North and the Norwegian Continental Shelf

North and the Norwegian Continental Shelf -Introduction, Summary and Recommendations KonKraft report no. 2016 1

KonKraft in brief KonKraft is a collaboration arena for the Norwegian Oil and Gas Association, the Federation of Norwegian Industries, the Norwegian Shipowners Association and the Norwegian Confederation of Trade Unions (LO), with LO members Fellesforbundet og Industri Energi. It serves as an agenda-setter for national strategies in the petroleum sector, and works to maintain the competitiveness of the Norwegian continental shelf (NCS), so that Norway remains an attractive area for investment by the Norwegian and international oil and gas industry including suppliers and the maritime sector. The council is KonKraft s supreme body. In addition comes an executive committee and a secretariat responsible for ongoing activities and day-to-day operations. Council members Gerd Kristiansen, President of the Norwegian Confederation of Trade Unions (LO) Karl Eirik Schjøtt-Pedersen, Director General of the Norwegian Oil and Gas Association Stein Lier-Hansen, Director General of the Federation of Norwegian Industries Sturla Henriksen, CEO of the Norwegian Shipowners Association Jørn Eggum, President, Fellesforbundet Frode Alfheim, Vice President, Industri Energi Arne Sigve Nylund, Executive Vice President Development and production Norway, Statoil Tor Arnesen, Managing Director, Norske Shell Jan Arve Haugan, President & CEO Kværner Jan Skogseth, President & CEO Aibel Jakob Korsgaard, Managing Director, Mærsk Odd Strømsnes, Managing Director, Technip Executive committee members Erling Kvadsheim, Norwegian Oil and Gas Association Turid Øygard, Norwegian Oil and Gas Association Torbjørn Giæver Eriksen, Norwegian Oil and Gas Association Hans Petter Bøe Rebo, Federation of Norwegian Industries Runar Rugtvedt, Federation of Norwegian Industries Thomas Saxegaard, Norwegian Shipowners Association Georg Oftedal, Norwegian Shipowners Association Olav Lie, Norwegian Confederation of Trade Unions (LO) Jørn Prangerød, Fellesforbundet Johnny Håvik, Industri Energi KonKraft s secretariat Roger Pedersen, Head of secretariat, KonKraft Inger Hoff, adviser, KonKraft

Published by KonKraft, May 2016 Layout: HK Reklamebyrå, Tromsø Print: Lundblad, Tromsø Photos front side: Rino Engdahl

Index 1. Introduction... 4 1.1. The area covered by the report: northern NCS... 4 1.2. The NCS and its northern part in a climate perspective... 6 1.2.1. Road map for the NCS and the KonKraft climate report... 7 1.2.2. Northern NCS and profitability... 8 1.3. A changing NCS from south to north... 8 1.4. Northern Norway is important for the national supplies sector... 10 1.5. Is the far northern environment more vulnerable to petroleum operations?... 12 1.6. Environmental risk: facts, fears and precautions... 12 1.7. Contents of the report... 13 2. Summary and recommendations... 14 2.1. Recommendations... 17

4 North and the Norwegian Continental Shelf 1. Introduction 1. Introduction The Norwegian petroleum sector has developed over 50 years into the country s most important industry. This has laid the basis for Norway s current position as one of the world s wealthiest nations. KonKraft published its report on Oil and gas welfare activities in northern Norway in 2009. Over the seven years which have passed since then, the opportunity space for far-northern petroleum operations has expanded. The most important event was the 2010 boundary treaty in the Barents Sea between Norway and Russia, which makes oil and gas activities possible on both sides of the dividing line in an area regarded as promising in resource terms. Some significant regional, national and international trends can be identified from an overarching perspective. The climate challenge is the biggest of these. It calls for a massive energy transformation to reduce global carbon emissions. Three important development trends on the Norwegian continental shelf (NCS) are that gas production has outstripped oil output, greater use is being made of subsea technology and activities are shifting gradually from south to north. 1.1. THE AREA COVERED BY THE REPORT: «NORTHERN NCS» The southern geographical boundary of this report is 65 30 N. This marks the boundary between Nordland and Nord-Trøndelag counties. The continental shelf above that latitude will be termed the northern NCS in this report, and will be the basis for the discussions and figures presented. The 65 30 N parallel is defined as a block boundary in the Norwegian Sea. It also serves as a boundary between licences with the exception of production licences (PLs) 837, 798 and 211 (B). These lie in an area which straddles the 65 30 N parallel, but the bulk of each licence lies above the boundary. This delineation puts the oil field Skarv on the northern NCS while excluding Heidrun. That also corresponds with which of these fields has their supply based in Nordland. The background for this report is the KonKraft organisation s common view that it is now important to take advantage of the expanded opportunity space in the far north in order to secure value creation, robust centres of expertise and jobs. Although attention in these pages is concentrated primarily on the northern NCS, the oil and gas sector will always be a nationwide industry. The purpose of this report is to make a fact-based contribution in discussions on the opportunities and challenges presented by oil and gas operations on the northern NCS. One of its basic assumptions is that increased activity in the far north is desirable, providing climatic, company and socioeconomic conditions can be met. Petroleum operations require a long-term perspective because the industry itself is a long-term business. KonKraft wants to identify the conditions which must be in place in order to realise increased oil and gas production in the far north towards 2030.

