OREANDA-NEWS. The relatively low cost of new Norwegian oil and gas projects helps limit the risk of a significant fall in production, Fitch Ratings says in a report published today. Cash production costs in the region have been rising but remain competitive and most of the country's potential new developments would break even at below USD55/bbl, suggesting they will go ahead. But some marginal projects, especially in the Norwegian and Barents Seas, will probably be suspended.

Depletion of Norway's North Sea oil and gas fields led to a nearly 50% drop in oil production between 2001 and 2013, although the overall impact has been tempered by rising gas production. Production started to stabilise in 2014 as new fields came on stream and as recovery rates improved. The pipeline of new projects remains fairly strong even though oil prices have tumbled since the middle of last year, as 67% of new probable developments in Norway break even at USD55/bbl, and 85% do so at USD80/bbl.

In addition, cash production costs in existing projects compare well with deep offshore and unconventional projects, including shale/tight oil in the US and Canadian oil sands, which are more likely to fall prey to deflated oil prices. Norwegian cost pressures should ease in 2015-2016 due to the krone depreciation, negotiation with suppliers and potentially some process re-engineering. Overall, therefore, we do not expect any decline to be severe, although a further production fall is possible, and becomes more likely the longer prices remain depressed.

The Johan Sverdrup field is the biggest project in development. It contains 1.7 billion-3.0 billion barrels of oil equivalent and will produce 600,000 barrels per day at its peak, or a quarter of the country's planned oil production by 2025. It is not only size but also economics that makes this project significant. Johan Sverdrup breaks even at USD40/bbl, meaning it will command solid margins even if oil prices remain depressed.

Some planned projects have questionable economics at current prices. These are mainly in the Norwegian and Barents Seas, and are unlikely to proceed unless prices recover to above USD80/bbl. Our corporate rating case assumes the recovery will be gradual, with Brent averaging USD55/bbl in 2015, USD65/bbl in 2016 and USD80/bbl in 2017. One example is the Johan Castberg field in the Arctic, where Statoil and its partners have delayed their final investment decision to 2017.

Another risk for the industry is that low prices may lead it to abandon North Sea fields earlier than planned. Recovering the last barrels is usually more expensive and needs to be done while the existing infrastructure is still in good shape. Decommissioning is not intense, but should increase from the mid-2020s and will become more common if oil prices remain depressed for a long time.