NORWEGIAN ENERGY: A MERRY-GO-ROUND OR FISHY

C O N F I D E N T I A L OSLO 000623

SIPDIS

EUR/NB (MMCDOWELL),DEPARTMENT OF COMMERCE (LMARKOWITZ),
DEPARTMENT OF ENERGY (EROSSI, TSARKUS, JGIOVE),INR/I,
EEB/ESC

E.O. 12958: DECL: 11/18/2018
TAGS: ECON ENRG EPET PGOV SENV NO
SUBJECT: NORWEGIAN ENERGY: A MERRY-GO-ROUND OR FISHY
BUSINESS?

REF: A. OSLO 126

B. OSLO 128

C. OSLO 129

Classified By: DCM Kevin M. Johnson, Reasons 1.4(b) and (d)


1. (C) Summary. Embassy officers approached
parliamentarians to discuss concerns voiced by American
producers and suppliers operating on the Norwegian
Continental Shelf (NCS). Given the forthcoming 20th
licensing round, American energy majors are increasing calls
for greater field operatorship opportunities, while stressing
the need for opening up exploration areas. StatoilHydro's
NCS operatorship dominance also raises concerns from U.S.
companies. U.S. companies also emphasized:

-- The ability of U.S. companies to effectively tackle the
technological challenges posed by NCS deep-sea exploration;

-- Concern that Norwegians are becoming increasingly
disinterested in tapping the country's energy resources; and

-- The vital role that energy companies play in the
Norwegian economy.

It is troubling that some segments of Norwegian public
opinion strongly oppose any future NCS exploration. The
Ambassador raised U.S. company concerns to Energy Minister
Riis-Johansen on November 20. End Summary.

Background: Unlock the Blocks!
--------------


2. (SBU) Norway is the third and fifth largest global
exporter of gas and oil, respectively. In 2007, total
Norwegian oil production was 2.6 million barrels per day
(mbd),with total exports of 2.3 mbd. Recent government
estimates indicate a current annual gas production of 96.4
billion standard cubic meters (bcm),of which 93.3 bcm were
exported. Gas production is estimated to increase to 120-140
bcm by 2020. Norwegian gas extraction has increased sizably
from 2007, in part due to increased deliveries from the Ormen
Lange and Statfjord fields. Nevertheless, industry and
governmental officials are concerned about future dwindling
gas supply.


3. (U) NCS development involves a licensing system. The
GON owns all subsea petroleum deposits on the NCS, and
periodically opens certain blocks for exploration, production
drilling and production. Production licenses are normally
awarded through licensing rounds, with the GON announcing a
certain number of blocks for which a production license
application may be made. The GON decides, through the
Norwegian Petroleum Directorate (NPD) and ultimately the
Petroleum Ministry, on available blocks for each round.
Undeveloped NCS frontier areas, which offer the most
attractive potential commercial opportunities, are announced
every 2-3 years. Frontier acreage is characterized by little
geological knowledge of the area, significant technological
challenges and a lack of infrastructure.


4. (U) The 20th licensing round has attracted 46
applicants--a record, and up significantly from the 19th
round application size, where 24 companies submitted
applications. The 20th round also involved the largest
number of blocks--79 open for consideration. The previous
round encompassed 33 blocks.


5. (U) Mature areas, mostly in the long-developed North Sea,
considered less financially attractive given the small
possibility of a "big find," have a separate licensing round
regime, the award of production licenses in predefined areas
(APA). APA awards occur annually.


6. (U) The Petroleum Ministry ultimately awards
operatorships, and usually creates a group of companies for
each license. The Ministry may also make adjustments to a
group which forwarded a joint application. The license
provides an exclusive right for exploration, drilling and
petroleum production. The initial exploration period may
last up to 10 years.


7. (C) Officially, licenses are awarded on the basis of
impartial, objective, non-discriminatory and published
criteria. While American companies reiterate their


willingness to do business in Norway, one executive of a
major producer previously noted that Norway practices
"discretionary transparency," where the government awards
licenses on those it simply "likes best." Petroleum Ministry
officials have been candid as to the wholly subjective nature
of the process, allowing successful applications to those it
believes play by its rules (Reftel C).

