Wood Mackenzie Sees 2014 as Key Year for Norwegian Oil & Gas Sector

Wood Mackenzie’s annual review of Norway’s upstream oil and gas industry concludes that the sector showed no signs of slowing down in 2013, with high levels of development spend, asset deals, exploration activity, and a record NKr 176 billion (US$30 billion) capital investment.

Wood Mackenzie also says heightened upstream activity has led to an increase in costs, impacting economic margins of a number of projects. In a bid to avoid the sector from overheating, the Government announced Norway’s first petroleum tax increase in 20 years. By reducing the capital uplift allowance the Government hopes to ensure that operators focus more on controlling costs. Looking ahead, Wood Mackenzie expects 2014 to be a key year for the Norwegian sector. Spend will remain high on exploration and development activity. M&A could be set to hit record levels, with the trend for larger companies to optimise their portfolios continuing, meaning there will be plenty of deal potential.

Malcolm Dickson, Senior Norway Upstream analyst for Wood Mackenzie says: “The Norwegian oil and gas sector showed no signs of slowing down in 2013. We saw high levels of development spend, asset deals and exploration across the upstream sector in Norway last year. Most significantly, it was another record year for capital investment – reaching almost NKr 176 billion (US$30 billion), which was a 30% increase on 2012.”

Wood Mackenzie says high demand and busy development activity have driven up costs globally in recent years, but the effect was particularly prevalent in Norway in 2013. Dickson continues: “The level of cost inflation across the upstream sector in Norway led to a series of major cost revisions resulting in challenging economic margins for several large scale developments last year.”

The Norwegian government also introduced the first petroleum tax increase in 20 years. “This came as a big surprise to Norway’s upstream industry and although the marginal rate remained at 78%, capital uplift was reduced – hitting marginal fields the hardest, such as the Johan Castberg field,” Dickson adds.

2013 also saw the second highest number of E&A wells drilled on record in Norway. However, Wood Mackenzie says quantity did not always equal quality, as Dickson explains: “Overall discovered reserves were down 30% compared with 2012, with an additional 14 exploration wells. 18 discoveries yielded 715 million barrels of oil equivalent (mmboe) last year with two of the most significant finds, Lundin’s Gohta and OMV’s Wisting, in the Barents.”

Commercial M&A value was second only to the record NKr 19 billion (US$3.2 billion) set in 2012. Wood Mackenzie estimates that the value of Norway focused deals in 2013 was NKr 15 billion (US$2.5 billion) with only one less deal done. Dickson asserts: “Norwegian deal activity picked up towards the end of the year, with Statoil continuing to optimise its portfolio. This created opportunities for ambitious new entrants, for whom a Norwegian portfolio would be a prized asset, given the country’s prospects and stability.”

Looking ahead, Dickson offers: “2014 is expected to be a key year for the Norwegian upstream sector. Capital investment levels will remain high and we estimate close to NKr 176 billion (US$30 billion) will be spent across the sector this year. M&A spend could be set to surpass record levels, with the trend for larger companies to optimise their portfolios continuing, meaning there will be plenty of potential deals, with Talisman Norway, RWE Dea and Marathon Norway – just three of the portfolios up for sale.”

“Norway will also see significant developments in 2014 with projects such as Johan Castberg, Johan Sverdrup and Goliat on track to reach crucial milestones in terms of their development. The impact of the 2013 petroleum tax on marginal projects will also become clearer, with a full list of developments that qualify for transition terms expected from the Norwegian government this year,” Dickson concludes.

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Press Release, January 15, 2014