land to offshore installations has already been implemented or is being adopted on several fields where conditions are appropriate. Ormen Lange and Troll A are powered from shore today, with Gjøa and Valhall due to follow in 21. The industry is assessing power from shore for all new developments on the NCS. Large-scale electricity transmission to existing offshore installations is technically feasible, but would be very expensive. It has accordingly only been relevant in connection with extensive modifications to particular installations. In many cases, power from shore will also call for reinforcement of the electricity grid, with the challenges that can pose in terms of decision processes and environmental burdens. Another important consideration is that gas previously used for power generation on the NCS will be piped instead to Europe and burnt there. In a global perspective, therefore, power from shore will not necessarily reduce greenhouse gas emissions. The Climate Cure report also provides support for the industry s view that carbon capture and storage (CCS) applied to flue gases will not have a genuine potential in the offshore sector until after 22. Great uncertainty continues to prevail over the technology for and cost of CCS, and solutions must be tested on land before their possible application offshore. Other possible measures, such as sharing power generation between several fields, could provide marginal emission reductions. Establishment of small offshore wind farms could be possible before 22, but this is unlikely to represent a genuine potential for the offshore industry within that time frame. Substantial measures pay off Greenhouse gas emissions per unit of oil and gas produced vary considerably between different parts of the world, ranging from about nine to 35 kilograms per boe. Norway has an average figure of roughly nine kilograms per boe. The high values in certain other parts of the world partly reflect extensive flaring of associated gas from oil production. Europe has a well-developed gas infrastructure from field to market, and Norway operates an efficient transport network with high regularity and no leaks. Figure 3: Greenhouse gas emissions per unit produced in certain petroleum provinces in 28 Kilograms of carbon equivalent per boe produced Sources: OGP and Environment Web Carbon emissions per unit of oil and gas produced from the NCS were low as early as 199, primarily because of very limited flaring. General technological progress has occurred down to the present day, and a number of measures have been implemented to reduce emissions. The amount of carbon dioxide released by the industry has accordingly increased more slowly than production, and emissions per unit produced

30 3 declined until the last few years. But the maturing of the NCS means the presence of older fields with lower pressure and a higher water cut, which in turn calls for greater use of energy. Combined with the transition from oil to gas, the northward shift of operations and longer distances for gas transport, this will tend to boost carbon emissions per unit produced up to 22. Forecast: halving of emissions Total Norwegian carbon emissions have risen by about eight per cent since 199, and amounted to 5.8 million tonnes of carbon equivalent (including all greenhouse gases) in 29. The petroleum sector accounted for 13.2 million tonnes of this, including 12.4 million tonnes of carbon emissions. That represented a decline from 13.8 million tonnes in 28. According to production forecasts and without further new measures, the industry s emissions will stay at their present level in 22. However, they are expected to drop sharply from then until 23 as a result of declining output. The NPD expects emissions to fall by half. These predictions also mean that measures under assessment will have a short economic life, with a strong effect on their cost. Figure 31: forecasts Million tonnes Carbon emissions on the NCS actual developments and Carbon emissions from oil operations Carbon emissions corrected for petroleum production developments Sources: Environment Web and NPD The industry will continue its efforts to reduce greenhouse gas emissions through enhanced energy efficiency, power from shore, renewable energy and the development of CCS. Measures to be implemented in the future must be assessed in an overall perspective, with the emphasis on cost efficiency. Figure 32: Actual and forecast carbon emissions Million tonnes of carbon equivalent Industrial processes and combustion Land transport, aviation and other mobile sources Petroleum Agriculture Other (shipping, fishing, energy production, heating, waste, fluorine compounds in products) Sources: Climate Cure/NHO The oil and gas industry has not only belonged to the EU ETS since 28 and buys allowances for all its emissions, but also pays carbon tax. For several years, the OLF has proposed that these tax payments be dedicated to a climate fund. It is positive that such a fund has also been described by the Climate Cure report as a possible instrument for implementing emission reduction measures. That would be efficient in terms of both management and cost, could create predictability, and might contribute to faster national results. Norway can point to good experience with other funds and agreements between industry and government. However, a fundamental assessment is required of the way a possible climate fund might be structured and administered. In that context, the OLF is participating in a collaboration between the Confederation of Norwegian Enterprise (NHO) centrally and other national associations to develop and clarify this question. Success with nitrogen oxides Norway is committed under the Gothenburg protocol to reducing national emissions of nitrogen oxides. According to the SSB, these totalled tonnes in 29, down by about four per cent from 28. The oil and gas industry accounted for 29.7 per cent of this amount, which was rather higher than the year before. Certain sectors, including the offshore industry, are liable to nitrogen oxide tax. During the process of introducing this levy in 27, the government and the industry associations established a voluntary scheme whereby companies instead of paying the tax can contribute to a fund which helps to finance emission reduction measures. Coming into