While Norwegian natural gas production continues to rise, oil production peaked in 2001 at 3.4 million barrels per day. Oil production now stands at around 1.8 million bpd, having declined an average of more than 5 percent each year since its peak. The North Sea has long been Norway's center of hydrocarbon production, but after nearly five decades of output, many of the more accessible resources have been produced, and the decline has hit many North Sea fields hard.
Completely reversing the decline in the North Sea may not be entirely possible, but new technological developments can at least slow its decline. And while the North Sea will remain Norway's most productive hydrocarbon zone for the next decade or so, Norway has significant potentially productive areas farther north on its continental shelf in the Norwegian and Barents seas and the rest of the Arctic. These regions, however, carry their own set of challenges — hurdles that will not always overlap with the problems operators face in the North Sea.
Technological challenges are nothing new for Norway, and neither is overcoming them. When foreign companies first came to Norway to explore for hydrocarbons in the 1960s and 1970s, the country's domestic knowledge and capabilities in the area were practically nonexistent. Oslo soon set up Statoil, requiring operators to hire a minimum number of local companies in order to cultivate a technically proficient domestic industry. Norway also quickly adapted its shipbuilding and maritime technology, gained over centuries of experience, and merchant shipping sector to serve a burgeoning offshore oil and natural gas sector.
Norway is now home to dozens of innovative oil and natural gas companies that rank among the world's leaders in offshore technology, most commonly in offshore environments similar to Norway. This includes everything from behemoth Statoil to service companies such as Aker Solutions. Of course, not all of the groundbreaking technology being deployed in Norway is developed by Norwegian companies. But Statoil and Norway have an ongoing history of working assiduously to set up joint industry projects in order to solve some of the challenges to, and develop some of the necessary technology for, hydrocarbons production in Norway.
Maintaining North Sea Production
Like the Netherlands and the United Kingdom, Norway is doing everything it can to sustain production levels in the North Sea. But new discoveries in the region are becoming increasingly expensive to produce, usually because of a combination of factors: The discovery is relatively small, geologically challenging (such as a high-temperature, high-pressure area) or isolated from existing infrastructure. Meanwhile, old fields are becoming more difficult to manage. Many have been in production for years and are losing reservoir pressure. This means gas injection wells are needed to maintain pressure and production rates.
Statoil and its partners hope to overcome many of these issues by continuing to transition away from traditional processing facilities onshore or above water. In most typical offshore oil and natural gas production schemes, there is limited infrastructure on the seabed, usually just a few wells with underwater pipelines that send oil and natural gas to facilities above water for processing. These above-water facilities control most operations involved in managing an oil field, such gas injection, water separation, natural gas and oil separation and a host of other processes. But as production zones venture farther offshore, depths increase and the surface environment becomes harsher, making the traditional operations setup more expensive.
Norway has slowly but surely paved the way for the integration of some of these processing facilities into subsea infrastructure. In 2007, the world's first subsea water separation, boosting and injection system was installed at Statoil's Tordis field, increasing the aging field's recovery rate from 49 to 55 percent. In 2009, a subsea seawater injection system was installed at the Tyrihans field, increasing the recovery rate by 10 percent. In the first quarter of 2015, Statoil will launch the world's first subsea gas compression system — a system the size of a football field — at the Asgard oil field. The system is expected to increase overall recovery by 280 million barrels by injecting gas into the reservoir. By 2020, Statoil hopes to have every process done on the seabed, a scheme it terms a "Subsea Factory."
Many obstacles to that lofty goal remain. But even so, the development of subsea technologies can improve the economics of many of the North Sea's marginal and mature fields. Such technologies can increase recovery more efficiently, since injection facilities are best suited to be deployed closer to production wells. They also eliminate the need for facilities above water or onshore, potentially reducing capital expenditures. They are unmanned as well, reducing operational expenditures. And perhaps most significantly, these systems can be adapted to subsea environments beyond the North Sea. For while Statoil's goals for subsea technological development are being designed for immediate use in the North Sea, Statoil also envisions them as potential solutions to problems farther north.
Operations in the Arctic and Farther Afield
Production in the Norwegian and Barents seas and the broader Arctic carries more challenges than operating in the North Sea. The entire region is isolated from existing infrastructure, meaning all of it must be built from scratch. As a result, discoveries will likely be too small to make economic sense — at least initially — because existing infrastructure cannot be used to reduce costs. The region is also much colder, so icing, hydrate formation and the risk of iceberg strikes must also be addressed. Additionally, operations in much of the Arctic involve drilling wells through subsea permafrost, requiring care to ensure that the subsea permafrost does not melt from the heat generated by drilling.
