Valuation

24.06.2010

On the basis of the updated resource picture, the NPD has conducted a financial valuation of the potential petroleum resources. These calculations are based on a number of technical and economic assumptions, including the time when these areas are opened to petroleum operations, exploration activity and development solutions. Such assumptions are necessary when making economic assessments.

Only one exploration well has been drilled in the sea areas off Lofoten, Vesterålen and Senja, and the history of their geological development is complex. The NPD’s estimate of undiscovered resources accordingly has a wide uncertainty range. For that reason, two valuation methods which complement each other have been utilised (figure 21). A statistical model is used to calculate the expected profitability and its uncertainty range. However, this model fails to take account of the fact that uncertainty may decline over time, both through further processing and interpretation of seismic data and by drilling exploration wells. New information and opportunities to make step-by-step exploration and development decisions create value which must be taken into account in the traditional financial calculations. Scenario analyses have been used to accomplish this in a better way, and to value resource outcomes which are at the upper limit of the uncertainty range.

 

Valuation methods

The financial valuation is based on the estimated volume of resources with its associated uncertainty range (figure 18). One method uses a statistical (stochastic) financial calculation model, where each resource value is associated with a development solution and its profitability the calculated. These calculations provide both the expected profitability (net present value) and its uncertainty range.

These calculations indicate that it would be profitable to initiate exploration in the area. The breakdown by net present value shows both the financial downside and upside of such a decision. However, the upside is most significant for the decision to initiate exploration in a new area. It is the possible upside which provides oil companies with incentives to explore in such regions.

Part of the geological uncertainty in the areas will be clarified over time through active measures such as drilling exploration wells. The latter could prove or disprove plays. Reducing uncertainty through learning creates opportunities – or options – in that decisions can be taken step by step (sequentially) and based on new information. A discovery, for instance, could provide further information on the geology in surrounding areas and thereby lay the basis for more efficient exploration.

Taking account of the option value created by new information and opportunities for step-by-step exploration and development decisions in the financial calculations is demanding. That is particularly the case in this analysis because it deals with many prospects which are mutually dependent. As a result, scenario methods have been applied in addition to the statistical model in order to identify possible option value.

The value of undiscovered resources has been estimated for four different scenarios (A, B, C and D). In addition, the NPD has prepared a “wild-card” scenario (X). This reflects the fact that uncertainty over resource outcomes in an unopened area is substantial, and outcomes which lie at the upper limit of the NPD’s resource distribution cannot be excluded. Scenario X assumes that the two plays with the biggest resource potential – the Jurassic and the Upper Cretaceous – are both confirmed. It illustrates an option which should be included when assessing the possible impact of opening areas for exploration.

 

Valuation assumptions

Valuation of the undiscovered resources is based on a number of assumptions. The most important of these are briefly covered below.


The environment

The areas off Lofoten, Vesterålen and Senja were assessed as particularly valuable and sensitive in Report no 8 to the Storting (2005-06). The valuations assume the same operational standards which apply in those parts of the management-plan area where petroleum activity is permitted.

 Figure 21. Valuation of undiscovered resources – various methods.

Figure 21. Valuation of undiscovered resources – various methods.

 

Timetable for activities

This valuation is based on opening the areas off Lofoten, Vesterålen and Senja for petroleum activity in 2014.

These operations are assumed to apply the strategy of step-by-step exploration employed elsewhere on the NCS. This means that an evaluation of exploration results in blocks awarded should be available before further work is initiated.

The valuation assumes that Nordland VI and Troms II are explored first as part of the step-by-step approach.

One exploration well is expected to be drilled during 2014 in production licence 219 in Nordland VI, which was awarded in 1996. The assumption is that up to two exploration wells will be drilled annually in both Nordland VI and Troms II from 2015. Exploration of Nordland VII, with two wells drilled per annum, is expected to start rather later than in Nordland VI and Troms II.

The valuation of the areas assumes that they will be explored in detail before development decisions are taken, with the first investment decision expected in 2024. Four years are assumed to elapse between an investment decision and the start to production.

 

Geologists investigate Jurassic sandstones at Ramså on Andøya.

