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Norwegian tax break will increase gas and oil supply to Europe
1/2/2023
The energy crisis in Europe triggered by the ongoing war between Russia and Ukraine has left the continent short of hydrocarbon supplies and increasingly reliant on LNG imports. However, Norway is expected to increase oil and gas supplies to Europe following a record-breaking sanctioning boom on the Norwegian Continental Shelf (NCS), reports Rystad Energy.
Some 35 projects have been greenlighted in the last two and a half years as operators have been scrambling to get their plans of development and operation (PDO) submitted within the temporary tax regime window that was implemented in response to the COVID-19 pandemic-induced market downturn.
The temporary tax regime incentivised operators to spend by offering direct expensing and boosting the investment uplift rate on all ongoing investments in 2020 and 2021, as well as on all development projects sanctioned before 2023 up until first production is realised.
The sanctioned projects will help maintain high gas production on the NCS towards 2030. While key producing fields such as Troll, Oseberg and Aasta Hansteen will slowly enter the decline phase in the coming years, projects developed under the temporary tax regime such as Aker BP’s Yggdrasil Hub (start-up in 2027), Shell’s Phase 3 of Ormen Lange (start-up in 2025) and Equinor’s Irpa (start-up in 2026) will be particularly significant in maintaining a steady high flow of gas from Norway to Europe.
NCS liquids production is also expected to be sustained going forward, which is welcome news as Europe seeks to wean itself off Russian oil imports. From the temporary tax regime, Aker BP’s Yggdrasil Hub (start-up in 2027), Equinor’s Breidablikk (start-up in 2025) and Vaar Energi’s Balder Future (start-up in 2024) will be the largest contributors in terms of oil output. Most oil production will, however, stem from major fields sanctioned during the standard tax regime, such as Johan Sverdrup – particularly since the giant offshore field’s second phase came online in December 2022, notes Rystad Energy.
Together, these projects have pushed back the production decline on the NCS to 2028. According to the market analyst’s research, the additional supply of gas in 2028 will be about 24.9bn m3, equivalent to around 6.225% of demand in the European Union and the UK combined. This increase from 96bn m3 to 121bn m3 means Norway will go from supplying just under a quarter (24%) to close to one-third (30.25%) of all European gas in five years.
Norway will see development spending skyrocket in the short-term as the buildout of the NCS project portfolio is forecast to launch $42.7bn of greenfield investments.
Aggregated, the 35 projects are estimated to hold a total of 2.472bn boe in economically and technically recoverable resources. Of all the projects, Aker BP’s Yggdrasil Hub leads the field, holding roughly 571mn boe, split between 266mn boe from Munin, 238mn boe from Hugin and 66mn boe from Fulla. The giant North Sea hub holds around 55% oil, 33% gas and 12% natural gas liquids (NGL).
Shell’s development of a subsea compression system at the Ormen Lange gas field follows, as the upgrade will allow for the extraction of about an additional 210mn boe of gas during the field’s lifetime. Equinor’s Breidablikk, Aker BP’s Fenris and ConocoPhillips’ Tommeliten Alpha hold approximately 192mn boe, 140mn boe and 134mn boe, respectively.
Measuring by company, Aker BP, Equinor and Vaar take the upper hand by holding 780mn boe, 570mn boe and 265mn boe, respectively, from these projects, reports Rystad Energy.
Production from the tax window projects is expected to peak at 921,000 boe/d in 2028. According to Rystad Energy, production stemming from the temporary tax regime will not sizably increase before 2025, despite Aker BPs Graasel coming online in 2021, Hod last year, and a few smaller projects slated for launch this and next year. This first lift will be fuelled by projects such as Equinor’s Breidablikk, Vaar’s Balder Future, and ConocoPhillips’ Tommeliten Alpha reaching plateau after coming online in 2024, in addition to Shell’s Phase 3 of Ormen Lange and Aker BP’s Tyrving starting up in 2025.
A steep ramp-up towards peak is forecast, with production jumping from 300,000 boe/d in 2025 to 446,000 boe/d in 2026 and 702,000 boe/d in 2027, powered sharply by the start-up of Aker BP’s Yggdrasil Hub.
Commenting on the impact of Norway’s temporary tax regime, Mathias Schioldborg, upstream analyst at Rystad Energy, says: ‘The outcome […] is three-fold: increased investment on the NCS; increased tax receipts when production starts; and increased supply to Europe at a critical time. Norway will need to consider if this regime is a one-off to attract investment, or if lessons can be learned for the future.’
