the danish oil and gas sector’s …...the average expected size of discoveries is approx. 6 times...

THE DANISH OIL AND GAS SECTOR’S DEVELOPMENT AND SOCIAL IMPACT (1992-2022)

PREPARED BY QUARTZ+CO MAY 2012

2 3

PREFACE

In connection with the decision to establish a united trade association for the Danish oil and gas sector un-der the name Oil Gas Denmark, Quartz + Co. has been chosen to drawn up a sector analysis which should factually and briefly describe the characteristics of the Danish shelf, development of the sector and the sector’s direct and indirect social impact.

We have chosen to divide the description into four chapters supported by a number of illustrations of the most essential analyses:Chapter 1: The Danish shelfChapter 2: The social impact of the Danish oil and gas sectorChapter 3: The future activities and impact of the Danish oil and gas sectorChapter 4: Utilisation of the potential on the Danish shelf

The analysis period is set for the period 1992 to 2022 given that it was at the beginning of this period, the recovery of oil and gas on the Danish shelf seriously gathered speed and at the same time, it is es-timated that a projection of 10 years represents a period of relatively strong expectations. In the areas relevant to the description, both the historical and the future period are extended.

The descriptions of the Danish shelf and projection of the sector’s development are based on Quartz+Co’s analysis models using primary input data from the sources: The Danish Energy Agency, Wood Mackenzie, IHS Global Windows, The Rushmore Reviews, BP Statistical Review and BAFA (in re-lation to price movement of gas). In that connection, it should be noted that projections on the oil price are based on the Danish Energy Agency’s basis scenario and that expected decommissioning costs on the Danish shelf are an estimate made by Quartz + Co. based on experiences from Oil & Gas UK.

The analysis method for calculating the sector’s historical direct and indirect effect on employment and gross value added has been developed and validated by Copenhagen Economics and primary input data have been provided by Statistics Denmark.

During the process, a number of meetings have been held with joint representation from the trade as-sociation members to discuss the progress and compare the analysis to the industry experiences.

Thomas G. Arentsen Steinar ÅrilPartner, Quartz+Co Engagement Partner, Quartz+CoCopenhagen Oslo

CONTENT

Summary . . . . . . . . . . . . . . . . . . . . 4

1. The Danish shelf . . . . . . . . . . . . . . . . . . 6

1.1 The first activities began approx. 50 years ago and are today concentrated in ageing fields. . . . . . . . . . . . 6

1.2 Production peaked in 2004 and according to the forecast the reserves of the shelf will be very limited in 20-25 years . . . . . . . . 7

1.3 The Danish oil and gas sector is characterised by large long-term investments and historically the return has been good, assisted by increasing oil prices . . . . 8

1.4 By comparison with the Norwegian and the British shelf, the Danish shelf is both small and technically hard-to-reach . . . . . . . . 10

1.5 The characteristics of the shelf causes the global oil companies’ interest in the Danish shelf to be limited . . . . . . . . . . . . 10

2. The social impact of the Danish oil and gas sector . . . . . . . . . . 12

2.1 The oil and gas companies are the largest fiscal contributors and have significant impact on the gdp and the trade balance . . . . . . . 12

2.2 Oil and gas represent a considerable share of the Danish energy consumption and Denmark has been self-sufficient during the last 20 years . . . . . . . 12

2.3 The total employment in the oil and gas sector is estimated to approx. 15,000 (direct and indirect). . . . . . . . . . 14

3. The future activities and impact of the Danish oil and gas sector. . . . . . . 16

3.1 It is expected that the absolute level of production, investment and operating costs will decrease during the coming 10 years . . . . . . . 16

3.2 The decrease in the absolute activity level will have a significant socio-economic impact . . . . . . . . . . . . . 16

3.3 The indirect employment follows the decreasing investment level of the sector while the direct employment is expected to maintain approximately the same level as today . 18

3.4 Previous forecasts indicate, however, that it is difficult to foresee the future volume of production . . . . . . . . . . . . 18

4. Utilisation of the potential on the Danish shelf . . . . . . . . . . . 20

4.1 Oil price and framework conditions are essential for the future level of activity in the oil and gas sector on the Danish shelf . . . . . . . . . 20

4.2 Investment in exploration and a boost of extraction can give a considerably socio-economic profit . . . . . . . . . . . 22

THE DANISH OIL AND GAS SECTOR’S DEVELOPMENT AND SOCIAL IMPACT (1992-2022) THE DANISH OIL AND GAS SECTOR’S DEVELOPMENT AND SOCIAL IMPACT (1992-2022)

4 5

THE DANISH SHELF

The Danish shelf supplied its first barrel of oil at the beginning of 1970-ies. Today, approx. 55 platforms exist in 17 active fields in the Danish sector of the North Sea.

The five largest fields account for approx. 80% of the production on the Danish shelf and of these only the Halfdan field has been discovered during the last 30 years. Production on the Danish shelf peaked in 2004, and it is estimated that approx. three quarters of the commercial reserves of the shelf have been produced, and two-thirds of the value has been realised.

