In this newsletter, the Thommessen Oil and Gas group will discuss some of the reasons why the NCS continues to be attractive to investors, and which players we can expect to see on the NCS in the years to come.

Increasing oil price and reduced cost level

At the time of writing, the oil price has increased by more than 170% since the bottom in January 2016. Combined with the significant cost cuts initiated during the oil crisis, the profit levels in the industry are rapidly rising. For the NCS specifically, the Norwegian Petroleum Directorate stipulates that development costs have been sliced by 30-50% in the last few years. A Rystad Energy analysis moreover shows that production costs are low in Norway compared to many other countries, far lower than comparable jurisdictions such as the UK, and on level with India, Egypt and Qatar.

In line with the increasing oil price the activity level on the NCS has soared, with ten Plans for Development and Operation ("PDOs") submitted in 2017, and one so far in 2018. Six additional PDOs are expected to be submitted before year end. Moreover, the latest estimates from Statistics Norway show that 2018 oil investments are expected to reach NOK 156.5 billion. This is a slight reduction from the estimates from February 2018, but nonetheless a significant upwards adjustment from the NOK 144.3 billion estimate presented in November 2017. With increasing investment levels, the oil service industry and sub-suppliers will hopefully also enjoy the positive oil price effects.

Basin with potential

The NCS has potential for years to come. The latest official prognosis shows that more than half of the total resources on the NCS are expected to still remain, with over two thirds located in the Barents Sea. It will be interesting to observe whether the considerable expectations for the Barents Sea are translated into high interest in the Barents Sea blocks in the recently announced 2018 APA round, where the predefined area has been expanded by a total of 103 blocks – including 56 blocks in the Barents Sea. The APA 2017 round already boasted record interest, with an unprecedented number of applications submitted.

There is however still enthusiasm for the North Sea, with the 2018 exploration programme of Equinor demonstrating a heavy North Sea focus. The largest NCS operator is planning to drill 60% of the 2018 wells in the North Sea, compared to 30% in the Norwegian Sea and 10% in the Barents Sea. It should be added that Equinor's ambitious 2018 programme underpins the company's assurances that it remains committed to its oil and gas business, regardless of the recent name change from Statoil.

Who are the new players?

It is becoming increasingly clear that the NCS currently attracts different players than some years back. Independents and private equity backed companies largely constitute the most active licensees today, whereas majors and European utilities are selling down or exiting. Several of the newcomers appear to be targeting similar assets, favouring near-term or immediate production, which is a clear trend shift from the exploration focus some years back.

A common feature for NCS newcomers and incumbents alike is that they will face clear expectations from the Norwegian authorities to extract all resources in discoveries and fields which contribute with value to society, not only the "easy barrels". In line with this ambition, the authorities expect the industry to sanction identified projects, use existing infrastructure and employ new technology, both to extract new resources and to increase recovery from existing fields.