Norway"s Oil Sector Faces Existential Crisis

Authored by Tsvetana Paraskova via OilPrice.com,

Oil companies have recently focused on frontier exploration drilling in the Barents Sea offshore in Norway, neglecting the powerhouse of the Norwegian oil industry, the North Sea.

Exploration activity in the North Sea - the most mature area of Western Europe’s biggest oil producer - is at an 11-year low this year, which is a concern for the industry’s regulator, the Norwegian Petroleum Directorate (NPD).

“That worries me,” NPD Director General Bente Nyland told Bloomberg in a recent interview, voicing the industry concern that without new oil discoveries, especially in mature areas with well-connected infrastructure, the decline in Norway’s oil production would be even bigger than expected.

Following a continual decline between 2001 and 2013, Norway’s crude oil production rose last year for the third year running, but according to the Norwegian Petroleum Directorate (NPD), oil production this year would be nearly half the volume from the peak in 2000-2001.

Two huge fields discovered in 2010 and 2011, Johan Sverdrup in the North Sea, and Johan Castberg in the Barents Sea, are expected to start operations in 2019 and 2022, respectively, and will lift Norway’s oil production in the early 2020s compared to expected declines in 2018 and 2019.

But after 2025, production and activity are expected to significantly drop off unless there are new discoveries, according to oil major Statoil.

Norway’s Ministry of Petroleum and Energy, and NPD say:

“Production from new fields that come on stream will compensate for the decline in production from ageing fields. However, in the longer term, the level of production will depend on new discoveries being made, the development of discoveries, and the implementation of improved recovery projects on existing fields.”

Encouraged by recently opened areas and potentially huge yet-to-be-discovered resources, oil companies launched a record exploration drilling campaign in Norway’s Barents Sea this year. But the drilling campaign was a flop, and even the most promising wildcat yielded no oil.

Companies are vowing to return next year for more exploration in the frontier regions, but they’ve been neglecting the North Sea—the most mature area where Norway’s petroleum history began, and which made the country one of the world’s richest.

The North Sea is still the powerhouse of Norway’s oil with 62 fields in production as of the end of 2016, compared to 16 fields in production in the Norwegian Sea and two fields—Snøhvit and Goliat­—in the Barents Sea.  

This year oil companies drilled a record number of wells in the Barents Sea, which is thought to hold 49 percent of Norway’s undiscovered resources, while the North Sea has 24 percent of undiscovered oil and gas, and the Norwegian Sea 27 percent.

The North Sea’s huge fields have pumped oil and gas for decades and are now maturing. Therefore, Norway needs to add more resources in the North Sea before some of the existing infrastructure, including platforms, is folded and decommissioned, according to NPD’s Nyland.

In an overview of the Norwegian Continental Shelf for 2016, Nyland pointed to “a great deal of uncertainty associated with exploration activity going forward.”

“It is very important to maintain exploration activity at a high level in order to maintain stable production in the future,” she said.  

The Barents Sea was a large part of exploration activity this year, but results were underwhelming.

“Exploration drilling in the Barents Sea in 2017 and 2018 will help clarify future opportunities in the Barents Sea and the Norwegian continental shelf,” Statoil says, but its chief executive Eldar Saetre also points out that the industry needs to heed what NPD’s Nyland has been saying about neglecting the North Sea.

 

“If we continue to see a trend where we’re not making bigger discoveries, we will have to search more in mature areas,” Saetre told Bloomberg in an interview. “This is an important issue,” he added.

As juicy as it sounds, the Barents Sea holds nearly half of Norway’s undiscovered resources, but the North Sea has the developed infrastructure to link new discoveries to existing fields and make even smaller new finds commercially viable when linked to producing areas. So, returning to the old stomping grounds may ultimately pay off.

Russia Goes All In On Arctic Oil Development

Authored by Tsvetana Paraskova via OilPrice.com,

Neither sanctions nor persistently low oil prices are hindering Russia’s ambitions or plans to develop oil resources in its sections of the Arctic.

