Money machine

person Finn Harald Sandberg, Norwegian Petroleum Museum
The Draugen platform has produced oil and gas with an overall value of roughly NOK 250 billion over the 25 years since it came on stream.
— Photo: Frank Berglund/Norwegian Petroleum Museum
© Norsk Oljemuseum

The field was discovered in 1984 in a highly permeable structure which has since proved to be an extremely productive reservoir. It soon became a candidate for development at a time when new discoveries had to queue up to secure official authorisation.

The Norwegian government had only opened the Norwegian Sea to oil and gas operations relatively recently, and a number of partnerships were drilling wildcats in the area.

Many groups had been against extending exploration to new areas of the Norwegian continental shelf (NCS), and thereby crossing the barrier represented earlier by the 62nd parallel.

This opposition reflected fears – which have since proved groundless – that the rich fisheries in the Halten Bank area could be harmed.

In fact, the fishing and petroleum industries have demonstrated that they are able coexist harmoniously in the Norwegian Sea.

When Draugen began producing oil on 19 October 1993, it was expected to yield almost entirely oil – some 430 million barrels or 68 million standard cubic metres of oil equivalent (scm oe).[REMOVE]Fotnote: Norwegian Petroleum Directorate, Facts, 1983.

Since then, the recoverable amount has been increased to about 140 million scm oe.[REMOVE]Fotnote: Norwegian Petroleum Directorate website, fact pages fields, 1 October 2018.

store verdier, graf,
Figure 1

Operator A/S Norske Shell has also made changes to its production facilities over these years.

The upshot of these alterations is that daily output has been significantly increased since the field first came on stream. Read more about capacity increases and updating.

Figure 1. Annual production peaked in 2001, the year after gas output and export was included.[REMOVE]Fotnote: Norwegian Petroleum Directorate website, fact pages fields, 1 October 2018

Figure 2. Draugen has produced assets worth almost NOK 250 billion in all since 1993. These revenues are calculated on the basis of a production profile obtained from the Norwegian Petroleum Directorate’s fact pages in the autumn of 2018 and an annual average oil price taken daily from Norwegian business newspaper Dagens Næringsliv.

store verdier, graf,
Figure 2
Published October 12, 2018   •   Updated October 17, 2018
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Petoro – a state-owned partner

person by Trude Meland, Norwegian Petroleum Museum
Petoro is a partner in the Draugen licence, with a 47.88 per cent stake at April 2018. This state-owned company manages the government’s own oil-related holdings.
— Petoro's logo
© Norsk Oljemuseum

The state’s direct financial interest (SDFI) covers shares in production licences, fields, pipelines and land-based plants associated with the Norwegian continental shelf (NCS).

petoro en statlig partner, illustrasjon, engelsk
Petoro's organizational chart. Illustration: Petoro

This makes the government a participant in its own right in the oil industry, and the assets involved include a third of Norway’s petroleum reserves. Although precluded from acting as an operator, Petoro otherwise works like any other oil company where the aim is to maximise revenues for its owner – in this case the state. But it differs from other players in that it is only a manager, not the actual licensee on the NCS. It administers the SDFI holdings which belong to the state.
Petoro therefore receives no revenues from the SDFI, nor does it contribute to any investment. All income and costs generated by the state’s interests are channelled over the government budget.

As the actual licensee, the government must meet its share of investment and costs while receiving a comparable share of revenues from each asset.
Petoro’s own operating costs are met by annual appropriations from the government. Nor does it sell the petroleum produced. This is done by Equinor (ex Statoil) together with its own output.

The Petoro name combines petra, meaning stone, or petroleum, which means “rock oil” and oro, meaning gold.

Creation

Petoro was founded on 9 May 2001, but the company’s history actually goes back in many ways to the original creation of the SDFI in 1985. Discussion raged in the early 1980s about state oil company Statoil’s rapid growth to a dominant position in Norway’s petroleum industry and the Norwegian economy in general. The non-socialist coalition led by Kåre Willoch was concerned about this relatively young enterprise being responsible for such as large part of the government’s revenues.
A broad compromise negotiated between the Willoch government and the Labour Party included transferring about 50 per cent of Statoil’s licence holdings to what became known as the SDFI.

The state had previously had interests in production licences, but through Statoil. These were now split into an SDFI share and one retained by the company.
That meant the state became the direct holder of shares in oil and gas fields, pipelines and land-based plants. The percentage size of these holdings varied from asset to asset.

Subsequently, the SDFI has been given its own share in new offshore licences awarded by the Ministry of Petroleum and Energy. The main purpose of this change was to separate the cash flows which would otherwise have gone to Statoil, and channel one part of them directly to the Treasury. To achieve this, the state had to become a direct licensee on the NCS with a corresponding responsibility for investment and operating costs, and exposure to risk.

