Development contracts

person by Trude Meland, Norwegian Petroleum Museum
Norske Shell became the first oil company to locate an operations organisation to mid-Norway and Kristiansund – a choice supported by the government providing the local region benefitted.
— The Shell building at Råket was ready for use in 1992. Photo: Heine Schjølberg/Norwegian Petroleum Museum
© Norsk Oljemuseum

To achieve that goal, the company had to find a way to support mid-Norwegian industry. One answer it came up with was known as the development contracts.
Experience from Stavanger and Bergen had shown that geographical proximity between oil companies and the service sector was important not only for building up the latter but also for cost-efficient operation of offshore fields.

Both Shell and the Norwegian government were hoping to repeat this synergy in Kristiansund and the mid-Norway region – which includes the counties of Møre og Romsdal and Sør/Nord-Trøndelag. [REMOVE]Fotnote: “Mid-Norway” is not a defined geographical area and is not regarded as an official region. It can embrace the whole of Møre og Romsdal up to and including the Helgeland area of Nordland county. The company therefore established an industry office in that part of the country to identify possible partners. Read more in the article on building an operational presence.

When approving the Draugen development and the location of its operations and base functions on 10 November 1988, the government emphasised that the field should create local spin-offs.[REMOVE]Fotnote: Ministry of Petroleum and Energy (1989) Utbygging av Draugenfeltet og lokalisering av drifts- og basefunksjoner for feltene Draugen og Heidrun. Proposition no 1 to the Storting, appendix 2 1988—89 for the 1989 budget year. Oslo: Ministry of Petroleum and Energy.

The choice of contract strategy and tendering practice were intended to create the basis for selecting competitive mid-Norwegian suppliers. But demands that the oil sector should encourage Norwegian industry to get involved on Norway’s continental shelf (NCS) were no new phenomenon.

As early as the fourth licensing round in 1978, oil companies were told that their applications would be judged in part on their technological and industrial collaboration with domestic firms. Such deals were meant to ensure that Norwegian enterprises were helped to develop new technology or to become involved in the offshore business as sub-contractors.[REMOVE]Fotnote: Vatne, E (2003) Regionale og distriktspolitiske virkninger av statlig petroleumspolitikk, vol no 8/03, working paper, analysis of regional and regional policy effects of government petroleum policy, Samfunns- og næringslivsforskning AS, Bergen: Downloaded from https://brage.bibsys.no/xmlui/bitstream/handle/11250/165714/A08_03.pdf?sequence=1&isAllowed=y

The licensing system developed by Norway from the 1960s was the government’s instrument for securing this collaboration. Since the state was the exclusive owner of the natural resources, it could determine who would get a licence, who would be partners and who would become the operator.

Anyone who failed to involve Norwegian industry faced the underlying threat of possible exclusion from future licensing rounds.

Guidelines

Specific guidelines for implementing industrial collaboration were enshrined in White Paper no 9 (1984-1985). Such partnerships had to benefit all Norwegian industry, and projects also had to be commercially viable and mutually beneficial to all parties.

A key aspect was that the cooperation requirement applied only to foreign oil companies. They had to contribute technology, market access, company development or training and/or internationalisation to a Norwegian partner, in addition to possible financial input.

In addition, collaboration efforts had to be pursued as a continuous process which was independent of individual licence awards.[REMOVE]Fotnote: Søilen, E (2002). Hvorfor gikk det galt?: Statens rolle i utviklingen av norsk næringsliv etter 1945. Oslo: Gyldendal Akademisk: 156.

This policy on goods and services was incorporated during 1985 in Norway’s Petroleum Act with the aim of ensuring that Norwegian companies had the opportunity to deliver to the oil sector.

Norway’s domestic offshore supplies industry had to be given preference for contracts if it was competitive on price, quality and delivery times. Oil companies were required to provide the sector with genuine opportunities to win work.
The following specific provision was incorporated in production licences for the Norwegian or Barents Seas: “Your company as operator has a responsibility to ensure that goods and services from areas north [of the 62nd parallel] can access the market represented by oil operations.”

An evaluation of the scheme in 1985 showed that it had been a success in terms of technology transfer, but less so for capital transfers. Research teams were the prime beneficiaries. The tax system also allowed foreign companies to deduct the cost of their collaboration deals from income. This meant in reality that it was the Norwegian government which paid.[REMOVE]Fotnote: Ministry of Industry (1985). Om erfaringene fra og justeringer av retningslinjene for teknologi- og industrisamarbeid, Report no 9 (1984-1985) to the Storting, Oslo: 7. Downloaded from https://www.stortinget.no/no/Saker-og-publikasjoner/Stortingsforhandlinger/Lesevisning/?p=1984-85&paid=3&wid=a&psid=DIVL1171.