The Danish shelf is significantly smaller than other shelves in north-western Europe, such as the Nor-wegian and the British, measured on production and reserves. As an example, the Norwegian shelf is more than 10 times larger measured on production and approx. 16 times larger measured on reserves. The average expected size of discoveries is approx. 6 times higher in Norway than in Denmark. In addi-tion, the Danish oil is difficult to extract as the ma-jor part of the oil lies in very tight layers of lime; that is the reason the recovery rate is relatively low in Denmark (approximately 26% compared to 46% and 41% in Norway and the UK, respectively). These conditions mean that the Danish shelf is considered less attractive among the large global oil companies and in recent years, more of these have chosen to leave the Danish shelf to prioritise activities in areas with greater commercial potential. The Danish shelf comprises only eight oil producing companies. By comparison, there are 32 and 63 different produc-ing companies on the Norwegian and the British shelf, respectively.

THE DANISH OIL ANG GAS SECTOR’S SOCIAL IMPACT

The oil and gas activity has had and still has a great social impact in Denmark. With approx. 3% of the Danish gross value added, the sector is among the most significant sectors - on a par with, for exam-ple the financial sector or the retailing sector. At the same time, the sector accounts for approx. 9% (DKK 48 billion) of the Danish export, which is on par with other leading export industries such as the pharma-ceutical or the meat production sector.

The sector’s impact in relation to taxes and dues are also substantial, as is the business sector, which by far contributes the largest share of taxes and dues. In 2010, the total contribution of direct taxes and dues was approx. DKK 24 billion - corresponding approximately to the state’s annual expenditure for higher education.

The oil and gas sector employs approx. 15,000 per-sons in Denmark. Of these, approx. 1,700 employ-ees are directly employed at the oil companies. This means that when one employee is employed in the oil and gas companies, approx. 8 jobs are created in related industries. A large part of the indirect ac-tivities lies in e.g. the engineering consultancy and other consulting assistance. Employment in the sec-tor ranges widely across types of job, but generally a high level of education is seen (54% have a higher education, where the national average is 35%) and approx. 60% of the jobs are located around Esbjerg. At the same time, prospects are good that the sup-plier market increasingly realizes international op-portunities based on knowledge and development in the sector.

The activities on the Danish shelf have resulted in Denmark being self-sufficient in oil and gas for the last 20 years and as a minimum Denmark is ex-pected to be self-sufficient until 2020. As part of a long-term Danish energy strategy, the oil and gas production is instrumental in maintaining high secu-rity of supply, at the same time as renewable energy represents an increasing share of the Danish energy mix.

THE EXPECTED FUTURE ACTIVITIES AND IMPACT ON THE DANISH OIL AND GAS SECTOR

According to forecasts by the Danish Energy Agen-cy, the production volume from the Danish shelf will decrease over the next 10 years – however, with a slight boost when the development of the Hejre field has been completed in about 2015. At the same time, it is expected that the level of investment de-creases significantly after 2015. The decreasing level of investment in the basis scenario will contribute to reduce the social impact of the sector – including both tax payments and employment.

The Danish Energy Agency has, however, estimated a potential in addition to the commercial reserves during the remaining lifetime of the shelf. This po-tential is quite significant and represents an up-side corresponding to approx. 70% of the reserves. With the current oil resource base, a boost of the extrac-tion rate of oil of just one percentage point corre-sponds to a total production value of approximately DKK 80 billion based on today’s oil prices.

EXPLOITATION OF THE POTENTIAL ON THE DANISH SHELF

Exploitation of this potential may contribute sig-nificantly to postpose the decrease in the level of investment and activities of the sector. If just half of this potential is realised, it will have a significant so-cial impact as there can be an additional fiscal con-tribution of more than DKK 5 billion per year and approx. 5,000 jobs over a twenty-year period.

In addition to the oil price, the framework conditions are essential for the oil companies’ opportunities to invest in exploration, technology and extension of fields and thus for the realisation of the potential. Experiences from both Norway and the UK show that changes of the framework conditions may have immediate impact on both the exploration and ex-traction.

As the sizes of discoveries are expected to be eco-nomically marginal in the future, it is crucial to uti-lise the current infrastructure. Therefore, there is an element of time pressure when taking decisions about future investments and activities, as most of the current production facilities on the Danish shelf have an advanced age at the same time as the de-creasing production limits the remaining lifetime.

SUMMARY


6 7

The Danish shelf delivered its first barrel of oil1 in 1972 and peaked in 2004 with a daily average pro-duction corresponding to more than half a million barrels. The shelf is significantly smaller measured on remaining reserves and is more challenging to operate compared to other shelves in northwestern Europe, such as the Norwegian and the British shelf. According to the current forecasts, approx. two-thirds of the value of the shelf has been realised and the production supplied by just eight companies.

