Shell drops novel Norwegian subsea gas project, cites costs

A logo for Shell is seen on a garage forecourt in central London March 6, 2014. REUTERS/Neil Hall

By Balazs Koranyi and Joachim Dagenborg

OSLO (Reuters) - Royal Dutch Shell has dropped one of Norway's biggest and most innovative industrial projects due to rising costs and complexity, dealing a blow to a technology that some hope could revolutionise offshore production.

Shell said on Friday it would postpone a project to provide subsea compression at the North Sea's Ormen Lange, the second-biggest Norwegian gas field, despite the objections of a key licence partner.

The decision will not be re-evaluated for several years, until new technology and reservoir information become available, Shell said.

Costs have soared in Norway's vast offshore oil sector over the past decade, and oil firms are cancelling or delaying major developments to save on costs and earn more cash for dividends.

Although Shell gave no cost estimate, a subsea compression project by Statoil at the Aasgard field is estimated to cost 15 billion crowns (1.49 billion pounds). Ormen Lange is more complex because waters are deeper and there would be no platform nearby to supply power and other equipment.

"The oil and gas industry has a cost challenge," Odin Estensen, chairman of the Ormen Lange Management Committee, said in a statement.

"This, in combination with the maturity and complexity of the concepts and the production volume uncertainty, makes the project no longer economically feasible."

Shell said it would not build a platform either given the costs and its new analysis shows that compression was not time-critical to the ultimate recovery of the field.

Petoro, the government's holding firm and the biggest shareholder in the licence, objected to the postponement, saying the project had already cost "several billions of Norwegian crowns".

The move shows that "the major oil companies now are going meticulously through their portfolios and cutting the most marginal projects to limit their investment level", Haakon Amundsen, an analyst at ABG Sundal Collier, said.

"There have been six to seven similar delays now, so this would not come as a shock to anyone. This is a gas project with new technology and production many years away, sometime in the future, so it is obviously vulnerable to high costs," he added.

Statoil has already delayed its $15.5 billion Arctic Johan Castberg projects and pushed back by one year the start-up date of Johan Sverdrup, Norway's biggest oil find in decades.

Ormen Lange produces an equivalent of a fifth of Britain's gas needs, and will eventually lose its natural pressure. Subsea compression was seen as a cheaper alternative to building a platform.

A Shell spokeswoman said: "We are not giving up on offshore compression at Ormen Lange, but we can't give any timeline (for how long the postponement could last)."

Norwegian oil services firm Aker Solution designed and built the compression pilot project for the field, hoping Shell and its partners would use the technology.

Subsea pumps could have squeezed more from the field and eliminate the need to keep workers offshore, but it is a new and still untested technology.

Shell is the operator of Ormen Lange with a 17.8 percent stake, while Norway's state-owned Petoro has 36.5 percent, Statoil 25.4 percent, Dong Energy 14 percent and ExxonMobil 6.3 percent.

Shell said Petoro was the only partner against postponing the offshore compression project.

(Additional reporting by Nerijus Adomaitis; Editing by Erica Billingham and Dale Hudson)