Nevertheless, the government continued to give weight to technology and industry collaboration when considering the award of licences on the NCS.[REMOVE]Fotnote: Ministry of Industry (1989). Om næringspolitikk, Report no 53 (1988-1989) to the Storting, Oslo: 79. Downloaded from https://www.stortinget.no/no/Saker-og-publikasjoner/Stortingsforhandlinger/Lesevisning/?p=1988-89&paid=3&wid=d&psid=DIVL1521. The crucial aspect of such cooperation was meant to be product development, rather than direct money transfers. And it concentrated on requirements in the Norwegian market.

Little attention was paid to exports, since interest in increasing the internationalisation of Norway’s oil community still remained low.[REMOVE]Fotnote: Ministry of Industry (1989). Om næringspolitikk, Report no 53 (1988-1989) to the Storting, Oslo: 76. Downloaded from https://www.stortinget.no/no/Saker-og-publikasjoner/Stortingsforhandlinger/Lesevisning/?p=1988-89&paid=3&wid=d&psid=DIVL1521. It is within this framework that mapping the industrial potential in mid-Norway and the development contracts between Norske Shell and industry in the region must be considered.

Mapping

As part of its licence terms, Shell was required to explain how it would follow up the use of mid-Norwegian industry to the Ministry of Petroleum and Energy and to the regional/local authorities.

An early step in mapping the opportunities for collaboration was the establishment of the industry office mentioned above – in Trondheim in 1988. It transferred to Kristiansund a year later. Key assignments for this body were to prepare an overview of mid-Norwegian companies and to provide information to regional industry and local authorities.

In addition, it identified goods and services for possible deliveries from mid-Norway in both project and production phases and prequalified possible suppliers.
The office also initiated company collaborations and contributed to recruitment, education and training[REMOVE]Fotnote: E-mail from Roy Ødegård to Norwegian Petroleum Museum. – all with the aim of establishing mid-Norwegian competence.

In other words, Shell wanted to make the maximum use of industry in the region, partly to meet government requirements but also because – as mentioned above – the company thought it would be effective and profitable to have suppliers close to its operations organisation, supply base and field.

Norske Shell drew up a development programme for efficient operation and maintenance of the Draugen platform. To identify maintenance requirements, the company signed a letter of intent with Trondheim’s Sintef research foundation.
The goal of this partnership was to exploit Sintef’s expertise in optimising the design and operation of the facility by utilising the experience and potential of mid-Norwegian industry.

Under the deal, Sintef was to identify types of equipment and assignments which had previously been found to represent the biggest offshore workloads.[REMOVE]Fotnote: Press release from A/S Norske Shell, 14 March 1988, “Draugen med eget utviklingsprogram for effektiv drift og vedlikehold”. Together with the Marintek research institute in Trondheim, the foundation had also been commissioned to study maintenance requirements on Draugen.

People in the Nordmøre district around Kristiansund were cross that two Trondheim bodies had won this job, and claimed that local firms such as Møre Engineering or Grøner could have done it.

The impact assessment for Draugen said local industry would be preferred if it was competitive. When such contracts went out of the district, the fear was that Nordmøre and Kristiansund would be left with orders for “nuts and bolts and that sort of thing …”.[REMOVE]Fotnote: Nordmørsposten, 15 June 1990. “Skruer og mutre og sånn …”. A number of local companies had hoped for more benefits from Shell, but the latter did not want to subsidise mid-Norwegian industry – which would benefit neither side in the long term.

Nevertheless, it was happy to provide “information subsidies” as a means of involving local businesses.[REMOVE]Fotnote: Hegerberg, H & Wærnes, A (2013). Alt på én hånd. Arnt A Wærnes: Suksessgründer mot alle odds. Kristiansund [A A Wærnes]: 104. The company therefore gave seminars, prepared data and visited potential suppliers. In cooperation now with Sintef and Marintek, Norske Shell invited selected companies in mid-Norway to seminars where they learnt about Draugen’s technical installations, maintenance requirements and operations philosophy.

The need for further development of companies and for ideas on products and services from mid-Norway were key themes. Shell hoped these sessions would help to put local industry in a good competitive position.[REMOVE]Fotnote: Press information from A/S Norske Shell, 8 August 1988, “Draugen – utviklingsprogram for effektiv drift og vedlikehold”. This work was by no means straightforward. While interest was high enough, the cope of available expertise was limited. That posed a big challenge for the region’s commercial sector.

Mid-Norwegian companies were mainly small and lacked the capital to make a commitment, and Shell argued that such minor firms should cooperate to strengthen their position.

One goal for the company was that suppliers should not focus solely on Draugen, but needed to have the whole oil industry – and by all means an international market – as their target.