1.1 THE FIRST ACTIVITIES BEGAN APPROX. 50 YEARS AGO AND ARE TODAY CONCENTRATED IN AGEING FIELDS

Formally, the Danish oil and gas sector has existed since 1962, when A.P. Møller was awarded Sole Con-cession for exploration and extraction of oil and gas in the Danish underground. During previous years, foreign companies have carried out a number of unsuccessful wells onshore with license from the

Danish state. The following year, A.P. Møller formed the Danish Underground Consortium (DUC) in co-operation with Gulf Oil and later on Shell to ensure sufficient expertise on the Danish shelf. Almost 10 years of major investments should pass, before it succeeded in developing the first field of significant size and thus in 1972, the first Danish oil was pro-duced from the oil field Dan.Today, the Sole Concession represents only a part of the activities.

Today, the oil and gas production takes place on 17 active fields where production is carried out from approx. 55 platforms. The five largest fields, Halfdan, Tyra, Dan, Valdemar and South Arne, alone produce about 80% of the total annual production on the Danish shelf. With the exception of Halfdan, which was discovered in 1999, these fields were dis-covered more than 30 years ago. New development of fields have not been made on the Danish shelf for almost 10 years.

1.2 PRODUCTION PEAKED IN 2004 AND ACCORDING TO THE FORECAST THE RESERVES OF THE SHELF WILL BE VERY LIMITED IN 20-25 YEARS

The oil and gas production on the Danish shelf gath-ered seriously speed through the 1990’ies and peaked in 2004, where approx. 200 mmboe2 were produced, corresponding to daily production of approx. 550,000 boe this year with a total production value of DKK 37 billion (the oil and gas prices of the time).

Since 2004, the annual oil and gas production has decreased by approx. 8% and approx. 5%, respec-tively, a year. So in 2011, 120 mmboe were produced. In 2011, however, the effect of the production value was offset by price increases as it was approx. DKK 53 billion.

Today, the Danish oil and gas shelf is at a mature stage where reserves are not replaced annually. Each year since 2003 more oil and gas has been produced than new reserves have been added.

The Danish Energy Agency estimates that approx.

three quarters of the commercial reserves of the shelf have been produced and with the current knowledge, the latest forecasts indicate that the Danish shelf will be almost emptied in 20-25 years.

Even if production is long past its peak and is con-centrated on a few mature fields, there is, however, a significant financial value of the remaining com-mercial reserves.

Additionally, potential new discoveries and/or boosts of the extraction effectiveness will be able to increase the value of the Danish shelf consider-ably. To a great extent, the realisation of potential depends, however, on future investments in technol-ogy and exploration, field development and life ex-tension of existing fields (see chapter 4).

As an example, the recovery rate3 of oil on the Dan-ish shelf has increased from 22% to 26% during the last 10 years. With the present oil resources base, a boost of the recovery rate of just one percentage point (approx. 133 mmboe) corresponds to a total production value of approx. DKK 80 billion on basis of today’s oil prices.

1. THE DANISH SHELF


2 A billion barrels oil equivalent (mmboe) corresponds to approx. 0.15 billion cubic metres gas

3 The recovery rate indicates how big a share of the oil resources of a shelf can be extracted1 A barrel corresponds to 158.97 litres

THE DANISH OIL AND GAS SECTOR WAS ESTABLISHED IN 1962, WHEN A.P. MØLLER WAS AWARDED THE EXCLUSIVE RIGHTS FOR EXPLORATION AND PRODUCTION

THERE ARE FEW LARGE OIL AND GAS FIELDS IN DENMARK AND MOST OF THE FIELDS ARE VERY MATUREOIL AND GAS FIELDS ON THE DANISH SHELF (MMBOE)

1970 1980 1990 2000 2010

2004: Oil production in Denmark peaks

1984: Several oil and gas fields have now been discovered

1966: The first offshore discovery (Kraka field)

1963: DUC is established by Maersk and Gulf Oil – Shell joins later on

1962: A.P. Møller is awarded exclusive rights for exploration and production of oil in Denmark

SOURCE: THE DANISH ENERGY AGENCY

1972: The first oil is produced on Danish shelf (Dan field)

1984: The first gas is produced on Danish shelf (Tyra field)

2012: Nordsøfonden becomes a partner of the DUC with a share of 20%

Oil production

Gas production

NOTE: DAGMAR AND REGNAR ARE EXCLUDED FROM THE ILLUSTRATION, AS THE FIELDS AT PRESENT ARE NOT ACTIVE. TYRA SOUTH EAST IS INCLUDED IN THE TYRA FIELD. PRODUCTION TO DATE AND REMAINING RESERVES HAVE BEEN STATED AS OF 1.1.2011SOURCE: THE DANISH ENERGY AGENCY

Remaining reserves

Produced to date

PRODUCTION 2010 (MMBOE)