The civil service was not geared to running commercial activities on the scale required by the SDFI. Statoil was accordingly asked to administer these interests.
That system persisted until the oil company was partially privatised in 2001. During this period, the SDFI was pretty anonymous. Both partners and the public saw only Statoil.

The management system involved the state company selling the SDFI’s oil and gas together with its own – a solution which has continued after Petoro was established.

In connection with Statoil’s stock market listing in 2001, the responsibility for running the SDFI portfolio was transferred to Petoro. But the Storting (parliament) imposed restrictions on the latter’s operations. As noted above, it is not allowed to be an operator. Its workforce was also restricted to 60 people – the new company was not intended to grow into another Statoil.

The latter merged in 2007 with the oil and energy division of Norsk Hydro, and the ceiling on Petoro’s staffing was lifted. It would now need to do more technical and commercial work itself.

petoro en statlig partner, logo, engelsk,
StatoilHydro's logo

Licensee

Pursuant to the regulations, one of Petoro’s duties as a licensee both on Draugen and elsewhere is to ensure that the operator runs a field in a prudent and efficient manner. That applies not least to such areas as health, safety and the environment (HSE), where Petoro – like all licensees – is required to promote continued progress on the NCS.

petoro en statlig partner, logo, , engelsk,
Petroleum Safety Authority Noway's logo

The Petroleum Safety Authority Norway (PSA), responsible for supervising HSE in Norway’s oil sector, conducted audits of Petoro as a licensee in 2002 and 2015.
Covering the company’s whole involvement on the NCS, the 2002 check left the regulator with a “positive impression”. Petoro had a functioning HSE management system, it found.  In addition, the PSA established that the company discharged its duty of seeing to it that the operator acted properly, and had an active and conscious attitude to its role as licensee.

petoro en statlig partner, engelsk,
Health and safety regulations are strictly followed offshore. The right gear and equipment must be used at all times. Photo: Shadé Barka Martins/Norwegian Petroleum Museum

The 2015 audit looked on Petoro’s role in the Draugen licence and also covered Norske Shell as the operator. No nonconformities or improvement points were found on this occasion either. “Our general impression … was that management at both Norske Shell and Petoro covering the subjects of the audit are satisfactory, and no breaches of the regulations were found,” the PSA report states. “Nor were any improvement points identified.”

It appears that Petoro does its job as partner and manager of the SDFI well. That is important when the company ranked in 2018 as by far the largest company on the NCS in terms of oil and gas output. Through Petoro, the state has direct interests in 203 production licences, 39 producing fields and 16 partnerships for pipelines and land-based plants. Net cash flow from the SDFI in 2018 is estimated at NOK 77.4 billion.

Published October 1, 2018   •   Updated October 19, 2018
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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
© Norsk Oljemuseum
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Political management of Norway’s oil sector

person Finn Harald Sandberg Norwegian Petroleum Museu
Activity on the Norwegian continental shelf (NCS) had become so large by the early 1980s that key politicians were concerned it could damage other industries in Norway. Several decisions by the Storting (parliament) were to affect planning and design for Draugen.
— Sunset at the Ekofisk centre. Photo: Harry Nor-Hansen/Norwegian Petroleum Museum
© Norsk Oljemuseum

Tempo commission

The government appointed a commission of inquiry on 5 March 1982 to assess the future scope of petroleum operations on the NCS.[1] This became known as the “tempo commission”.[2] Chaired by Hermod Skånland, deputy governor of Norges Bank, it was to report to the Ministry of Petroleum and Energy (MPE).

When explaining the appointment of the commission, the government pointed to the political consensus on maintaining a moderate pace of production on the NCS.

Such a pace had been “defined” in 1974 as 50-90 million tonnes of oil equivalent (toe) or 375-675 million barrels (boe) per annum. That corresponded to an average daily output of 1-1.85 million boe.

The higher figure had been proposed by the Labour government’s finance minister, while the lower was backed by the Storting opposition.

A White Paper from the finance ministry in 1974 calculated that annual output in 1981-82 would be 670 million barrels and would then decline from known fields.[3] (It might be noted in passing that peak output from the NCS, achieved in 2004, was 1 662 million toe.[4])

Offentlig styring av oljevirksomheten, engelsk,
At the completion of the deck to Statfjord B, there were more than 3,000 persons working at Rosenberg shipyard in Stavanger. This image is from a shift, where it was often crowded in the stairs between the floors. Photo: Rein Øverland / Norwegian Oil Museum

In 1982, the workforce in the petroleum sector as such accounted for a mere 0.5 per cent of overall Norwegian employment and just one-fortieth of all industrial jobs.

