Industry sources have expressed concern that several major oil companies may choose to retreat from Norway’s offshore sector this year, as the country’s fiscal regime is deemed to have grown less stable.
A new report from UK-based analyst group Wood Mackenzie predicts that oil company divestments will drive up merger and acquisition spending to a record level in Norway in 2017. Majors are currently seeking buyers for asset packages with a significant share of their producing interests in the country.
“The majors have lofty global divestment targets and their Norwegian assets are attractive to the right type of company. But from a major’s perspective, with production in the country falling, they are likely to prioritize investments in their growth regions,” explained Neivan Boroujerdi, Northwest Europe upstream analyst at WoodMac.
Such a development would fly in the face of the Norwegian government’s stated desire to keep international oil giants active on its continental shelf. Boroujerdi told Upstream there are steps the government can take to avoid such an exodus.
“Given the majors’ involvement in legacy late-life assets, a popular move would be to implement incentives for increased oil recovery. Better terms for IOR projects would likely make them more interested to keep investments in Norway up,” he said.
Nevertheless, WoodMac believes the floodgates will open for private equity-backed vehicles to make their entrance on the Norwegian continental shelf.
“Private equity companies have cash to spend and mandates to grow,” according to the analyst. He also believes new players and national oil companies from Russia and the Middle East may have Norway in their sights.
Sources have told Upstream that ExxonMobil, Shell and Total are among the heavy-hitters that have significant asset packages for sale in Norway at present.
Potential buyers are thought to include Russian giants Lukoil, Rosneft and Gazprom, as well as Kufpec of Kuwait, Delek of Israel and Germany-based DEA, controlled by Russian billionaire Mikhail Fridman. Last year, Gazprom bought Norwegian assets from Austrian energy company OMV, while Kufpec and Delek bought asset packages from Total and Dana Petroleum, respectively.
Despite its high government take, Norway has long been regarded attractive to oil and gas companies, partly due to its stable fiscal regime. However, the country has since 2010 reduced tax uplift but increased the surtax for oil and gas production. Meanwhile many Norwegian politicians have argued recently that oil industry taxes should be tightened further.
In its new report, titled “A balancing act – fiscal trends and benchmarking”, WoodMac assesses how various countries have met the vast drop in oil prices over the past two years with changes in fiscal terms. At a time when oil producing nations must compete tooth and nail to attract investment capital through tax breaks, Norway has moved in the opposite direction.
In the report, Norway is ranked yellow/orange in a colour coded map that ranges from green to red, where green is most stable and red is least stable. Norway is ranked by WoodMac as being less stable in this regard than most African nations.
Boroujerdi explained that the ranking is a result of many factors, including whether countries offer legal protection against future changes and whether changes are likely to impact production from existing fields or only from future licences.
Petter Osmundsen, professor in petroleum economics at the University of Stavanger, said Norway has an inconsistent tax treatment of petroleum extraction versus land-based industries.
He explained that, in order to maintain Norway as a competitive country for investments, onshore industries have been granted tax cuts, with reference made to international competition.
“In contrast, the Norwegian petroleum industry has met an increase in tax,” Osmundsen lamented.
“The fact that supermajors are divesting in Norway, at a point in time when large prospective areas remain unexplored, should be a clear signal that a modern approach to taxation is needed for the petroleum industry,” Osmundsen added.
Bente Nyland, head of the Norwegian Petroleum Directorate, stressed the importance of avoiding an exodus of oil majors, as they offer vast international experience and worldwide organisations with unique competence that is valuable to Norway. She argued that the solution is to make new attractive acreage available in up-coming licensing rounds.
“The majors are not into awards in predefined areas, they want to hunt for bigger fields in new areas,” Nyland said, noting that US giants ConocoPhillips and Chevron returned to Norway in the country’s 23rd licensing round in 2015. They will participate in Statoil’s highly anticipated Korpfjell well in the Barents Sea this summer, with experts talking of multi-billion-barrel potential.
Despite the risk of an exodus, WoodMac remains optimistic about future activity levels in Norway. “While we have not witnessed a full recovery, at least the sector is up and out of bed. Against the backdrop of a rising oil price, this recovery is set to continue into 2017,” Boroujerdi said.
Norway’s explorers will be at the forefront of the recovery, with WoodMac expecting volumes discovered in 2017 to be at their highest since 2010.
“There will be an increase in the number of wells and – more importantly – a clear shift towards high-impact activity as companies go elephant hunting again. Norwegian wells will be watched globally,” he added.