Dan

RoarNini

CecilieRolf Kraka

Harald

Valdemar

Siri

Lulita

Syd Arne

Tyra

Skjold

Svend

Halfdan

Gorm

YE

AR

FO

R F

IRS

T P

RO

DU

CT

ION

8 9

1.3 THE DANISH OIL AND GAS SECTOR IS CHARACTERISED BY LARGE LONG-TERM INVESTMENTS AND HISTORICALLY THE RETURN HAS BEEN GOOD, ASSISTED BY INCREASING OIL PRICES

The Danish shelf is now concentrated on eight companies which take part in oil and gas produc-tion. The current DUC-members, Shell, Maersk and Chevron, account for approx. 90% of today’s pro-duction, while the other operators, DONG Energy, Hess, Noreco, RWE-DEA and Danoil account for the remaining production. In the future, the companies outside DUC will account for an increasing share.Only a few sectors can demonstrate so attractive margins at the level the oil and gas sector does to-day – helped by historically high oil prices - but con-versely, only a few sectors operate with the same long timeframes, massive investment levels and high risk profiles of investments.The oil and gas business is characterised by high-er risk, higher initial and ongoing investments and

longer payback horizons compared to most other sectors. Prior to production of the first barrel of oil in an oilfield, typically many years of investment in exploration have passed, and if finding sufficient quantities, one or more platforms are established and infrastructure is connected. During the explora-tion phase, the oil companies run a significant finan-cial risk to find only little or no oil at all.

This process can easily last more than 10 years and cost the companies up to DKK 20-30 billion. As an example, the accumulated investments in the Dan field have all in all exceeded DKK 30 billion. In ad-dition to this, a considerable future clean-up work has to be performed at the end of the lifetime of the fields. The first decommissioning tasks on the Dan-ish shelf are expected to begin within the next 10 years and based on experiences from the UK shelf, these can easily amount to DKK 1.5-2.0 billion per main platform.

Despite the high volatility in oil prices, the oil price has developed favourably in the sector as a whole. Thus, the oil price has increased more than seven-fold during a ten year period from 1998 to 2008. In 2008, the production value of oil was about twice as high as in 2004, even though 2004 was the year when production volume peaked.Since the annual production is strongly decreasing, it is difficult to imagine the same production values and thus the same attractive conditions going for-ward, as back in 2008.


THE MAJORITY OF THE VALUE OF DANISH SHELF HAS BEEN REALISED HISTORICAL AND FUTURE PRODUCTION VOLUME AND CASH FLOW DKK BILLION (2010 PRICES); INDEX, 1990=100

NOTE: CASH FLOW IS CALCULATED ON BASIS OF ESTIMATED PRODUCTION VALUE DEDUCTED OPERATION, EXPLORATION AND INVESTMENT COSTS AND EXPENSES FOR THE STATE (TAX, DUES AND PROFIT SHARE). 2011-2016 IS BASED ON THE DANISH ENERGY AGENCY'S FIVE-YEAR FORECAST, 2016-2042 IS ESTIMATED ON BASIS OF AVER-AGE CASH FLOW PER PRODUCED UNIT FROM 2011-2015. PROJECTION INCLUDES ESTIMATED DECOMMISSIONING COSTS. DECOMMISSONING ESTIMATE ON BASIS OF EXPERIENCES FROM OIL & GAS UK. THE LIFETIME OF THE FIELDS ARE FORECASTED WITH ASSISTANCE FROM THE DANISH ENERGY AGENCY

SOURCE: THE DANISH ENERGY AGENCY; UK OIL & GAS; QUARTZ+CO ANALYSE

Estimated Cash flow (net)

Historical Cash flow (net)

Oil price

Production volume

1980 1990

70% OF ACCUMULATED CASH FLOW 30% OF ACCUMULATED CASH FLOW

2000 2010 20302020 2040

40

30

50

DKK BILLION INDEX(Production volume and oil prices)

10

20

400

300

500

100

200

0

10 11

1.4 BY COMPARISON WITH THE NORWEGIAN AND THE BRITISH SHELF, THE DANISH SHELF IS BOTH SMALL AND TECHNICALLY HARD-TO-REACH

The Danish shelf is very small in an international con-text and in relation to our oil-producing neighbours such as Norway and the UK, the Danish shelf has a limited size with regard to both production and re-serves. As an example, the Norwegian and British shelves have 65 and 168 fields, respectively, from which approx. 10 and approx. 6 times as much oil as in the Danish shelf is produced annually. Today, the Danish shelf includes only eight producing compa-nies. By comparison, the Norwegian and the British shelves have 32 and 63 different producing compa-nies, respectively. Commercial reserves on the Dan-ish shelf are estimated to be 1,242 MMboe, whereas the reserves of Norway and the UK are approx. 20,150 MMboe and 4,500 MMboe. Measured on reserves, the Norwegian shelf is thus approx. 16 times larger than the Danish shelf.

