Norway Upstream Sector Thriving, Wood Mackenzie Report Says

Wood Mackenzie’s annual review of the Norwegian upstream sector shows that the country’s oil and gas industry is thriving: 2012 was a record year for capital investment, M&A activity, and licences awarded.

However, this was tempered by an underwhelming year for exploration and concerns about the sector overheating, as the ramp-up in activity on the Norwegian Continental Shelf (NCS) led to delays and increased costs.

Wood Mackenzie’s review asserts that once again Norway was a top destination for global upstream investment in 2012, with US$25 billion (NKr 146 billion) of development capital expenditure, or capex. Malcolm Dickson, Norway Upstream Analyst for Wood Mackenzie, elaborates: “Most of this was spent on producing assets, in particular on increasing recovery from giant fields like Ekofisk and Troll. Seven developments were sanctioned in 2012, which was lower than anticipated at the start of the year, but still healthy.”

Wood Mackenzie says 2013 is set to be another year of major investment, with development spend set to increase again as key developments including Åsgard, Edvard Grieg, Martin Linge and Ivar Aasen get underway. However, it warns that there are signs the Norwegian industry is overheating, with the service sector at peak capacity and costs increasing year-on-year. In 2012 this led to several projects being delayed, and cost overruns on many projects. This will not change in 2013: “Project delays and overspend will be a common feature on the Shelf, as companies struggle to access rigs and equipment on time or in budget,” Dickson adds.

Another key conclusion of the review is that exploration success and portfolio rationalisation have spurred M&A in Norway. According to Wood Mackenzie, the value of assets transferred in M&A reached a new high of US$3.9 billion (NKr 22.5 billion) in 2012, up 70% on last year’s record. This was underpinned by Statoil’s US$1.2 billion deal with Wintershall. Statoil continued with its strategy of portfolio rationalisation to focus on new, higher profile developments, while for Wintershall, the deal was transformational in Norway.

Other companies sought to grow through M&A, most notably OMV through its acquisition of RWE’s interest in Edvard Grieg. Tullow Oil and Cairn Energy acquired Spring Energy and Agora to enter the country, demonstrating the attractiveness of the NCS.

“We expect M&A to continue to be buoyant in Norway in 2013 as the main catalysts will still be present: high activity levels, costs, and a tight rig market will push companies to evaluate and optimise their portfolios,” says Dickson.

After word-class exploration success in recent years, Dickson concedes that 2012 was a disappointing year for discoveries: “Exploration drilling was down and results were generally poor. Although 14 discoveries were made in 2012, yielding 709 million barrels of oil equivalent (mmboe), this was down 8% from last year, and was below the ten year average of 860 mmboe.” Notable finds included Havis in the Barents Sea, Zidane-2 in the Norwegian Sea, and Skarfjell and King Lear in the North Sea. Drilling also decreased, as the number of exploration and appraisal wells dropped from 54 in 2011 to 43 in 2012. This was mainly because companies struggled to access rigs, and some drilling times overran significantly. Appraisal drilling at Johan Sverdrup was a major focus of the year.

“Exploration is expected to increase in 2013, with up to 55 wells planned, including high profile prospects in the Barents Sea and the Utsira high – arguably Norway’s most prospective areas. Licensing will reach a new record high as mature and frontier rounds are due to be concluded in the first half of the year,” Dickson offers.

Dickson adds in closing: “Although exploration success in Norway was lower than average this year, in comparison to the UK, the results look much better. In the UK, despite there being 23 more wells drilled, there were two discoveries made, with only 20 mmboe between them. The UK remains an attractive place to explore, as shown by the interest in the most recent licensing round, and we expect exploration there to be much better in 2013.

“In both the UK and Norway, M&A activity was strong. However, the UK had a much higher number of deals, resulting in a huge overall value of US$9.3 billion of assets traded. There are more companies active and more assets to trade compared with Norway and there is no State involvement. The capital investment that both the UK and Norway attract is testament to the booming sectors. When combined, the UK and Norway North Sea totals mean that the North Sea had the third highest upstream investment in 2012.”

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Source: Wood Mackenzie, January 10, 2013