1. Introduction North and the Norwegian Continental Shelf 5 Figure 1.1. A map of the northern NCS covered by this report, with its southern limit of 65 30 N. (Source: KonKraft) 65 30 N Open for petroleum activity Open, special schemes, see WP no 28 (2010-2011) Announced blocks in 23rd licensing round Awards in predefined areas (APA) Assumed maximum extent of sedimentary rocks which may contain petroleum Limits of the NCS according to the UN Convention on the Law of the Sea 65 30 N-border

6 North and the Norwegian Continental Shelf 1. Introduction 1.2 THE NCS AND ITS NORTHERN PART IN A CLIMATE PERSPECTIVE World energy markets face big changes in upcoming years. This restructuring will be essential if global warming is to be limited to 2 C. At the 2015 UN climate summit in Paris, the world leaders reached agreement that global emissions had to be cut as quickly as possible. The overall goal is to limit global warming to well below 2 C, and the countries will work to prevent the rise exceeding 1.5 C compared with the pre-industrial level. These energy-market measures and reorganisations coincide with other major changes in the world. Forecasts indicate that global population will rise by 2.5 billion people up to 2050, with prosperity also set to rise. The world leaders reached an agreement in 2015 on the UN sustainable development goals a common action plan with 17 targets for ending poverty, combating inequality and halting climate change by 2030. Energy supplies at affordable prices are an important precondition for value creation, growth and prosperity. Healthy economic development is also necessary if the world is to achieve the transition demanded by the dual climate and energy challenge. Fossil fuels currently account for 81 per cent of world energy consumption, and a very high proportion of global greenhouse emissions. According to the 2 C (450 ppm) scenario from the International Energy Agency (IEA), these sources will account for an estimated 60 per cent of global energy consumption in 2040. Demand will rise by 15 per cent for natural gas and fall by 21 and 36 per cent for oil and coal respectively. The Paris agreement thereby also builds on an understanding that the world economy for a long time will depend on supplies of fossil fuels. Minimising greenhouse gas emissions from production, transport and use of these energy sources is therefore important. Renewable sources will significantly increase their share of energy consumption in the time to come. The IEA assumes a growth of almost 2 000 per cent for other renewable sources up to 2050, 1 and assumes an annual rise of almost 10 per cent. However, earlier forecasts have underestimated the expansion for renewables. Despite this growth, and even if it proves higher still for such renewables as solar and wind, oil and gas will continue to account for a large share of the energy mix in 2050. An important change which will be required is a reduction in the share of coal in both power generation and as an industrial input. Coal is the most carbon-intensive fossil fuel, 2 and emits twice as much CO₂ as natural gas. 1 Source: IEA Energy Technology Perspectives 2015 2 In other words, has the highest greenhouse gas emissions per unit of energy produced. Figure 1.2. Coal, oil and gas consumption in the IEA s 450 ppm/2 C scenario. (Source: IEA, WEO 2015, World primary energy demand by fuel and scenario (Mtoe)) 3929 2495 4219 3351 2901 3335 36% 2013 2040 COAL 21% 2013 2040 OIL 15% 2013 2040 GAS