Recently, the exploration activities and new discover-ies of resources on the Danish shelf have been rela-tively limited and significantly lower than in Norway and the UK. As an example, during 2007-2011, only 10 exploration wells were drilled on the Danish shelf compared to 186 and 183 during the same period in Norway and the UK respectively. At the same time, the future size of discoveries is expected to be con-siderably lower in Denmark than in Norway - 15 MM-boe compared to 95 MMboe.

In addition to the limited size of the shelf, the Danish fields have also lower recovery rates than in Norway and the UK.

The main reason for the lower recovery rate is that most of the fields in Denmark are found in tight lay-ers of lime. Lime is porous and has low flow ability lowering the recovery rate and the production rate. At the moment, it is expected to be able to recover 26% of the oil resources from the Danish shelf, while the corresponding figures for Norway and the UK are significantly higher with average recovery rates up to 40-50%.

Thus, in Denmark you must drill longer and more hori-zontally to reach and exploit the reservoirs best pos-sible. The horizontal well lengths on the Danish shelf are up to three times longer than on the Norwegian shelf (average 2007-2011). When adding that the ex-pected size of discoveries is about six times lower in Denmark than in e.g. Norway, this means that you drill longer to discover and produce less.

1.5 THE CHARACTERISTICS OF THE SHELF CAUSES THE GLOBAL OIL COMPANIES’ INTEREST IN THE DANISH SHELF TO BE LIMITED

The specific characteristics of the Danish shelf mean that it is considered less attractive among the major global oil companies which assess the at-tractiveness of several shelves, when efforts and in-vestments shall be prioritised. This has caused that out of six so-called super majors (BP, Exxon-Mobil, Shell, Chevron, ConocoPhillips and Total) only the DUC partners, Shell and Chevron, are active on the Danish shelf, whereas all six are active in Norway and the UK.

There are also examples that large companies have left the Danish shelf in recent years - including ConocoPhillips (2007), Petro-Canada (2008) and Statoil (2009). When Statoil left the Danish shelf, the arguments were among other things to priori-tise exploration activities in areas with greater po-tential.


LONGER WELLS DRILLED TO FIND LESS OIL/GAS ON THE DANISH SHELFAVERAGE WELL LENGTH AND EXPECTED FUTURE SIZES OF DISCOVERY (METRE; MMBOE)

* INCLUDES BOTH VERTICAL AND HORIZONTAL WELL LENGTH** COMMERCIAL OIL AND GAS RESERVES AS OF 1.1.2011

SOURCE: THE DANISH ENERGY AGENCY; IHS GLOBAL WINDOW; THE RUSHMORE REVIEWS; BP STATISTICAL REVIEW

Remaining reserves 2011 (mmboe)**

4020 60 80 100

AV

ER

AG

E E

XP

EC

TE

D S

IZE

OF

DIS

CO

VE

RY

(M

MB

OE

)

5000

4000

6000

AVERAGE WELL LENGTH, 2007-11 (METRE)*

3000 Holland7.601

The UK4.523

Denmark1.242

Norway20.130

12 13

The Danish oil and gas sector has been and still is one of the most essential financial contributors to Danish society. The primary contributions are made through taxes and dues, trade balance and energy security, and the indirect impact such as employ-ment in related industries is also essential. For each employee in the oil and gas sector, approx. 8 per-sons are employed in related industries.

2.1 THE OIL AND GAS COMPANIES ARE THE LARGEST FISCAL CONTRIBUTORS AND HAVE SIGNIFICANT IMPACT ON THE GDP AND THE TRADE BALANCE

In relation to taxes and dues, the sector is by far the highest contributor in Denmark with a total annual contribution of taxes and dues of approx. DKK 24 billion (2010). Approx. one third of the contribution of taxes and dues derive from the ordinary corpo-ration tax (approx. 15% of the state’s total income from corporation tax), while approx. one third is made up of the so-called hydrocarbon tax. Primar-ily, the remaining third is made up of profit sharing with the state.

Overall, the sector’s annual contribution of taxes and dues are for example at the level of the state’s annual expenditure for Denmark’s higher education system.

In 2010, the oil and gas sector’s primary compa-nies generated totally a gross value added (GVA) of approx. DKK 48 billion corresponding to approx. 3% of Denmark’s total GVA (gross value added is a measure of a given company or sector’s importance of GDP). This places the oil and gas sector among the most contributing sectors in Denmark (out of totally 117 sectors, according to Statistics Denmark). By comparison, the Danish retail sector generated approx. DKK 50 billion in 2010.

The sector’s contribution to the trade balance is among the largest compared to other sectors in Denmark. In 2010, the sector’s exports amounted to approx. DKK 48 billion corresponding to 9%. By comparison another significant sector, the pharma-ceutical sector, exported for approx. DKK 51 billion in 2010.

