Tight conditions pressure Norway contractors, fabricators

Norway's cost-cutting NORSOK program was having the desired effect - until lately. The initial impact was favorable, in that development activity soared across the Norwegian shelf. Since then, however, a combination of a tight rig market, strict regulations, and falling oil prices have caused operators to lose money on drilling operations. They, in turn, appear to be retrieving their losses by pressurizing contractors and fabricators' margins.

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Producer squeeze defeats NORSOK efforts

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Norway's Petroleum Minister Marit Arnstad says she is "shocked" by Norwegian operating expenditure forcasts.


Norway's cost-cutting NORSOK program was having the desired effect - until lately. The initial impact was favorable, in that development activity soared across the Norwegian shelf. Since then, however, a combination of a tight rig market, strict regulations, and falling oil prices have caused operators to lose money on drilling operations. They, in turn, appear to be retrieving their losses by pressurizing contractors and fabricators' margins.

This has led to escalation of the old adversarial ways that NORSOK was supposed to eliminate. It may also explain why the government froze new oilfield developments this year. High project cost overruns are to nobody's benefit.

Over the past year, several major FPSO construction and outfitting projects have fallen behind schedule or exceeded their budgets. The latest is Norsk Hydro's Visund, reportedly more than 30% over budget at NKr 4.5 billion. The Kv?rner-built Siri platform will incur a 25% price overrun, at NKr 2 billion, according to client Statoil.

Kv?rner Oil & Gas president Tore Bergersen remembers the euphoria across the industry when NORSOK was created in 1994 with the aim of reducing costs and schedules by 40-50%.

"When the first projects were launched, however, it soon dawned on us that we couldn't reach those ambitions. Now we and the industry as a whole are suffering from a lack of profit and even potential losses on a lot of those contracts," he pointed out.

Research failings

With the backing of oil companies as well as the supply industry, the government has set up an investments committee to analyze NORSOK's failings and the currently troubled oil and gas projects. The committee will conclude its assessment by end-January 1999. Members include a professor at the University of Oslo, a researcher from the Norwegian Bureau of Statistics, trade union officials involved with NORSOK in the past plus two oil industry representatives.

Petroleum Minister Marit Arnstad described the Norwegian oil directorate's forecast of NKr 750 billion for operations over the next 25 years as "shocking". That figure had to be reduced, she said, if necessary through further government intervention. License partners would be encouraged to improve management of their resources, which could mean more exploration drilling close to established infrastructure. However, she also conceded that the low oil price would hit exploration investment levels.

Norway's 22 key producers and investors have taken the resource message to heart by agreeing to extend their forum for reservoir characterization and reservoir engineering (Force) to December 31, 2001. Force, established in the fall of 1995, is designed to advance programs for improved oil recovery on the Norwegian shelf, where IOR potential is put at 5.3 billion bbl.

Since 1991, claims the Norwegian Petroleum Directorate, the recovery factor off Norway has risen to 43% from 34%, and the target currently is to recover an average of 50% from existing fields and new discoveries.

Drilling restrictions

For that to happen, drilling costs will somehow have to be contained. This will always be a struggle, given the constant influx of new drilling regulations on the Norwegian CS. The latest revision calls for more pilot wells to be drilled to identify shallow-lying gas pockets, rather than relying on seismic surveys alone. According to the Norwegian Petroleum Directorate, these pockets led to several serious life and environment-threatening incidents last year.

At ONS in Stavanger this past August, Statoil's director of drilling and well technology, Mads Grinroed, complained that operator's Norwegian regulations were impacting production activities. "Availability of rigs is critical to us reaching our production and value creation goals," he said, but Norwegian regulations prevent a rig suitable for UK sector work being transferred to Norway, without expensive upgrades.

With the quality rig market already tight, and oil prices down, Statoil has lost money on Gullfaks, Heidrun, and Statfjord Nord, he claimed, through not being able to drill production wells.

Although the lower oil price will lead to greater rig availability, he added, most of the available units will be creaking workhorses. These will not suit Statoil's future requirements, hence its decision to launch a new mobile rig drilling unit strategy called "Rig 2010."

Statoil upgrading

Between now and 2005, Statoil has 17 semisubmersibles, drillships, and jackups on short to long-term contracts, 15 in the North Sea with optional extensions on seven units. However, as a responsible operator (Grinroed's words), Statoil also wants to renew its fleet where practical.

Up to three of its current units were built in the 1970s, and increasingly they require too much maintenance and other work to keep up with current Norwegian regulations. "Also, I think the older rigs will not be suited for our future operations." These units are used in operations down to 500 meters of water - Statoil is covered in the deepwater market, Grinroed added.

Statoil's dilemma is how to balance the financial risk when it secures the necessary capacity. Where newbuildings are concerned, Statoil naturally wants to incur the lowest possible risk exposure, while the drilling contractors want minimum financial exposure. "I don't think 50% is an unreasonable financial risk for contractors to bear on a newbuild," Grinroed argued. "It's equivalent to a five-year contract. For a 10-year contract, they would have made a down payment."

Statoil has also weighed up rig ownership. "Calculations suggest it is more favorable to own a rig," Grinroed said, "but we want to focus on our role as an operator, leaving the rest to the drilling contractors. We also want to select fewer contractors to work with us - that way we will be able to understand each other better, and that will also make some of the contractors better qualified than they are today."

Grinroed also called for license partners to pool costs of dedicated well intervention rigs. "But, it's difficult to get smaller oil companies especially to commit to such a rig on a long-term basis." In general, Statoil seemed to be shouldering too much of the burden for renewal of the Norwegian fleet.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.

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