NORWAY Norsok group identifying profitability, cost reducing areas

Nick Terdre Correspondent - Europe There was a feeling of optimism in the air when the Norwegian oil industry gathered recently to present the Norsok report to the nation. The formal recipient of the report, "The Competitive Standing of the Norwegian Offshore Sector," was industry and energy minister Jens Stoltenberg, whose predecessor Finn Kristensen set the movement going almost two years ago.


Study report calling for cooperation in the midst of competition

Nick Terdre
Correspondent - Europe

There was a feeling of optimism in the air when the Norwegian oil industry gathered recently to present the Norsok report to the nation. The formal recipient of the report, "The Competitive Standing of the Norwegian Offshore Sector," was industry and energy minister Jens Stoltenberg, whose predecessor Finn Kristensen set the movement going almost two years ago.

For the industry, it marked the culmination of a year's hard work in committee during which it believes it has identified the tools with which to overcome the threat to its future posed by the high cost of finding, developing and producing oil in Norway.

"There has been a very serious effort by all parties involved to come up with ways and means of improving our profitability through the whole value chain, from the gathering of seismic data, through the exploration phase into field evaluation and development, and finally into operations," says Anders Utne, executive vice president of Saga Petroleum who sat on the Development and Production Forum which gave rise to Norsok.

The Norsok target is to achieve a 40-50 percent reduction in project time and costs over a five-year period, taking 1993 as the base year, without undermining safety or environmental standards.

At the heart of the report are practical recommendations on how these ends may be achieved by seven working groups drawn from oil companies, contractors, authorities, and research bodies.

A whole range of changes are called for:

  1. A switch from carefully tailored solutions for each project to the use of standardized equipment.
  2. A reduction in the huge volume of documentation and the effective use of information technology.
  3. Collaboration between the oil companies on logistical matters.
  4. Clearer guidelines and a greater use of functional specifications in health, safety and environmental matters.
  5. Changes in the regulatory and fiscal framework.

But perhaps the most important change is that required at the cultural level, with the transformation of the old adversarial relationship between oil companies and the contractors and suppliers into one of cooperation to their mutual benefit.

To some extent, Norsok reflects what the industry is already doing, even if not in a very systematic way. But Utne can point to various examples of improved practice.

In March, the Diskos project to establish a common geological data bank came to fruition when the bank opened for business in Stavanger.

"This is a good example of how the industry has realized that we must join forces to save costs," he says. "We are still competitors; that should never change. But the competition parameter will be the interpretation of data, which is the main point."

Saga's new approach to exploration drilling provides another illustration. "There is more target-setting these days," Utne says. "And the price environment in which we are living has made us more specific as to the requirements of each particular well. We also consider it essential to have a close dialogue between the exploration and drilling departments."

The result is that Saga's well costs have fallen from some NKr 50,000-60,000 per meter in the 1980s to a current best level of NKr 12,000-15,000. The present target is to get them below NKr 10,000.

With the Forsook recommendations out, the industry must not sit back and relax. "It is very important to keep the focus on this issue and not think that the job is done," Tune says. A secretariat will be set up and a means established of monitoring that the recommendations are being put into effect.

Missionary work has yet to be done within the industry. "The message has been accepted at top management level but there is still a challenge in spreading it down to the rank and file in individual companies."

In fact the question of involving the workhorse is a key one. As the report acknowledges, "Successful implementation will depend heavily on whether it proves possible to establish a close and trusting collaboration with the unions."

This has been achieved with the LOA union group, which took part in the Forsook work, but not with the OF union, which sees the initiative as a threat to its members' jobs.

The government must also play its part, notably in adjusting the tax regime to the prevailing conditions. "I am confident that the Norwegian authorities are realistic," says Tune. "Once they see that it is necessary to improve the tax situation if we are to become competitive, they will address the problem in a way that we can live with."

He hopes that the government will also make a contribution by allocating modest interests to the state in the 15th licensing round. And he expects to see major players like Shell, which opted out of the 14th round, applying for licenses this time.

Norway still has a lot of potential. Hopes are high that massive reserves are waiting to be discovered in the Veering basin, which will be opened up in the 15th round. Forsook could ensure that the potential will now be tested.


Phillips Petroleum is implementing many of the new Norsok standards on the redevelopment of the Ekofisk complex.


An important role in restoring the Norwegian shelf to profitability falls to the government. The legal and fiscal framework which governs the activities of the offshore industry is identified in the Norsok report as an area where a number of reforms are needed.

Probably the single most important recommendation requiring government action is that calling for reform of the system whereby oil companies pay a marginal tax rate of 78%, made up of 28% company tax and 50% special tax.

"The tax system was established in the early days of the Norwegian shelf when oil prices were high, and the perception was that that situation would continue," says Bengt Lie Hansen, senior vice president at Norsk Hydro who chaired the Norsok working group on petroleum policy issues.

It is only six months since the government last turned down the industry's pleas for an easing of the tax regime. Now the issue has resurfaced in the light of how the Norsok cost benefits will be distributed.

"The oil companies will only get a small share, around 15%, of the reduction in costs," says Hansen. "The other 85% will go to the government, in the form of taxation or through the state's direct financial interest.

"The conclusion is that the incentives to implement a new regime along Norsok lines are not strong enough."

Hansen does not expect the government to ignore the recommendation, but cannot say when it may react. "I expect that the government will come up with more flexible fiscal terms, the question is when," he says. "In the meantime, although production is currently increasing, future investments will certainly fall, though we do not know by how much."

Other observers note that when the government refused to make tax changes last year, companies resumed their development activities, made nominations for the 15th licensing round and so on, despite their previous warnings that activity levels would suffer.

