UPDATE 2-Norway cuts oil output target, warns about costs

Wed Jan 15, 2014 6:58am EST

* Oil, gas output seen stagnating this year

* Investment growth coming to a halt

* Big increase in Arctic resource estimate

By Gwladys Fouche

STAVANGER, Norway, Jan 15 (Reuters) - Norway cut it oil and gas production forecasts on Wednesday and warned that rising costs are thwarting investment even as resource estimates rise on more Arctic riches.

The world's seventh-biggest oil exporter and Western Europe's top gas supplier cut its forecasts on capacity constraints, a big slowdown in investment and project delays.

It also warned that new developments are at risk.

"The biggest challenge is that costs have increased," said Bente Nyland, director of the Norwegian Petroleum Directorate (NPD).

"Higher costs have already led to some projects being delayed ...and higher costs and uncertain future oil and gas prices is a significant challenge."

Energy firms around the world delayed or cancelled big projects last year, trying to rein in capital spending and save cash for dividends after a decade-long boom in investment.

Norway's state-controlled Statoil last year delayed development of the $15.5 billion Johan Castberg oil field in the Barents and $7 billion Bressay field in the U.K. North Sea, citing rising costs, among other factors.

For 2014, the NPD cut its oil production forecast to 1.46 million barrels per day (bpd), in line with last year, but below a previous 1.52 million bpd forecast. It also sees steady gas production after earlier predicting a rise.

It also lowered its investment forecasts, predicting just 2 percent growth over the next two years before a decline.

INCREASED M&A?

"If oil and gas prices fall and costs remain stable or rise, this will have an impact on decisions to start up new projects, and will entail lower investments than included in the forecasts," the NPD added.

To improve efficiency, mergers and acquisitions activity may increase, Nyland said.

"There are a lot of companies on the shelf. We have said earlier that this kind of restructuring is possible to happen, particularly now when you see the capital strains and you need the capital to fulfil your obligations," Nyland told Reuters.

"That might be tough for some of the smaller companies with no production or income," she added.

"It's very obvious that costs are a major challenge," said Thina Saltvedt, an oil analyst in Nordea Markets.

"Investments will slow down and the scale of investments will be significantly lower."

Even as investment growth slows, the NPD sharply increased its total undiscovered resource estimate to 18.5 billion barrels of oil equivalents (boe) from a previous estimate for 16.3 billion with much of the rise coming in Arctic waters.

That number can grow further, the NPD said.

"When new areas are opened, the amount of resources ...can increase," Nyland said.

Oil and gas resources in the Arctic Barents Sea are seen at 8 billion boe, 33 percent more than earlier, following a string of recent discoveries. The resource estimate for the Norwegian Sea was increased by 9 percent to 5.3 billion boe.

The NPD expects energy firms to drill 50 wells this year, up from 47 last year, with over a fifth set for the Barents Sea.

Norway's top oil producers include Statoil, Shell , BP, ConocoPhillips and ExxonMobil .

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