1. Introduction North and the Norwegian Continental Shelf 7 Gas has an important role in reducing greenhouse gas emissions. Norwegian natural gas, for example, is crucial for Europe s ability to reach its climate goals, and Norway currently accounts for about a fifth of total European gas supplies. Every third French meal is cooked on Norwegian gas, and likewise every fifth British cup of tea. The EU has large coal reserves, while its gas production is in decline. If Norway s petroleum sector was to cease delivering gas to Europe, the chances are that this energy would be replaced by coal with higher emissions. Coal currently accounts for no less than 17 per cent of electricity generation in Europe and 25 per cent in Germany despite its major commitment to renewables. Domestic EU gas production is expected to decline by about 50 per cent up to 2030, and thereby the requirements for import will increase. The UK government decided in the autumn of 2015 to phase out coal-fired power by 2025, and aims to replace this generating capacity with natural gas and nuclear energy. Europe is the largest market for Norwegian petroleum, more than 90 per cent of the Norwegian oil and gas output are transported to, and sold there. Norway ranks as a strategic energy partner for the EU, and the European Commission wants to integrate the Norwegian electricity and petroleum sectors even more closely with the EU s single market. Norway s short-distance oil and gas deliveries are important for European security of energy supply, and have a low carbon footprint compared with petroleum from alternative suppliers. 3 Moreover, the Norwegian petroleum sector is an integrated part of the EU s emission trading system (ETS). Norway s oil and gas industry believes that the ETS should remain the EU s most important climate-policy instrument. A well-functioning ETS with sufficiently high emission prices will contribute to replace coal with gas, and thereby reduce global emissions. Increased ETS rates would provide additional incentives for developing low-emission technologies, while giving Norwegian natural gas a competitive edge in Europe. That is because gas pollutes less than coal and because Norway produces it with lower emissions than other countries. One of the biggest challenges for conducing an ambitious climate policy in Norway and the EU is to limit the scope of carbon leakage whereby global greenhouse gas emissions increase because companies move production outside the European Economic Agreement (EEA) area because the ETS increase their costs and makes them less competitive. Norway s power-intensive sector, for example, receives a carbon compensation from the government because the ETS has boosted electricity prices in Norway even though the industry uses hydropower. 1.2.1. Road map for the NCS and the KonKraft climate report Global climate targets and the Paris agreement will result in more stringent regulation of future greenhouse gas emissions. Expectations are high that the petroleum sector will reduce emissions, enhance energy efficiency and utilise low-emission technology. The long-term value creation potential on the NCS must be realised while helping the world to reach its climate goals. It has been decided to draw up a road map for the Norwegian oil and gas industry. 4 The ambitions are two folded. First to draw the ambitions for reducing greenhouse gas emissions from the NCS by 2030 and 2050. And define the industry s ambition for long-term production and value creation on the NCS over the same periods. Work on the road map is being coordinated with an updating of KonKraft s climate report. 5 This work will also be significant for conditions relating to the northern NCS. The NCS is included in the EU-ETS, where goals have been set for 2030. These are expected to be carried forward, with emissions having to be further reduced up to 2050. The EU s objective is an 80 per cent cut in greenhouse gas emissions by 2050. That means a substantial reduction must also be achieved on the NCS in the same time frame. In future, this will have a particular effect on the choice of power supply solutions, requirements for technology advances to reduce emissions, and the choice of development solutions. At the same time, emissions from the use of oil and gas must be cut substantially. Work on the road map and the climate report will be completed during 2016. 3 Norwegian oil and gas production leads the world for low emissions per unit produced. The amount of CO₂ per unit produced released on the NCS is about half the world average, and emissions of other greenhouse gases are even lower.. 4 KonKraft s council gave its support to work on a road map for the petroleum sector, which will be led by the Norwegian Oil and Gas Association and the Federation of Norwegian Industries. Work on the road map will be carried out by a work group drawn from Norwegian Oil and Gas, the Federation of Norwegian Industries, the Norwegian Confederation of Trade Unions (LO), the Norwegian Shipowners Association and the KonKraft secretariat. 5 KonKraft published The petroleum industry and climate issues (report no 5) in 2009. Its council decided to update this document in the autumn of 2014.

8 North and the Norwegian Continental Shelf 1. Introduction 1.2.2. Northern NCS and profitability The oil and gas companies in Norway currently pay a marginal tax rate of 78 per cent 6 on production from the NCS, making this one of the world s most heavily taxed petroleum provinces. To encourage a greater diversity of small and medium-sized companies, and to boost exploration on the NCS, the government refunds the tax value of losses incurred from exploration. 7 With a marginal tax rate of 78 per cent, companies can request that the tax value of these expenses be refunded. This puts new players without taxable earnings on a par with established participants who can offset their exploration costs against taxable income. Questions are sometimes raised over whether this tax system provides incentives for socioeconomic unprofitable investment relating to fields due to be on stream after 2050. Where developments in the Barents sea and other northern parts of the NCS are concerned, expected production life extends not only to but well beyond 2050. By then, demands for much lower carbon emissions from oil and gas production will be very noticeable. The profitability of fields which fail to reach such targets will thereby be low. It is important to appreciate in this context that no investment in new production capacity whether in established areas for petroleum output or in new areas will be made unless such spending is expected to yield the return required by the companies. If investment is commercially profitable, it will also be socioeconomically profitable for the government. An illustration of expectations for future profitability is provided by the interest shown in applying for acreage in new areas, such as in the 23rd licensing round. developed and brought on stream. Production will decline from the late 2020s, and a number of the large fields on the NCS particularly in the North Sea are likely to be approaching the end of their producing lives or shut down after 2030. A failure by Norway to maintain output will mean a decline in revenues, value creation, expertise and jobs in the industry, which would in turn affect opportunities to maintain Norwegian prosperity. In addition, oil and gas would be delivered from other parts of the world with higher emissions of greenhouse gas than the NCS. This makes it crucial for the industry to obtain new, attractive exploration acreage and to find additional resources which can be developed through to production. As figure 1.4 shows, production in recent years has been much higher than resource growth from new discoveries. Over the past 20 years, discoveries have only exceeded the quantity produced and sold in 1997 and 2010. It was in these years that Ormen Lange and Johan Sverdrup respectively were discovered. Ormen Lange came on stream in 2007, while Johan Sverdrup is expected to do so in late 2019. Fields on the NCS require an average of 10 years to move from discovery and production. 6 The extraordinary profitability of producing petroleum resources (economic rent) means the oil companies are subject to a special tax of 53 per cent in addition to Norway s standard corporation tax rate of 25 per cent. 7 See section 3c of the Petroleum Tax Act. 1.3. A CHANGING NCS FROM SOUTH TO NORTH Oil and gas production on the NCS peaked in 2004, and oil output has more than halved since its own peak in 2001. The substantial expansion in gas production during recent years has stabilised overall petroleum output on the NCS. Substantial gas volumes remain in existing Norwegian fields, which also offer a big potential for improved recovery and exploration close to them. But new commercial discoveries are required if Norway is to be a long-term gas supplier at its current level and to exploit its existing gas infrastructure. Looking further ahead, production on the NCS can be maintained at a relatively high and stable level up to 2025-30. That requires existing discoveries, such as Johan Castberg in the Barents Sea, to be actually