Geologists investigate Jurassic sandstones at Ramså on Andøya.

 

Development solutions

The total volume and types of resources in the areas will determine which development solutions are chosen. Integrated solutions are assumed where these represent the most profitable approach.

Pure gas discoveries will either be piped to land for processing and onward transport to the Halten Bank, or compressed on vessels offshore and shipped to the same hub.

Oil discoveries (with associated gas) are either piped to land or processed and loaded offshore. The associated gas is reinjected in the reservoir should no solution for landing it be available locally.

Where transport to land is chosen for both oil and gas, an integrated solution based on subsea separation and separate pipelines for gas and liquids has been assumed. The oil is dewatered on land – with the water returned to the field for injection – and shipped out in tankers, while the gas is piped to the Halten Bank for export.

A possible land-based plant and associated subsea developments are illustrated in figures 22 and 23, while figure 24 presents an offshore development solution for oil discoveries.

 

A land-based plant

Figure 22. A land-based plant.


 

Overtrawlable subsea development.

Figure 23. Overtrawlable subsea development.


 

A floating production installation.

Figure 24. A floating production installation.

 

Prices, costs and discount rates

The calculations are based on price forecasts for oil and gas from the Ministry of Petroleum and Energy. In the short term, the oil price forecast is just over USD 80 per barrel, rising towards USD 97 per barrel in 2030. For technical accounting reasons, an exchange rate of NOK 6 to the USD has been assumed. The ministry’s forecasts are in line with predictions by other players who produce price estimates. On this basis, gas prices are forecast to be NOK 1.78 per scm in 2010, with a slightly rising trend up to 2030. To illustrate the level of uncertainty in the price prediction, sensitivities of +/- 30 per cent have been applied. Prices are real prices in 2010 value.

Estimates for exploration, development and operating expenses are based on the level of costs in 2010.

Furthermore, a real interest rate of four per cent has been utilised in the calculations.

 

Valuation based on a statistical (stochastic) model

The anticipated gross sales value for total oil and gas resources are calculated at about NOK 600 billion. Profitability (expected net present value) is put at about NOK 105 billion. The cumulative probability distribution in figure 25 (blue line) shows that the likelihood of a positive value is about 88 per cent. This figure also shows a 75 per cent probability that the value will be NOK 51 billion or more, and a five per cent probability that it will be NOK 178 billion or more. These figures are naturally very sensitive to the underlying price assumptions for oil and gas.

The negative value reflects the possibility that a number of exploration wells are drilled without finding sufficient volumes for a profitable development. The probability of negative value is about 12 per cent.

In addition, profitability has been calculated for changes in the price assumptions (+/- 30 per cent). The overall expected value of the total resources is calculated to be about NOK 150 billion for the high price forecasts and NOK 60 million for the low.

The overall value without discounting is estimated at roughly NOK 480 billion.

 

 Figure 25. Value estimates for the areas based on play analysis.

Figure 25. Value estimates for the areas based on play analysis.

 

Scenario-based valuations

The NPD has developed four scenarios for future developments. Their purpose is to identify value which arises from step-by-step exploration and development decisions. These scenarios also provide a better visualisation of the level of uncertainty than the stochastic method.

When preparing the scenarios, the main emphasis has been on discovery size (large or small) and resource volume (above or below expectations). Price trends for oil and gas are taken as given. The structure of the scenarios is presented in figure 26.

 

 

Figure 26. Scenario matrix.

Figure 26. Scenario matrix.

 

Each scenario represents possible outcomes from possible developments within the NPD’s resource distribution. In addition, a wild-card scenario (X) is presented at the upper limit of the uncertainty range for the resource distribution. This reflects a case in which the two plays with the biggest resource potential are both confirmed. Each scenario is written out as a brief description of the road taken from today to 2030. It is assumed that resources after 2030 are phased into and produced through the infrastructure existing in 2030 as spare capacity becomes available.

The estimated gross sales value for the total oil and gas resources is calculated for each scenario. This varies from NOK 0 in scenario C to about NOK 1 800 billion for scenario X (figure 27). Figure 28 illustrates exploration, investment and operating costs for each scenario. Total costs vary from NOK 7 billion to about NOK 440 million. That can give an indication of the level of activity associated with the petroleum business, including the basis for spin-offs in the region.

