Arctic border deal may extend Norway's oil boom

OSLO Fri Apr 30, 2010 6:30am EDT

OSLO (Reuters) - A major Arctic border deal between Norway and Russia this week gives Norwegian Prime Minister Jens Stoltenberg a chance to extend Norway's oil boom without splitting the ruling government coalition.

The surprise agreement by Stoltenberg and visiting Russian President Dmitry Medvedev to end a border dispute opened the way to exploring an area of the Barents Sea seen rich with oil and gas.

The deal makes the area into the new focal point for hopes of growth in Norway's oil industry.

Norway's oil production has slumped by more than 50 percent since its peak early in the last decade to some 2 million barrels a day, as output from aging North Sea oilfields fell faster than expected.

A switch to natural gas production helped cushion the blow, but the industry needs to discover large new resources to prolong Norway's energy bonanza and offshore investment boom which has made Norway one of the world's richest states.

Until now, new crude reserves in the Arctic archipelagos of Lofoten and Vesteraalen were seen as the saviors of the oil industry, but opening that region to drilling would probably split the center-left cabinet because of environmental concerns.

Official estimates show the Lofoten region could provide 1.3 billion barrels of oil equivalent if opened for exploration.

But the entire demarcated Barents Sea region could hold 10 billion barrels, according to reports citing communist-era studies of the 175,000 square kilometers disputed zone ranging from continental Europe's northern tip to the Arctic Ocean.

"There is a great economic potential... that can be unleashed," Stoltenberg said about the new border accord.

Even Stoltenberg's junior partners the Socialist Left -- who have put a ban on Lofoten drilling at the top of their political agenda -- want to map the resources in the new Barents zone.

FACE SAVING COMPROMISE?

The Lofotens, with unique cold water reefs and fish spawning grounds, have become the battle cry for greens seeking to keep at least part of Norway's vast coast closed to drilling. But much of the Norwegian Barents is open for exploration.

"Our party program does not bombastically say that we cannot have oil and gas activities in the Barents Sea (disputed zone)," Socialist Left leader Kristin Halvorsen said, opening the door to a face saving compromise for all sides.

The extra oil reserves mean the environmentally-sensitive Lofotens could be kept oil free, the oil industry could gain important new supplies and taxes on oil and gas sectors contributing a third of state revenues will continue flowing in.

"This may be the line that will dominate the Norwegian debate going forward," Jakob Godzimirski, research fellow at the Norwegian Institute of Foreign Affairs, told Reuters.

Frank Aarebrot, professor of comparative politics at the University of Bergen, said that offering the industry new Barents Sea acreage in exchange for closing the Lofoten area to drilling "may alleviate the problem for the government."

Geology consultant Finn Tony Lysell, who has studied the Barents, said the disputed zone "should be one of the most attractive new areas in Europe and maybe the world."

Lysell added that the zone's old resource estimates had to be confirmed by new seismic studies and may prove overblown.

The Norwegian Oil Industry Association said the new zone could be open to seismic surveys as early as 2012-2013 if it is included in a government white paper due out later this year.

The border deal must also be finalized, probably later in 2010, and ratified by parliaments in Russia and Norway.

HARSH NEIGHBOURHOOD

The only offshore developments in the Barents are Statoil's Snoehvit field and liquefied natural gas (LNG) complex plus Italian ENI's Goliat oil field under construction. Both are on the Norwegian side west of the disputed zone.

Both had to be designed to withstand the harsh Barents Sea environment, including months of uninterrupted darkness during the Arctic winter, deep waters and hurricane-strength storms that can trigger severe icing, as well as some of the world's strictest environmental norms including no water pollution.

Near the disputed zone on the Russian side is Shtokman, a huge gas reservoir capable of quenching the entire world's thirst for natural gas for over a year. It is undeveloped due to high costs and technical difficulties, although Gazprom and its minority partners Statoil and France's Total are expected to make a final investment by 2011.

"International oil companies are interested in the new areas because they are promising and because fields may be closer to shore than Shtokman, so cheaper to develop," said Rune Rafaelsen, head of state-run Norwegian Barents Secretariat.

(Editing by Michael Hogan)

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