In April, state-controlled oil giant Rosneft started drilling the northernmost well on the Russian Arctic shelf in the Khatangsky license area in the Laptev Sea. In June, Rosneft struck first oil in the Eastern Arctic in this license.

Earlier this month, the oil firm said that recoverable reserves at the field exceed 80 million tons of oil, which is equal to around 586.4 million barrels. Geological data point to reserves at the field at 298 million tons of oil, or some 2.184 billion barrels, and the oil is high quality - light and low-sulfur, according to Rosneft.  

The Russian oil giant - whose CEO Igor Sechin is a close ally of Vladimir Putin - continues to drill at the field to study its geology, search for more oil, and define future drilling strategies at the license, Rosneft says.

Rosneft and Gazprom’s oil unit Gazprom Neft are the only two companies allowed to drill in the Arctic offshore under Russia’s legislation.

Gazprom Neft operates the only oil-producing platform in Russia’s Arctic currently. The Prirazlomnoye oil field in the Pechora Sea started pumping oil back in late 2013. The field is estimated to hold 70 million tons of oil, or 513 million barrels, with annual production averaging 5.5 million tons (40.3 million barrels) at full capacity. Related: Is The Aramco IPO On The Brink Of Collapse?

Rosneft also plans to resume drilling in the Barents Sea next year and in the Kara Sea within two years, thus committing itself to conduct drilling works across the entire Russian section of the Arctic.

Rosneft holds 28 licenses in the Russian Arctic shelf that are estimated to have combined reserves of 34 billion tons of oil equivalent, or 249.22 billion barrels. Since 2012, Rosneft has invested $1.74 billion (100 billion rubles) in Arctic exploration, and will invest in 2017-2021 another $4.354 billion (250 billion rubles).

Russia, for its part, has stated that Arctic oil and Arctic development are priorities in its policies, and is supporting development with financing in a kind of political message that sanctions won’t deter its Arctic oil ambitions.

The U.S. Treasury sanctions list from 2014 prohibits the exports of goods, services (not including financial services), or technology in support of exploration or production for Russian deepwater, Arctic offshore, or shale projects that have the potential to produce oil. 

While Western banks are still evaluating the potential impact of the latest round of U.S. sanctions on Russia from this summer, Moscow is committing funds to Artic development. At the end of August, Prime Minister Dmitry Medvedev said that Russia will finance the development of the Artic continental shelf and the economy of the local areas with more than $2.787 billion (160 billion rubles) by 2025. He said Russia’s program for Arctic development rests on three pillars: boosting economic growth, developing sea infrastructure, and developing the continental shelf with modern technology and equipment. Related: Oil Markets Fear Iraqi Escalation

As part of that program, in 2021-2025, the government will fund $414.5 million (23.8 billion rubles) for a program to build oil and gas equipment and technology and industrial machinery for exploration and development in the Arctic.

According to experts cited by Rosneft, the Arctic shelf is expected to account for 20-30 percent of Russia’s total oil production by 2050.

It’s not clear who will need Russian Arctic oil in 2050, but in the shorter term, Russia is betting on the Arctic, and Rosneft’s exploration success this year could really pay off. 

Norway Removes Greenpeace Ship From Statoil Arctic Drill Site

Authored by Zainab Calcuttawala via OilPrice.com,

Norway’s coast guard has removed Greenpeace protestors from a safety zone near Statoil drilling operations in the Korpfjell field of the Barents Sea, according to a new report in the Maritime Executive.

The protestors used kayaks to infiltrate a 500-meter exclusion zone around the Songa Enabler on Thursday in order to attach a large globe to the rig. On it was a statement from environmentalists calling on Norway to end its drilling in the Arctic.

Statoil called the stunt “illegal and irresponsible” before summoning the authorities to remove the protestors’ vessel, Arctic Sunrise.

On the other hand, Greenpeace Norway argues the coast guard’s actions were unlawful.

“The Norwegian coast guard doesn’t have the right to board or remove our ship,” said Truls Gulowsen, head of the local branch of the environmental group.

“Protest at sea is an internationally recognized lawful use of the sea, related to the freedom of navigation. We are taking action against Arctic drilling in an area where our rights to protest are protected under international law. The Norwegian government cannot unjustifiably interfere with that right.”