2.2 OIL AND GAS REPRESENT A CONSIDERABLE SHARE OF THE DANISH ENERGY CONSUMPTION AND DENMARK HAS BEEN SELF-SUFFICIENT DURING THE LAST 20 YEARS

In addition to a significant economic impact on so-ciety, the sector also has a considerable strategic value in relation to the self-sufficiency rate. Today, more than half of Denmark’s energy consumption consists of oil and gas, which is also expected to be the case for a long time to come. Thus, a strong oil and gas sector is a prerequisite to keep Denmark energy self-sufficient. With the current expectations for production and annual oil and gas consumption, it is expected that the sector keeps Denmark self-sufficient up to and including 2019 for oil and 2021 for gas.

2. THE SOCIAL IMPACT OF THE DANISH OIL AND GAS SECTOR

THE DANISH OIL AND GAS SECTOR’S DEVELOPMENT AND SOCIAL IMPACT (1992-2022)THE DANISH OIL AND GAS SECTOR’S DEVELOPMENT AND SOCIAL IMPACT (1992-2022)

SOURCE: STATISTICS DENMARK: THE DANISH ENERGY AGENCY

1980 1990 2000 2010 203020201970

200

100

150

MMBOE

0

50

The present estimates indicate that Denmark will be self-sufficient of oil and gas until approx. 2020

PERIOD AS SELF-SUFFICIENT

Production

Consumption

THE SECTOR HAS SECURED DENMARK SELF-SUFFICIENCY OF OIL AND GAS SINCE THE BEGINNING OF THE 1990’IES AND AS A MINIMUM IT IS EXPECTED TO CONTINUE UNTIL APPROX. 2020PRODUCTION AND CONSUMPTION OF OIL AND GAS IN DENMARK (1972-2030), MMBOE

2,53,85,2

23,7

7,4

16,4

8,2

Kulbrinteskat og overskudsdeling

CORPORATION TAX FOR THE MOST CONTRIBUTING SECTORS 2010DKK BILLION

SELECTED PUBLIC EXPENDITURE AREAS, 2010DKK BILLION

10,6

25,4

68,9

59,9

SOURCE: STATISTICS DENMARK, THE DANISH ENERGY AGENCY

The Danish Energy Agency estimates that the total direct company tax contribution from the oil and gas sector amounts to DKK 23.7 billion

Finance- and

insurance sector

Extraction of

oil and gas

Wholesailing

and retailing

Transport sector

Elementary school

and the like

Unem

ployment

Higher and advanced

education

Police

Pharma

THE DANISH OIL AND GAS SECTOR PAYS MORE IN TAXES AND DUES THAN ANY OTHER SECTOR

14 15

2.3 THE TOTAL EMPLOYMENT IN THE OIL AND GAS SECTOR IS ESTIMATED TO APPROX. 15,000 (DIRECT AND INDIRECT)

It is estimated that for each employee with direct employment in an oil company, approx. eight jobs are filled in a wide range of subcontractors for the sector. This means that the oil and gas sector overall employs approx. 15,000 persons today4.

By comparison, there is a factor of 10 between an em-ployee with direct employment in the Norwegian sec-tor and the number of indirect employees. The reason is that Norway has more national oil and gas subcon-tractors and is thus less dependent on imports.

The sector employs a wide range of trade groups and levels of education where engineering consul-tancy and other consultancy services are the most essential suppliers to the oil and gas sector. The oil companies alone employ approx. 1,700 per-sons. This means that the sector in relation to em-ployment is one of the minor sectors in Denmark, but if the sector’s tax contributions or GVA per em-ployee is taken into account, it appears that the jobs in the sector are among the absolutely most pro-ductive in the country.

The average level of education of the sector is also among the highest, compared to other sectors. For example, the sector has significantly more employ-ees with a long higher education and scientific edu-cation than the national average.

The geographical location of the sector’s jobs is heavily weighted towards the Esbjerg region, which - with direct access to the North Sea - is Denmark’s main oil and gas town. Thus, approx. 60% of the sector’s direct jobs are located geographically in Esbjerg with consequent high importance for the region. The remaining jobs are located in the Co-penhagen area.

The sector’s indirect impact on related sectors has also contributed to foster an underwood of suppli-ers which have also in recent years experienced a significant share of exports of products and servic-es. As examples can be stated engineering consul-tancy companies like Rambøll and ISC and Welltec, Semco and Maersk Drilling, which provide services to both the Danish and international oil industry.