force on 1 January 28, this solution builds on an environmental compact between 14 industry associations and the Ministry of the Environment. The agreement regulates commitments made by the industry associations to the government for cutting their overall nitrogen oxide emissions. Support for the deal from the industries liable to the tax has been good, with more than 6 enterprises signed up including all the companies responsible for operations on the NCS. That represents more than 9 per cent of registered taxable enterprises, and about 95 per cent of taxable emissions. All these companies report their emissions to the nitrogen oxide fund and are then invoiced for their contribution. NOK 65 million was paid by affiliated enterprises in 29. The nitrogen oxide fund will have some NOK 1.8 billion available to help finance measures over the four-year life of the agreement. Norway well placed Verified nitrogen oxide emission cuts as a result of projects implemented in 28-9 document that reduction commitments by the industry associations for these years have been fulfilled. If all the measures submitted to the fund for financial support up to the end of 211 are implemented as intended, the organisations are also highly likely to meet the overall reduction commitment in the agreement. Norway will simultaneously fulfil its obligations under the Gothenburg protocol. The biggest emission cuts so far have been achieved on service vessels delivering to the oil and gas business, followed by fishing boats and merchant vessels operating in Norway and to European ports. An important motivation for entering into the nitrogen oxide agreement and establishing the fund was to develop new environmentally efficient solutions for shipping and to provide greater market opportunities for such systems. Support from the fund has increased both expertise with and the ability to deliver solutions of this kind in the Norwegian market. In all, support totalling NOK 1.8 billion from the fund will unleash measures and

31 31 activities in the supplies industry worth just over NOK 5 billion in Norway. The overall employment effect for the supplies industry is estimated at 5-7 work-years per annum during the agreement period. An extension of the fund was accordingly also included as a key instrument in the government s shipyard package, which was presented in April 21. Figure 34: Forecast output and discharge of produced water Million cubic metres Innovation, not tax The good results achieved with nitrogen oxides demonstrate that a combined agreement and fund solution could be a constructive way of reducing national emissions. As a result, the government and the industry organisations are now negotiating on a continuation of the agreement. An extension for up to seven years, as permitted under EU rules, is under consideration with the use of the same fund model adopted so far Produced Discharged Nothing is known at the moment about possible new international reduction obligations for Norway after the Gothenburg protocol has been fulfilled. A new environmental agreement must accordingly be based to a greater extent on an assessment of the remaining national reduction potential, while also emphasising the development of sustainable environmental technology with guidelines tailored to a long-term perspective. The latter approach, with both efficient shortterm emission cuts and more long-term technology development, should be adopted if one or more climate funds are to be created. Produced water down The petroleum industry is working continuously to reduce and minimise its discharges to the sea. These efforts have yielded very good results for chemical additives, with discharges of environmentally harmful substances cut by 99.5 per cent over the past decade. The largest remaining discharges to the sea involve produced water, which accompanies oil up from the reservoir. A total of 134 million cubic metres of this fossil water were released on the NCS during 29. Such discharges declined by about 1 per cent from the previous year for the second year in a row. This primarily reflects lower production from the NCS. About 3 million cubic metres of produced water were injected, amounting to roughly 19 per cent of total water production. Figure 33: Discharge and injection of produced water Million cubic metres Produced water injected Produced d water discharged d to the sea Source: Environment Web Oil is the principal pollutant in produced water. The concentration of crude has lain for many years at about 1 milligrams per litre. A total of just under 1 5 tonnes of dispersed oil was discharged to the sea in 29, a reduction of almost six per cent from the year before. Sources: Ministry of Petroleum and Energy/NPD The industry is continuing its efforts to reduce discharges even further. Results from on-going environmental monitoring document that these discharges have had no identifiable impact on the environment. Fewer major acute oil spills Acute spills are defined as significant unplanned pollution which occurs suddenly and is illegal. The number of spills greater than 5 litres of oil has declined by more than 65 per cent over the past decade. A total of 147 incidents were recorded in all size categories during 29, with four larger than one cubic metre. During more than 4 years of activity on the NCS, no significant environmental effects have been identified as a result of petroleum operations. Figure 35: Acute oil spills larger than 5 litres on the NCS Source: Environment Web The possible environmental consequences of an acute oil spill will depend on its pollution properties, the volume spilt and when/where it takes place. Preliminary reports from environmental investigations after the world s largest offshore blowout, which occurred when the Deepwater Horizon rig exploded in the Gulf of Mexico earlier this year, indicate that the damage has been substantially less than many feared. However, it must be emphasised that the total environmental impact remains to be clarified, and that it will be important to identify possible long-term consequences of the accident. Lasting from 2 April until the well was shut in on 15 July, the Macondo blowout is estimated to have released 65 tonnes of crude. By comparison, the Ekofisk Bravo blowout in April 1977 the biggest acute spill on the NCS totalled some 1 tonnes.

