Crunch year ahead for Norway's Arctic oil adventure

Tue Apr 1, 2014 9:10am EDT

Related Topics

* Arctic drilling to hit record high

* Rising costs, small finds create challenge

* 2014 could be make or break year

By Balazs Koranyi

HAMMERFEST, Norway, April 1 (Reuters) - Rising costs, lack of infrastructure and a string of poor exploration results may mean Norway's Arctic oil exploration peaks this year, energy officials said on Tuesday.

Drilling in the Barents Sea will reach a record high this year with 12 wells but the sector could quickly shift its focus to more promising regions if the heavy investment fails to pay off, especially as firms around the world are already cutting back capital spending plans.

"There are dark clouds gathering on the horizon because of rising costs and investment cuts by energy companies," oil minister Tord Lien told Reuters on the sidelines of a conference. "This could be a critical year for projects in the Barents Sea."

"Costs are rising too high and too fast and the Norwegian costs have increased a bit more than elsewhere," he added.

Exploration in 2013 was mixed and the few notable successes were more than offset by either dry wells or small gas discoveries, which tend to be uncommercial because the area lacks the extensive pipeline infrastructure found in places like the North Sea.

"The cost per produced unit (of oil and gas) in Norway has increased dramatically, by tenfold over the past 10 years," said Bente Nyland, the director of the Norwegian Petroleum Directorate.

"The problem is that we have a lot of small discoveries but no means of getting out the gas."

With no pipelines in the Arctic, the only way to get gas out is Statoil's liquefied natural gas plant on Norway's northern tip but the plant is expected to run at full capacity for the next several decades, unable to take on new volumes.

The plant will be expanded only if there is enough gas available and there is a viable market. However, energy firms will not drill for more gas unless they know they can get it out, said Grethe Moen, the CEO of Petoro which manages the government's direct stake in oil licences.

"This is a Catch 22 situation," Moen told the conference. "Given the current high cost level it's difficult to see new infrastructure built."

Statoil drilled aggressively around its Johan Castberg oilfield last year to secure more resources for the $15 billion Arctic project but mostly found gas. The poor figures could force the company to scrap a big onshore processing terminal that was intended to accommodate future finds.

"The four wells we drilled resulted in ... far less than we hoped," said Arne Sigve Nylund, Statoil production chief for Norway.

"Bringing the resource to shore requires resources of a certain size but right now there's only Castberg," he said. "The job is to bring down the costs to a level ... so we're also studying offshore production and loading."

Weak exploration results this year would likely shift focus to Norway's border zone with Russia, an area of the Barents Sea that was opened to the sector just this year and has no oil and gas infrastructure of any sort.

"It's a make or break year for the 'old' Barents Sea," the petroleum directorate's Nyland said. "This year will be quite important ... then the sector could shift to southeast Barents."

(Editing by William Hardy)

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