A cash flow of NOK 111 billion in 2014 represented a continued high level of revenues from the State’s Direct Financial Interest (SDFI) in Norway’s oil sector. Petoro chief executive Grethe Moen notes that fewer new developments mean income from the SDFI will be more dependent than ever on the mature fields over the next few years.
The reason why existing fields will gain even more significance in the years to come is that capital constraints in the oil companies and increased uncertainty about oil price trends will lead to delays, cut-backs or halts to investment in new developments. Capital spending in the portfolio managed by Petoro on behalf of the government was 30 per cent lower in the fourth quarter than in the same period of 2013.
No less than 66 per cent of remaining proven resources on the Norwegian continental shelf (NCS) lie in producing fields, and more than 80 per cent of Petoro’s total production comes from mature fields. The actual operation of existing fields can cope with low oil prices, but realising their value potential in the medium term calls for decisions on and implementation of a number of new projects for further development of mature fields – particularly new wells.
“A halt to investment is a sure route to early cessation for many fields,” says Moen. Keeping today’s installations in operation for a long time is important. More than 90 per cent of the portfolio of discoveries on the NCS will probably have to be tied back to existing facilities to achieve profitable development.
The sharp increase in costs has meant that a radical improvement in efficiency is needed along the whole value chain for long-term commercial operation and to achieve profitability in future projects. This commitment to efficiency applies both to operators and to all stages in the supplies chain. “We have seen examples of successful measures for enhancing drilling efficiency on certain fields in 2014,” observes Moen. “That’s very gratifying. The challenge will be to ensure repetition and implementation across fields.”
Snorre 2040 is a large and time-critical project for drilling more wells on and improving recovery from the mature Snorre field, while Johan Castberg is a big new discovery in an area far to the north without infrastructure. Both projects have been postponed before, and Petoro with its partners recently deferred the point in time for the next decisions by another year.
The company is concerned that both Snorre and Johan Castberg get the time to benefit from the results of current improvement efforts in the industry. Moen says this will make these projects more profitable and better equipped to also face a future with low oil prices. “On that basis, it’s appropriate to devote a bit more time to them even if that means revenues begin to flow a little later. Where Snorre is concerned, we’re pleased to see work is also under way in the project on limiting a possible loss of production as a result of the revised schedule, by extending the producing life of existing installations.”
The big Johan Sverdrup field will contribute to investment and activity in coming years, but it is not due to begin yielding revenues until 2020. Petoro has been heavily involved in contributing to a good and forward-looking development solution. “This is a fantastic field which will provide big revenues to our owner for many decades to come,” says Moen.
Results for the SDFI show that the cash flow of NOK 111 billion was 11 per cent lower than in 2013. Net income came to NOK 120 billion, compared with NOK 133 billion the year before. Production and investment in 2014 were maintained at roughly the same level as in 2013. Oil prices fell sharply in the final quarter of the year. However, the impact on cash flow from the SDFI was limited because both the exchange rate for the US dollar against the Norwegian krone and the level of production were high. Lower investment also contributed to a higher cash flow.
Health, safety and environmental results continued to improve in 2014, with the serious incident frequency declining from 0.9 per million working hours to 0.7. “At a time of great change, this is a particularly gratifying development,” says Moen, who believes it is fully possible to achieve a high level of efficiency while simultaneously enhancing HSE performance.
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