32 32 Reducing probability The Norwegian oil and gas industry is constantly seeking ways to prevent incidents which could lead to acute discharges. Analyses carried out by the Petroleum Safety Authority Norway (PSA) and Det Norske Veritas (DNV) over the past year show that these measures have clearly reduced the probability of acute discharges. The DNV report documented that the likelihood of a blowout on the NCS has been reduced by more than 7 per cent over the past two decades. During the same 2-year period, DNV has identified 22 blowouts in the Gulf of Mexico compared with just one in the North Sea. The latter occurred with a high pressure and temperature (HPHT) well on the UK continental shelf in 1988, before special procedures and standards for this kind of operation were introduced. Based on the level of activity, DNV calculated that the probability for a blowout in the Gulf of Mexico was almost 1 times higher than on the NCS. This one incident in the Gulf of Mexico affects neither the probability that a blowout will occur in the relevant areas off Lofoten or in the Barents Sea, nor the rate/duration calculations. It is also worth recalling the summing-up given by the NPD on 15 September concerning the petroleum-related differences between the Gulf of Mexico and the areas off Lofoten/Vesterålen. Assessments of spill size must be based on the best possible knowledge about local conditions, not on events in other parts of the world. Environmental harm, luck and clean-up response Although final data for the environmental investigations in the Gulf of Mexico are not available, it appears as mentioned above that pollution damage from the Macondo blowout could be less extensive than first feared. Moreover, it has been claimed in various quarters that the extensive mobilisation of clean-up resources witnessed in the Gulf would not have been possible in Norway. Combined with what the same commentators claim was lucky weather conditions, this is promoted as an important reason why the environmental harm was considerably less than would probably have been the case off Norway. What is being forgotten here is that a corresponding use of fishing vessels has so far been banned on the NCS as a result of Norwegian regulations. The oil companies and the Norwegian Clean Seas Association for Operating Companies (Nofo) have been negotiating with the government for several years to secure a change in these rules, precisely in order to strengthen preparedness in near-shore waters. These talks now look like being successful, so that it will be possible to make legal use of fishing vessels in Norway s nearshore response. The change will also have a substantial effect on preparedness for discharges from shipping traffic, which occur much more frequently than from the oil industry. In addition, Nofo and the industry have been implementing measures for many years to improve oil spill response on the NCS, and particularly in nearshore waters. Considerable progress has been made in developing detection and monitoring systems, so that response vessels are largely independent today of light and visibility conditions during a clean-up operation. More extensive and frequent clean-up exercises have been held with the Norwegian Coastal Administration, the regional committees against acute pollution (IUAs) and fishing vessels, involving a substantial commitment to operational management for ensuring effective utilisation of available resources. Educational resources and capacity related to oil spill response have been strengthened at the Norwegian Fire Protection Training Institute in Nordland county. This institution educates firefighters from all Norway s local authorities, who simultaneously represent core personnel in most of the IUAs which provide a significant resource for coastal and shoreline clean-up. Agreements have been established with fishing personnel along the coast on the use of their vessels for near-shore response. This has been implemented on a trial basis in a number of coastal local authorities, but is now formalised in Finnmark county and ready to be rolled out along the whole coast where a need to strengthen response in the coastal zone has been identified. Access to small fishing vessels with trained crews will strengthen national preparedness in near-shore waters. Agreements have been established with a company in Harstad on the use of landing craft able to transport equipment into areas without road connections in a specified response time. These vessels can operate in shallow and narrow waters where other means of freighting heavy equipment do not exist. A specialised team has been built up and agreements established with volunteers who have particular expertise in shoreline clean-up. Extensive surveys and studies have been conducted to identify response requirements related to coastal and shoreline clean-up, both in Finnmark in connection with the Goliat development and in cooperation with the IUA for Lofoten and Vesterålen. This will provide a good basis for a new review of emergency response requirements in the coastal and shore zones within the management plan area, as recommended by the Norwegian Climate and Pollution Agency (Klif) in its comments on the integrated management plan for the Barents Sea. The efficacy of the oil spill response system is not determined by the number of metres of oil booms, but by how precisely and efficiently they are utilised during a clean-up operation. Only three per cent of the oil spilt into the Gulf of Mexico was collected. This was primarily because mechanical clean-up with collection of the