DEN DANSKE OLIE- OG GASSEKTORS UDVIKLING OG SAMFUNDSMÆSSIGE BETYDNING (1992-2022) THE DANISH OIL AND GAS SECTOR’S DEVELOPMENT AND SOCIAL IMPACT (1992-2022)

4 Estimated on basis of the level for the period 2008-2010 (Quartz+Co- and Copenhagen Economics-analyse)

NUMBER OF DIRECT JOBS IN OIL ANDGAS SECTOR (AVERAGE, 2008-2010)

HIGHEST COMPLETED LEVEL OF EDUCATION NUMBER OF EMPLOYEES (PERCENTAGE OF TOTAL)

SOURCE: STATISTICS DENMARK; "REGISTERBASERET ARBEJDSSTYRKESTATISTIK"

Elementary school

Short higher

education

Upper secondary

Medium

long

higher education

Long higher

education

Ph.d.-level

or the like

ESBJERG

COPENHAGEN

~1.700*

~680(40%)

~1.020(60%)

2%1%

0%

14%

7%

20%

15%

19%

13%

22%

30%

1%

Extraction of oil and gas

National average

* ESTIMATE OF THE OIL AND GAS SECTOR IS BASED ON AN AVERAGE OF 2008-2010SOURCE: STATISTICS DENMARK – NATIONALREGNSKABET; GREENS.DK

Exploration

of oil and gas

Architects

and engineers

Managem

ent

consultants

Wholesale

Job creating

activities

Mining

supporting

service activities

IT-service-

activities

Contractors

Production of

other machinery

Other jobs

Indirectly employed

Directly employed

318334357505

601603

1.010

Aprox. 1.700*

4.795

5.095

FEATURED COMPANY EXAMPLES

THE MAJORITY OF THE DIRECT JOBS IN THE OIL AND GAS SECTOR IS LOCATED IN ESBJERG AND THE LEVEL OF EDUCATION AMONG THE EMPLOYEES IS CONSIDERABLY HIGHER THAN THE NATIONAL AVERAGE

THE OIL AND GAS SECTOR IS PRIMARILY SERVICED BY ENGINEERING-INTENSIVE JOBSEMPLOYEES IN RELATED INDUSTRIES BY ACTIVITY IN THE OIL AND GAS SECTOR. NUMBER OF EMPLOYEES IN 2008.

16 17

Investments in e.g. the Hejre field will give the de-creasing production curve a minor boost in three to four years, but otherwise the total production on the Danish shelf is expected to be significantly lower and more expensive in 10 years compared to today (based on the conditions known today). This has a significant impact both on the earnings and the con-tribution levels and employment in related industries by virtue of close connection with the investments in the oil and gas sector. Historically, it has, however, proved difficult to foresee future production levels on the Danish shelf.

3.1 IT IS EXPECTED THAT THE ABSOLUTE LEVEL OF PRODUCTION, INVESTMENT AND OPERATING COSTS WILL DECREASE DURING THE COMING 10 YEARS

Despite the fact that the oil and gas sector will con-tinue to develop and extend life of the Danish oil and gas shelf, it is expected that the production lev-el decreases significantly. Assuming that the condi-tions, which apply today will also apply in the future, it is expected that the production level will be 30-50% lower in 2022.

In spite that the investment level is expected to in-crease over the next two to three years in connec-tion with the ongoing field developments, a signifi-cant reduction of the investment level will occur in the basis scenario.

Correspondingly, the sector’s total operating costs are expected to be much lower in 2022 than today, primarily due to a significantly lower production level.Although a decrease in both the absolute level of investments and operating costs is expected, it be-comes increasingly more expensive to produce oil and gas. This means that the unit costs per pro-duced unit of oil and gas increases on the Danish shelf. Primarily, this is due to the fact that it becomes more difficult to produce the remaining oil and gas resources, at the same time as the production costs increase due to lower production volume (loss of scale effect). Furthermore, the sector’s suppliers typically increase the price level upward by oil price increases, which to a great extent has contributed to higher unit costs on the Danish shelf during the past ten years.

3.2 THE DECREASE IN THE ABSOLUTE ACTIVITY LEVEL WILL HAVE A SIGNIFICANT SOCIO-ECONOMIC IMPACT

Primarily, decrease in activities measured on pro-duction, investments and operating costs are ex-pected to affect the sector’s economic contribution to the state in the form of lower taxes and dues. With the expected decrease in production and as-sumptions concerning oil prices and framework conditions at the current level, the contribution of taxes and dues will be about 40% lower in 2022 than today. This corresponds to a decrease of more than DKK 7 billion a year.

It is also expected that the sector’s impact on GDP in the form of gross value added (GVA) will decrease by almost 45%. This corresponds to a reduction of almost DKK 20 billion a year.

3. THE FUTURE ACTIVITIES AND IMPACT OF THE DANISH OIL AND GAS SECTOR


*SEEMS TO ASSUME DECOMMISSIONING/RATIONALISATION OF FACILITIES NOTE: REGARDING OIL PRICE AND –PRODUCTION, THE DANISH ENERGY AGENCY IS USED AS SOURCE DURING THE ENTIRE PERIOD.SOURCE: THE DANISH ENERGY AGENCY (DEA); WOOD MACKENZIE (WM)

