'Productivity key' to killing Norway costs

Productivity call: Det Norske chief executive Karl Johnny Hersvik

The boss of Det Norske Oljeselskap is calling for improved frame conditions to promote greater competition on field development off Norway in order to drive innovation that can generate productivity gains to turn the tide of rising costs.

Exploration and development activity off Norway has been hit by a costs spiral that has led dominant player Statoil to slash investments and cut spending as it exercises greater capital discipline to boost returns for shareholders.

Det Norske chief executive Karl Johnny Hersvik believes a “fundamental problem with underlying productivity” in almost all areas of operation off Norway needs to be addressed to arrest the costs spiral.

“What other industry could have  survived a 40% drop in underlying productivity over the past 10 years?” Hersvik told delegates at the ONS conference in Stavanger.

He claimed, for example, that drilling operations now take much longer than previously despite the use of more advanced rigs, citing productivity statistics gathered over the past two decades.

Operators have not had an incentive to implement measures to boost productivity, and therefore cut costs, as the oil price has quadrupled over the past decade, according to Hersvik.

“In most other industries, competition and innovation are the fundamental drivers for improved productivity,” he explained.

While Norway has promoted a greater diversity of explorers on the exploration side through tax incentives and offering acreage under the Awards on Pre-defined Areas rounds, Hersvik believes it is now time for the country to promote competition on the production side where Statoil remains dominant.

“Competition in  the production space is fundamental to turning the cost curve,” he said.

“One of the key changes that need to be made is to put improved frame conditions in place that can ease operating parameters on the production side to enable participation by more players.”

Big discoveries such as Johan Sverdrup, in which Det Norske is a partner, with low per-barrel costs are becoming increasingly rare, he said.

Recent years have though seen the emergence of a new breed of producers such as Sweden’s Lundin Petroleum, Wintershall of Germany and home-grown player Det Norske itself, which recently took a major production leap with its recent $2.1 billion acquisition of Marathon Oil’s Norwegian assets including the producing Alvheim field.

However, Hersvik said “it is getting harder for smaller companies to make the transition from exploration to production”.

He also pointed out that rising costs were part of a wider malaise also encompassing trust and the sustainability of the industry.

“This industry has a trust problem, particularly in the Norwegian community, and it is impacting directly on how politicians and regulatory bodies, but also the man in the street, perceive our industry,” he explained.

Recent dramatic events in the Middle East and Ukraine had underlined the volatile geopolitical conditions affecting the local industry and it was vital for it to be able to adapt to such changes to ensure its long-term sustainability as a global energy provider, according to Hersvik.

“Who would have believed just a year ago that we would have warlike conditions in central Europe? That the liberalisation of the gas market would all of a sudden cry for security of supply again? And that gas from the north would be looked upon as a feasible alternative to gas from Russia?” he said.

Rapidly changing world events present a challenge for an industry that prizes stability and predictability, and must make investment decisions based on long-term forecasts, Hersvik said.

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