Petroleum Activities MINISTRY OF ENERGY AND PETROLEUM (MPE) ON NORWAY S PETROLEUM ACTIVITIES: WHITE PAPER (2011) AND THE STATE BUDGET PROPOSAL 2012 1 EXECUTIVE SUMMARY In the White Paper on Norway s petroleum activities, the Government voices an ambitious policy for increase and maintenance of a high level of activities in the Norwegian petroleum industry. It is acknowledged that oil and gas activities on the Norwegian Continental Shelf (NCS) are in a different phase today compared to ten years ago, and that a change in strategies and adoption of new policy instruments is necessary. The White Paper outlines a number of concrete and tangible measures that if implemented will have a significant impact on sector management and business opportunities. However, the White Paper is only intended to express Government policy and strategies that may be later be codified in detailed legislative framework. In the State Budget for the year 2012, the Government proposes allocation of funds in order to implement some of the measures that are proposed in the White Paper. Among others, it is proposed that more funds should be allocated for data acquisition in the High North, for strengthening Petoro and for establishment of two research centres. It is proposed that funds should be allocated to a research centre for petroleum activities in the arctic region and a research centre for enhanced recovery. Page 1 of 8 Newsletter Ministry of Petroleum White Paper to the Norwegian Parliament Activities Arntzen de Besche
Mature areas The Government aims at encouraging increased exploration and production in open areas. Key measures in this regard will be to award production licenses in mature and frontier areas. Furthermore, the Award of Predefined Areas (APA scheme/tfo) is intended to continue as an annual licensing round for all mature areas. Since it is acknowledged that a substantial part of future production will come from mature fields and proven discoveries, the main challenge is improving recovery from producing fields and early phasing-in to development of marginal fields and minor discoveries. Challenges in this regard relate to continuing optimisation of use of existing infrastructure and encouragement of development and use of appropriate technology. Unopened and frontier areas The MPE sees that a key measure for upholding high levels of production ought to include an appropriate policy for management of unopened areas. The Government intends to conduct an opening process for the area around Jan Mayen, facilitate further discoveries in the areas offshore Northern Norway and initiate an impact assessment with the view on awarding production licenses as well as data acquisition in the previously disputed area on the Barents Sea South. Cost control Moreover, the Government acknowledges that a crucial factor for being able to maintain and increase activities is finding viable solutions for cost control. It is acknowledged that there is a negative trend with sharp acceleration of operational costs on the NCS. The MPE points out in particular that curbing the pressure on the rig market is crucial for the purpose of cost control and predictability in exploration and resource exploitation. 2 MORE EXPLORATION IN OPEN AREAS The Government expresses a strong desire for maintaining a high level of exploration activities in open and mature areas. Measures include: Page 2 of 8 Newsletter Ministry of Petroleum White Paper to the Norwegian Parliament Activities
Carrying out of the APA (TFO) scheme as an annual licensing round for all mature areas on the NCS. Continued efforts in facilitating the establishment of competent minor players interested in exploration activities. 3 OPPORTUNITIES IN THE NORTH AND MANAGEMENT OF UNOPENED AREAS It is emphasised that opening of new areas is crucial in order to maintain high levels of activities for the period after 2020. Therefore, the Government intends to, inter alia: Conduct an opening process in the area around Jan Mayen, including environmental and resource mapping, acquisition of seismic data and shallow drilling. When the agreement with Russia on maritime boundaries and cooperation in the Barents Sea and the Arctic Ocean enters into effect; initiate an impact assessment with a view to award production licenses and data acquisition in the previously disputed area west of the demarcation line in the Barents Sea South. The Norwegian Petroleum Directorate considers this area as particularly interesting. Facilitate further discoveries in the areas offshore Northern Norway. These areas are considered as particularly interesting for potential large discoveries which may have a positive spin off effect on commercial activities in the region. The state budget proposal earmarks NOK 84 million for acquisition of seismic data in Nordland IV and V and the northeast Norwegian Sea and impact assessments for Jan Mayen and the Barents Sea southeast. In addition, NOK 180 million is earmarked for acquisition of seismic data acquisition around Jan Mayen and the Barents Sea southeast. Altogether, the Government proposes approximately NOK 260 million for activities in the Northern areas as part of a follow-up of the management plan for the Barents Sea and the sea area outside Lofoten that was submitted in spring 2011. Page 3 of 8 Newsletter Ministry of Petroleum White Paper to the Norwegian Parliament Activities
