Making haste slowly
Most Norwegians learn about new offshore discoveries through media headlines large and small. Stories such as “sunset cancelled” or “new optimism in the oil industry” can give the impression that additional oil is set to flow from the wells fairly soon.
Unfortunately, it can take many years from discovery until production begins. Much time often passes before deciding that a specific deposit can be profitable.
A review of oil fields which are or have been on stream on the Norwegian continental shelf (NCS), covering 98 developments from 1971 to 2014, shows that it takes about 15-20 years from the award of the licence to bring a field on stream.
This period can be divided into three stages:
- From award to discovery (exploration)
- From discovery to development decision (maturation)
- From approval to production (construction).
As with most things, the rule is that size decides. To provide a comparative perspective, discoveries on the NCS have been divided into five classes from extra small (XS) to extra large (XL). The results are presented in table 1.
| Class | Number | Size (million scm oe) | Time for award to production (years) |
| Extra small (XS) | 27 | Less than 10 | Average 21.3 |
| Small (S) | 19 | 10-20 | Average 22.6 |
| Medium (M) | 17 | 20-50 | Average 20.8 |
| Large (L) | 13 | 50-100 | Average 17.2 |
| Extra large (XL) | 22 | Greater than 100 | Average 15.2 |
Table 1: Overview of developed fields on the NCS by reservoir size (recoverable reserves).
Size is calculated as the expected volume of recoverable reserves (oil, gas and natural gas liquids) when the development decision was taken.
A standard cubic metre of oil equivalent (scm oe) corresponds to 6.29 barrels. Gas volumes are divided by 1 000 to convert it to oil equivalent, while a tonne of NGL corresponds to 1.9 scm oe.
Valhall is regarded in this context as belonging to the “extra large” category, with Hod considered to be in the “small” category.
Figure 1 shows how much time passes from the award of a production licence until the production of hydrocarbons begins from any discoveries made.
The percentage difference in time taken is greatest in the first and final phases. That is not surprising – it is easier to make a large discovery than a little one, and it takes longer to develop big platforms than small facilities.
Various factors explain why the length of the phase from discovery to decision is more similar between different discoveries. When Valhall and Hod are compared with other fields in their respective classes, it can be seen that both were in line with the average time taken.
Factors which affect the time from discovery to decision include the following.
A. Available technology
B. Political initiatives
C. Negotiations on gas deliveries
D. Tax regime
E. Market conditions
Examples of these factors are presented below.
A. Available technology
Found in 1967, Balder was the first discovery on the NCS. But more than 30 years were to pass before it was brought on stream in 1999.
The chosen development solution – subsea-completed wells tied back to a specially designed floating production, storage and offloading (FPSO) unit – had not reached a stage where it could be used in North Sea conditions until well into the 1980s.
B. Political initiatives
Fairly strong concerns were expressed in the late 1980s that a high level of activity on the NCS would put excessive pressure on Norwegian pay and capacity. It could also help to weaken Norway’s foreign trade.
The government decided to limit annual investment in the petroleum sector, and the Storting (parliament) followed up in the spring of 1988 with a queuing system for offshore developments.
This imposed a specific sequence and timetable for initiating many large and important development projects. Postponed for up to five years, Brage was the hardest-hit project.
Later events followed a different course, with the whole scheme abandoned when the Storting approved Proposition no 58 in February 1990. Brage’s development plans were approved as early as 29 March that year.
C. Negotiations on gas deliveries
Up to 2000, it was important to secure gas sales contracts with individual or groups of buyers before drawing up final plans for development, operation and transport.
Several factors underpinned this need for early clarification. In particular, determining the quality or composition of the gas to be delivered to the buyer’s receiving facilities was crucial for the dimensioning and design of the production facilities.
In addition, it was naturally important to clarify the quantity and price of the gas concerned so that the profitability of a development could be calculated.
The British government’s rejection of the sales contract negotiated between Statoil and British gas (later the BG group and part of Shell from 2016) for Sleipner gas in 1985 took the Norwegian authorities by surprise.
Negotiations with the UK had been under way since 1981. After several efforts to push matters forward, the Norwegians began to lose patience, but British side maintained it had good time.
The UK decision meant the loss of a contract worth NOK 250 billion. In the Storting, Labour representative Einar Førde commented that “original sin has entered the world”.
A technological breakthrough around 2000 also made it possible to regard gas as a tradable commodity on a par with oil. That has simplified planning for fields with large quantities of gas, because sales contracts no longer need to be secured with specific customers before deciding on installations.
D. Tax regime
The Storting appointed a petroleum revenue committee on 24 January 1974 to discuss the government’s income from the oil sector.
This concluded that the industry could not be compared with other commercial activities and that a special tax should be introduced. The committee’s recommendations were included in Report no 25 (1973-74) to the Storting.
The oil companies protested sharply. One of several consequences of this decision was that Amoco halted the planned development of South-East Tor, discovered in 1972. That field has never been developed.
Several lawsuits related to taxation have also been pursued between the government and various oil companies. The “Valhall case” began in 1987 and lasted until a compromise was achieved in 1996 (see the articles on “Rows over royalties” and “Tax protest from Amoco”).
E. Market conditions
Construction costs may also rise quickly and unpredictably at times. That was especially true between 2003 and 2009, for example, when the increase occurred on an international scale.
It reflected a combination of greater demand as a result of sharply rising oil prices (“everyone” wanted to develop new fields), as shown by figure 3, and capacity restrictions.
The latter had emerged in turn because low oil prices around 2000 led to a big loss of personnel who were in possession of important expertise.
In a longer perspective, it could also be interesting to consider the position when the decisions were taken to develop Valhall and Hod – in 1977 and 1987 respectively.
As figure 4 shows, the relevant oil price was below USD 20 per barrel on both occasions. The initial period for Valhall was surprisingly positive, while Hod saw no significant improvement until after 2000.
As these examples show, an operator who wants to arrive at profitable solutions for oil and gas production has to overcome many obstacles, even when it has been awarded promising acreage to explore.
So the few factors which can be influenced (such as direct and indirect taxes) are naturally kept stable over long periods.