1. Introduction North and the Norwegian Continental Shelf 9 Figure 1.3: Historical production of oil, gas, natural gas liquids and condensate in Norway, 1971-2015, and a forecast for future production by resource class, 2016-30 (in million scm oe). (Source: NPD ) 300 250 200 150 100 50 0 Figure 1.4. Resource growth and overall petroleum production on the NCS in million scm oe, 1995-2015. (Source: NPD ) 600 500 400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 Oil Condensate NGL Gas Reserves Resources in fields Resources in discoveries Resource growth on the NCS Overall petroleum production on the NCS

10 North and the Norwegian Continental Shelf 1. Introduction The North Sea is the most mature area of the NCS, where most producing fields (61) and the bulk of the largest ones are to be found. With 16 fields on stream, parts of the Norwegian Sea also rank to a great extent as a mature area. The exception is the northernmost section. The North Sea will remain important on the NCS, with the Johan Sverdrup discovery in 2010 not least contributing to renewed confidence that big new resources could be found in this area. Nevertheless, the far north is where the largest remaining undiscovered resources are expected to lie. The Norwegian Petroleum Directorate (NPD) estimates undiscovered resources on the NCS to be 2.8 billion standard cubic metres of oil equivalent (scm oe) or roughly 17.5 million barrels of oe. After almost 50 years of oil and gas production on the NCS, just under 50 per cent of the resources have been produced and sold. The NPD s resource estimate also shows that the big undiscovered resources on the NCS are probably in the far north. As figure 1.5 shows, the Barents Sea is the part of the NCS where the largest total future resources are expected to be found. Including Norwegian Sea North-East, with the Nordland VI and VII plus Troms II areas, 8 more than half the estimated undiscovered resources lie on the northern NCS. The big gas resources for the future are also expected to be located in the Barents Sea. Only a third of the gas resources on the NCS have been produced, and the Barents Sea is also expected to contain two-thirds of those which remain. Figure 1.5: Total undiscovered resources broken down by oil, gas and condensate for the North, Norwegian and Barents Sea (in million scm oe). (Source: NPD) 1600 1400 1200 1000 800 600 400 200 0 North Sea Norwegian Sea Barents Sea 1.4. NORTHERN NORWAY IS IMPORTANT FOR THE NATIONAL SUPPLIES SECTOR Supplying oil and gas operations is Norway s second largest industry by turnover. 9 This supplies sector comprises more than 1 250 companies involved in seismic surveying, engineering design, fabrication and drilling equipment, which deliver everything from valves, bolts and hoses to fabrication yards, advanced offshore supply and service vessels, and subsea technology. The industry has developed over 50 years of petroleum operations in Norway, and ranks today as a highly competent and internationally competitive sector spread over the whole country. Some 140 000 people were directly employed by the supplies industry in 2014. 10 The Norwegian supplies industry had a turnover of NOK 524 billion in 2013, with about 60 per cent deriving from the domestic market. Deliveries are made to many countries worldwide, with South Korea, Brazil, the UK, the USA, Angola, Australia and Singapore as the largest recipients. Norway s oil and gas industry must secure new attractive exploration acreage in the time to come if a competitive supplies industry is to be maintained nationwide which is far ahead in developing technology and new solutions. That will make it possible to safeguard Norwegian employment, centres of expertise and tax revenues even when petroleum production from the NCS declines towards 2050. 8 The NPD expects 202 million scm oe to be present in Norwegian Sea North-East. 9 The oil and gas sector is Norway s largest industry by value creation, government revenues, investment and export value. It accounted in 2015 for 15 per cent of gross domestic product (GDP), 20 per cent of government revenues, 26 per cent of total investment and 39 per cent of total exports. (Source: national budget 2016) 10 Industry builders 2015, Iris report 2015/031. Oil Gas Condensate

1. Introduction North and the Norwegian Continental Shelf 11 Figure 1.6. Norway s supplies industry is very diverse. (Source: Ministry of Petroleum and Energy) Figure 1.7. Total turnover (in billion NOK) from Norwegian suppliers to the petroleum sector, including shipping companies, etc, in Norway and internationally. (Sources: Federation of Norwegian Industries business trend report for 2015 and Rystad Energy) 600 500 400 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Norway International turnover Norway (projections) International (projections)