The profitability of the petroleum resources varies from a negative figure of NOK 7 billion for the scenario with the smallest resources (C) to about NOK 650 billion for the wild-card scenario (X). See figure 29. The calculations show a big range in the valuation of petroleum resources in the areas, which reflects the high level of uncertainty in estimating their size.

Part of the geological uncertainty can be reduced over time by drilling exploration wells. That will clarify whether the direction of travel is towards scenarios A, B, C, D or perhaps X. That creates opportunities or options in that decisions can be taken step by step and tailored to new information. The value of such options can be substantial and should be taken into account in the exploration process. A sensible resource policy is therefore to adopt a step-by-step approach, so that possible option gains can be realised.

 

 

Figure 27. Gross sales value for oil and gas in the various scenarios.

Figure 27. Gross sales value for oil and gas in the various scenarios.

 

 

Figure 28. Exploration, investment and operating costs in the various scenarios.

Figure 28. Exploration, investment and operating costs in the various scenarios.

 

 

Figure 29. Valuation (net present value) in the various scenarios.

Figure 29. Valuation (net present value) in the various scenarios.

 

 


 

A – High resource outcome and small discoveries

 

Many small discoveries in clusters

Download: Fig.pdf


Nordland VI:
This area is opened for exploration in 2014, with the first well spudded in the same year. The finding rate is high, but discoveries are small. Eight have been made by 2024. They lie in clusters, concentrated in two limited areas. Total recoverable resources are 45 million scm (280 million barrels) of oil and 30 billion scm of gas.


Troms II
:
Exploration begins in 2015. By 2024, seven small discoveries have been made – again in clusters. Overall proven recoverable resources are 40 million scm (250 million barrels) of oil and 25 billion scm of gas. More small discoveries will be made in the area during 2024-30.

Nordland VII:
Two discoveries totalling 20 million scm oe will be made by 2030. That is insufficient to secure profitable development. However, optimism remains for further exploration in the area.

A total of 370 scm oe is found in the areas, including discoveries after 2030.

Subsea installations in clusters tied back to land

Many small discoveries make it challenging to find good development solutions. A final decision on developing the discoveries in Nordland VI and Troms II is taken in 2024. The portfolio of discoveries means that a shared, integrated land-based processing plant is established. Discoveries are developed with overtrawlable subsea templates, with oil and gas separated for transport to the land facility in separate pipelines. Produced water is returned and injected into the reservoir for pressure support. The gas is piped to the Halten Bank, with the oil shipped out from the land terminal.

New discoveries will constantly be made in the years to come. All finds after 2024 in Nordland VI/VII and Troms II are phased into the established infrastructure in the area.


Long time to realise value

Scenario A yields a gross sales value of about NOK 700 billion for oil and gas. Small discoveries, a long maturation period and many exploration wells yield a net present value of roughly NOK 365 billion.


Scenario-A

 


 

B – High resource outcome and large discoveries

 

A number of large discoveries off Lofoten and Vesterålen

Download: Fig.pdf


Nordland VI:
The first oil discovery is made in 2014, followed by four more up to 2030. A total of 150 million scm (938 million barrels) of oil and 27 billion scm of gas is found in the period.

Troms II:
The first oil discovery is made in 2016. Up to 2027, three large oil discoveries are made with a total of 100 million scm (625 million barrels) plus a gas discovery of 25 billion scm. A number of small oil and gas discoveries are also made.

Nordland VII:
A number of small and scattered discoveries are made, but no clarification emerges on development by 2030.

Overall, about 370 million scm oe is found in the areas, including discoveries after 2030.

Subsea solutions and large land plant

The resources prove to exceed the NPD’s expectations in 2010. That provides the basis for landing them. The concept chosen is a large oil and gas plant.

Discoveries are developed with overtrawlable subsea solutions. Oil and gas streams are piped separately to the land-based terminal. The gas is sent on to existing infrastructure on the Halten Bank, while the oil is shipped from the terminal.