But people were concerned that even limited changes in oil activity would have a substantial impact on other parts of the national economy.

During the 1970s, the petroleum sector had given an important stimulus to elements of Norwegian industry at a time when international economic development was weak.

It was seen that this had led to the acquisition of expertise which could lay the basis for new production and exports. But worries were nevertheless expressed that oil operations could divert key personnel from other industries.

An important element in the tempo commission’s mandate was an emphasis (as in the 1974 White Paper cited above) that the resources on the NCS had to benefit the whole society.

Offentlig styring av oljevirksomheten, illustrasjon, graf, engelsk,
Historical overview of investment in the Norwegian oil industry, 1990-2012. Source: Ministry of Petroleum and Energy

At the same time, government oil policy should be shaped to ensure that associated social changes occurred within an acceptable framework.

The commission proposed that the government should use total demand from the petroleum sector as the criterion for managing, preserving and developing expertise in this industry and in Norway’s offshore supplies business.

Maximum and minimum levels should be set for this criterion. The base line was seen as particularly important in preventing Norwegian industry becoming overly dependent on a single sector.

A stable level of investment of about NOK 25 billion per annum was considered to provide the desired effect. But it proved impossible to stick to that target.

 

Offentlig styring av oljevirksomheten, engelsk, illustrasjon,
Number of PDOs approved since 1990 by size. Source: Norwegian Petroleum Directorate

To achieve good management of activities, the commission called for a change to the practice of considering and approving all plans for development and operation (PDOs) of petroleum fields in the Storting’s spring session.

Instead, it proposed a process which would make it easier to even out the level of investment. This involved authorising the MPE to approve developments within a defined level of activity.

It was not until 1994 that a PDO was approved on these terms (for Vigdis on 19 December). Since then, about two-thirds of the 70 PDOs submitted up to 2015 have been ministry-approved.

 

A third proposal from the commission which has been highly significant and has attracted much attention was the creation of a special government fund.

This could serve as a buffer against big fluctuations in oil and gas revenues (from major price changes, for example). The suggestion was slipped in by interpreting the mandate a little broadly.

The “oil fund” – officially the Government Pension Fund – was not established until 1990, and the first transfer of revenues to it occurred six years later.[5]

Renamed the Government Pension Fund – Global in 2006, this sovereign wealth fund exceeded NOK 7 billion for the first time in 2015.

 

 

Queue

Offentlig styring av oljevirksomheten, engelsk,
Crude oil at Draugen. Photo: Shadé Barka Martins/Norwegian Petroleum Museum

When oil prices were at their lowest following the dramatic slump in 1986, the government had sought to encourage companies to maintain their level of exploration activity through tax cuts.[6]

However, concern was expressed when presenting the national planning budget for 1988 that the pace of development on the NCS was too rapid.

The petroleum White Paper presented in April 1987 had stated:

 

A level investment of NOK 25 billion in 1987 value could be too high when viewed in relation to the desired development of the rest of the Norwegian economy. The government will therefore continue its work on the question of how high the level of investment in the petroleum sector should be. Further details on this will be provided in the national planning budget for 1988.[7]

 

The government sought to pursue a strategy which it believed would take account of developments in Norway’s mainland (ie, non-oil) economy, petroleum-related industry, the resource position and revenue risk.

Known as the “queue system”, this approach was meant to be based on operator plans adjusted for restrictions on gas sales. That would allow the government to decide on postponements to bring annual investment down to NOK 25 billion.

At that time, in the autumn of 1987, the MPE had received PDOs for the Snorre and Draugen fields and was awaiting them for Oseberg phase 2, Heidrun and Brage.

In addition, a plan for installation and operation (PIO) of the Haltenpipe gas transport system in the Norwegian Sea was due before Christmas.

The first chapter of the White Paper concluded that: “The government will revert to the question of which fields should be developed first.”

Significance for Draugen

This field lies in block 6407/9 in the Norwegian Sea, where a production licence was awarded on 9 March 1984 as part of the eighth licensing round. Oil was proven there in the same year.

Draugen was accordingly found right in the critical period of low crude prices. And the government had been advised to manage the pace of oil development by regulating investment.

To secure permission to develop the field, it was therefore important to be able to come up with a “low-cost” and efficient solution.

The size of field and the government’s talk of offshore tax reliefs also meant it was interesting to plan for a rapid development process.

Where a find the size of Draugen is concerned, it has historically taken about seven years on average from discovery to PDO approval by the Storting.

In Draugen’s case, however, the time lag was a mere four years.[8] Its PDO had been submitted in September 1987, a full year before it gained the green light.

