Norway’s oil industry faces cost jump as finds lure explorers

Total SA (FP), Royal Dutch Shell Plc (RDSA), Dong Energy A/S and other explorers face rising costs in Norway as the biggest crude finds in almost 40 years rekindle interest in exploring off the Nordic country’s shores.

The discoveries are driving demand, pushing up prices for equipment and services and potentially jacking up commitments for licenses, Soeren Gath Hansen, chief for exploration and production at Dong, a Danish oil explorer, said in an Aug. 29 interview in Stavanger, Norway.

“The competition is stiffer now, which is good for Norway — or complicated for the rest of us,” he said, comparing oil companies to lemmings. “Everybody just runs in the same direction, even if there’s a cliff.”

Finds such as the Johan Sverdrup deposit, which could hold as much as 3.3 billion barrels of oil equivalent, have renewed optimism in Europe’s second-largest oil producer after a decade of falling crude production. Investments are estimated to reach a record 194 billion kroner ($33 billion) next year, according to the statistics bureau, also driven by an almost three-fold increase in the price of oil over the past three years.

“It’s clear that there’s some tightening in the market, and that normally results in cost pressures,” Martin Tiffen, head of Norway for French oil producer Total, said in an interview. Total will seek contractors not based in Norway as one of the “ways around” the cost increase, he said.

High Wages

Norway was already struggling with costs to sustain an oil industry that has helped build the world’s third-richest nation per capita. Drilling is 40 percent to 45 percent more expensive than in neighboring U.K., meaning companies are drilling less and resources are being left in the ground, a government- appointed committee concluded in an Aug. 16 report.

Norwegian oil professionals have annual pay checks averaging $180,300 — more than double the global average, according to a study published by Hays Oil & Gas this year. A strike over pay and pensions at the end of June and beginning of July was ended by the government through forced arbitration as a total close loomed. The strike had disrupted 15 percent of oil production and 7 percent of gas output, according to Norway’s Oil Industry Association.

Job Cuts

Statoil (STL) is now considering cutting as many as 500 administrative jobs in Norway, Jannik Lindbaek Jr, a company spokesman said by phone yesterday. “We see a potential for cost reductions.”

The report on Norway’s rig capacity advised authorities to consider changes in the industry’s wage regime and to ease regulatory differences for rigs in the U.K. to work in Norway.

“I think that would be helpful,” Tiffen said.

Norway’s Oil and Energy Minister Ola Borten Moe said to reporters yesterday that the country “needs to control costs,” declining to comment directly on the commission’s conclusions.

David Loughman, head of Shell’s operations in Norway, said yesterday that there are “multiple opportunities” for the industry in Norway after “very significant” discoveries and with the work to increase recovery from existing fields.

“If the supply chain does develop on that sort of scale, I don’t know, I can’t speak for all the other operators in the projects and what they’re going to do, but clearly, as we all know, there will be pressure,” he said.

Honey Pot

According to Jarand Rystad, managing partner at consultant firm Rystad Energy, cost pressures are unlikely to be as severe as in 2005-2008 because of the weaker global economy.

“We will get less price inflation than we did in the last boom,” he said. “Because then price inflation was almost 100 percent over four, five years.”

Norway is now opening new areas in the Barents Sea in the Arctic, which is home to 72 of the 86 blocks nominated for the next licensing round.

Dong has interests both in the Arctic and the North Sea, where drilling has begun at the Lupine prospect near Johan Sverdrup.

Operator Statoil ASA said this week that a find at Lupin could be “high impact,” defined by the company as containing at least 250 million barrels of oil equivalent.

“All the bees are around this pot of honey,” Gath Hansen said. Dong sees the Barents Sea off northern Norway as “most exciting” in the long term, he said. “We would have loved to be in the Johan Sverdrup and some of the other finds, but basically we are thinking long term.”