33 33 oil is not a priority in the relevant preparedness system in the USA, while substantial weight is given to dispersants. Compared with that approach, the Norwegian oil industry has substantial resources of modern oil booms with good capacity to collect likely oil types. When the weather is too difficult, as was the case for part of the time during the Statfjord leak in 27, the oil naturally blends down into the water column where it will be rapidly broken down by the local bacteria. Claims such as when the accident happened, they were lucky the spilt crude was a light type and it occurred in one of the world s warmest seas where the water has a great ability to break down oil and the temperature of the seas off Norway is very different from the Gulf of Mexico, and only a fraction of the oil would have been broken down there are based on ignorance. Research shows that oil degrades just as well off Norway as in the Gulf. This breakdown is governed not by temperature but by the supply of oxygen and nutrients. The bacteria present in the water column off Norway are adapted to Norwegian conditions and the temperatures which prevail there. Monitoring the marine environment The oil and gas industry conducts extensive environmental monitoring to identify possible effects from its discharges to the sea. This surveillance is carried out by independent scientists in accordance with government guidelines, and its quality is controlled by an independent group of experts appointed by Klif. Environmental monitoring involves the systematic collection of data with the aid of checkable methods in order 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 stretching back to the 197s from a large number of fixed sampling points off the whole Norwegian coast. This database thereby represents a unique resource, which is freely available to interested scientists independently of the industry and the government. The University of Oslo, for instance, has used this material as the basis for a number of doctoral theses. Several of these have contributed to proposals for further improvements to the monitoring process. Sediment monitoring The most important effects identified on the seabed relate to the release of oil-based drilling mud and oil-contaminated drill cuttings in earlier times. Such discharges ceased in 1993, and the impact of today s release of water-based mud and cuttings is now confined to an area up to a few hundred metres from a platform. On new developments, effects can only be observed close to the installation and these can often not be separated from the impact of the installation itself. This experience accords well with corresponding surveillance results in Denmark and the UK. When drilling in areas which contain cold-water corals, the companies can take special measures to avoid negative effects. These may, for instance, including concentrating drill cuttings and other discharges away from the corals or possible transport to land for deposition. It must also be emphasised that oil companies never drill in coral reefs and have never damaged such structures. Water-column monitoring This detects discharges of produced water, which could contain dispersed drops of oil, water-soluble substances and residues of chemical additives. Such monitoring is conducted today by installing large cages containing mussels and cod in the sea. These are positioned in a system of coordinates around an installation, at an increasing distance from the discharge point. Water-column monitoring has been conducted since the mid-199s with various methods and at different locations. The three last surveillance periods took place on the Ekofisk field in Norway s southern North Sea sector. Comprising independent and experienced scientists, the Klif group of experts has concluded that on-going monitoring of the water column has not identified negative effects of significance. However, the oil and gas industry is contributing to continued research in order to refine monitoring methods through projects pursued by the operator companies, the OLF and the Research Council of Norway. Figure 36: Environmental monitoring regions Source: Klif

34 34 «Serious personal injuries have declined steadily on the NCS in recent years, and that trend continued in 29.» Health, safety, the working environment and operations on the NCS The Norwegian petroleum industry maintains a high level of health, safety and the working environment (HSWE). At the same time, the whole sector is conscious that work on HSWE offers no respite. The OLF and the individual companies are concerned to learn in order to improve both from the good stories and from accidents, whether these occur in Norway or in other parts of the world. This year marked the 3th anniversary of the Alexander L Kielland disaster, which claimed 123 lives in the Norwegian North Sea. On 2 April, the Deepwater Horizon rig exploded in the Gulf of Mexico with the loss of 11 lives. The subsequent blowout released large volumes of oil into the sea. Both these incidents confirm that avoiding accidents in this business has an intrinsic value and that the industry has a strong self-interest in preventing accidents and undesirable incidents. The incident in the Gulf is being carefully studied to prevent anything similar happening on the NCS. Norway s petroleum industry has set itself the ambitious target of being a world leader for HSWE in the petroleum business, based on a philosophy of zero accidents. The figures convey a clear message. According to the annual RNNP survey by the PSA on trends in risk level in the petroleum activity, the level of risk has declined in recent years. This study also shows that employees feel ever safer when going to work on the NCS. Figure 37: Overall level of risk on the NCS Relative risk indicator, three-year rolling average. 2= Source: PSA/RNNP

