Norway, Western Europe’s largest oil and gas producer, has been facing a rapid decline on the list of leading supplying and producing countries. Shrinking oil reserves and the lack of new deposits in the North Sea have slowed the industry and competitors from other areas of the world have overtaken the country as the industry leader.

Norway’s oil production has reported a 40% drop from its 2001 peak to around two million barrels per day and is set to decline even further unless new deposits are explored; however, with Statoil’s 500 million barrel oil discovery at its Skrugard Prospect, some 200km offshore in the western Barents, the winds seem to have changed. Norway’s biggest oil discovery in a decade could breathe new life into it’s rapidly declining industry, triggering new appetite for the exploration of Norway’s northernmost waters.

In addition, The Norwegian Government has made a further step towards opening the Arctic for exploration. After decades of border disputes with Russia, the conflict between the two countries finally was finally settled in 2010. At the government’s licensing round on 15 April 2011, half of the 24 new offshore production licences were awarded in the Barents Sea.

"There is unprecedented interest in our northernmost seas," said Norwegian Minister of Petroleum and Energy Ola Borten Moe at the licensing round in April. "The companies have been awarded 12 production licences for the Barents Sea, making this the licensing round with the most awards relating to the Barents Sea. The present level of activity in the Barents Sea is high and increasing."

Norwegian-Russian border disputes halt exploration

The major reason for the delayed offshore exploration in the Arctic region was a 40-year border dispute between Norway and Russia, which was only settled with the signing of a treaty in September 2010. The two countries divided the 175,000km² area, situated north of Russia’s Kola Peninsula and the Norwegian coast, equally between them.

The disagreement started in the 1970s and reached its climax when Russia planted a flag at the bottom of the Arctic Ocean in 2007 to support its claim of a bigger part of the area. Even though the dispute was initially about fish, it primary effect was to stop both countries from exploring the area’s oil and gas reserves.

The treaty has set the foundation for several initiatives — from both the government and the oil and gas industry — to further develop the relationship between Norway and Russia.

"This is important to make sure the resources, both over and under the seabed, are managed in the best possible way," says Tom Gederø, communications manager for the Norwegian Oil Industry Association.

Russia yet has to finalise the border treaty signed last year, but Norway aims to start the process of the further opening of its zone in the Barents Sea as quickly as possible.

"New and exciting areas in the Norwegian part of the eastern Barents Sea will be mapped in the next few years."

Awakening interest in the Arctic

Although exploration and drilling in the Arctic is pricey, not to mention industrially and technically difficult, the deep sea of the northernmost shelf contains a promising treasure.

"After 90 exploration wells and only two fields in production, the recent discovery of Skrugard has brought new optimism into the Norwegian petroleum industry regarding the Barents Sea," says Gederø. "New and exciting areas in the Norwegian part of the eastern Barents Sea will be mapped in the next few years."

According to approximate numbers from the US Geological Survey, the Arctic contains 13% of the world’s undiscovered oil, as well as 30% of the unexplored gas. Official forecasts from the start of 2011 put Norway’s potential oil and gas resources in its section of the Barents Sea at some six billion barrels.

Norway’s decision start opening the region to new exploration activities has come at the right time: oil and gas majors are attracted by the country’s political stability, brought into focusby the current climate of unrest in the Middle East. Falling North Sea output is also a consideration. Soaring oil prices and increasingly advanced technologies have made the Arctic more and more attractive, despite all the challenges of the extreme climate with its very low temperatures, the complete darkness in winter and the distance from existing infrastructure.

Offshore politics

At the licensing round in April, Norwegian state-owned industry giant Statoil Petroleum received the most licences, winning eight. While the company was pleased to have won permits near the Skurgard deposit and hopes to start producing oil within five to ten years, it has also criticised the government’s updated management plan for the Barents Sea, which the authorities presented in early March.

"The government’s decision is not the one for which Statoil and the Norwegian oil and gas industry have argued."

Even though the new plan will open the way for oil and gas activity in some areas of the Barents Sea, the government also decided not to carry out the highly discussed and controversial assessment of the environmental impact of oil and gas exploration in the Lofoten, Vesteraalen and Senja areas in the eastern Barents Sea.

The area is believed to contain high resource potential, but the government restricted a study of exploration opportunities in the area for at least the current parliamentary period. But the authorities said that they would still gather intelligence about the "effects of petroleum activities" in the region that could provide the basis for a future study beyond the next election in 2013.

"The government’s decision is not the one for which Statoil and the Norwegian oil and gas industry have argued," said Statoil CEO Helge Lund, in a response statement to the presentation of the updated management plan. "However, the fact-finding process now being initiated means that once a decision to carry out an impact assessment has been taken less time is needed to open up for exploration activity.

"It’s positive for the industry that the government, by means of this decision, is also clearly signifying its intention of further developing the utilisation of resources in northern waters, among them the eastern Barents Sea."

Lund added that Statoil will work with the Norwegian authorities to realise the potential of the area. At the same time, the company warned that if the new acreage is not opened to extend the basis for new discoveries, Norway’s oil production will fall considerably after 2020.

Among industry players, the government’s move has been understood as a political compromise by the Labour-led government, which forms a coalition with the Socialist Left and Centre parties. They have strongly opposed the assessment of the Lofoten, Vesteraalen and Senja. Consequently, the final decision regarding activity in these areas of the eastern Barents Sea has yet to be taken.

Environmental concerns

Environmental groups and NGOs, however, share the government’s concern about the ecological impacts of an exploration of the Barents Sea for oil and gas resources. The Arctic’s icy climate and remoteness entails not only greater vulnerability to pollution than an ecosystem further south but is also at greater risk of spills.

"We are very concerned about the opening," says Friends of Earth environmental advisor, Elisabeth Sæther. "The Barents Sea has some especially fragile areas such as spawning areas for fish and nesting areas for vulnerable sea birds. They are especially fragile to the exploration operations and the danger of a potential large oil spill.

"We will follow the further process very closely and hopefully the Ministry of Oil and Energy will share our concerns. The state environmental experts have been very critical and have expressed concerns about exploration and drilling in these areas."

"Large parts are still not opened for petroleum activities and the mystery of where the petroleum is hidden has not been solved."

Tom Gederø from the Norwegian Oil Industry Association claims: "The Norwegian Petroleum Sector is known for high environmental standards and those standards will also be implemented in the Barents Sea."

The full opening of the Barents Sea to oil and gas exploration is dependant on many factors: Russia yet has yet to finalise the border treaty, and studies on the feasibility of further opening and the impact on the environment still have to be carried out.

"There still are major challenges that remain in the Barents Sea," says Gederø. "Large parts are still not opened for petroleum activities and the mystery of where the petroleum is hidden has not been solved."

Nonetheless, industry members believe that the Barents Sea could shift Norway’s oil industry away from the North Sea and towards the Arctic, breathing new life into the declining productivity of Western Europe’s leading oil and gas supplier.