The North Sea has experienced sequential and constant declines in oil production over the past. Norway produced 61 million barrels of oil in August 2013 which was a decrease of 2.15 percent YoY. Norwegian oil production has experienced slowdowns over the past four years and has a four year CAGR of -5.94 percent.
Declining North Sea output
Annual oil production in Norway saw a peak on 1.52 billion barrels in 2000 and has halved ever since. Oil production in 2012 stood at 748 million barrels while it is expected to reduce further to 717 million barrels in 2013 with a 12 year CAGR of 5.73 percent.
Figure 1: Norwegian oil production, forecast and actual (million barrels)
The Norwegian Continental Shelf is a mature area and much of the hydrocarbons have already been extracted from this area. Extraction began in 1971 and the global oil giants have been harvesting the area ever since. Consequently, the wealth of the North Sea has deteriorated over the years.
Figure 2: Norwegian estimates on oil reserves
Lack of investment caused reduced production
With the depreciation of reserves, the country is facing new challenges. There are fewer significant discoveries and expansions now in the area. The residual reserves require a lot more investment and technological development to be brought online. “It is thus more difficult for individual projects to finance technological development. A continued focus on research and development is needed from the players on the Norwegian shelf and the State as resource owner,” says the Norwegian Petroleum Directorate.
Talisman has recently reported that saving on maintenance investment in the North Sea during the production phase can mean higher capital expenditure requirements at the later stages. Continued investment is required from the large companies in order to sustain the production levels. However, as shown in the graph below, the planned and approved investments for the next five years are declining. However, unplanned investment could come in to cover the deficit in required investment.
Figure 3: Investments in the North Sea
Plans to boost investment
Statoil ASA(ADR) (NYSE:STO), Royal Dutch Shell plc (ADR) (NYSE:RDS.A) (NYSE:RDS.B), Exxon Mobil Corporation (NYSE:XOM) and Total SA (ADR) (NYSE:TOT) have agreed to combine their investments to counter the technological gaps in the North Sea. “Norway’s upstream oil majors have agreed to combine new testing technologies designed to increase the oil reserve recovery factor. This should eliminate redundancy and limit the financial strain placed on oil companies by the testing of new extraction methods. The aim of this concerted effort is to raise Norway’s recovery level to 60% by 2020, from its current 47%,” reports Philipp Chladek.
The Norwegian Petroleum Directorae reports that investments in modern extraction technologies can help extend the lives of fields in the North Sea. The rate of oil recovery has improved from 40 percent in 1995 to 47 percent in the current period but this is still considered inadequate. The recovery rates have to be improved to keep the North Sea area alive and to sufficiently milk this cash cow.