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Norwegian Oil Plays Struggling After Oil Price Collapse

Rune Likvern

Norwegian crude oil extraction peaked in 2001 at 3.12 Million barrels per day (Mb/d) and in 2016 it was 1.62 Mb/d, growing from 1.57 Mb/d in 2015 and 1,46 Mb/d in 2013 (a growth of 10 percent since 2013).

The Norwegian Petroleum Directorate’s (NPD) recent forecast expects crude oil extracted from the Norwegian Continental Shelf (NCS) to fall to 1.60 Mb/d in 2017.

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Figure 01: The chart shows the historical extraction (production) of crude oil (by discovery/field) for the Norwegian Continental Shelf (NCS) with data from the Norwegian Petroleum Directorate (NPD) for the years 1970 – 2016. The chart also includes my forecast for crude oil extraction from discoveries/fields towards 2030 based on reviews on individual fields, NPD’s estimates of remaining recoverable reserves, the development/forecast for the R/P ratio as of end 2016.

Further, the chart shows a forecast for total crude oil extraction from sanctioned discoveries/fields (green area, refer also figure 02) and expected contribution from Johan Sverdrup phase I (blue area) [at end 2016 estimated at 1.78 Gb; [Gb, Giga (Billion) barrels, refer also figure 07] and this development phase is now scheduled to start flowing in late 2019.

Sanctioned Developments in Figure 01 represents the total contributions from 7 sanctioned developments of discoveries now scheduled to start to flow between 2017 and 2019.

My forecast for 2017 is 1.51 Mb/d with crude oil from the NCS.

My forecast shown in figure 01 includes all producing and sanctioned developments, but not contingent resources in the fields (business areas). The forecast is subject to revisions as the reserve base becomes revised (as discoveries pass the commercial hurdles) the tail is likely to fatten as from 2022/2023 mainly due to Johan Sverdrup phase II and Johan Castberg (Barents Sea).

Related: The Oil Market Is At A Major Turning Point

My forecast includes about 7 percent reserve growth (300 Mb) for discoveries in the extraction phase, but does not include the effects from fields/discoveries being plugged and abandoned as these reach the end of their economic life.

Discoveries sanctioned for development and Johan Sverdrup (with an expected start up late 2019) is expected to generally slow down the decline in Norwegian crude oil extraction.

My forecast in figure 01 shows that the Norwegian crude oil extraction will be in a considerable decline until Johan Sverdrup Phase I builds towards the plateau. Norwegian oil consumption is now around 0.2 Mb/d, and with what is known about Norwegian crude oil reserves, Norway will remain a net exporter of crude oil for another 20 to 30 years.

Discoveries under development and scheduled to start to flow during 2017 – 2019

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Figure 02: The figure above shows a forecast of crude oil production from NCS sanctioned fields which is scheduled to start to flow during the years 2017 to 2019. Any changes to the scheduled startups could affect the forecasts as shown in figures 01 and 02.

It is now expected that around 0.03 Mb/d (Mb; Million barrels) on an annual basis will be added during 2017 from startups of sanctioned developments like Gina Krog, Flyndre, Hanz and Byrding.

Norway extracted, sold and delivered around 591 Mb of crude oil in 2016, up from 572 Mb in 2015 (up 3 percent).

The 4 sanctioned developments scheduled to start up in 2017 are now estimated to add around 130 Mb of crude oil reserves for extraction in 2017 (developments/discoveries reported under existing business areas and are not included) while expected extracted is 550 – 570 Mb.

My 2016 forecast

In the spring of 2016 I forecast that crude oil extraction from NCS in 2016 would become 1.50 Mb/d and it became 1.62 Mb/d. The reasons for this deviation are several.

My model used for forecasting Norwegian crude oil extraction for my 2016 forecast left out one discovery/field (a broken link) which, when adjusted for, would have brought my forecast to 1,55 Mb/d in 2016.

Fields that had been in the extraction phase before 2002 lost “only” 22 kb/d during 2016 (less than half of what was expected). New developments delivered 38 kb/d more than expected. This is due to combinations of less downtime and recent developments delivering (way) above expectations.

The flip side to developments delivering above expectations are that they later are likely to have steeper declines.

kb/d; kilo (1,000) barrels per day

A closer look at actual crude oil extraction

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Figure 03: The figure above shows development of crude oil extraction from NCS sanctioned fields that started to flow prior to 2002 and by vintage since 2002 (rh scale) together with the (nominal) oil price (lh scale).

Note the recent years slow down and temporary reversal in crude oil extraction from discoveries starting to flow prior to 2002. Collectively these grew their extraction with 28 kb/d since 2013.

In 2016 around 54 percent of the crude oil came from business areas that started to flow prior to 2002 while 46 percent came from 49 (out of 76 with reported crude oil extraction) discoveries started since 2002.

The high oil price in recent years allowed for more infill drilling and developments of discoveries within existing business areas. Infill drilling allows both for accelerated depletion and increased recovery. Inasmuch infill drilling has been widely used in recent years, a period with lasting lower oil prices may materialize itself through higher decline rates.

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Figure 04: The figure above shows development of crude oil extraction from sanctioned NCS fields by vintage since 2002 (rh scale) together with the (nominal) oil price (lh scale).

The characteristics of “small” deep water discoveries/fields (here defined as having less than 100 Mb of recoverable crude oil) are a fast build up, followed by a short plateau (typically 2 years) succeeded by steep declines, typically at annual rates of 15 – 25 percent, refer also figures 09 and 10.

A growing portfolio of small discoveries with short plateaus followed by steep declines makes it increasingly difficult to keep pace with the “Red Queen”. The portfolio of developments sanctioned in the high price environment is fast being depleted.