12 North and the Norwegian Continental Shelf 1. Introduction 1.5. IS THE FAR NORTHERN ENVIRONMENT MORE VULNERABLE TO PETROLEUM OPERATIONS? The waters off Lofoten and northwards in the Barents Sea are among the most productive in the world, and contain a significant share of the marine resources in the north-eastern Atlantic. They contain substantial resources of fish, seabirds and marine mammals. The regional and local significance of fishing increases northwards in Norway, and this industry is particularly important north from Lofoten. High productivity of plankton and fish creates the basis for a large variety of seabird species and marine mammals. A significant proportion of the world stocks of some seabird species are found in this area, even outside the breeding season. These waters accordingly have substantial economic and ecological value. However, it is important to understand the distinction between valuable and vulnerable. The substantial economic and natural value in the far north is used as a justification for regarding the area as more sensitive than the southern parts of the NCS. This provides a basis for warning against oil and gas operations in the far north. But a valuable resource is not necessarily vulnerable to every form of stress. Vulnerability is often defined as the ability of a species or a habitat to maintain its natural condition in relation to external, often human-induced, stress. The vulnerability of a species, a stock or an ecosystem cannot be valued without also specifying the stresses involved and their potential effects on the relevant resource. Deepwater coral banks on the northern NCS are very vulnerable to physical damage, but not necessarily to the discharge of drill cuttings. When assessing vulnerability, the robustness, resistance and adaptability of the resource must be taken into account. Robustness says something about the ability of the resource to return to its normal condition after an impact, while resistance deals with the way it withstands change through its general condition. The northern NCS is characterised by great variations in climate and other environmental factors. While conditions in the southern part of this region are comparable in terms of variability with the North Sea, seasonal contrasts become greater when moving northwards. Generally speaking, species are adapted to the great variations found in the Barents Sea, with life strategies which make stocks robust in relation to natural changes in temperature, variable food supplies and other external stresses. 1.6. ENVIRONMENTAL RISK: FACTS, FEARS AND PRECAUTIONS Like all other forms of administration, the management of sea areas, natural resources and the environment is risk-based. Very little of what humans do is risk-free, and people take conscious or unconscious account of risk in most of their undertakings. A best possible grasp of risk is the basis for good management. This is a matter of understanding the picture of possible consequences and having a reasoned view of the probability that these consequences could occur. Management is not only knowledge-based, but must also accord a significant place to the precautionary principle. The latter will be applied to environmental management where scientific documentation is inadequate, non-existent or uncertain, and where relevant scientific assessments indicate reasonable grounds for concern that substantial harmful effects for the environment will occur which conflict with the protection needed or determined by political decision. People must not wait to act until incontrovertible evidence is available. The Rio declaration 11 defines the principle as follows: 12 In order to protect the environment, the precautionary approach shall be widely applied by States according to their capabilities. Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation. Norwegian legislation (the Nature Diversity Act) also emphasises that indications of significant or irreversible damage should be present before the principle is invoked as a basis for decisions. Building on a knowledge-based management of resources and the environment is fundamental for the oil and gas industry. It wants to learn more about and achieve an ever-better basis for understanding actual risk related to its present and future operations. 11 The Rio declaration, adopted at the UN conference on environment and development held at Rio de Janeiro in 1992, contains 27 principles for achieving sustainable development. 12 Principle 15 of the Rio declaration.

1. Introduction North and the Norwegian Continental Shelf 13 1.7. CONTENTS OF THE REPORT Chapter 2 summarises the main points in the report and KonKraft s recommendations to the government and the industry. Chapter 3 provides a description of the processes involved in opening new areas and awarding production licences. It also identifies opened areas on the northern NCS, the status of resources, reserves, discoveries and fields in these waters, and the player picture. Chapter 4 presents the industry s view of those parts of the northern NCS which are not open to oil and gas activities. It also shows how such operations could be conducted in Nordland VI and VII plus Troms II if these areas were opened. In order to assess future spin-offs, expertise gaps and infrastructure requirements for operation and exploration, this report presents a vision of the way the northern NCS might look in 2030. This future picture is outlined in chapter 5, which also presents options for tomorrow s gas infrastructure and for transporting oil from the northern NCS. Under the title spin-offs from the oil and gas industry in northern Norway, chapter 6 presents the revenues generated for the nation from the northern NCS, spin-offs from development projects and the oil and gas industry in Norway s three northernmost counties. It also describes how the industry has contributed to expertise enhancement and innovation in north Norwegian companies. An overview is provided in chapter 9 of the work being pursued continuously in the oil and gas industry to ensure good safety and emergency preparedness in the far north. Addressing the need for a high level of attention to the far northern environment, chapter 10 discusses both acute and regular discharges particularly in relation to possible consequences for the environment. Environmental risk is often defined as the probability of a discharge and the scope of the associated environmental damage. This definition also takes account of the uncertainty in both the probability of an incident and the assessment of the scope of its damaging effects. Offshore oil and gas operations in high latitudes are not a new phenomenon, and the industry has developed equipment and methods for oil spill response under conditions far more challenging than would be encountered on the northern NCS. Chapter 11 describes the present position for oil spill preparedness and dimensioning, as well current development activities. Attention in this report is primarily concentrated on the oil and gas industry and its present and future significance for northern Norway. This region of the country has a diversified economy and a broad range of industries which are important contributors to value creation and employment there. The fishing and tourism sectors occupy a special place in relation to the oil and gas industry, and chapter 12 takes a closer look at the interface between these three activities. A status report on the way educational institutions in northern Norway facilitate learning directed at the petroleum sector is provided in chapter 7. Furthermore, collaboration between the petroleum industry and the educational sector in the region is described including requirements for courses directed at oil and gas operations. The measures which must be implemented to highlight career opportunities in the petroleum industry for today s young people are also outlined. Chapter 8 describes the status of the logistical infrastructure required for operating the field centres currently on stream, and the exploration-related facilities which must be in place. The chapter starts with a description of the base structure in northern Norway. These facilities are an activity directly related to petroleum operations, and activate in turn a broad range of indirect enterprises. Thereafter, the transport infrastructure and communication solutions are discussed.

