Oil slump pits UK carrots against Norwegian stick in North Sea

MIKAEL HOLTER and ANGELINA RASCOUET

LONDON (Bloomberg) -- Faced with the collapse in oil prices, the two dominant North Sea producers are taking opposite approaches to bolster dwindling investment: The UK is offering carrots, while Norway is wielding a stick.

Britain plans to extend the 1.3 billion pounds ($2 billion) of tax cuts granted to producers in March after more than one in three fields was rendered uneconomic by the slump in crude. In contrast, Norway has shunned incentives and warned companies that scrapping projects could hurt their chances of getting new Arctic licenses.

The differing strategies highlight the divide between depleted British waters and the untapped potential and larger reserves on the Norwegian side of the North Sea. Norway can afford to be uncompromising, while the UK struggles to extend the life of aging and higher-cost fields.

“The UK shelf is in a far more desperate situation than the Norwegian one,” said Jarand Rystad, managing partner at Oslo-based consultant Rystad Energy AS. “On the Norwegian shelf there’s still a significant positive cash flow and the state is still getting large tax earnings despite the downturn.”

Norwegian fields not only produce more than double the oil, but their operational costs of $9.20/bbl this year are one-third of those in the UK, according to Rystad.

UK oil production fell 71% to 850,000 bpd last year from a peak of 2.93 MMbpd in 1999 as fields opened as long as four decades ago were depleted, while a more moderate 44% decline cut Norwegian output to 1.9 MMbopd in 2014 from a high of 3.4 MMbopd in 2001, according to BP data. That has left the North Sea, home of the global Brent benchmark, contributing about 3% of global supply.

With Brent plunging almost 60% to under $50/bbl in 17 months, oil companies on both sides of the North Sea are curbing investment and cutting costs. In Norway, more than 25,000 energy industry job cuts have been announced as Finance Ministry figures show spending is set to fall 11% this year. More than 60,000 UK jobs supported by the sector have been lost since the start of 2014, Oil & Gas UK, an industry group, said in September, with investment to drop by as much as a third this year.

Pitted against giant discoveries such as Norway’s Johan Sverdrup, 155 km (96 miles) west of Stavanger, higher-cost projects to prolong production from old North Sea deposits are among the first to suffer. Maersk Oil cut 220 jobs in the UK this year related to the early closure of Janice field in the North Sea.

Tax Considerations

In Norway, state-controlled Statoil ASA, the country’s biggest producer, has delayed a project to boost reserves at Snorre field by as much as 300 MMbbl of oil and the development of its Arctic Johan Castberg deposits. Royal Dutch Shell Plc said a year ago that it will probably close down its Draugen field in the Norwegian Sea about a decade earlier than it had previously expected.

While Statoil has said a 2013 tax increase contributed to the delays at both Snorre and Castberg, Norway has shown no inclination to match the incentives offered by the UK.

Instead, the head of the Norwegian Petroleum Directorate warned companies on Oct. 15 that failure to produce less profitable barrels could hurt their chances of getting new blocks in the Arctic next year. Norway’s Petroleum and Energy Ministry has said it may not renew one of Statoil’s Snorre licenses if it fails to take steps to maximize oil extraction.

Stable Framework

Stable framework conditions are the main priority for oil producers, Knut Rostad, a spokesman for Statoil, said in an email on Oct. 20.

While agreeing with Statoil’s sentiments about the predictability of Norway’s tax rates regulations, Helge Hammer, COO of Faroe Petroleum Plc, a London-listed company operating on both sides of the North Sea said “it’s a bit disappointing that they didn’t do anything that could have stimulated investments in mature and small fields.”

While Norway’s top tax rate of 78% for the most profitable developments is high, direct reimbursements for exploration and other deductions reduce risks for companies, said Petroleum and Energy Minister Tord Lien. Opportunities in the Barents and Norwegian seas also gives the country an advantage over the UK, Lien said in an Oct. 27 interview.

Producers don’t want to fall out with Norwegian authorities because they’re still in a position to allocate good licenses, said Ian Wood, former chairman of oil services company John Wood Group Plc and the author of a state-led review of UK operations in the North Sea.

Those UK operations will see further job cuts next year, with as many as half the fields unviable at $50/bbl to $55/bbl, Wood said in a Nov. 2 phone interview.

Brent, the global benchmark, added 0.7% to $48.33/bbl on the London-based ICE Futures Europe exchange at 9:51 a.m. London time.

“The North Sea is having a very hard time,” said Wood, adding that UK tax cuts have yet to stimulate spending because the oil price is too low. “In Norway, they effectively have the authority to make people invest.”