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Norway Forced To Cancel Arctic Drilling Plans

Offshore oil

Norway has pushed the oil and gas boundaries further north in recent years, opening up the Arctic for drilling. But low oil prices and environmental opposition are forcing a rethink in the Arctic nation.

Norway’s government retreated on a plan to open up new parts of the Arctic for exploration. Environmentalists and local fisherman beat back a proposal to allow drilling near the Lofoten Islands, a picturesque area that is crucial to fish spawning and has the largest cold-water coral reef in the world. The government had previously left out the Lofoten Islands from any exploration plans, so the decision to push forward sparked outrage. Norway’s oil minister, in the face of opposition, recently scrapped those plans in order “to create calm,” as the FT reports.

Johnny Berfjord, chairman of the Norwegian Fishing Vessel Owners Association, in an interview with the FT, described his anger about the move to open up new areas for drilling: “Of course, it’s an act of war. It’s a stupid act. This kind of politics belongs to 20 years ago. They are missing what is happening in the world.”

The pressure to open up more of the Arctic for drilling is coming from Statoil, the state-owned Norwegian oil company, which faces long-term decline in oil production unless it can find new reserves. Statoil has been struggling with low oil prices and mature oil fields in the North Sea. It plans on slashing another 1,500 positions this year and has even offered all of its 22,000 employees the option to apply for a severance package. Statoil does have the Johan Sverdrup field under development, which could eventually reach peak production at 550,000 to 650,000 barrels per day. The field is expected to come online in 2019. Related: Gartman: ‘’Crude Not Going Above $55 For Years’’

But Statoil – and the Norwegian government – are concerned that they will need more to replace aging North Sea oil fields. The government’s revenue for the first six months of 2016 was down roughly 29 percent from the same period a year earlier. In January, Norway was forced to dip into its massive $819 billion sovereign wealth fund for the first time in the fund’s history in order to plug budget holes. Statoil, unsurprisingly, is feeling the pain of low oil prices as well. In the second quarter, Statoil swung to a $28 million after tax loss, compared to a $929 million profit a year earlier.

As such, Statoil feels a sense of urgency to expand production. On September 6, the Norwegian company told The Wall Street Journal that it was planning to push deeper into the Arctic, pursuing licenses in the Barents Sea. Statoil bought stakes in four Arctic licenses from Tullow Oil, which comes after it acquired or expanded its stakes in five separate licenses in the Arctic in recent months. “We’re doing this in a very countercyclical manner, meaning that we were able to pick up these licenses at what we consider to be very attractive terms,” Jez Averty, Statoil’s head of exploration in Norway and the UK, told the WSJ. Related: An OPEC Production Freeze Could See Oil Prices Rise To $60

Still, there are a few reasons to question the wisdom of such a move. First, the environmental risks are real and serious. Drilling in the Arctic is technically complex and expensive, and if something goes wrong, the mess is harder to clean up than in warmer waters closer to infrastructure. For evidence, Statoil needs not look far. Eni operates the world’s northernmost oil field in the Arctic – the Goliat project – and has struggled terribly since it came online in March, a startup date that was already well behind schedule. The Goliat shutdown again in August for the second time in three months. That comes after several mishaps along the way, including a gas leak and a worker injury. The WSJ reports that the Norwegian government is pressing Eni for more detailed plans on resolving its long list of problems. Eni’s struggles have not exactly endeared the Norwegian public to further Arctic drilling.

Second, it is not at all clear that the world will be in great need of Statoil’s Arctic oil when it comes online…in 2030. Falling costs for electric vehicles could cut substantially into global oil demand. Bloomberg New Energy Finance sees EVs possibly killing off 13 million barrels per day of oil demand by 2040. Under that scenario, Arctic oil may not be needed. Royal Dutch Shell scrapped its Arctic ambitions off the coast of Alaska last year, as the long-term financial risks are just too great. “I’m not really sure that these areas will be profitable. The more expensive producers such as Norway will have a lot of challenges going forward,” Thina Saltvedt, analyst at Nordea, told the FT.

By Nick Cunningham of Oilprice.com

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