Norway’s oil and gas sector is forecast to see record number of final investment decisions (FIDs), propelled by a temporary tax package designed to support the industry through COVID and expected to expire at the end of 2022.

Growth in production and record cash flows expected next year are likely to also strengthen the balance sheets of many companies in the oil and gas industry.

Neivan Boroujerdi, principal analyst, European upstream, at Wood Mackenzie, said: “We believe deal flow will pick up with fiscal proposals improving near-term term liquidity. We also could see the first European oil and gas IPO since 2019– any compelling investment story is likely to be reliant on Norway’s green credentials.”

Total output from the Norwegian oil and gas industry is expected to uptick slightly to just over 4 million barrels of oil equivalent per day (boe/d). This is buoyed by upcoming start-ups, including Equinor’s Martin Linge, Johan Sverdrup Phase 2 and Njord Future, as well as Wintershall DEA’s Dvalin.

The country’s response to Europe’s gas crisis is expected to also help boost output, with increased permits at Troll and Oseberg.

This move could pave the way for increased gas production from the country in 2022, going beyond the 125 billion cubic metres it recorded in 2017.

Boroujerdi said: “We also expect companies to book record profits next year. Cost cutting carried out during previous downturns will combine with strong prices to generate cash flow generation levels never seen before on the Norwegian Continental Shelf.”

Investment into Norway’s Oil and Gas Sector to Decline

However, investment into the Norwegian oil and gas sector is likely to dip slightly next year to $17 billion, its lowest since 2003. But the fall will be short-lived with a record number of FIDs on the table, Wood Mackenzie said.

The energy research institution indicated that up to 25 projects across the Norwegian Continental Shelf could get the green light, equating to over $30 billion of future investment.

Norway’s temporary tax terms are driving the activity, making it a global niche for offshore investment.

In addition, “the economics look good, too,” Boroujerdi said. “Average project break-evens are below US$30/bbl (NPV10) making these projects some of the most competitive globally. But the spike in activity will stretch the Norwegian supply chain, which means longer lead times and higher rig rates are possible.”

Apart from the increased output in oil and gas, five electrification projects, totalling $3 billion, are to be sanctioned next year, across a number of existing and new developments.

Exploration outlook to remain flat

Explorers will also look to continue what Wood Mackenzie has dubbed a “recent renaissance in performance”.

Exploration activity is expected to remain subdued in 2022, making only about 10% of global well count. Consequently, it will be propped up by its leading group of local explorers– Equinor, Lundin Energy and Aker BP will account for over 35% of wells on a net basis.

About 2 billion barrels of oil equivalent of prospective resources will be targeted, split evenly between oil and gas.

Boroujerdi said: “Norway will remain a seller’s market. High-quality, low carbon intensive assets will continue to make it one of the most competitive markets in the world with deal valuations above global averages. Changes to the fiscal system, if passed, will increase corporate liquidity and strengthen the pool of buyers.

“International oil companies will weigh up the ‘M&A versus ESG’ arbitrage: high prices may entice some to exit but at the expense of diluting carbon credentials. The removal of the exploration tax rebate should prompt some tax-driven deals by the smaller, more organic focused players.

“We could also see the first oil and gas IPO in Europe since 2019: the timing of which would coincide with some private equity investment cycles. Var Energi is the latest to suggest an IPO. Other North Sea-focused E&Ps will be exploring their options.”
Neivan Boroujerdi, principal analyst, European upstream, Wood Mackenzie