Solberg: Reduced reservoir utilisation not a viable option for cutting costs
Norwegian Prime Minister Erna Solberg today addressed the attendees of the Subsea Valley Conference in Fornebu, Norway.
The Prime Minister highlighted the importance of the oil & gas sector to the Norwegian economy, praising competence and technology as Norway’s main competitive advantages. However, Solberg, aware of the rising costs, warned the industry that reduced utilisation of reservoirs is not a viable option for cutting costs. Read the full speech below:
Thank you very much for giving me this opportunity to present Norway’s most important industry to such a diverse and well-informed audience.
Norway has enjoyed a unique economic position in Europe over the last few years. We have seen steady growth and low unemployment rates in a period where our neighbours have experienced limited growth and high unemployment rates – especially among young people.
Less than two weeks ago, I met my European party colleagues in Brussels. Although the critical situation in Ukraine dominated the agenda, I could sense that Europe is now beginning to recover from the economic crisis. There are signs of optimism and growth. Competitiveness is high on the agenda and it is high our political agenda, as today’s conference also illustrates.
In my view, Norway will face a number of challenges in the time ahead. Our cost level is high, and like the rest of the industrialised world, we have had weaker growth in productivity over the past few years.
This is of utmost relevance to the oil and gas sector and the subsea industry.
Last year, several large contracts from Norwegian operators went abroad. Some companies have announced staff cuts. We need to put competitiveness high on the agenda to keep developing our position as a leading oil and gas nation.
Today, I would like to share our “recipe” for strengthening Norwegian competitiveness. As Norway has a small, open economy, the Government cannot do this job alone. I would therefore like to present four points that are important for enhancing our competitiveness.
First, the Government will continue to offer new blocks at a steady rate. This is important for maintaining a high level of exploration activities.
Secondly, Norway’s competitive advantages are competence, technology and innovation. This fact will be reflected in our policies.
Thirdly, it is important to reduce costs. However, reduced utilisation of reservoirs is not a viable option.
And last but not least, the oil and gas industry is the cornerstone of our economy. A transition towards new profitable industries must build on the expertise that has been acquired in the oil and gas sector. A strong oil and gas sector does not undermine the development of new profitable industries; rather it is a prerequisite for this.
Let me elaborate on these points.
Offering new blocks at a steady rate
As you all know, the extraction of oil and gas is not just a simple matter of putting a pipe into the ground and filling a tanker. It is a process that involves some of the most advanced technologies we know.
Accordingly, you cannot “turn” the industry on and off. A steady rate of new awards is necessary to continue active exploration and make new and profitable discoveries regularly.
After a boom period of huge investments, the level of activity offshore has now stabilised. During the next few years the Government will work to bring about positive, long-term development for the oil and gas industry.
Our main contribution will be to provide stable framework conditions and offer new exploration acreage.
Access to new acreage is crucial for ensuring a strong oil and gas industry in Norway.
As you know better than me, a considerable period elapses from the time a new block is announced until production is started. A long-term approach is needed to maintain a steady level of activities.
This year’s round of awards in predefined areas will be announced in the coming days. The deadline for applications will, as usual, be in the autumn. Awards are planned for early 2015.
For the first time since the mid-1990s, a new area is being opened for oil and gas activities in Norway: the Southeastern part of the Norwegian Barents Sea.
This area is included in the 23rd licensing round on the Norwegian Continental Shelf. A proposal for areas to be included in this licensing round is currently being circulated for comment, with the deadline 4th of April. The next step will be for the Government to announce the round. We plan to do this during the second half of this year.
With the inclusion of new, largely unknown areas, it will be very exciting to follow this licensing round all the way to exploratory drilling – and hopefully large discoveries. This sense of excitement is a continuation of the positive trend for offshore oil and gas in the Barents Sea that we have seen over the last years.
Oil and gas can make a crucial contribution to one of our most important strategic priority areas – Norway’s High North policy.
An important factor to ensure a high activity level is to put a framework in place so a diverse group of companies would like to do business at the Shelf. Adjustment in licensing and the fiscal framework introduced in 2004 has been vital for the increase in number of companies we have seen offshore.
As a result, we have seen a Swedish company Lundin discovering Avaldsnes – a part of the giant Johan Sverdrup. They had new ideas about the exploration phase, and they succeeded.
Competitive advantages: expertise and technology
Norway’s main competitive advantages are its high level of expertise, cutting-edge technology and rapid rate of innovation.
In February, the Minister of Finance, the Minister of Petroleum and Energy and I gathered a diverse group of stakeholders from the oil and gas sector. The topic was the same as it is today: Competitiveness.
Norway has an advanced economy with many jobs based on advanced technology. I often say that Norway should never aim to be the cheapest labour or services, but we can aim to provide the smartest staff and solutions. Accordingly, knowledge and innovation are a crucial priority for my Government.
