Another North Sea project hit by cost inflation as capex estimate goes up

Norwegian oil and gas player Vår Energi has updated its cost estimate for a field life extension project in the North Sea offshore Norway in a bid to ensure it reflects a tighter supplier market, mitigates schedule risk, and improves construction productivity. This project is still on track to come on stream in 3Q 2024.

According to Vår Energi, the high activity on the Norwegian Continental Shelf (NCS), supply chain challenges, and the Ukraine crisis have contributed to cost inflation and resource constraints, which are impacting productivity, and increasing expected capex to reach completion, reflecting additional man-hours to maintain progress, as well as higher prices and rates for equipment, offshore support vessels, and labour. Two projects, which the Norwegian player deems to be key growth ones – Balder X which is operated by Vår Energi and Equinor’s Johan Castberg where Vår Energi has a 30 per cent stake – have also been affected by this.

Nick Walker, the CEO of Vår Energi, commented: “Balder X and Johan Castberg are two major development projects that will materially contribute to our industry-leading production growth and long-term value creation despite the announced increased capex. We aim to extend the Balder area production beyond 2045 with the upgraded Jotun FPSO as a host for potential new tie-ins such as the King and Prince fields discovered in 2021, and future discoveries and tie-ins.”

When it comes to Vår Energi’s Balder X project, the re-float and heavy lift installations were completed on plan regarding the upgrade of the FPSO Jotun and the current focus is on executing the remaining construction work and commissioning. The drilling and subsea activities are progressing according to schedule and the overall project is more than 80 per cent complete. However, the capex estimate has increased by approximately $340 million (about NOK 3.6 billion) net pre-tax to Vår Energi.

Back in August 2022, Vår Energi took steps to take over a new operatorship in the Balder area thanks to deals for two licences, including two existing discoveries, to increase the firm’s acreage positions in the North Sea off Norway. As explained at the time, these licenses would be worked as part of the further development of the greater Balder area.

The company plans to extend the lifetime of the Balder field through the Balder X project, in a bid to extend production from the Balder hub beyond 2045. To this end, the company has four ongoing projects, including the Balder FPU life extension through a vessel upgrade and drilling new wells on the Ringhorne III and Ringhorne IV projects.

The firm’s plan for the Balder field also entails an upgrade of the FPSO Jotun and the drilling of 14 new production wells along with one water injection well. In addition, the firm is considering drilling new exploration wells in the area. The previous change to the cost estimate for the project was in September 2022, when the first oil from Balder X was bumped to the third quarter of 2024 instead of in late 2023, as previously expected.

Furthermore, Vår Energi also provided an update on its project development portfolio, following the completion of a baseline review of cost and schedule, and narrowed the full-year 2023 production guidance range to 210-220 kboepd, while maintaining the end-2025 production target of above 350 kboepd. The Norwegian player is on track to deliver more than 50 per cent high-value production growth on the NCS by the end of 2025 supported by 12 projects under development.

The company elaborates that 10 out of the 12 projects are progressing in accordance with estimates and plans, with eight projects being more than 50 per cent complete. One of these is the Breidablikk project, which is now likely to come online in the fourth quarter of 2023, earlier than planned, as it was slated for the first quarter of 2024.

On the other hand, the Equinor-operated Johan Castberg project is impacted by similar factors to the Balder X project in addition to the increased scope of work in Norway after mobilisation from Singapore. The capex estimate has increased by around $390 million (about NOK 4 billion) net pre-tax to Vår Energi. The scheduled start-up of production in the fourth quarter of 2024 remains unchanged.

The increased capex estimate for Johan Castberg is mainly due to the transfer of more work than planned from Singapore to the yard in Norway, increased complexity, and lower-than-expected productivity. The market prices for marine operations, drilling, and completion services have also increased since the last update.

Vår Energi is working on executing its plan for growing production to above 350,000 barrels per day by end-2025, with additional upside from taking over Neptune Energy Norway. The company is also pursuing decarbonisation with offshore wind, as demonstrated by a collaboration with a consortium consisting of Odfjell Oceanwind and Source Galileo to explore opportunities for floating offshore wind through a pilot project at a field located in the Barents Sea.

Meanwhile, the Norwegian player handed out a five-year deal to Halliburton, covering drilling services related to exploration and production drilling across its portfolio on the NCS. The firm’s drilling activities are focused around four strategic hubs in the Balder/Grane area, the North Sea, the Norwegian Sea, and the Barents Sea.

Two weeks ago, Vår Energi hired a sixth-generation semi-submersible rig from COSL Drilling Europe for drilling operations in the Barents Sea with the aim of ramping up the search for more hydrocarbons offshore Norway.