Shelving the Shelf?
--------------


8. (SBU) Norway's energy sector is transitioning from oil to
gas, with NCS oil production falling fast. No major oil
fields have been discovered in 10 years, and recently revised
estimates indicate that oil production will soon begin its
long-expected decline quicker, and more sharply, than
previously predicted (Reftel A).


9. (SBU) By all accounts, massive energy resources exist in
the Nordland VI, VII and Troms II fields, located in the
Barents Sea off the Lofoten Islands. The current Norwegian
government, facing elections in 2009, has declared those
fields off-limits, due to various environmental and fishing
concerns. (Reftel B).


10. (C) The GON's integrated Management Plan, a paper
providing the framework for petroleum activities in the
Barents Sea and off of the Lofoten Islands, continues to face
a delayed release. Industry insiders speculate that the
delay is attributable to the lack of cohesion among the GON's
coalition partners, who cannot agree upon a singular
framework.

U.S. Suppliers, Producers Energized: In or Out?
-------------- --


11. (U) The major U.S. producers are well-represented in NCS
exploration. The significant U.S. investors offshore are
ExxonMobil, ConocoPhillips, Chevron, Marathon and Hess.
Major U.S. petroleum service providers include Halliburton,
Baker Hughes, National Oilwell Varco, Weatherford and BJ. In
2006, foreign and Norwegian petroleum firms invested
approximately NOK 93 billion (USD 15 billion) in the offshore
petroleum sector. During the last several months, industry
has relayed concerns over access which are discussed below.

StatoilHydro: Big Company on Campus
--------------


12. (U) In October 2007, Statoil and Norsk Hydro merged to
create a massive Fortune 50 company, which holds
approximately 80% of NCS operatorships. The company is the
ninth largest energy supplier in the world (Reftel B),and
has significant U.S. operations, including the Gulf of
Mexico, the Chukchi Sea off of Alaska, and the Marcellus
Shale assets in Appalachia. The company is majority owned by
the GON, which will increase its ultimate ownership stake in
the company to 67.5 percent.

Problems Afield
--------------


13. (C) Embassy officers met with parliamentarians on the
Storting (Parliament) Standing Committee on Energy and the
Environment and/or their energy advisors, which involved
members of the Conservative, Progress, Labor and Liberal
parties. A spectrum of political viewpoints and ideologies
were represented. The current GON ruling coalition is
center-left under PM Jens Stoltenberg, consisting of the
Labor, Socialist Left and Center parties.


14. (C) The following U.S. company concerns were conveyed by
Embassy Officers during the meetings:

-- While the increased number of 20th round bidders confirms
continued interest in NCS development, the large number of
applicants does not show large-scale interest by the major
producers. The larger applicant pool consists mainly of
small to mid-sized companies, many of which have been hard
hit by the global credit crises. Larger energy producers
possess the needed technical expertise (particularly demanded
by the Barents Sea's challenging geologic and deep-water
weather conditions),necessary investment capital and
experience to tackle many of the demands required for
operators.



-- U.S. companies have been in Norway since the late 1960s,
with ConocoPhillips behind the massive Ekofisk project, which
initiated the Norwegian "oil adventure." These companies
know how to navigate the thorny Norwegian regulatory regime,
and have proven their long-term commitment to Norway and
sensible, environmentally-sound NCS development.

-- Many U.S. companies are expressing interest in "marginal"
blocks, where profits will be small at best. The GON should
view this as a commitment to NCS development, and consider
such commitment when the same companies are applying for
other more commercially lucrative blocks.

-- StatoilHydro's market dominance remains a concern.
Awarding the company a sizable increase in operatorships in
the next round, or handing it the most economically
interesting opportunities, sends foreign companies a message
challenging Norway's claim to a perfectly transparent and
fair system. Further, the company's existing NCS
operatorships are causing problems for American licensee
partners. Apparently spread too thin globally, StatoilHydro
is not focusing on may of these operatorships--leaving their
American partners frustrated that projects are not paid
adequate attention, and moving too slow. In the short term,
this means decreased GON energy revenues.

