Scandinavia: investing to grow

Scandinavia’s oil and gas industry, focused on Norway and Denmark, is expecting a resurgence. Espen Erlingsen looks at trends in the sector. The North Sea is characterized by large, producing platforms with declining production. To stop the falling production in the North Sea, countries are now developing and investing in new projects, which are expected to come online before the end of this decade.

This counts also for countries like Norway and Denmark. Both Norway and Denmark experienced declining oil and gas production over recent years. Since the peak in the middle of the last decade, Norwegian and Danish production has fallen by 15% and 45%, respectively.

However, Rystad Energy estimates that in future there will be an upward trend. Norway will be able to increase production and Denmark will stay around current levels. This is illustrated in Figure 1, which shows total oil and gas production for these countries split by the lifecycle of the underlying fields.

Since 2003, production in Norway has declined almost every year. Exceptions include 2007, which saw the start-up of the Snøhvit and Ormen Lange developments, and 2012, due to high demand for Norwegian gas.

Source: UCube, Rystad Energy.Historically, new projects were not able to compensate for declining production from old assets. The period from 2000 to 2012 also saw a change in the production mix. In 2000, gas contributed to about 20% of total production; by 2012 this amount had increased to approximately 50%.

Although current Norwegian producing fields are predicted to continue to decline in future, total production is expected to move from a declining to a growing trend over coming years, as fields currently under construction come online. The biggest contributor, in the short run, will be the development of the Valemon, Gudrun, and Martin Linge fields.

Between 2013 and 2015, around 27 new fields are expected to start up, compared to 10 fields between 2010 and 2012. Toward 2020, total production has the potential to peak at more than 4MMboe/d.

This growth is a combination of three elements: new discoveries, such as Johan Sverdrup; new platforms on already producing fields, including Ekofisk and Eldfisk; and old stranded discoveries being developed, such as Gina Krog. At the same time, due to more liquids production, the gas content is estimated to make up around 45% of the total production for the remaining decade. Looking at Denmark, it is estimated that Danish production will continue to decline in the short term, due to the lack of new development projects currently in place.

Today, only the DONG-operated Hejre field is under development, with estimated start up in 2016. Among the current discoveries not yet developed, Rystad Energy estimates that about five fields would be able to start first production by 2020. Hibonite is the main discovery in this area.

Source: UCube, Rystad Energy.With potential production from these fields, the total oil and gas production for Denmark is estimated to stabilize at just above 200,000boe/d, compared to about 250,000boe/d today.

Figure 2 shows total spending related to the upstream activities for Norway and Denmark, split by exploration, operation, and capital expenditure. Rystad Energy estimates that total 2013 exploration and production (E&P) spending for Norway and Denmark is US$46.3 billion and US$3.2 billion, respectively.

From 2010 to 2013, the total Norwegian E&P spending increased by about 20% annually. This growth was caused by both higher activity and cost inflation. As illustrated in the production graph, a large part of the Norwegian production in 2020 will come from not yet producing fields.

This indicates that significant investments are needed for new infrastructure. This is also reflected in the Norwegian spending chart, by growth in the capex (capital spending) segment. In addition to new infrastructure, existing fields are expected to have high activity levels related to new drilling campaigns, modifications and maintenance going forward.

The Danish oil field service market is considerably smaller than the Norwegian market, as illustrated in the spending graph. Over recent years, total spending has increased, due to both higher investments and operational costs. In the short term, the main driver for increased spending is the development of the Hejre field.

With activity and investments picking up in the North Sea, the foundation for a new oil and gas supply has been set. The second half of this decade could see the decline production profiles reversed, creating highly valuable resources. OE

Espen Erlingsen is the lead Norwegian Continental Shelf analyst at Rystad Energy. His expertise includes company and acreage valuation, breakeven price analysis and international petroleum fiscal regimes. He has an MSc in industrial economics from the Norwegian University of Science and Technology. UCube is an online, complete, and integrated field-by-field database, including reserves, production profiles, financial figures, ownership, and other key parameters for all oil and gas fields, discoveries, and exploration licenses globally.

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