14 North and the Norwegian Continental Shelf 2. Summary and recommendations 2. Summary and Recommendations This chapter summarises the report s main points and presents KonKraft s recommendations to the government and the industry. Oil and gas operations have developed over the past 50 years into Norway s most important industry. This has laid the basis for making the country one of the world s wealthiest nations. The world s energy markets face major changes in coming years, and the climate challenge must be overcome. The Norwegian oil and gas industry plays an important role here. It has been decided to develop a road map for the petroleum sector which will define ambitions for reduced greenhouse gas emissions from the Norwegian continental shelf (NCS) up to 2030 and 2050, and for the industry s long-term production and value creation. 1 Only about half the areas which may contain oil and gas on the NCS are open for petroleum activity today. Half the estimated undiscovered resources are expected to lie on the northern NCS. Oil and gas production above 65 30 N currently takes place from four field centres: Goliat, Skarv, Norne and Snøhvit. Aasta Hansteen is under development. Work is also now under way to find development solutions for Johan Castberg, Alta/Gohta and Wisting. Oil and gas production from the NCS peaked in 2004. Gas accounted for more than half the total output in 2015, while oil production has fallen by over 50 per cent from 2001. Petroleum output is set to decline from the late 2020s, and a number of the large fields on the NCS particularly in the North Sea are likely to be approaching the end of their producing lives after 2030. A failure by Norway to maintain output will mean a decline in revenues, value creation, expertise and jobs in the industry. That would make it demanding to maintain Norwegian prosperity. Since forecasts indicate 2 that the world will continue to need petroleum, that would then be delivered from other parts of the world with higher greenhouse gas emissions than the NCS. This makes it crucial for the industry to obtain new, attractive exploration acreage and to find additional resources which can be brought on stream. Providing more acreage is also a precondition for maintaining a competitive supplies industry throughout Norway, which is still among the front runners in developing technology and new solutions. The most attractive unopened areas on the NCS are Nordland VI and VII plus Troms II. They have known geology and a big resource potential, and are regarded as technically uncomplicated for exploration and for development solutions. Oil and gas activity in these areas has long been under discussion, and much data and knowledge have been acquired. An impact assessment of these areas must be conducted as quickly as possible. Impact assessments are intended to identify the possible effects of opening an area to petroleum operations on commercial and environmental conditions, including possible pollution threats, and the expected economic and social consequences. They also ensures the involvement of local and regional government and organisations with a special interest in the issue. The government can then submit a recommendation to the Storting (parliament) on opening the area to petroleum operations if the assessment and resource mapping provide a basis for doing so. An impact assessment does not automatically mean an area is opened for petroleum operations. That has not been the case on several occasions in the past. 1 KonKraft s council gave its support to work on a road map for the petroleum sector, which will be led by the Norwegian Oil and Gas Association and the Federation of Norwegian Industries. 2 From the International Energy Agency (IEA).