-- The GON should not increase the number of licensees in
each package of awarded blocks. The more actors makes it
unwieldy for operators to effectively and economically
operate or manage a field.

-- Opening new acreage is necessary. Norway has not had a
major find since the Ormen Lange field in 1997. Major
producers are unlikely to continue business in Norway if
there are no-long significant term business opportunities.
Companies compete internally for valuable exploration
resources: if the areas off Lofoten are never opened, U.S.
companies may lose interest in further Norwegian investments.
Developing a field takes at least 10-12 years. Decisions
today about future development will have long-term
implications. British Petroleum's decision to not
participate in the 20th round is a strong sign that Norway's
commercial attractiveness for the majors steadily decreases.

-- The energy industry is important to Norway, and public
outcries to halt NCS development will have serious domestic
consequences. The petroleum sector accounts for
approximately 24 percent of the country's GDP, and provides
about one-third of Norway's revenues. An estimated 70,000 to
80,000 jobs are directly tied to the energy industry, while
another 300,000 positions are indirectly linked--huge numbers
for a country with a total population of approximately 4.6
million. Given global financial uncertainty, there seems
little new industry which could immediately fill the job
creation void should NCS development cease. Further, sending
signals to Norwegian's youth that the energy industry is a
dying career will discourage students in related disciplines:
Norway's pride in deep-water engineering/technology
excellence could thus be seriously undermined.

-- Norway maintains a sterling safety and environmental
record. (Note: Stringent GON safety requirements are often
begrudgingly accepted by U.S. companies, who voice
frustration that the GON mandates tougher requirements than
its U.K. neighbor, including rig retrofitting, lower maximum
labor hours and larger sleeping spaces). Operating near an
environmentally-sensitive area would allow the GON to trumpet
its tough operating requirements.

-- The GON, including the Environment Minister and high-level
Petroleum Ministry and Directorate officials, have raised
increasing concerns that seismic tests (used in exploration)
scare away fish. Industry understands that the GON may be
setting the groundwork for denying Lofoten access by building
an argument that fishing stock will be frightened away by
basic exploration techniques.

The Parliamentarians, Advisors react
--------------


15. (C) Meetings with the parliamentarians and/or their
energy advisors revealed a commonality: all were concerned
with StatoilHydro's market dominance. Each stressed that
competition encouraged innovation. The Liberal party,


adamantly opposed to opening up acreage off o Lofoten due to
environmental concerns, pointed ut alternate possibilities
in the Barents. (Note: Econ Officer was informed by one major
U.S. prodcer that initial tests in the Barents have proven
very disappointing).


16. (C) The Progress andConservative party representatives
backed most, f not all, of the raised concerns, recognizing
the long-time necessary for NCS development. The
Conservative party, in particular, noted that the closing NCS
opportunities would seriously undermine Norway's position as
an expert in deep-sea extraction technologies. That party's
Energy Advisor also stressed that the issue of "scared fish"
is linked to the NPD's failure to enter into a meaningful
dialogue with fishermen. All were admittedly candid that
even their own parties suffered dissension. The Conservative
Party's lead Parliamentarian on energy is facing concern from
his Northern Norwegian constituents as to how opening acreage
would hurt their fishing industry.

Still Open, or Closed, for Business?
--------------


17. (C) Comment. U.S. energy producers and suppliers doing
business in Norway often lambaste Norway for its tough
regulations, high tax rates and sizable operation costs.
Nevertheless, the same companies simultaneously praise the
country for its stable government, clear playing rules,
positive investment climate and overall transparency. The
phrase "this isn't Venezuela" has been frequently voiced by
industry. Yet, all is not ideal. Resources are falling,
despite recent gas finds. Acreage of great potential, such
as the areas off of the Lofoten Islands, may never be opened
due to intense domestic fears of environmental degradation
and decreased fishing stocks. The market dominance of
StatoilHydro shall be put to the test during the 20th
licensing round, answering foreign energy producer and
supplier concerns. Public indifference as to overall
exploration may ultimately close the tap on Norwegian energy.
It is doubtful that U.S. companies will sit still as the
Norwegian energy tolerance, and market opportunities, run
dry. End Comment.
WHITNEY