Spiralling rig and oilfield service costs have eroded income gains from Norwegian offshore oil assets held by the state to leave their value virtually unchanged over the past two years, according to a new report.
The State’s Direct Financial Interest (SDFI) is currently estimated to be worth Nkr1234 billion ($202 billion) in the report produced by Oslo-based analytical firm Rystad Energy for the Petroleum & Energy Ministry, representing a slight decrease on Nkr1237 billion in 2012.
The latest estimate - including net cash flow to the state from oil assets of Nkr147 billion and Nkr125 billion in 2012 and 2013 respectively - takes into account higher production forecasts for existing fields such as Troll and Oseberg as well as resource upgrades for finds such as the giant Johan Sverdrup discovery.
However, the report revealed cost inflation over the period, fuelled by high rig dayrates and a supply sector capacity squeeze due to high activity levels, has led to higher investments that have effectively cancelled out resource value gains, despite significant positive cash flows.
“The SDFI portfolio has, along with the overall oil and gas industry, been subject to slightly downward trending oil prices, increasing costs and weaker free cash flow,” the report stated.
Rystad said increased US production of so-called tight oil due to the shale boom has put pressure on oil prices, although the firm expects more offshore output will be needed towards 2020 to meet forecast future demand growth as mature fields decline.
The SDFI portfolio, which last year accounted for 28% of domestic production, is expected to generate annual output of about 1 million barrels until 2024 when production is forecast to drop.
The state-held assets, which accounted for 36% of the government’s total income from petroleum activities in 2013, are a big contributor of income to the country’s Petroleum Fund, which is currently worth about Nkr5417 billion after rising by Nkr72 billion in the first quarter.