35 35 The industry s refusal ever to be satisfied with the status of HSWE reflects four considerations Avoiding harm to people, the natural environment and material assets has an intrinsic value. Work with oil and gas is conducted under high pressures and temperatures. Accidents in the petroleum sector can accordingly have major consequences. It must therefore be in a higher division than other industries. The industry depends on the confidence of government, its employees and society at large in order to operate and continue to develop its activities. Preventing accidents and harm makes good economic sense for the individual company and for the community. Deepwater Horizon When the Deepwater Horizon disaster struck, it quickly became clear that the Norwegian oil and gas industry had to draw lessons from this incident in order to do what it could to prevent anything similar happening on the NCS regardless of whether conditions in the Gulf of Mexico differed from those off Norway. In order to improve understanding of the investigative findings emerging from the USA, the OLF and the Norwegian Clean Seas Association for Operating Companies (Nofo) commissioned Det Norske Veritas (DNV) to produce a report describing the regulatory regimes for petroleum in Norway and the USA. A dedicated company-run working party was also established to review all available material/data concerning this incident, including the relevant investigation reports, so that the Norwegian petroleum sector can draw systematic lessons from it. Experience transfer and learning Ultimately, all operations are associated with a certain element of risk. The job is to manage this risk in order to reduce the probability of accidents and to limit the impact of those which nevertheless occur, so that undesirable incidents are not allowed to develop into major accidents. Putting more barriers in place is important. If an undesirable incident occurs, an isolated fault should not be able to lead to a major accident. Barriers technological, organisational and/or human must be present in other areas to restrict the possibility of such an escalation. A key element in HSWE work is that senior management has this high on its agenda. Together with a good management system and decisionmaking processes, such a focus is crucial for achieving good HSWE results. In addition, it is essential to develop the organisation so that employees know at all times how they are to do their jobs safely and are conscious of the risks associated with that work. Openness is a prominent characteristic of Norwegian society and the country s petroleum industry. Reporting of incidents is detailed and systematic. Cooperation between the industry, the unions and the government is close. This means that a high level of agreement exists between these three parties over the most important places to concentrate their efforts for preventing major accidents. The companies are working together through the OLF, for instance, to reduce the number of gas leaks and well incidents. Because these efforts are made collectively, lessons learnt are spread across companies. Tripartite arenas such as the Safety Forum and Working Together for Safety (SfS) mean that important issues are raised and discussed between the industry, the government and the unions. Joint action on major accidents Preventing major accidents has a very high priority in the OLF s HSWE work. The PSA produces its RNNP report annually in cooperation with the companies and the unions. This document provides the parties with a basis for allocating resources where they are most needed. In many respects, the OLF s goals reflect the areas identified by the RNNP as the most important from a major accident perspective hydrocarbon leaks, well incidents and ships on a collision course. Gas leaks The OLF s gas leak reduction project has demonstrated over several years that purposeful work pays off. Having met its goal of reducing the number of leaks to fewer than 2 per year in 25, the industry set a new ambitious target of less than 1 by 28 which was met in 27. Leaks per installation-year in 29 were in line with the average for 23-8, but showed a small increase from the year before. The industry is not satisfied with this rise, and its efforts to reduce the number of leaks even further are continuing. Causal analyses have revealed inadequate management and lack of expertise as contributory factors in the great majority of hydrocarbon leaks. As a result, management involvement and a focus on appropriate behaviour and awareness have been enhanced in the companies. Guidelines have been prepared for enhancing the expertise of employees working with pressurised hydrocarbon-bearing equipment. A stronger focus on expertise is expected to contribute to a further reduction in the number of gas leaks on the NCS. Figure 38: Development in gas leaks on the NCS Number of leaks greater than.1 kg/s reduction goal by 31 Dec Source: PSA/RNNP Well incidents Work on enhancing the attention paid to well incidents has a high priority in the OLF s HSWE work. The work of the Well Integrity Forum in this area 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 reporting was evaluated and improved in 29, and will be reflected in an additional chapter in the OLF s well integrity guidelines. The latter are used for reporting to the RNNP study. The OLF s various fora for drilling and well technology are also participating actively in experience transfer work following the Deepwater Horizon incident. Cutting well incidents and a focus on well integrity are significant in reducing the risk of major accidents on the NCS, lost production and costs.

