Infrastructure Catch-22 in Barents Sea
Resources in the Barents Sea could play a key role in maintaining Norwegian gas output in the 2020s and beyond, according to a Gassco report on new gas transport and processing facilities published today.
Planned exploration activity up to 2017 is expected to double the resource base in Norway’s Barents Sea sector, and the study shows that developing gas discoveries there could provide substantial value from a socioeconomic perspective. However, getting started on developing gas infrastructure from the region will be a demanding business. No single license is likely to be able to bear the necessary cost alone – either for new liquefaction capacity or for a pipeline solution.
Gassco concludes that feasibility studies must be launched as early as next year if new gas infrastructure is to be operational from 2022. The coming 12 months will be important for updating analyses based on discoveries and for looking at the organization of transport and processing facilities from the Barents Sea in order to underpin decision-taking by the players.
Global and European gas markets are currently characterized by complexity and uncertainty. The future energy mix is unclear, the price differentials across regional gas markets are significant, and political turbulence is influencing existing trading patterns.
On the Norwegian Continental Shelf (NCS), the situation is also evolving. The center of gravity of undiscovered resources is moving north, covering a huge geographic area and with an increasing numbers of participants.
Against this backdrop, the development of the petroleum resources in the Barents Sea takes place. The Barents Sea is the next horizon in the development of the natural gas and oil resources on the NCS. While a significant amount of natural gas has already been discovered and is waiting for additional gas transport capacity, the next step in the development of gas infrastructure capacity is not obvious. Oil developments are also likely to require gas infrastructure for associated gas.
Such oil developments could face a delay due to the lack of gas infrastructure with the consequence that important field developments would be put on hold or alternatively that value creation could be lost due to undesired re-injection of gas.
The BSGI Forum was established to investigate the potential for new cost effective gas infrastructure for the resources in the Barents Sea, in particular whether production from current fields and discoveries are sufficient to justify new infrastructure investments near-term. The analyses are based on a unique set of data with the latest resource estimates from the companies. Volume scenarios have been developed to span the potential outcome of near-term exploration activities in the Barents Sea.
The main observations in this study are as follows:
1. The Barents Sea has the resource potential to play a key role in sustaining NCS gas production during the 2020s and beyond.
2. Existing discoveries are not sufficient to justify investment in new gas infrastructure from the Barents Sea, both from a post- and pre-tax perspective.
3. New gas infrastructure is socioeconomically more profitable in four out of five near-term exploration scenarios, and marginally lower than Liquefied Natural Gas (LNG) lifetime extension in one of the scenarios. Both pipeline and LNG are relevant export solutions.
4. It will be challenging to realize new gas infrastructure from the Barents Sea from a post-tax project-robustness perspective.
5. The rate of return from field investments could be improved if separated from investments in the gas transportation system with regulated return.
6. Collaboration across licenses will be needed as no individual license seems able to carry significant new gas infrastructure investment on its own.
7. Late start-up of a new gas infrastructure to align with development of the Barents Sea Southeast will reduce the pre-tax Net Present Value (NPV) at seven percent discount rate and only marginally improve the post-tax rate of return. The project robustness could improve due to an increased reserve base. 8. A late development of the Barents Sea may lead to consolidation of existing gas infrastructure and cost for rebuilding capacity.
9. There is a potential upside by realizing parts of the resources currently evaluated to be uneconomic.
10. To have decision-making flexibility with respect to an early start-up in 2022, a feasibility study needs to be initiated in 2015. To maintain an early start-up option for a new gas transport solution from the Barents Sea, such infrastructure would have to be progressed in parallel with improving the understanding of the resource base.
Identification of possible measures to bridge the gap between socioeconomic and project economic perspectives should be a focus area in near-term. Two specific issues are recommended to be addressed to create a basis to start a feasibility study by mid-2015.
1. Update the resource basis following the results from Barents Sea exploration activity and revisit the basis for starting a feasibility study.
2. Assess organization of infrastructure developments in the Barents Sea.
Clarifying these issues will enable the industry and the authorities to make informed decisions to maximize the value of the Barents Sea resources and to secure alignment with decisions that are taken in the existing system.
Gassco’s Barents Sea Gas Infrastructure report can be found here.