Einar Knudsen, former head of communication at Norske Shell, recalls the process as follows:

 

The queue proposal was launched, in other words, while the authorities were right the middle of considering the PDO. Shell and its partners reacted sharply to this arrangement, which struck more or less like a bolt from the blue. We were wholly unable to accept this for a project which was profitable, risk-free and not least friendly to outlying districts. Our strongest ‘competitor’ in this respect was the Heidrun early production project.

 

We worked intensively with the Storting’s standing committee on energy and the environment, and also succeeded in building strong alliances with politicians from Møre og Romsdal [county] in general and Kristiansund in particular, since we envisaged operating Draugen from the latter. This was also documented via the impact assessment, which we used for all it was worth. The combination of strong project economics (not least for the government) and sustainable regional policy meant that we won the day and were not included in any queue system.[9]

 

With the exception of a small delay to the Brage development, the queue system was never actually put into practice. Investment admittedly remained at about NOK 25 billion for a couple of years, but already exceeded NOK 50 billion in 1987 value by 1992. See the figure.

In chapter 5 of the 1994 oil White Paper, which covered further development of the petroleum industry, the Ministry of Industry and Energy stated:

 

The level of activity on the Norwegian continental shelf has been managed largely through the award of production licenses in […] 14 licensing rounds. Managing activity through licensing policy also represents the best way to take care of the need to secure continuity and predictability in the activity. Direct intervention […] to influence activity could reduce efficiency and increase costs […]. Viewed in isolation, that could also weaken interest in investing on the Norwegian continental shelf.”[10]

 

When summarising this chapter, the White Paper concluded that the pace of development on the NCS was dependent on conditions outside the government’s control.

When the PDO for Draugen came to be approved by the Storting in the autumn of 1988, the MPE recommended that the proposed plateau rate of production be increased from 90 000 barrels of oil per day (bod) to 110 000.

This move would have a substantial negative significance for the private companies in the licence, given that the government operated at the time with a “sliding scale” for state holdings.

Under that system, the government would regulate the division of interests in a field to give the state a bigger share if daily plateau output forecast for it exceeded 100 000 bod.

Where Draugen was concerned, this would mean an increase in the state’s direct financial interest (SDFI) from 50 to 65 per cent – with a possible rise to 75 per cent.[11]

The corollary was that Shell’s interest would decline from 29.4 to 15 per cent. That would represent virtually a halving of its holding.

A decision to exercise the sliding scale did not have retroactive effect, so that all the expenses met by the companies until then would remain theirs while their future revenues were significantly reduced.

The licensees, with Shell in the lead, reacted sharply to this recommendation and initiated effective lobbying efforts. These proved a success, and the PDO was approved with 90 000 bod as the expected plateau production.

Three alternatives for developing Draugen were referenced in the 1988 budget recommendation. When the PDO was approved on 19 December that year, interests in the licence were revised so that the SDFI and state oil company Statoil obtained a combined holding of 65 per cent.

Shell had to accept a reduction in its share to 21 per cent. And a further eight per cent increase in the state interest was approved by the Storting on 1 July 1995.[12]

Interests in the licence were again changed several times after the standing committee on energy and the environment recommended this increase from 65 to 73 per cent.

Over the years until 2002, however, the state’s direct holding was reduced to 47.88 per cent – which is where it stood in 2017.

[1] Norwegian Official Reports (NOU) 1983: 27, Petroleumsvirksomhetens framtid.

[2] Ryggvik, Helge and Smith-Solbakken, Marie (1997), Norsk Oljehistorie volume 3: 410.

[3] Ministry of Finance, Report no 25 (1973-74) to the Storting.

[4] Norwegian Petroleum Directorate (2013). Facts. The Norwegian Petroleum Sector.

[5] Norges Bank Investment Management  www.nbim.no/no/fondet/historien/.

[6] Ryggvik, Helge and Smith-Solbakken, Marie (1997), Norsk Oljehistorie volume 3: 413.

[7] Ministry of Petroleum and Energy: Report no 46 (1986-87) to the Storting.

[8] Norwegian Petroleum Museum http://www.kulturminne-valhall.no/Feltet/Geologi-og-reservoar/Fra-null-til-hundre-i-loepet-av-20-aar.

[9] E-mail from Einar Knudsen, former head of communication at A/S Norske Shell, to the Norwegian Petroleum Museum, 2016.

[10] Ministry of Industry and Energy, Report no 26 (1993-94) to the Storting: 53

[11] Energy and industry committee: Budget recommendation no 8 to the Storting. Supplement 2. (1988-89).

[12] Energy and environment committee: Budget recommendation no 197 to the Storting. (1994-1995).

Published May 14, 2018   •   Updated October 1, 2018
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