"This is not in the hands of the industry and energy ministry," said one. "It's the finance ministry that decides these questions. And they will only do something when one of the foreign oil companies pulls out of Norway."

The petroleum policy committee also recommends a reduction in the tax on offshore carbon dioxide emissions, which is currently set at NKr 0.83 per cu meter. Primarily intended to bring about a reduction in emissions, it has had little effect, Hansen says.

Other changes called for include further restrictions on the use of the sliding scale to increase the state's interest on certain fields, and an easing of the rules on license relinquishment.

A series of recommendations on simplifying the process of preparing and approving plans for development and operation (PDOs) are also made, including an important call for companies to be able to undertake substantial contractual obligations and start construction work ahead of PDO approval.


The radical overhaul in relations between oil companies and the contractor and supply sectors has already begun. This lies at the heart of the Norsok recommendations.

In project work, turnkey contracts are already common, giving contractors considerable freedom to bring their expertise to bear over a significant scope of work. Production operations such as platform maintenance are increasingly handled through long-term contracts.

BP's integrated drilling services contract on Gyda/Ula, and Smedvig's contract to supply water injection services on Ekofisk are other examples of operators handing greater responsibility to contractors.

Adoption of the Norsok recommendations will reinforce this trend, which in many ways represents a return to basics, with oil companies concentrating on finding oil and managing reservoirs, and contractors taking responsibility for the installations and facilities they require for these tasks.

"There will be a bigger role for contractors," says Asle Solheim, divisional director for ABB Offshore Technology. "We will have much more total responsibility, and there will be more integration of our competencies."

The process of consolidation in the contractor/supply industry is likely to continue, with the larger companies taking over the smaller ones and forming alliances among themselves to offer complete solutions.

The shape of the future can perhaps be seen on the Haltenbank gas fields, where Statoil has ABB, Aker, and Kvaerner to come up with development proposals, a move welcomed by Solheim.

Besides redefining roles, oil companies and contractors must learn to cooperate better with each other. Statoil has taken an interesting initiative on the Sleipner B project, creating a partnership with HMV and NRC, according to Hans Riddervold, senior vice president for market and technology at Aker Oil and Gas Technology.

But the two sides of the industry still have to go through a learning process to make the cooperative relationship work at its best, says Riddervold, who was a member of the Norsok working group on operator and supplier relations.

"This is what the cultural change is all about - to find out if you can have the same targets, and feel confident in each other. If there isn't mutual trust, you can forget about the whole question of cooperation."

Another key area in which substantial improvements wait to be made is in documentation. When Aker engineered the Sleipner A topsides in the late 1980s/early 1990s, the pile of documents would have been 650 meters high, Riddervold says.

IT offers a solution to many of the problems. "Aker Engineering doesn't need to send drawings to Aker Stord - they can just put them on-line to their CAD system, and Stord can decide which drawings they want to pull out of the system. And the information is available not just to the manager but also on the shop floor."

IT is already well advanced and it is a question of finding the best way to use it, of developing the necessary information systems, Riddervold says.

A key project in this respect is Caesar, on which oil companies and the supply industry are cooperating to develop information models.

The authorities can also play their part, by minimizing documentation requirements.

Riddervold participated in the Norsok working group on operator and supplier information, and says that the representatives of the oil companies, suppliers and the government became closer as the work went on. "The real challenge now is to get this same effect on projects," he says.


With reserves of some 1.3 tcm of gas, Troll is one of the massive fields developed in the first age of the Norwegian shelf. Standing 369 meters high and weighing over 650,000t, the base is the world's largest offshore concrete structure - and may well be the last such giant to be built for the North Sea. The platform is due to be towed to the field in July and to commence gas deliveries to the Continent in October 1996. The left photo shows a closeup of the superstructure. The right photo shows the deck - jacket mating.


One very tangible result of the Norsok movement so far is the production of 88 new standards which companies are now beginning to put into practice. Statoil, Norsk Hydro, and Saga are using them to some degree on their Norne, Njord, and Vigdis projects respectively, and Phillips on the Ekofisk redevelopment, says Knut Taranger, vice president for engineering in Saga's technology and development division, who chaired the Norsok working group on standardization.

During the history of the Norwegian shelf so far, each of the operating companies has developed its own standards, involving some 250 to 300 sets of specifications, Taranger says.

Each of the Norsok standards represents a cut of 50-80% in the volume of specifications. Functional specifications have been used where possible, putting responsibility on the supplier to propose what he considers to be the best solution.

This should enable substantial savings to be made, by simplifying both the supply of equipment and systems and their installation.

Nine of the new standards concern design principles, 33 common requirements, and 46 specific system requirements.

Implementing the Norsok standards will make the supply industry much more efficient, according to Hans Riddervold, Aker Oil and Gas Technology's vice president for market and technology.

"Each standard took more than one week to punch into the CAD/CAM system," he says of previous times. And not only did each company have its own standards, it might also have different standards for different projects, he adds.

"As soon as you apply industry standards, you can rely on sub-suppliers as well," Riddervold says. "So it's not only more efficient for the engineering company, but document-wise it will be much more efficient through the whole value chain."

Taranger says a good working relationship developed in the committee, whose supply industry members came from Dresser Rand, Frank Mohn, Kongsberg Offshore, Kvaerner, and the Maritime Group.

In the process traditional barriers fell: "It was unique for operators to allow suppliers to give their views on the sacred specifications," he says.

While further work remains to be done on developing new standards, Taranger sees the next step as being a move to internationalize them.

CRINE, Norsok's counterpart in the UK, is engaged in the same work. It is only logical, Taranger says, to harmonize standards in the two offshore sectors and ultimately to have them adopted by the International Standardization Organization (ISO).

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