So far, the government maintains that it acted within its rights when it removed the ship due to the clear establishment of the exclusion zone.

To this claim, the group retorts:

“While Greenpeace recognizes that Norway has the right to establish a safety zone around a fixed offshore installation, there should also be room to exercise the right to protest in a safe and peaceful manner.”

Environmentalists continue to protest drilling in the Arctic and the potential opening of the Lofoten islands to exploration.

Greenpeace is suing Norway in a trial set to begin in November, arguing that “granting licenses to open a new oil frontier breaches the Norwegian Constitutional right to a healthy and safe environment for current and future generations and contravenes the Paris Agreement.”

Russia Launches Biggest Arctic Military Expansion Since Fall Of USSR

In what will likely be interpreted as the latest "test" by the Kremlin to gauge western military preparedness, Reuters reports that Russia has quietly unleashed the biggest military build up targeting the Arctic since the fall of the Soviet Union.  "It is part of a push to firm Moscow"s hand in the High North as it vies for dominance with traditional rivals Canada, the United States, and Norway as well as newcomer China." It is also part of the ongoing scramble for resources above the commodity rich arctic circle.

Russian servicemen of the Arctic mechanised infantry brigade participate in a military
drill on riding reindeer and dog sleds near Murmansk, Russia January 23, 2017.

As Reuters notes, under Putin, Moscow is scrambling to re-open abandoned Soviet military, air and radar bases on remote Arctic islands and to build new ones, as it pushes ahead with a claim to almost half a million square miles of the Arctic. It regularly releases pictures of its troops training in white fatigues, wielding assault rifles as they zip along on sleighs pulled by reindeer.

"History is repeating itself," Vladimir Blinov, a guide on board the icebreaker Lenin, which is named after communist revolutionary Vladimir Lenin, told a recent tour group. "Back then (in the 1950s) it was the height of the Cold War and the United States was leading in some areas. But we beat the Americans and built the world"s first nuclear ship (the Lenin). The situation today is similar."

The expansion has far-reaching financial and geopolitical ramifications: "the Arctic is estimated to hold more hydrocarbon reserves than Saudi Arabia and Moscow is putting down a serious military marker."

The Arctic, the U.S. Geological Survey estimates, holds oil and gas reserves equivalent to 412 billion barrels of oil, about 22 percent of the world’s undiscovered oil and gas. Low oil prices and Western sanctions imposed over Moscow"s actions in Ukraine mean new offshore Arctic projects have for now been mothballed, but the Kremlin is playing a longer game.

Some more details: according to Reuters, Russia is building three nuclear icebreakers, including the world"s largest, to bolster its fleet of around 40 breakers, six of which are nuclear. No other country has a nuclear breaker fleet, used to clear channels for military and civilian ships. Russia"s Northern Fleet, based near Murmansk in the Kola Bay"s icy waters, is also due to get its own icebreaker, its first, and two ice-capable corvettes armed with cruise missiles.

"Under (Soviet leader Mikhail) Gorbachev and (Russian President Boris) Yeltsin, our Arctic border areas were stripped bare," said Professor Pavel Makarevich, a member of the Russian Geographical Society. "Now they are being restored."

The build-up has been noticed in Washington. U.S. Defense Secretary James Mattis, in a written submission following his confirmation hearing, described Moscow"s Arctic moves as "aggressive steps" and pledged to prioritize developing a U.S. strategy, according to Senator Dan Sullivan.

Naturally, Russia"s military expansion poses a dilemma for Trump, who wants to repair U.S.-Russia ties and team up with Moscow in Syria rather than get sucked into an Arctic arms race: it is guaranteed that US neocons will be scraming bloody murder unless Trump somehow responds to the US expansion.

The build-up is causing jitters elsewhere. As reported two weeks ago, 300 U.S. Marines landed in Norway this month for a six-month deployment, the first time since World War Two that foreign troops have been allowed to be stationed there. And with memories of Russia"s 2014 annexation of Ukraine"s Crimea still fresh, NATO is watching closely. Six of its members held an exercise in the region in 2015.