2. Summary and recommendations North and the Norwegian Continental Shelf 15 Should Nordland VI and VII plus Troms II be opened for oil and gas operations, it is very important that possible seismic surveys in these areas are conducted to minimise the impact on fishing and to limit the environmental footprint. That makes it important to establish a Nordland group shoot project for such surveys, which ensures that all conditions and requirements are fulfilled in a safe and effective manner. In that way, relevant stakeholders can achieve the same benefits and incentives as those secured by the Barents Sea South-East group shoot project. The area covered by new seismic data from a group survey must be large enough to cover several production licences. Exploration drilling is necessary to prove oil and gas deposits. Major efficiency gains have been achieved in recent years by drilling wells faster and more efficiently. Exploration drilling in Nordland VI and VII plus Troms II is regarded as technically uncomplicated, the geology is familiar, and the risk of incidents causing delays to operations is small. Cost-efficient operation is important for the industry, since the operational window will probably be relatively short in order to minimise the risk of potential conflicts over space with other stakeholders in the area. The Norwegian Petroleum Directorate (NPD) must intensify efforts to map the resource base in Barents Sea North including Barents Sea North-East and data already acquired must be made available to the industry. Once the results of the NPD s mapping are available, an impact assessment must also be initiated for Barents Sea North and North-East. Northern NCS in 2030 The report presents a future picture for the northern NCS. Should this come to pass, the level of activity will rise substantially and boost demand for goods and services regionally and nationally. That means the northern NCS will become more important for both Norwegian suppliers in general and north Norwegian ones in particular. Requirements for expertise and a modern infrastructure are also expected to become more stringent. Infrastructure for gas transport has gradually been expanded in connection with the development of new fields. The gas infrastructure which will emerge in the northern Norwegian Sea and the Barents Sea is directly related to the provision of new acreage, and will also depend on additional gas discoveries and their size, coordination between licences, and the financing model. Oil developments could also be dependent on transport solutions for associated gas. Both pipelines and LNG are possible solutions for the Barents Sea. Future transport requirements and market prospects will ultimately lay the basis for the choice of solution. This report presents four options: step-by-step development of pipeline solutions, a giant discovery in the Barents Sea with a new Barentsrør pipeline, infrastructure with new financing solutions, and increased LNG capacity. Oil produced in the Barents Sea must be shipped to market by tanker. One option for storage and export is an FPSO 3 with the capacity to store oil and transfer it to a shuttle tanker. A fleet of winterised tankers would transport the oil to terminals and refineries around the world. A second option is a production facility with capacity for storage and transfer to a shuttle tankers, where winterised tankers take the oil to a transhipment terminal on land. Conventional tankers would then distribute the oil to refineries. The third option is a production facility combined with a pipeline to land for oil storage and transhipment. Water depths in the Barents Sea mean that the combination of production and storage offered by an FPSO is often the preferred solution in financial terms. In addition, great distances between fields and the coast would impose additional costs for installing oil pipelines. Spin-offs from the oil and gas industry in northern Norway Oil and gas operations on the northern NCS have had spin-offs for other industries through exploration activity, developments and the operation of fields on stream. A number of the north Norwegian companies which currently deliver goods and services to the oil and gas industry do so both locally and nationally, and some also internationally. Over time, operators and supplier companies have established a presence in the region and represent an important part of north Norwegian industry. It must nevertheless be admitted that developments are concentrated on a few towns and regions the concept of the three Hs (Hammerfest, Harstad and Helgeland) is used as an illustration, for example. North Norwegian suppliers have improved their competitiveness over time, but still have a big development potential. Norway s oil and gas industry currently faces a demanding time. High costs combined with low oil prices have called for measures to reduce expenses and enhance efficiency. The same conditions apply globally, and have led to lower activity. As this report shows, the supplies industry in northern Norway also expects a decline in turnover and employees. Examples of this have already emerged throughout the region. Looking rather further ahead, the signs are that turnover will pick up again. 3 Floating production, storage and offloading unit used in the oil and gas industry.

16 North and the Norwegian Continental Shelf 2. Summary and recommendations Direct revenues from oil and gas sales in northern Norway began when Norne came on stream in 1997. Petroleum worth more than NOK 396 billion has been produced since then. Oil and gas output from Norne, Skarv and Snøhvit was worth NOK 44 billion in 2015, down from NOK 58 billion the year before. In other words, the industry in the region makes a substantial contribution to Norway s tax revenues, value creation and jobs. Expertise boost in the north A fundamental precondition for continued development of petroleum operations in northern Norway is the availability of competent personnel. This was also noted in KonKraft s 2009 report, which found that oil-related education in Norway was heavily concentrated in the south-west and in Trondheim. The present report records great progress with the interaction between the petroleum industry and the technical colleges and university sector as well as other research institutions in northern Norway. This is because the oil and gas industry, the government and R&D institutions have all, from their various perspectives, identified and initiated good measures in new priority areas. The result has been new courses, improved equipment, and new institutes and centres, highlighted by the establishment of courses relevant to the oil and gas sector at several places in the three northern counties. Experience shows that the simplest approach is to recruit north Norwegians for jobs in northern Norway. That makes it important for the county councils there to develop an educational provision which gives young people who want to work in the petroleum sector the opportunity to do so. According to the report s future picture, more people with an education at upper secondary level will be needed along the whole value chain in the petroleum sector. It will therefore be necessary to maintain the level of education in relevant subjects, and if possible to increase it somewhat. Enhanced expertise will still be needed in north Norwegian companies which want to qualify as suppliers to the oil and gas industry. Good infrastructure important Freight shipments for oil and gas operations on the northern NCS go largely to the bases at Hammerfest and Sandnessjøen, while passenger transport takes place to a great extent from Hammerfest and Brønnøysund. Current and probable developments over the next few years will largely be covered by the existing bases. Growing activity in Barents Sea South-East will create a need for increased supply-base and heliport capacity further to the east in Finnmark. It is important to note that this activity should be close to industrial hubs and resources on land. A substantial strengthening and improvement of communication solutions in the far north are crucial for safe and efficient operation by all the industries active in this region. High level of safety in the far north Good safety and emergency preparedness are crucial preconditions for continued value creation on the northern NCS. However, oil and gas operations in high latitudes are not a new phenomenon. The petroleum sector has pursued prudent operations in these regions for many decades, both on the NCS and not least internationally. Year-round production is currently being pursued in such areas as the Canadian Arctic, Alaska and off Sakhalin in Russia under conditions far more challenging than on the northern NCS. Norway s oil and gas industry is continuously improving. A collaboration between companies, unions and government has identified challenges and possible measures on the northern NCS. Tripartite agreement exists on this work, which forms the basis for further efforts. The report presents a number of the collaborations currently under way. Great attention paid to far northern environment Requirements for safe operation and a minimum impact on the natural environment have been fundamental for the Norwegian oil and gas industry. Over more than 50 years of oil and gas activity on the NCS, no acute discharges causing substantial damage to the environment have occurred from offshore operations, related transport or associated land facilities. Several decades of environmental monitoring and available statistics from the Petroleum Safety Authority Norway show that the trend for actual discharges is declining and that identifiable discharges to the sea are becoming smaller and more local. Building further on this operating experience is important as the scope of far northern activity grows. The waters off Lofoten and northwards in the Barents Sea are among the most productive in the world, and contain a significant share of the marine resources in the north-eastern Atlantic. But the environment in the far north is no more sensitive to oil and gas operations than in other parts of the NCS. The far north is characterised by great variations in climate and other environmental factors. While conditions in the southern part of this region are comparable in terms of variability with the North Sea, seasonal contrasts become greater when moving northwards. Generally speaking, species are adapted to the great variations found in the Barents Sea, with life strategies which make stocks robust in relation to natural changes in temperature, variable food supplies and other external stresses. As a number of studies have also noted, conditions on the northern NCS do not vary significantly from those found in the Norwegian and North Seas with regard to weather and wave heights.

