Norway Concerned Cheaper Oil Will Hit Investment

By MarEx 2014-09-30 15:51:00

Norway is concerned about a drop in energy investment levels and would like oil prices to rise back above $100 per barrel, but still sees activity levels high by historical standards next year, the energy minister told Reuters on Tuesday.

Exploration in Norway's Arctic was disappointing this year, despite record high drilling activity, and a key worry for the sector is if service companies permanently remove capacity, as they did in the 1990s, becoming unable to meet increased demand once oil prices rise again, Tord Lien said.

"We like to see oil prices above $100 and we like to see them stable," Lien said on the sidelines of a conference. "But we also see a technical floor under oil prices ... at around or above $80.

"I'm not expecting it to go in that direction, but there's never been a technical floor in the oil market before," Lien said. "Earlier the floor depended on political decisions in large oil-producing countries."

Brent crude dipped under $96 per barrel last week, hitting a more than two-year low, raising concerns for oil companies which are struggling with rising costs, falling efficiency and demands from shareholders for increased returns .

Norway, the world's seventh-biggest oil exporter and Western Europe's top gas supplier, relies on energy tax income to fund spending and the central bank said on Tuesday it would start converting foreign currency oil income for the budget as local currency tax revenue is no longer enough.

"Over the last decade, the oil price has almost tripled from just above $40 to around $100 per barrel," Helge Lund, chief executive of Statoil, Norway's biggest energy producer, said separately.

"But due to escalating investment, increased costs, more complexity (and) more risk, the return on capital from the majors has decreased by 30 percent over the same time."

UNSUSTAINABLE LEVEL

Lund said half of Statoil's peers had returns on capital employed of 10 percent or less, a level considered unsustainably low, especially given the rising cost of future investment.

Norway expects oil and gas investments to fall around 10 percent and Lien said it will not be a smooth ride for all.

"There is reason to be concerned as projects are being put on hold," Lien said. "There will have to be some readjustment in the supplier industry ... and not everybody will experience a soft landing."

Oil companies are delaying developments or upgrades to existing fields to save cash and the Norwegian Petroleum Directorate earlier said it no longer expects any development plans this year. Meanwhile oil service companies have started to lay off some staff and reduce capacity.

Lien said a key risk is that service firms, which do everything from seismic surveying and engineering to field development, will permanently take out capacity.

"We're not there yet," Lien said. "But in the 1990s, when oil prices started to rise, the supplier industry didn't have the capacity to meet demand. I hope they've learned from that."

Lien said exploration results in the Arctic Barents Sea had been disappointing as mostly relatively small pockets of gas had been found, but he was optimistic about the eastern Barents, an offshore zone bordering Russia, where licences will be awarded for the first time in 2016.

Sanctions against Russia will have minimal impact on Norway's oil industry in the short term, but if sanctions prove longer lasting, some service companies will face falling demand, Lien added. 

By Balazs Koranyi (C) Reuters 2014.