Ships moored in the Northern Fleet"s Arctic headquarters of Severomorsk, Russia.

Previously, the Soviet military packed more firepower in the Arctic, but it was set up to wage nuclear war with the United States not conventional warfare. Arctic islands were staging posts for long-range bombers to fly to America. But in an era when a slow-motion battle for the Arctic"s energy reserves is unfolding, Russia is creating a permanent and nimble conventional military presence with different and sometimes superior capabilities.

Sergei Shoigu, the defense minister, is presiding over the re-opening or creation of six military facilities, some of which will be ready by the year"s end. They include an island base on Alexandra Land to house 150 troops able to survive autonomously for 18 months. Called the Arctic Trefoil, officials have said they may deploy military jets there. MiG-31 fighters, designed to shoot down long-range bombers, or the SU-34, a frontline bomber, are seen as suitable.

Moscow"s biggest Arctic base, dubbed "Northern Shamrock", is meanwhile taking shape on the remote Kotelny Island, some 2,700 miles east of Moscow. It will be manned by 250 personnel and equipped with air defense missiles. Soviet-era radar stations and airstrips on four other Arctic islands are being overhauled and new ground-to-air missile and anti-ship missile systems have been moved into the region.

Russia is also spending big to winterize military hardware. "The modernization of Arctic forces and of Arctic military infrastructure is taking place at an unprecedented pace not seen even in Soviet times," Mikhail Barabanov, editor-in-chief of Moscow Defense Brief, told Reuters.

Barabanov added that two special Arctic brigades had been set up, something the USSR never had, and that there were plans to form a third as well as special Arctic coastal defense divisions. "Russia"s military activity in the Arctic is a bit provocative," said Barabanov. "It could trigger an arms race." Of course, Russia"s military activity could be simply seen as a preemptive move to western expansion in the region, as telegraphed by the recent build up of NATO forces in Eastern Europe.

* * *

Meanwhile, Russians are delighted by this latest "arms race."

In Murmansk, home to Russia"s icebreakers and just an hour from the Northern Fleet"s headquarters, the prospect of an Arctic renaissance is a source of pride. The city is steeped in Arctic and military history. The conning tower of the Kursk submarine, which sunk in 2000 after an explosion, looks down from a hill above the port. And in central Murmansk, scale models of dozens of icebreakers crowd the halls of the Murmansk Shipping Company, while sailors, wrapped in great coats, barrel along its streets.

For Russia, the issue of militarizing the Arctic boils down to a simple equation: we have to do it before others do.

"These Arctic bases are on our territory. Unlike some other countries we are not building them overseas," said Denis Moiseev, a member of the Russian Geographical Society. "Other countries are also very active in trying to push their borders towards the North Pole. Our army must be able to operate on all our territory in extreme conditions."

One country regularly mentioned as an unlikely Arctic rival is China, a close Moscow ally, which has observer status on the Arctic Council, the main forum for coordinating cooperation in the region, and is starting to build its own icebreakers.

Politicians are keener to discuss a commercial Arctic push. New roads and a railway are being built and ports overhauled as Moscow expands its freight capacity and, amid warmer climate cycles, readies for more traffic along its Arctic coast. It hopes the Northern Sea Route, which runs from Murmansk to the Bering Strait near Alaska, could become a mini Suez Canal, cutting sea transport times from Asia to Europe. But while the route"s popularity inside Russia is growing, relatively high transit costs and unpredictable ice coverage means it has lost some of its luster for foreign firms.

Grigory Stratiy, deputy governor of the Murmansk Region, told Reuters there was strong interest in sea route from Asian nations however and that new icebreakers would allow for year-round navigation in the 2020s. "Whatever the weather, the Northern Sea Route will be needed. Its use will definitely grow," said Stratiy, who said Russia was keen to attract foreign investment to the Arctic.

When asked about his country"s military build-up, he smiled. "There"s no reason to be afraid I can reassure you," he said, saying it was driven only by a need to modernize.

"Russia has never had any aggressive aims and won"t have them. We are very friendly people."