In order to maximise possibilities of positive spin off effects in the high North, the Government intends to implement a policy for integration of regional and local activities. Expressed measures include: Gradual capacity increase of the Norwegian Petroleum Directorate regional office in Harstad. Facilitating inclusion of local businesses in the supply industry. Emphasis on analysis of the impact of petroleum activities on local communities including a post PDO evaluation. The proposed state budget earmarks NOK 1 million for support of development of a data tool for transparency in tendering of supply industry contracts. 4 EXPLOITATION OF PROVEN RESERVES Measures in order to meet challenges associated with exploitation of proven reserves and discoveries include: Voting rules greater emphasis of majority participating interests: It is observed that the current voting rules could be inadequate for efficient decision making and development of challenging fields. It is pointed out that such inadequacy may be due to conflicting prospects on profitability; an issue that appears to be especially present in licenses with many small minority owners and a few but resourceful majority owners. Consequently, the Government intends to place greater emphasis on majority participating interests when determining voting rules upon award of new production licenses and when evaluating extension of production licenses. Extension of production licenses: Unless special factors determine otherwise, it is asserted that the determining factors for approval of extension of production licenses will be the presence of the same ownership structure and prospects for optimal exploitation of the resources. Of relevance is also the Government s option to require renegotiation of license terms, including increase of the State s Direct Financial Interest (SDFI/SDØE). The MPE could also consider requiring a new development plan where deemed appropriate. Page 4 of 8 Newsletter Ministry of Petroleum White Paper to the Norwegian Parliament Activities
Enhanced recovery: The Government intends to focus on enhanced recovery and intensified follow-up of fields in tail production. There are intentions to introduce requirements for new production plans where this is deemed appropriate. Discretionary powers for issuing new conditions for enhanced recovery where such conditions do not entail substantial increase in costs will remain an essential tool. Phasing-in of minor discoveries and marginal fields: The Government plans to reinforce the practice of early submission of plans for development and early phasing-in of marginal projects into larger projects. Efforts will be made to facilitate greater use of standardised solutions (fast-track) in order to enable swift developments of marginal resources. Petoro: The Government intends to strengthen Petoro s competence and finances for the purpose of a better follow-up of mature fields. In the proposed state budget for 2012, the Government proposes an increase of Petoro s funds with NOK 17.1 million to NOK 281.2 million. Electrification of offshore operations: There are express intentions for increased exploitation of mainland energy solutions for electrification of offshore petroleum operations. The underlying objective for electrification is related to international commitments on reduction of carbon emissions. It is stated that the main focus for electrification will be on developments of new substantial fields and major modifications of existing fields. It is acknowledged that early planning and co-ordination ahead of field development or modifications is crucial. It is anticipated that Statnett will play a role as a facilitator in the evaluation and coordination of electrification of offshore petroleum projects. Nevertheless, it is acknowledged that such electrification of offshore petroleum operations will have to be balanced with the mainland need for electricity. 5 COST CONTROL General efforts for cost control: It is acknowledged that cost control is crucial for increased resource exploitation in mature areas and conducting operations in challenging frontier areas. The Government will encourage joint efforts from the public and the private sector for a broad evaluation of cost reduction measures. In this regard, the Government has already engaged KonKraft for analysis of measures for reduction of operational costs. Page 5 of 8 Newsletter Ministry of Petroleum White Paper to the Norwegian Parliament Activities