If we take a look at the slide, we can see that Norway has a competitive position in terms of the share of GDP spent on public R&D. However, Norway’s spending on business-oriented R&D is well below the Nordic and OECD average.
One explanation for this is that we have a commodity-based private sector, but this argument does not fully explain the situation. We have therefore increased measures to stimulate business-oriented research. We have strengthened the tax deduction scheme for R&D costs – called SkatteFunn, and we have strengthened the scheme for public support of business-related research – called BIA.
A recurrent message from the industry to the Government was the need for highly competent personnel, both skilled workers and engineers. The entire sector relies heavily on the skills of its employees. The governments tries to answer to this demand.
We have ambitions to establish world-class universities in various subject areas. The Subsea Valley is an example of a world-class hub of expertise, where our higher education sector maintains a high standard in a specific subject area. But in the fast-changing world of business, we can never afford to relax our efforts.
Even if we hold a high standard today, that does not mean we automatically will hold a high standard by tomorrow.
The higher education sector has therefore been allocated more resources, and in the Government’s policy platform we have stated that we will increase student capacity in the fields of engineering and natural science.
Increasing spending on R&D is another important way of promoting innovation. This is why the Government has increased the budget for petroleum-related research for 2014. We increased the budget by 15 % compared to 2013. An innovative Norwegian oil and gas industry is also vital for ensuring the efficient and safe production of our petroleum resources.
Cost reduction and the utilisation of resources
In our February meeting with the oil and gas industry, certain other issues were mentioned. One of them was the high cost level in Norway.
The great paradox among energy companies is that while both production and prices have increased rapidly over the last decade, the value of the same companies has remained stable.
One plausible explanation for this is that the focus on maximising production has driven the cost level upwards not only among operators, but also in the supplier industry.
The result of the high cost level has become clear in the last year. Norwegian operators have chosen international suppliers for some of their largest orders. Some Norwegian companies have announced staff cuts due to the cost level.
It is in our common interest to reduce the negative impact of a high cost level on Norwegian value creation. The authorities have to take some action, but as it was made clear at the industry meeting I mentioned, the main responsibility lies with the industry itself.
Productivity measures will enhance value creation. Although oil and gas extraction is extraordinarily advanced, there are quite a few similarities between projects. Standardisation and industrialisation will greatly reduce expenditure. You need to act now.
Cost reduction is important, but some measures are unacceptable.
On fields in operation, it is vital to initiate projects for improving recovery rates early enough for them to be profitable. As you might see from the slide, the green part of the bar chart shows the remaining value of different fields in production.
Licensees have a responsibility to society to extract all profitable resources from the fields. If projects are put on hold with a view to cutting costs in the short term, this means that licensees will not be able to fulfil their obligations to utilise all available and profitable resources.
Consequently, reduced utilisation of reservoirs is not a viable option.
The oil and gas sector: The cornerstone of our economy
The oil and gas sector is the cornerstone of our economy. It accounts for a significant share of our exports and our GDP.
The spill-over effects from the oil and gas sector are also significant. It has greatly increased the value creation of our mainland industry and ensured low unemployment.
This is all – as you understand – very positive. The downside is that we are more vulnerable to a drop in the price of the commodities that we rely on.
But let me make this clear: This does not mean that we should reduce activities in the oil and gas industry.
Norway’s success in the oil and gas sector has been heavily dependent on our maritime tradition. Knowledge from advanced research and operations in the maritime industry was fundamental to our success offshore.
New profitable industries in Norway should build on the expertise acquired by the oil and gas sector, just as the oil and gas sector built on the maritime expertise.
This industry has an impressive record of competence-building and innovation. What’s more, you have also been able to commercialise services and products so as to be highly competitive, even in the face of fierce international competition.
You have shown how Norwegian-based companies can prosper in a globalised world. Other industries can learn from your experience.
The oil and gas sector is and will remain our most important source of income for the next decades. This is not negative, but a rather starting point for developing new business ideas that will create new jobs.
I will soon open up for a Q&A-session. But first, let me conclude by summarising our ideas for strengthening Norway’s competitiveness:
First, the Government will continue to offer new blocks at a steady rate, to ensure a vital industry both on and off shore.
Secondly, Norway’s main competitive advantages are competence, technology and innovation. We have therefore introduced a comprehensive plan to strengthen knowledge by investing in teachers, higher education, skilled workers, innovation and research.
Thirdly, it is important to reduce costs. Standardisation and industrialisation will be important measures in this context. However, reduced utilisation of reservoirs is not a viable option for cutting costs.
And finally, the oil and gas industry is, and will remain, the cornerstone of our economy for decades to come. A strong oil and gas sector does not undermine the development of new profitable industries; rather it is a prerequisite for coming up with new ideas for sustainable business.