No topsides success

Not a single contract for the Draugen platform’s topsides was placed in Nordmøre. Few companies there could deliver what was required or had an integrated and long-term commitment.

Some surprised Shell by turning down the offer of work. A big fabricator like Sterkoder opted to stay out of the oil industry because its order book was full.
The production phase was the most important for Nordmøre. But Shell felt it had done what was expected of it, having awarded a number of contracts to mid-Norway.

However, it did not think in terms of historical regional boundaries. So these orders had gone to the Romsdal district further south and to the Trøndelag counties. The bulk of the work – and the biggest assignments – naturally went to the established offshore supplies community in Stavanger and Rogaland county.
Shell wrote itself in a 1988 press release that “the response from the industry has been very positive, and all the companies invited have declared their participation”.[REMOVE]Fotnote: Press information from A/S Norske Shell, 8 August 1988, “Draugen – utviklingsprogram for effektiv drift og vedlikehold”.

However, journalist and author Helge Hegerberg reported that interest from Nordmøre in this period was low: “A number of companies did not even respond to the approach”.[REMOVE]Fotnote: Hegerberg, H & Wærnes, A (2013). Alt på én hånd. Arnt A Wærnes: Suksessgründer mot alle odds. Kristiansund [A A Wærnes]: 104.
This also emerges from a study carried out by Asplan on behalf of the Mid-Norwegian Oil Office in 1991, which found that Shell had started in an outgoing and open way to attract firms.

For various reasons, however, most companies fell by the wayside. Many of those give the opportunity to tender for work pulled out. Reasons for this included insufficient capacity, incompatibility with the company’s established capabilities, and the greater profitability of existing work. That applied particularly to the engineering sector, where the majority of enterprises contacted did not even bother to reply to the approach from Shell.[REMOVE]Fotnote: Asplan (1991). Leveranser til Draugen-utbyggingen.

Although limited success was achieved in attracting Nordmøre companies, Norwegian industry in general demonstrated its competitiveness. Ninety-three per cent of gross deliveries to the Draugen project came from suppliers in Norway. After deducting their purchases, the Norwegian proportion came to 78 per cent.
Shell had delivered on the government’s requirements. Domestic companies had won their contracts through regular competitive tendering. But the oil company still wanted to continue its efforts to utilis local industry. It simply had to make appropriate arrangements, and support education and company build-up.

Further progress

This was done in part by the companies pursuing special development projects, or being involved for shorter or longer periods in connection with commissioning the Draugen platform. The initiative for such projects had to come from the individual enterprise. Long-term success for mid-Norwegian industry depended on companies being willing to commit. Despite receiving support from Shell, they had to compete over quality and price. The oil company believed that this was the only way to create viable operations.

AS Linjebygg

One of the firms which secured a development contract was AS Linjebygg. It was not from Nordmøre, but from the neighbouring Romsdal district and had its head office in Molde. Established in 1933, this company ranked in 1993 as one of Norway’s leading installers of electricity transmission cables, and also built bridges and communication systems. When the decision to develop the Halten Bank in the Norwegian Sea was taken, Linjebygg saw that it was favourably placed. But it still needed experience to get into this market.

Work was secured on the Ekofisk field in the Norwegian North Sea. Its big advantage was the expertise it had acquired in working at a height above ground.
The company forged a link in 1991 with AAK Fjellsportsenter, which was then developing for securing access to hard-to-reach areas.

This solution was intended to simplify the performance of work at a height on platforms, and thereby to replace scaffolding along walls, under decks and up flare booms. Linjebygg secured a contract from Shell in 1991 to continue developing the access technique and to analyse the Draugen facility with an eye to using such methods.

This led to a mobile work platform which Shell liked, and Linjebygg secured a contract for offshore inspection and maintenance of structures, piping systems and tanks on Draugen.[REMOVE]Fotnote: Haukebø, Bjørn (1994). “Kostnadsreduksjoner i drift av offshoreinstallasjoner – mulighet for nye aktører?” Paper at the Halten Bank Conference, 8-9 March 1994, Trondheim. The need for expensive scaffolding offshore was greatly reduced.

Oss-nor

Contracts also came to Kristiansund. Local company Oss-nor won a development assignment which proved to be the start of a long relationship. That in turn strengthened its competitiveness.[REMOVE]Fotnote: Sysla, 21 July 2014, “Shell-kontrakt til Oss-nor”.
In 1990, Oss-nor secured an order from Kongsberg Offshore to produce subsea equipment for Draugen. This was followed in 1991 by a development contract directly with Shell. Through that assignment, it proved possible to build a market niche in maintaining valves. The contract was constantly renewed and later extended to Shell’s Ormen Lange gas field as well.

