The good news: Investments rise in 2019

The significant oil price drop in the months from October 2018 caught most analysts by surprise. Although the general consensus is that prices will likely soon increase, the mood is less positive than in 2018's 80 USD/bbl scenario.

The Norwegian Oil and Gas Association's (NOROG) recently published investment prognosis, covering the timeframe from 2019-2023, contributes to some extent to this mixed outlook. In its prognosis, NOROG estimates that oil and gas investments will rise from around NOK 160 billion in 2018 to NOK 184.5 billion in 2019. This growth is explained mainly by increased competitiveness leading to more projects becoming profitable, but also by some shift in budgets between 2018 and 2019. Investment levels in the years 2020-2021 will thereafter decrease, reaching NOK 141.5 billion in 2023.

It should be noted that NOROG's relatively high estimates include both projects where investment decisions have been made and projects which have not yet been sanctioned. For example, NOROG explains that 40% of the investments estimated in 2023 are not sanctioned today. The situation after 2023 is even more uncertain, illustrated by the fact that Equinor, arguably the most important operator on the NCS, does not have a single PDO on the NCS in the pipeline after Johan Castberg and Johan Sverdrup phase 2 are completed in 2022. The industry therefore heavily relies on investment decisions being made in the years to come. Adding to this a backdrop of concern for changes in the industry's frame conditions, there is some uncertainty regarding NCS activity going forward.

Frame conditions under pressure?

An important message from NOROG is that since such a large share of future investments relate to non-sanctioned projects, changes in the oil industry's frame conditions could lead to a significant share of these investments not being realized. This appears to be a clear signal from the industry to the ongoing government negotiations, as the risk of changed conditions for the industry seems to be greater than before. Before the commencement of the government negotiations earlier in January, two of the four coalition parties (the liberal party Venstre and the Christian democrat party KrF) indicated that they consider to propose changes to the exploration refund scheme and the oil taxation regime, respectively. Both parties were citing environmental reasons for these moves.
Although it seems unlikely that such demands will be accepted by the other coalition parties, these initiatives could mark a gradual change in Norwegian politicians' sentiments towards the oil and gas industry. Whilst we believe that the frame conditions will remain stable in the foreseeable future, uncertainty on this topic could in itself hamper NCS investments going forward.