Operations in these regions will also pose significant logistical difficulties. With little to no daylight during the winter months and the potential for sea ice, the drilling season will be limited. The environment in the Arctic is also fragile, creating other obstacles. Even health and safety protocols for workers will be challenging because of the harsh climactic conditions and extreme isolation. Thus, operations here will almost certainly be megaprojects with high capital expenditures and development times running into years if not a decade, adding financial risks due to the likelihood of cost overruns and other financial burdens.
In a bid to overcome some of these hurdles, Aker Solutions is developing an Arctic drillship with unique icebreaking capabilities that would enable it to work in areas with ice drift. Normal icebreakers break ice by lifting their mass onto the ice. For a drillship, this can be problematic because broken ice can affect the drilling riser. Aker Solutions is getting around this problem in part by redesigning the hull to redirect broken ice to the ship's sides.
Statoil's offshore acumen has also made it a key explorer and producer far from northern waters. It has operated in most of the world's busiest offshore oil and natural gas regions, everywhere from Nigeria, Angola, the Gulf of Mexico and Canada to, more recently, Tanzania, where Statoil is helping pave the way for the African country to export natural gas in the coming years. It has also provided technical expertise and served a supplier role in other areas, such as Australia and in the South China Sea, where it has installed subsea components for China National Offshore Oil Corp. But the most geopolitically important petroleum relationship abroad for Norway will be with Russia.
Norway's subsea technical proficiency means it probably will always be at the forefront of solving Arctic or near-Arctic offshore challenges, making Statoil and other Norwegian companies logical partners for Russia. But this cooperation is complicated by Oslo's unique relationship with Moscow. Russia and Norway share a maritime and land border in the Arctic. The maritime border was disputed for decades before the countries signed a treaty demarcating it in 2010. Russia agreed to the demarcation treaty in exchange for technology and help developing its resources.
These included a Rosneft and Statoil partnership in the Perseevsky concession in Russia's portion of the Barents Sea. Statoil is also helping Russia in pilot programs for onshore shale oil and heavy oil production — other areas where Statoil has extensive experience from work in the United States. As Russia's own onshore production becomes more complex and expensive and declines in some areas, Russia will be more reliant on these partnerships — which bring in foreign technology — especially in offshore and unconventional plays. This is because Moscow relies on hydrocarbon production to give it geopolitical heft.
Like Russia, Norway is a significant natural gas producer and exporter to the European market. But for Norway, while partnership means leveraging technology for economic opportunities, safeguarding its own interests in the Arctic from potential Russian aggression is also a major consideration.
Western countries with an interest in the Arctic, including Norway, Denmark, Sweden, Finland, Canada, Iceland and the United States, are all trying to extend their territorial sovereign rights around the North Pole to exploit natural resources. Russia is no exception.
Control of the Arctic also has military implications. Norway's location straddling the North Sea and the Arctic means that it is a natural point of resistance to the projection of Russian naval power, potentially giving Norway the ability to interdict the supply lines linking Russia's Baltic and Arctic fleets. This makes Norway a vital member of NATO. Norway will continue to work with NATO to ensure that Norwegian sovereign interests in Norway's maritime zones are protected, even as the Russians actively send warships across the Barents, Kara and Laptev seas.
In the context of recent events in Ukraine, Norway's possession of key subsea and other technologies suited for cold offshore environments means that Oslo's position on Russian sanctions becomes more significant. Although Norway is not a member of the European Union, it has typically followed the bloc's lead on sanctions. Europe's latest round of sanctions on Russia barred new contracts for the export of equipment and technologies for deep-water, shale oil and Arctic oil and natural gas exploration and production. Norway has said it will align itself with the new sanctions but has not yet followed through.
Even if it never did, many Norwegian companies are subsidiaries of European companies, meaning they fall under the jurisdiction of EU sanctions. In a deal that this mechanism would now prohibit, North Atlantic Drilling, the Norwegian subsidiary of London-based Seadrill, signed a $4.25 billion contract with Rosneft for the use of offshore rigs just hours before the EU sanctions took effect.
Ultimately, the European Union faces an already large and growing energy deficit, potentially increasing its reliance on Russian energy resources. This means that for the rest of Europe, investments in the Norwegian hydrocarbon technological sector not only will be a profitable business endeavor, they will be strategic, too.