2. Summary and recommendations North and the Norwegian Continental Shelf 17 Oil spill preparedness strengthened The oil and gas industry internationally has developed equipment and methods for oil spill response under far more challenging conditions, particularly in terms of low temperatures and ice, than will be experienced on the northern NCS. Most of this region will pose no new challenges for such response compared with the NCS further to the south. Wind and wave conditions, for example, are more challenging in the Norwegian Sea than those experienced in the Barents Sea. Responsibility for oil spill preparedness rests with the companies in the areas where they operate. This duty is primarily handled through the Norwegian Clean Seas Association for Operating Companies (Nofo), to which all operators on the NCS belong. Oil spill response has been substantially expanded in line with the rising level of activity in the far north. As chapter 11 reports, capacity for coastal and shoreline response has doubled over the past seven-eight years. To strengthen near-coast oil spill response, both Nofo and the Norwegian Coastal Administration (NCA) have entered into agreements with fishing-boat owners along Norway s entire coast. The number of vessels varies, but around 100 fishing boats are normally affiliated to these arrangements. Nofo has the largest number of agreements, covering about 65 vessels. Two-thirds of all the ships are based in northern Norway. Strengthening oil spill preparedness also reinforces general preparedness in the far north for other incidents including those related to maritime traffic, including oil shipments, already taking place along the Norwegian coast. Interface with other industries The fishing and petroleum industries are important for value creation and employment nationally and for many regions and local communities nationwide. They are particularly significant for coastal societies. These sectors have developed side-by-side for more than 50 years. Both are heavily regulated, and great responsibility and willingness has been shown by both sides in finding good solutions which emphasise the interests of the whole community. Drilling, development and production by the oil and gas industry generate few conflicts, but acquiring seismic data poses a number of challenges. Such information is crucial for pursuing petroleum operations in all phases of the business. To ensure that both fishing and petroleum activities can develop and operate as effectively as possible, purposeful efforts must by pursued by all sides to strengthen the basis for co-existence and to reduce the potential for conflict between them. The most important competitive advantage for northern Norway s tourist industry is its spectacular nature and the cultural history related to human life in this setting. All market surveys show that Norway is associated with clean and beautiful scenery, and that northern Norway s uniqueness lies in its Arctic environment and animal life, and not least such natural phenomena as the Northern Lights, the Midnight Sun and the North Cape. No detailed studies have been conducted in Norway on visitor satisfaction with a region before and after petroleum operations have begun, but some of the country s biggest nature-related tourist attractions lie in its western counties. Møre og Romsdal, Sogn og Fjordane, Hordaland and Rogaland offer magnificent scenic experiences for tourists. At the same time, this region has several decades of experience with petroleum operations off its shores. This demonstrates that nature tourism and the petroleum industry are able to co-exist. Good opportunities are available for constructive interaction between the tourist industry and the oil and gas sector. The latter is an important player in business travel and makes extensive use of the services offered by the north Norwegian tourist industry, which is thereby able to offer a larger number of year-round jobs. The recommendations made by KonKraft to the government and to the industry itself are summarised below. Many of the tasks and challenges identified here must be dealt with through a collaboration between government and industry. 2.1. RECOMMENDATIONS KonKraft makes the following recommendations. The Norwegian government must ensure stable and predictable frame conditions for the oil and gas industry. This helps the NCS to remain attractive and competitive, and will permit a high level of activity, with high employment and value creation, for a long time to come. It is important that petroleum policy rests on a broad foundation of political support. Licensing policy must remain unchanged, with ordinary rounds every other year and annual APA rounds. 4 This provides a good framework for meeting the industry s need for new exploration acreage, not least in the far north. 4 Awards in predefined areas.