36 36 Figure 39: Well incidents per 1 wells Number Personal injuries Serious personal injuries have declined steadily on the NCS in recent years, and that trend continued in 29. This trend is naturally welcome. With a goal of zero accidents, however, the industry is continuing its efforts to reduce injuries even further. Instruments for reducing injury frequency include work on experience transfer between companies through the OLF and SfS. 15 Figure 41: Serious personal injuries on the NCS Exploration drilling Production drilling Number Source: PSA/RNNP 45 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 SfS collaboration has also developed the draft of a common checklist for offshore service ships entering the 5-metre safety zone. In addition, the industry has put in place a system to monitor sea areas in which it is working. Figure 4: Ships on a collision course Number Source: PSA/RNNP Although the trend has been positive, incidents have occurred which show that the industry has not reached its target. It will accordingly continue to work purposefully to reduce the number of incidents related to ships on a collision course Source: PSA/RNNP Fatal accidents A man was killed in 29 when he fell 14 metres from scaffolding to the deck of Oseberg B. The previous fatal accident on the NCS was in 27, when a Filipino seafarer fell overboard from Saipem 7 during a lifting operation in the North Sea. Before that, the last fatal accident related to petroleum operations on a fixed Norwegian installation was on Gyda in 22. Every life lost is a great tragedy, and thorough investigations are always pursued to prevent a repetition. The petroleum industry s commitment to preventing such accidents has also yielded results over time. Compared with other sectors, the number of fatalities in the Norwegian oil and gas business is very low. Dropped objects Dropped objects have the potential to cause injuries to people and damage to equipment, and accidents of this kind 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 211, compared with the figure for 28. A dedicated project was initiated in 29 to enhance the attention paid to this challenge. An important part of its work has been to secure feedback about measures adopted from people employed on the installations. The response and commitment have been considerable, which is encouraging for future work. Figure 42: Dropped objects Number Source: PSA/RNNP

37 37 Noise Increased attention has been paid in recent years to hearing damage attributable to noise in the industry, as shown not least by the injuries reported to the PSA. The OLF s member companies have got to grips with the problem, and guidelines have been produced to systematise practice in Norwegian oil companies for dealing with levels of noise which could damage hearing. An electronic support tool called NoiseRisk has also been developed for assessing hearing risk. Chemical exposure An industry project on chemical exposure in the oil and gas sector was initiated in 27 as a response to the PSA s report on this issue, and in close contact with the then Ministry of Labour and Social Inclusion. The OLF is collaborating here with the Federation of Norwegian Industries, the Norwegian Shipowners Association and the unions to provide an overall picture of present and earlier exposure to chemicals in the petroleum business by describing and closing knowledge gaps and helping to ensure that the industry gets better at managing risk related to chemicals in the working environment. A number of reports have been published over the past year on such topics as historical exposure to chemicals, exposure to oil fumes and smog, methods for chemical sampling and biological exposure markers. Various guidelines for working with chemicals and health monitoring are under preparation. Seminars, breakfast meetings and courses have been staged with many participants from the whole industry, as well as from other sectors. Several courses are organised in collaboration with leading international specialist teams. Work by the industry has been presented at a number of conferences both in Norway and abroad. The industry s purposeful work in recent years has laid the basis for a continued commitment to the chemical working environment. This is particularly important with a view to avoiding future damage to health. Lifeboat project Five years after faults were discovered in freefall lifeboats on the NCS, improvement efforts are still under way. However, work on the freefall lifeboats has largely been completed. Activity in 21 has concentrated primarily on conventional lifeboats and launch systems. The OLF s lifeboat project has attracted international attention, and won a prize at the global health, safety and environmental conference staged by the Society of Petroleum Engineers (SPE) in Brazil during the spring of 21. Helicopter safety The third major helicopter safety study (HSS3) on the NCS was completed in 21. Its report concluded that the risk associated with helicopter traffic in these waters has declined over the past 1-year period. A further reduction in risk is also expected in the coming decade. Covering , HSS3 follows two studies which dealt with the period from the start of petroleum operations on the NCS in the mid-196s to All these reports have been compiled by the Sintef research foundation. The general trend throughout has been a continuous reduction in the risk of helicopter transport. 