Several of the recent NCS developments that were sanctioned after the increase in the oil price have been subject to considerable reserves after the price collapse (and thus financially) write downs which also weakens the companies’ balance sheets and affect their financial capacities for future investments. Several of these developments were sanctioned on the expectations of a lasting high oil price.

The bigger picture

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Figure 05: The figure above shows developments in world crude oil and condensates supplies split on 3 entities, North America [Canada, Mexico and USA], OPEC and other non-OPEC, which includes Norway, using January 2007 as a baseline [colored areas and rh scale]. The black line shows the development in the oil price [black line and lh scale].

The figure shows that it was very likely the rapid debt fueled growth in Light Tight Oil (LTO) extraction, primarily in the USA, led to an oversupplied market that collapsed the oil price. After the oil price collapsed, OPEC increased its production in an effort to recapture its market share which was not very helpful for the oil price.

The chart also reveals another interesting fact, other non-OPEC (light green area) had a negligible change to their oil extraction during the years the oil price remained high. The other non-OPEC share of the global crude oil supplies has been in a steady decline since 2007 and was at about 37 percent (about 30 Mb/d) in 2016.

Related: OPEC Out Of Moves As Goldman Sachs Expects Another Oil Glut In 2018

The development in other non-OPEC crude oil supplies while oil prices remained high is a giveaway about their future potential for crude oil supplies.

The R/P ratio reveals the future trajectory for NCS crude oil extraction

A simplistic description of the R/P ratio (Reserves at year end divided by the Production for that same year) is the (theoretical) number of years the extraction/production level may be sustained using that year as a baseline. In the real world, it works somewhat differently, as the reservoir depletes the extraction will (normally) decline. This may result that the R/P ratio remains fairly constant during the decline/tail phase as the reservoir depletes and the extraction declines.

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Figure 06: The chart above shows cumulative NCS crude oil extraction versus the R/P ratio for fields/discoveries in the extraction phase at end 2016 plotted against the right-hand scale [black dots connected by a black line]. The red line, plotted against the left-hand scale, shows the cumulative portion of the crude oil extraction versus the R/P ratio.

For all NCS discoveries/fields in the extraction phase their R/P ratio was 6,7 at end 2016.

Figure 06 illustrates that about 50 percent of the NCS crude oil extraction in 2016 was from 42 fields/discoveries (out of 76 with reported crude oil extraction) with an R/P ratio of 5 or less.

Broadly speaking reservoirs of crude oil with an R/P ratio of less than 5 should be expected to exhibit steep depletion induced declines in extraction, and year over year declines in the range of 15 – 25 percent has been observed.

Development of Norwegian crude oil reserves

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Figure 07: The figure shows the history and the status of the total discoveries by year (stacked columns) since oil exploration started on the Norwegian Continental Shelf (NCS) and as of 2016. The light green columns show what has been extracted, sold and delivered. The dark green portion of the columns is total remaining reserves. The yellow portion of the columns shows reserves in discoveries under evaluation. Furthermore, in the chart is also shown annual production (thick black line) for extraction of crude oil since it began in the 1970s. The chart has a table that shows the year of discovery for fields estimated to originally hold more than 1 Giga barrels (Gb) of recoverable crude oil.

(Gb; G = Giga, Billion barrels)

Figure 07 illustrates that the biggest NCS discoveries were made early and these discoveries continues to contribute a big portion of total NCS crude oil production.

Of 18 discoveries started from 2012 to 2016 NPD data shows a downward revision to total estimated recoverable reserves from 1 034 Mb to 967 Mb or about 6 percent.

Discoveries and contingent reserves in fields now hold the potential to add about 4 Gb to a total of about 36 – 38 Gb of reserves.

Figure 07 also illustrates that the growth in the oil price above $50/b in 2005 allowed for increased exploration activities resulting in several successful discoveries with the most prominent being the Johan Sverdrup discovery in 2010.

The chart above is based upon Norwegian Petroleum Facts.

(A site operated by the Ministry of Petroleum and Energy [MOE] and the Norwegian Petroleum Directorate [NPD].)

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Figure 08: The chart above shows the development of total NCS crude oil discoveries since exploration began and as of end 2016 [data from NPD Resource Accounting at end 2016]. The chart is often referred to as a “creaming curve”.

The light green portion of the columns shows the development in total extracted, sold and delivered. The dark green portion shows the development in estimated remaining recoverable reserves. The yellow portion shows the development in total estimated reserves in discoveries that are under evaluation and that has not been sanctioned at end 2016.

The chart illustrates that a major portion of the NCS reserves was discovered in an early phase and the effect from the recent years’ higher oil price encouraged increased exploration and testing of new exploration models resulting in new discoveries of which many are expected to be commercialized.

Depletion and decline rates for small deep water discoveries

A closer look at deep water fields illustrate the rapid depletion and high decline rates, which are typical for discoveries/fields with about 100 Mb of recoverable crude oil.

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Figure 09: The chart above shows the development of crude oil extraction (green area and right hand scale), annualized (12 MMA) extraction rate (black line and right hand scale) for the Skarv discovery/field.

At end 2016 NPD estimated Skarv to contain 120 Mb with original recoverable crude oil.

Skarv had an annualized decline of about 25 percent in 2016.

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Figure 10: The chart above shows the development of relative remaining reserves (black line and left hand scale), annualized yield (red line and right hand scale) and the annual moving average of the depletion rate (blue dotted lines, right hand scale) for crude oil extraction from the Skarv discovery/field.

At end 2016 NPD estimated Skarv to contain 120 Mb with original recoverable crude oil.

The past high crude oil depletion rate for Skarv and its R/P of 3,6 at end 2016 suggests now a continued high decline rate in the extraction.

By FractionalFlow.com

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