Field/project development

Project Overruns, Hydrogen Investment Highlight Norwegian Budget for 2022

More time and money are needed for Johan Castberg and others, while government looks to boost hydrogen research.

Budget documents find cost increases on crucial oil projects and a planned boost in spending on hydrogen research.

The Norwegian government’s national budget for 2022 revealed that Equinor’s ambitious Johan Castberg project in the Barents Sea will now cost more and come onstream later than most recently planned. The Norwegian oil company confirmed that the cost estimate for the project has increased by $222 million (NOK 1.9 billion). In addition, there is an estimated cost increase of near $701 million (NOK 6 billion) due to weakened Norwegian krone compared to the currency expectations at the time of sanction. Total cost for the project is now $6.91 billion (NOK 59.1 billion) – up 15% since the operator submitted its plan for development and operation (PDO). Equinor continues to believe the project has a break-even price below $35 per barrel.

The project, which had been most recently slated for start-up around year-end 2023, is now scheduled for the fourth quarter of 2024. Equinor cited the main cause of the shift being the Covid-19 pandemic, which has impacted the construction of the floating production storage and offloading (FPSO) vessel both in Singapore and at Norwegian yards.

The yard in Singapore has been shut down for long periods, and still has reduced access to manpower due to entry restrictions associated with the virus. The hull will be transported to Stord in the first quarter of 2022 for processing module installation and commissioning.

Equinor also revealed the project has also faced challenges connected to the welding quality in Singapore. The company added those issues will be rectified before the hull leaves the yard.

Equinor operates Johan Castberg and holds a 50% stake in the project. Partner Vaar Energi, a subsidiary of Eni, holds 30% and Norway’s state-owned Petoro owns 20%.

Budget documents revealed two additional developments are also facing overruns. Equinor’s Njord Future field will cost $3.45 billion (NOK 29.5 billion), up 19% over a year ago estimate.

“In spite of the cost estimate having increased by NOK 13.1 billion (80%) since PDO, the project is profitable at oil prices significantly lower than today,” said Equinor in a statement.

Field start-up is now slated for year-end 2022, roughly a year later than originally planned.

Vaar Energi’s Balder Future project will cost $3.13 billion (NOK 26.8 billion), around 34% more than expected a year ago. Costs are on the rise due to more work than anticipated is needed on the field’s FPSO.

Petroleum outlook
Norway’s net cash flow from petroleum activities is estimated at $24.5 billion (NOK 184 billion) in 2021 and $32.4 billion (NOK 277 billion) in 2022. Investments on the Norwegian continental shelf are expected to be about $21 billion (NOK 180 billion) in 2021. The budget forecasts that number to fall to $18.3 billion (NOK 157 billion) in 2022.

“The petroleum industry is Norway’s largest industry measured in terms of value creation, government revenues, investments and export value, and is an important contributor to financing the welfare state,” said Tina Bru, Minister of Petroleum and Energy. “The business contributes to jobs and activity across the country. The industry is skilled, innovative and high-tech. This gives positive impetus into other parts of the Norwegian economy.”

In the calculations of government revenues, an oil price of US $70 per barrel is assumed this year and US $67 per barrel in 2022, and a gas price of US $2.35 and NOK 1.90 per standard cubic meter, measured in fixed 2022 prices, respectively. Gas prices have been much higher than assumed in the third quarter. The turnover value of the oil and gas produced daily on the Norwegian shelf at today’s high prices is an estimated $467.5 million (NOK 4 billion).

Total petroleum production in 2021 is estimated at about 228 million standard cubic meters of oil equivalent – or around 3.9 million barrels per day. For 2022, total production is expected to increase to approximately 239 million standard cubic meters of oil equivalent.

Hydrogen boost
The Norwegian national budget for 2022 also included increased funding for research and development in hydrogen and ammonia by establishing its own research center. The center will receive an annual allocation from the Ministry of Petroleum and Energy of $3.5 million (NOK 30 million) for up to eight years, totaling $28 million (NOK 240 million).

The research center will develop solutions within hydrogen and ammonia and will start in early 2022. The establishment takes place through the FME scheme (Research Center for Environmentally Friendly Energy) in the Research Council of Norway.

“The development and use of hydrogen solutions can contribute to both green value creation and emission reductions in Norway,” said Bru. “Globally, a lot is happening in this area and a strong investment can create great value for Norwegian business and industry. So far, we have lacked a broad and unifying research center for hydrogen. We will now have that.”

The goal is to bring together strong research communities and many user partners from the business sector in a targeted, joint initiative, according to the government. The center will work holistically with hydrogen from both natural gas and renewable power, and the application of hydrogen and ammonia for energy, mobility and industrial purposes.

The Government will also continue the allocation to infrastructure and market development for hydrogen of $11.7 million (NOK 100 million) over the Ministry of Petroleum and Energy’s budget in 2022. The funding will be allocated to the Research Council of Norway, which will cooperate with Enova to support several pilot and demonstration projects that will contribute to early phase market development for hydrogen.