Big assets

Scenario B yields a gross sales value of about NOK 1 200 billion for oil and gas. Big discoveries mean that development solutions can be matured more quickly, and have big capacity. Combined with a reduced need for exploration wells, this gives a net present value of roughly NOK 460 billion.


Scenario-B



 

C - Low resource outcome and small discoveries

 

Few and small discoveries off Lofoten and Vesterålen

Download: Fig.pdf


Nordland VI
:
A dry well is drilled in production licence 219 during 2014, followed by several more dry wells. A number of discoveries are nevertheless made up to 2030, but they are small and so scattered that an integrated development is difficult. The hunt for the big discovery also prompts some exploration wells after 2030.

Troms II:
The first exploration well is spudded in 2015, with two small oil and one small gas discoveries up to 2022. Because only small discoveries are made, exploration takes a pause after 2022.

Nordland VII:
Five wells are drilled up to 2030. Discoveries are made, but they are very small and do not justify a development.

About 75 million scm oe is found in the area, including discoveries after 2030.


No development

The discoveries in Nordland VI and Troms II are small and so scattered that development would be unprofitable, either stand-alone or integrated.


Only costs

About NOK 7 billion is spent on exploration. The discoveries made do not lead to development. However, drilling has provided geological information which will be important for further exploration.


Scenario-C

 


 

D – Low resource outcome and large discoveries

 

Two large discoveries

Download: Fig.pdf


Nordland VI
:
A dry well is drilled in production licence 219 during 2014, followed by several more dry wells in subsequent years. However, a oil discovery of about 30 million scm oe in 2017 generates new optimism.

Troms II:
The first well in the area is drilled in the autumn of 2015, and proves to be dry. After a series of dry wells in the area, a gas discovery of about 20 billion scm is made in 2023. A number of wells are drilled in the area, but none yield commercial discoveries.

Nordland VII:
Five wells are drilled up to 2030. The results are disappointing, with no commercial discoveries made.

A total of about 75 million scm oe is found in the areas, including discoveries after 2030.


Offshore development

Nordland VI:
The decision to develop the oil discovery in Nordland VI is taken in 2024. Overall resources are too small to justify pipelines to land, and a floating production installation is accordingly chosen. Associated gas is injected into the reservoir together with produced water from the field, which helps to improve oil recovery.

Troms II:
A decision is taken in 2027 to develop the gas discovery with a ship for compression, combined with transport to the Halten Bank for further processing and export.

Nordland VII:
No decision is taken on developing discoveries in Nordland VII up to 2030.


Limited resources

Restricted resources yield limited value. The gross sales value is about NOK 260 million for oil and gas, with the net present value estimated at roughly NOK 75 billion.


Scenario-D

 


 

X

 

Two large discoveries

Download: Fig.pdf


Nordland VI:
A well drilled in production licence 219 in 2014 yields a small discovery. The prospectivity of the area is confirmed by the next well, drilling in a new license during 2015. This proves a major oil discovery – roughly 100 million scm oe. A new play is confirmed in the area during 2017, with a further oil discovery of about 100 million scm oe. The subsequent exploration wells in the area up to 2030 provide a number of oil discoveries which can be tied back to the first.


Troms II
:
The first well is drilled in 2015, and yields a big gas discovery containing about 40 billion scm. Exploration up to 2024 produces a number of gas discoveries in this size range, which can form the basis for an integrated development solution.

Nordland VII:
A small oil discovery and one of about 45 million scm oe are made by 2026. Several oil and gas discoveries up towards this size are subsequently made.

Overall, about 550 million scm oe (corresponding to just over 3.5 billion barrels) is found in the areas.


Several large discoveries – big capacity needed on land

A number of large discoveries calls for a big integrated land-based plant. Substantial resources ensure long-term capacity utilisation.

The discoveries are developed using overtrawlable subsea templates, with the oil and gas piped separately to the land terminal. While the gas is transported to existing infrastructure on the Halten Bank, the oil is shipped by tanker from the terminal.


NOK 650 million

Big resources yield large value. The gross sales value is about NOK 1 800 billion for oil and gas, with net present value estimated at roughly NOK 650 million.


Scenario-X

 

<< back to main page