Atlanten Elmek A/S

Another Kristiansund company to land a development contract was Atlanten Elmek A/S, which had come up with an environment-friendly generator for ships.
Norske Shell brought in Sintef to help develop and test this new solution, and thereby combined research expertise with product development. That accorded fully with the oil company’s strategy of relating scientific work closely to a commercial product.[REMOVE]Fotnote: Press information fra A/S Norske Shell, 2 July 1991, “Miljøvennlig energisparetiltak for skip”.

The Halaas og Mohn

company was established in 1992 on the basis of a development contract with Norske Shell.

Liaaen Engineering

The Sunnmøre district also secured its share of these agreements. Liaaen Engineering in Ålesund, for example, got the opportunity to work on a valve which could be installed and maintained in deep water without divers. Systems of this type were not available on the market at that time, and the NOK 7.2 million project – funded by Shell – accordingly offered prospects for commercial production.

This was precisely in line with the oil company’s intentions, and the collaboration with Liaaen Engineering came to be regarded as extremely successful.

Development and R&D contracts

were entered into with the following companies in mid-Norway:

  • Atlanten Elektro
  • Norwegian Institute of Technology (NTH, now the Norwegian University of Science and Technology – NTNU
  • Sintef research institute, with multidisciplinary and leading-edge expertise in technology, science and social science
  • Norsk Marinteknisk Forskningsinstitutt AS (Marintek – now Sintef Ocean
  • Continental Shelf Institute (IKU)
  • Sikrings Teknikk AS (Siktec)
  • Semantic Register for Electronic Collaboration (Seres)
  • Seatex – develops, produces and sells maritime electronics
  • Reslab – former oil service company
  • Oceanor – automated environmental monitoring, meteorology, oceanography and monitoring equipment
  • Liaaen – fabrication yard
  • Møre Engineering
  • Bentech Subsea
  • Oddstøl Elektronikk
  • Linjebygg
  • Oss-nor – oil service company
  • Møre Engineering/CorrOcean/Liaaen

Other programmes

hell also participated in the Development of Mid-Norwegian Industry (UMNI) programme together with Statoil, Conoco, the Norwegian Council for Scientific and Industrial Research (NTNF) and the region’s county councils.

A R Reinertsen was hired to coordinate this initiative, which provided support for a number of new projects.[REMOVE]Fotnote: Draugen Innsyn (1990), no 1. “Leveranser fra midt-norsk industri”. Several of these were commercialised.

One objective of the development contracts was expertise transfer, so that companies could compete with existing suppliers for operation and maintenance assignments. Most of the mid-Norwegian participants later won work in open competition.

The Mid-Norwegian Oil Office, which had been initiated by the region’s county councils, commissioned Asplan to examine the pattern of deliveries to the Draugen project.

This aimed to identify the scope of work going to mid-Norway, and the conditions which needed to be in place if its share of overall jobs from future field developments was to be increased.

In addition to the office itself, this study was funded by Norsk Shell, Conoco, Statoil and the Confederation of Norwegian Enterprise (NHO). According to Hans Henrik Lie at xx (Epof), the report painted “a very positive picture of Norske Shell’s commitment in informing and providing opportunities for mid-Norwegian industry”.

Extensive material also exists where central, regional and local government as well as company and organisation spokespeople talk positively about the way Shell fulfilled its licence terms. Some maintain that the company reaped its reward for this commitment in the shape of the subsequent operatorship for Ormen Lange.

Conclusion

As noted above, the licence terms required Shell to make provision for industry in the region to deliver to the project, providing it was competitive on price and quality. Many people were disappointed at the results. When the Draugen project began, companies from south-western Norway dominated the offshore market.
Nevertheless, 14 companies from mid-Norway won contracts to supply equipment packages for the platform topsides. That was perhaps rather better than could be expected. But none were from Kristiansund and the surrounding district, and the outcome for Nordmøre was a let-down. Things worked better in the operations phase.

A review of the Draugen development and mid-Norwegian industry was provided at the 1991 Halten Bank Conference by Dr Even Lind, who had participated in the study on this issue. He took a positive view of Shell’s efforts to involve local suppliers in the development phase, and noted that the company had been very open to making use such companies.

However, most of them had dropped out for various reasons – such as insufficient capacity, lack of a match with established activity or earning enough from existing work. Others could not even be bothered to reply when Shell contacted them.[REMOVE]Fotnote: Sunnmørsposten, 6 March 1991, “Oljedråper til Midt-Norge”.
As the review above has shown, a number of companies in mid-Norway were able to build up a presence in the petroleum sector on the back of development contracts with Norske Shell.

Published October 1, 2018   •   Updated October 2, 2018
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