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 in ensuring that installations maintain an acceptable standard beyond their original planned 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. Cost picture and regulatory development A new White Paper on safety and the working environment in Norwegian economic life is being prepared by the Ministry of Labour. The OLF is pleased that the oil and gas sector is being included in a policy document for the whole world of work in Norway, rather than being the subject of a separate White Paper on the issue. The approach taken by the government means it will be easier to view working conditions as a whole, which is not least important in avoiding cost-enhancing regulations for the NCS. During the consultation process on the White Paper, the OLF has pointed out that the principles of openness and involvement of both companies and unions are being observed. A key requirement for securing the best possible White Paper is that both sides in the workplace have opportunities to exert influence through genuine involvement. The OLF has emphasised to the ministry that account must be taken of good resource management, financial and administrative consequences, the distinctive nature of the activity, local conditions and operational requirements when pursuing regulatory work and supervision. Tripartite cooperation Collaboration between companies, unions and government calls for openness by all three parties. In the further development of this cooperation, it will be important to ensure that they are all involved and participate on equal terms. A key issue for the OLF is to stress that a clear distinction must be drawn between roles in the tripartite collaboration at industry level and the part played by the companies as an obligated party in this collaboration. Government practice on freedom of information must also be assessed in the tripartite collaboration. Information exchanged between companies and the authorities is publicly available today, while communications between government agencies remain largely confidential. This leads to an imbalance in the basis for a genuine tripartite collaboration. Cooperation between the parties in 21 has led to a revitalisation of SfS in order to ensure that important issues are subject to thorough consideration in this tripartite arena. Standardisation Standardisation is essential for contributing to a high level of HSWE. Standards also represent the industry s own tool for supplementing Norway s functionally based regulations. The development of international standards, in part through the International Organisation for Standardisation (ISO), is crucial to enhancing cost efficiency in the industry.

38 38 «Roughly 26 people are employed by companies involved with Norway s petroleum industry.» Working life and expertise in the petroleum industry A period of some uncertainty has passed, and the Norwegian petroleum sector is now seeing a slight growth in employment. Parts of the supplies industry had to report a worrying order position in 29, but are showing signs of optimism today. Demand for people with scientific and technological expertise will be high in the time to come. A number of engineers are set to retire in the next few years, while applications to study these subjects have been low over the past decade. Very few women are among the limited number of students who opt for scientific and technology subjects. The OLF is pursuing a number of measures on its own account and in cooperation with other players to arouse the interest of young people in science and technology and, later, a job in the industry. The international recession also contributed to a clear weakening of the Norwegian labour market from the middle of 28. Unemployment in construction and manufacturing increased rapidly, while job growth in typical service sectors slowed down. As a result of substantial order backlogs, the position for petroleum-related industry remained good. But work also began to run out for the supplies sector during the autumn of 29. A year later, the decline in employment has ceased and the number of jobs is once again on the way up. At the same time, unemployment is just under 3.5 per cent. The weakening of the Norwegian labour market since the problems began has accordingly been modest in an international context. Figure 43: The Norwegian labour market Employed, unemployed and labour market measures (seasonally adjusted) Number of people Employed, million registered unemployed and people on labour market measures (NAV) Unemployed, labour force survey Employed, labour force survey (right-hand scale) Sources: SSB and NAV

39 39 Figure 44: People registered as wholly unemployed Number of people regarded as insufficient to prevent low growth. The petroleum industry s core activities are defined as the production of crude oil and natural gas, associated services, pipeline transport and the construction of ships and platforms. According to the quarterly national accounts, almost 8 people were employed in these activities during the second quarter. That represented a marginal decline from the same period of 29. The NAV has identified the oil and construction industries as candidates for increased activity. At the same time, a relatively strong expansion in economically active age groups will help to increase the labour supply. The NAV accordingly estimates that registered unemployment will rise by 4 people from 21 to Industrial workers Service occupations Travel