Big capacity boost

The field had been shut down for a week and a half while these new facilities were tied in. When it resumed, daily production was up from about 100 000 barrels to 138 000. This was in line with a decision by the Storting (parliament) on 12 June, which set a new output ceiling for Draugen of 143 000 barrels per day on average.[REMOVE]Fotnote: Recommendation from the standing committee on energy and the environment on development and operation of the Njord discovery, determination of the state share in the Draugen and Brage fields and briefing on Norsok work. https://www.stortinget.no/no/Saker-og-publikasjoner/publikasjoner/Innstillinger/Stortinget/1994-1995/inns-199495-197/.

It was naturally good news for operator Shell, but with a bitter aftertaste – even with such a sharp increase, the company could not expect more money in the bank.

That was because Jens Stoltenberg, petroleum and energy minister in the Labour government, aimed to exercise the sliding scale provision on increasing state participation.

Put simply, Shell’s share of 100 000 barrels of oil per day was about 21 000 barrels. Once output passed that level, however, the government could boost the state’s holding in the licence.

This was done by taking over shares from licensees Norske Shell, Statoil and BP in June 1995 – which meant the operator still received only 21 000 barrels per day.

The government basically had the right to an additional 10 per cent share of the licence, but the principle of the sliding scale had become very controversial in the early 1990s. [REMOVE]Fotnote: Norsk Oljerevy Nr. 8, 1992, «Sannsynlig at glideskala faller, men: Ny type statsdeltagelse viktigste prinsipp-reform». 

After negotiations with the oil companies, who maintained that full exercise of the scale would make a production rise unprofitable, the proportion taken over was cut to eight per cent.

Shell’s holding thereby fell from 21 to 16.2 per cent, while BP lost 3.2 per cent and kept 10.8 per cent. Statoil and the state’s direct financial interest (SDFI) rose from 65 to 73 per cent.

As an international company on the Norwegian continental shelf (NCS), Shell had to be diplomatic in its language.

“I’d say we’re happy to have achieved a resolution,” operations head Knut Engebretsen commented in June 1995.[REMOVE]Fotnote: Bergens Tidende, 29 June 1995, “Kraftig økning på Draugen”. “We can live with this.”

But Shell was nevertheless far from satisfied. It had invested NOK 300-340 million to achieve the big output rise. Two-thirds of that went on drilling new production and injection wells.

To prevent this spending and the production increase from cutting its return, Shell had to reduce its operating costs by about 20 per cent.

Measures to achieve savings were already under way, so that spending was down to about NOK 600 million in 1995. A further cutback to NOK 500 million by 1996 would be pursued.

So the operator was uninterested in any further increase in production from Draugen in the immediate future. This would require such substantial investment that it would be unprofitable.

While Shell and Draugen had to struggle with the results of exercising the sliding scale, the government decided to drop this system for all future developments. That made application of the principle to Draugen particularly hard to swallow for Shell.[REMOVE]Fotnote: Bergens Tidende, 29 June 1995, “Kraftig økning på Draugen”.