Wood Mackenzie: Can Norway maximise its potential and become a Super Basin for Europe?

By Neivan Boroujerdi, Wood Mackenzie

photo: Wood Mackenzie
photo: Wood Mackenzie

The range of outcomes for oil and gas demand through the energy transition remains wide and in our base case, demand in the EU is likely to keep growing until the mid-2030s. Russia’s invasion of Ukraine has pushed energy security to the top of the agenda, and Europe’s desire to curtail imports from Russia has exacerbated pressure on already tight markets.

Norway, Europe’s biggest oil and gas provider, has responded to calls to raise short-term output and cemented its place as a supplier of choice. At a time when politicians are calling for extra taxes to be levied on producers’ windfall profits, Norway’s stable fiscal regime is appealing, and the country is leading the way on decarbonisation.

Can it seize this opportunity and maintain or even grow supply further? There are headwinds. An unprecedented level of activity – driven by the temporary tax package introduced in 2020 – is placing pressure on the supply chain. Raw materials inflation is being compounded by service sector capacity which is not the same as it used to be. Suppliers remain cautious about adding capacity and hotspots are emerging. Norway is one of them.

Development opportunities needed
On average, costs have risen nearly 40% from FEED through to FID for the “tax window” projects set to be sanctioned this year. Start-up dates have been pushed back by over a year too. While the fiscal terms provide flexibility to absorb cost overruns, long lead-times and execution risk remain big issues for industry safety records, project economics and near-term supply.

Of longer-term concern is a thinning pipeline of development opportunities. While current levels of production are likely to be maintained to the late 2020s, underwhelming frontier exploration results – particularly disappointments in the Barents Sea – have taken their toll.

Fundamentally, exploration – and new developments – are needed. We believe there is a lot to play for.

The Barents role
Norway is still a top-10 global regime in prospective resource terms but just under half the potential resides beneath the Barents Sea. The basin offers significant resource potential however, it carries many risks.

While we think there is a role for Barents gas in the supply mix, exploration in the past 10 years has failed to create value despite discovering almost two billion boe of resource. Further exploration is a tough sell. Waning interest in the basin has been exacerbated by the shift in the corporate landscape.

Sector momentum
The sector continues to be dominated by Equinor – which is celebrating its 50th anniversary this year – and the State Direct Financial Interest (State DFI) which, combined, hold more than 50% of Norway’s upstream commercial value and reserves.

The Majors and IOCs, for so long key players on the shelf have, however vacated in recent years due to a perceived lack of materiality and increasing competition for capital with higher-margin parts of portfolios.

The number of active producers has nearly halved in recent years from 55 in 2013, to less than 30 today and there are big question marks on whether the current crop of players has the appetite – or expertise – to unlock the complex developments required to maintain sector momentum.

Future energy super basin
Longer-term, the world’s growing need for sustainable energy will change the geography of oil and gas. Its future will be ever more entwined with renewables. For the upstream industry to become more sustainable, it must focus on resources co-located with both plentiful clean electricity and scalable CCS potential. These are the geological energy “super basins” of the future.

Norway ticks the boxes, helping it cement its status as an energy super basin of the future. It already has an electrification advantage and an early-mover foot on the offshore wind and CCS ladder.

Neivan is Wood Mackenzie’s Director of Research, Upstream Oil and Gas, with particular expertise in development costs, exploration and M&A
Neivan is Wood Mackenzie’s Director of Research, Upstream Oil and Gas, with particular expertise in development costs, exploration and M&A