Norway: PGNiG Expects Great Benefits from Skarv, the Largest Investment Project on the NCS

Polskie Górnictwo Naftowe i Gazownictwo SA (PGNiG SA) is completing preparations to produce oil and gas from the Skarv field on the Norwegian Continental Shelf (NCS). In early May 2011, a floating production, storage and offloading (FPSO) vessel will arrive at the drilling site.

The FPSO is the world’s largest unit of this type operating in difficult weather conditions. Production is planned to commence in the second half of this year, and PGNiG SA will be the first Polish company engaged in commercial oil and gas production abroad.

The production from the Skarv field alone will almost double PGNiG SA’s annual oil production, currently amounting to 0.5 million tonnes, as the Norwegian field is expected to yield 0.4 million tonnes of oil in 2012. In addition to oil, PGNiG will also produce natural gas from the field, initially 0.4 billion cubic metres per annum.

The development of the Skarv field is the largest investment project currently implemented in Norway. It is also the first foreign project of the PGNiG Group, expected to deliver measurable economic benefits. Given the planned production volume, PGNiG will generate in Norway revenue of more than USD 500m in 2012 (at current market prices). It should be mentioned that the revenue will be generated at a relatively low cost of sales and will be tax free in the first years of production.

Skarv – the largest investment project on the Norwegian Continental Shelf

Through PGNiG Norway, PGNiG SA holds an approximately 12% interest in the Skarv project. The field is operated by BP (24% interest), and the other partners are Statoil (approximately 36%) and E.ON Ruhrgas (approximately 28%). PGNiG is cooperating with these companies also under other licences. The development plan covers the Skarv and Idun fields, which jointly contain reserves of 434 million boe (of which PGNiG’s share is approximately 52 million boe). The total development cost is estimated at NOK 35.5bn (of which PGNiG will cover approximately PLN 2.1bn).

The Skarv field is located on the Norwegian Sea, approximately 300 kilometres north west of Trondheim, where water depth ranges between 325 and 450 metres. Licences around the Skarv field represent significant potential for further oil and gas exploration. In 2010, PGNiG discovered the Snadd North field, whose resources are estimated at 57-100 million boe.

The development concept is based on the floating production, storage and offloading (FPSO) vessel, constructed in South Korea over the last three years. In early March this year, the vessel reached Norway. It is the world’s largest FPSO unit, operating in difficult weather conditions, and measuring 292 metres in length and 51 metres in width. The unit’s capacity is 880,000 barrels. Its estimated value is over USD 2bn. The useful life of the FPSO unit is at least 25 years. Any modifications to the unit may be performed at sea.

Oil produced from the Skarv field will be sold on international markets, while gas is planned to be transported to the German coast. PGNiG will be able to sell the gas in different countries, but it may also transport it to Poland from the Emden terminal.

Financing of PGNiG’s Norwegian operations

The exploration and production activities on the Norwegian Continental Shelf are managed by PGNiG Norway. The company, established in 2007, is wholly owned by PGNiG SA and its share capital amounts to NOK 951m. PGNiG Norway employs an international team of 21 staff and holds interests in eight exploration and production licences on the Norwegian Continental Shelf. Its main asset is the interest in the Skarv field. In February 2007, PGNiG SA purchased the interest from ExxonMobil for USD 360m. In September of the same year, the company obtained the Norwegian authorities’ consent (pre-qualification) to operate on the Norwegian Continental Shelf, and in October it finalised the transaction with ExxonMobil. Over the last four years, PGNiG has secured in Norway recoverable reserves of 71 million boe in the Skarv, Snadd and Gråsel fields.

By the end of 2010, PGNiG Norway AS invested approximately USD 820m in the Skarv project (including the acquisition price). The funds were provided by PGNiG SA (USD 660m) and by banks (USD 160m). To complete the project until effective launch of production, additional funding of approximately USD 140m will be required in the years 2010-2013. The remaining funds will be provided under a reserve-based loan. In 2010, PGNiG Norway signed a USD 400m loan agreement with seven banks. The reserve-based loan is the first loan of such type to have been contracted by PGNiG and one of the first such loans in Central Europe.

Norwegian Continental Shelf

Norway is the world’s second largest gas exporter and the sixth largest oil exporter. Daily oil production (including condensate) amounts to approximately 2.3 million bbl, and gas production is approximately 103 billion cubic metres. Sales of gas from the Norwegian Continental Shelf are expected to keep growing in the coming years.

The recent years have seen a substantial growth in production of gas from the NCS. According to projections, the share of gas in total production from the NCS will rise from 43% in 2009 to more than 50% in subsequent years. It is connected with natural depletion of oil reserves and gradual recovery of gas from the fields.

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Source:PGNiG , April 13, 2011; Image: BP