Restrictions against lease of own facilities: The Government expresses concern with regard to tax motivated schemes in connection with lease of production facilities. Consequently, the Government voices intentions to amend the current legal framework in order to prohibit licensees from leasing production facilities from affiliated companies and entities. The drilling rig market: It is acknowledged that pressure on the Norwegian and international rig market has led to sub-optimal allocation of rig resources, leading to an acceleration of explorationas well as production drilling costs. Nonetheless, the Government acknowledges that regulating the rig market is a complex challenge, hence stating that appropriate solutions will have to be provided by the market participants as such. In this regard, the Government intends to further encourage the system of rig co-operation and co-contracting as initiated by market participants. Nevertheless, the Government acknowledges that such a system will be enjoyed mostly by participants with large and diversified portfolios. Also, the Government intends to encourage use of permanent rigs for exploration and production in connection with new major developments. Furthermore, the Government plans to appoint an expert panel for identifying challenges and measures for an increased rig capacity on the NCS. It is pointed out that such challenges may relate to industrial as well as regulatory issues. However, it is emphasised that safety requirements corresponding to at least the current level should not be compromised. Though not explicitly embraced by the Government, it is noteworthy that the expert panel for enhanced recovery (Åm-utvalget) proposes a harmonisation of EC legislation in order to improve conditions on the rig market. Nonetheless, apart from encouraging co-contracting and proposing a new expert panel, it is not yet conveyed what new incentives and concrete measures the Government will put in place in order to encourage solutions for reduction of drilling- and operational wellcosts. Tax reliefs and exploration costs: It is noteworthy that the appointed expert panel on enhanced recovery expressed concerns over unintended negative effects on production activities following recent tax reliefs in connection with exploration activities. However, the Page 6 of 8 Newsletter Ministry of Petroleum White Paper to the Norwegian Parliament Activities
Government rejects amendment proposals and affirms the importance of the tax reliefs for exploration activities. 6 OPTIMISATION OF THE UTILISATION OF OPERATIONAL FACILITIES AND TRANSPORTATION SYSTEMS The main principles regarding access to facilities and transportation system remain unchanged. However: Gassled: There is highlight on the recently introduced system of interruptible capacity in order to ensure equal access and optimum usage where there is free capacity. In this regard, priority rights of the infrastructure owner have been repealed. Also, an expert tribunal has been appointed for independent resolution of disputes in relation to the Gassled infrastructure. Gas pipelines and related facilities that are not included in the third party access (TPA) regulations: There are intentions to undertake an evaluation of whether to include the said facilities in the current legislation regime. Third party access and co-ordination of production facilities: There will be a review of the current regulations on third party access in order to assess compliance of the basic principle that profits should mainly be taken off petroleum production and not on the related infrastructure. Gassled forum: Measures to strengthen the existing Gassled user forum to ensure a real consideration of users viewpoints. 7 RESEARCH It is emphasised that the public sector plays an important role in facilitating research and development in the petroleum industry, and that public funds are needed in certain key areas where industry s efforts fall short. It is recognized that new methods, knowledge and technology are important in order to make further discoveries in frontier areas. In mature areas, new technology is necessary in order to increase exploitation from existing fields. In order to achieve these goals, the Government intends to: Prioritize research on enhanced recovery from existing fields, including establishment of a research centre for enhanced recovery. The Government will also consider establishment of a research Page 7 of 8 Newsletter Ministry of Petroleum White Paper to the Norwegian Parliament Activities
centre for assessment of challenges faced by the petroleum industry in the arctic regions. The proposed state budget for 2012 has earmarked funds for the purpose of assessing establishment of these research centres. Strengthen cooperation with key players on the NCS for piloting of new technology. It is expected that Petoro will play a central role in this regard. ARNTZEN de BESCHE Karl-Erik Navestad Senior Associate ken@adeb.no +47 98 29 45 66 Gloria Masika Associate gma@adeb.no +47 98 29 45 57 Cathrine Bjørge Hetland Associate cbh@adeb.no +47 98 29 46 31 Page 8 of 8 Newsletter Ministry of Petroleum White Paper to the Norwegian Parliament Activities