and transport Construction Engineering and ICT Source: NAV Immigrant workers hardest hit While employment figures in the SSB s labour force survey (AKU) cover only those registered as Norwegian residents, the national accounts also include people without such an affiliation but who are nevertheless employed by companies with activities in Norway. According to the quarterly national accounts, per capita employment at 3 June was roughly 45 below the peak figure in the autumn of 28. Annual figures from Statistics Norway (SSB) for employed and unemployed people temporarily resident in Norway indicate that immigrant workers have been hit much harder by the recession than Norwegians. At 31 December 29, Norway had about temporarily resident workers, a decline of from the year before. The largest category was citizens of the other Nordic countries, followed by workers from new EU members in eastern Europe. Many of the latter were employed in sectors sensitive to the business cycle, particularly construction and manufacturing. Unemployment among migrants from new east European EU members is currently almost three times higher than the general jobless rate in Norway. From private to public budgets Although employment has now ceased to fall and according to the latest monthly AKU figures is now on the way up again, it will probably take some time before the rate of growth increases. Many companies opted to hold on to their workforce during the recession, and higher demand for their products will accordingly make only a limited initial contribution to new recruitment. During the recession, a number of young people withdrew entirely from the labour market in favour of education. Most of these are likely to continue their studies even if economic conditions improve. Older age groups have also displayed a greater tendency to withdraw from the labour market. The numbers in receipt of early retirement (AFP) pensions have risen sharply during this period, and far more than demographic trends would indicate. Last, but not least, the recession has contributed to shifting jobs from the private to the public sectors. A total of 796 people were employed in the public sector during the second quarter, up by 35 from the third quarter of 28. NAV forecasts The Employment and Welfare Administration (NAV) expects international growth to be very moderate in 211. Since Norway has a small and open economy with a great deal of foreign trade, this will curb its economic expansion. At the same time, the development of domestic demand is Supplies industry part of the solution? A number of companies in the supplies sector were compelled to reduce their workforces in 29 through lay-offs, natural wastage and redundancies. This primarily affected companies working with new projects. The staffing position has stabilised to a great extent in 21. Although the outlook varies from segment to segment, signs of optimism can now be seen. New contracts are being awarded and order backlogs are increasing at the companies. Particular growth is expected over the next few years in maintenance, modification and operations (MMO) and drilling. But optimism also exists in the subsea area. Activity at companies involved in drilling and well service has been generally high in recent years, and this trend is expected to continue. Over a number of years, Norwegian suppliers/contractors have built up a unique expertise which makes them world leaders. This has allowed them increasingly to expand into new geographical areas through direct export of goods and services or by establishing subsidiaries. Their international turnover in 29 came to NOK 118 billion, according to report no 9/21 written by consultants Menon for the Ministry of Petroleum and Energy. The oil and gas industry currently faces a number of challenges related to such issues as environmental considerations, improved recovery or operation in demanding sea areas. These challenges must be overcome by or in cooperation with the supplies industry. At a time of falling oil production on the NCS, they must be regard as unique opportunities for the supplies industry. By developing new technology, these companies become part of the solution to the industry s challenges. Weak growth in employment Figures for 21 from the SSB estimate that roughly 26 people are employed by companies involved with Norway s petroleum industry. This count is based on both direct and indirect employment. The SSB issues a separate employment report for petroleum-related operations. This is restricted to the SSB s standard industry definitions, which divide the overall sector into two principal categories. The petroleum industry comprises companies which produce crude oil and natural gas on the NCS, while what the SSB terms the petroleum-related sector embraces companies producing goods and services used as input factors for petroleum industry players in Norway or abroad. A total of people worked in the petroleum sector during the fourth quarter of 29, up by people or four per cent from the same period of the year before. This increase was weaker than from 27 to 28. The number of Norwegian residents employed by the industry rose by more than 12 people or 4 per cent from 23 to 29. Employment in the petroleum-related category during the fourth quarter of last year declined by 721 or 3.5 per cent from 28 to 2 55 people. The definition of this group was changed in 28, so comparable figures are not available for earlier years.

40 4