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Norway’s oil production hits low, good for some offshore drillers

Xun Yao Chen, Industrials Analyst

Oil production and reserve: A key driver

Oil production or reserve is key driver of demand for offshore rigs or drillships. When production or reserve falls, countries will often issue new permits for oil companies to spend capital expenditure to search for oil, which increases demand for drillships and offshore rigs that are used to conduct exploratory and developmental drilling of new oil or gas wells. Conversely, when production or reserve is abundant, spending is limited.

(Read more: Diana Shipping: the most undervalued dry bulk shipping company)

As oil output falls, licenses issued

Norway’s oil output, the world’s number seven exporter and the largest producer in Europe, fell to a 25-year low of just 1.5 million barrels per a day in January 2013. Oil production has been gradually falling from 3.0 million barrels per day in 2003. As the country depends on oil revenues, Norway’s ruling Labour Party is warming up to more drilling in the region. On August 28, 2013, Norway had invited international oil and gas companies to begin making bids for the blocks they want to drill in, including the first-time eastern Barents Sea.

(Read more: Dry bulk capacity growth slows further, encouraging sign for later half of 2013)

More licenses to come

Interested oil and gas companies were given a deadline of January 14, 2014, to submit their bids for the blocks that contain an estimated 1.9 billion barrels of oil equivalent of oil and gas reserve, according to the Norwegian Petroleum Directorate. Only a limited number of licenses will be awarded in the eastern Barents Sea as a pilot for more licenses to be issued around the middle of 2015.

(Read more: New spear bit increases unconventional shale play drilling efficiency 22%)

Offshore drillers to benefit

Offshore drillers will benefit from new licenses, as oil companies with licenses will hire rigs to conduct exploratory and developmental drilling. Because drilling in the North Sea and the Arctic faces a much harsher environment than elsewhere in the world, this will primarily benefit the rates and utilization of high specification jackups. Offshore drilling companies that have a prominent presence around the area with the necessary fleets include Transocean Ltd. (RIG), Seadrill Ltd. (SDRL), Noble Corp. (NE), and to a lesser extent, Ensco Plc. (ESV). This is also positive for the Market Vectors Oil Services ETF (OIH) as well as the iShares U.S. Oil Equipment & Services ETF (IEZ).

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