1995 20052000 2010 202220202015

ENS-estimate WM-estimate

1992

600

400

500

0

300

200

100

Oil price(USD 110/boe) 8,2% 0,0%

Operating costs* 5,9% -3,6%

Investments 2,7% -6,0%

Oil production 2,5% -6,3%

Operating costs/boe (DKK) 2,9% 3,4%

19,3 18,915,6 37,1 67,960,647,222,2

CAGR’92-’10 ’11-’22

THE DANISH ENERGY AGENCY’S BASIS SCENARIO WILL RESULT IN CONSIDERABLE DECREASE OF ACTIVITIES IN THE OIL- ANG GAS SECTORACTIVITY PARAMETERS 1992-2022 INDEX, 1992 = 100

18 19

3.3 THE INDIRECT EMPLOYMENT FOLLOWS THE DECREASING INVESTMENT LEVEL OF THE SECTOR WHILE THE DIRECT EMPLOYMENT IS EXPECTED TO MAINTAIN APPROXIMATELY THE SAME LEVEL AS TODAY

Despite an expected decrease in production on the Danish shelf, the direct jobs in the sector will be af-fected only to a lesser extent over the next 10 years. This should be seen in connection with the fact that it is becoming more work-intensive to extract an oil and gas unit due to maturity of the shelf. It is, however, expected that jobs in related sectors will be affected considerably due to significantly lower expected investment level. To a great extent, the in-vestment level is driving the number of employees in related sectors, where a decrease in the invest-ment level will primarily affect the volume of job for consulting engineers, etc.

Employment will increase during the next two to three years due to the expansion of the Hejre field. After that, the basis scenario will decrease signifi-cantly to a level in 2022 being half as large as today. That means a total employment of approx. 8,300 and a decrease of well over 6,700 jobs compared to today.

3.4 PREVIOUS FORECASTS INDICATE, HOWEVER, THAT IT IS DIFFICULT TO FORESEE THE FUTURE VOLUME OF PRODUCTION

Historically, it has proven to be difficult to foresee the sector’s production level and thus get an ac-curate indication of future activities in the sector. Forecasts made by the Danish Energy Agency with five-year intervals for the years 1990, 1995 and 2000 have consistently been significantly below the ac-tually realised production level (with the exception of the estimate from 2005). This is probably driven by a combination of higher average oil price than expected - and thus an increased production incen-tive - and an underestimate of the companies’ abil-ity to boost the recovery rates through technologi-cal progresses. In any case, the historic uncertainty about the future production levels testifies to a sec-tor which has a significant sensitivity to a number of core conditions - including oil and gas price de-velopment, framework conditions and technological progress.


SOURCE: THE DANISH ENERGY AGENCY (ENS); WOOD MACKENZIE (WM)

1995 20052000 20101990

150

90

120

0

60

30

2005-forecast -19,3 -8,4

2000-forecast 31 13,5

Realised production

1995-forecast 56,8 24,8

1990-forecast 69,2 30,2

Volume (m

mboe)

Deviation between realised production and forecast in 2010

Value (DKK m

ia.)

8.300

1.800

6.500

15.000

1.700

13.300

AVERAGE

2008-2010 2022

-45%

26.700

3.800

54.900

48.000

6.900

AVERAGE

2008-2010 2022

-44%

17.350

28.800

30.500

AVERAGE

2008-2010 2022

-40%

DEVELOPMENT OF ACTIVITY DRIVERS EMPLOYEES GROSS VALUE ADDED TOTAL TAXES AND DUES

*SEEMS TO ASSUME DECOMMISSIONING/RATIONALISATION OF FACILITIES NOTE: INDIRECT CONTRIBUTION OF TAXES AND DUES IS NOT INCLUDED DUE TO LIMITATIONS OF DATA BASIS. KILDE: THE DANISH ENERGY AGENCY; WOOD MACKENZIE; QUARTZ+CO ESTIMAT

Oil and gas production, mmboe

55

-63%

148

Average oil price, USD/boe

+38%

11080

2.712

Investments, DKK billion

-60%

6.716

Operating costs, DKK billion*

-28%

5.2493.759

AVERAGE

2008-2010 2022

Direct

Indirect

FUTURE PRODUCTION HAS SHOWN TO BE DIFFICULT TO FORECASTOIL PRODUCTION IN DENMARK AND FORECASTS OF PRODUCTION ACCORDING TO FORECASTS OF PRODUCTION ACCORDING TO YEAR OF FORECAST MMBOE

IN 2022, A DECREASE IN THE SCALE OF 40-50% IS EXPECTED FOR THE PRIMARY SOCIAL CONTRIBUTION PARAMETERS COMPARED TO TODAY

20 21

There is a significant potential to increase the ex-pected level of activity through the exploration and technology development. Important prerequisites for realisation of this potential are development of the oil price and framework conditions of the sector. Maximum long-term social value creation must thus be achieved through an optimal balance between tax revenue and stimulation of the companies’ invest-ments in the Danish shelf.

4.1 OIL PRICE AND FRAMEWORK CONDITIONS ARE ESSENTIAL FOR THE FUTURE LEVEL OF ACTIVITY IN THE OIL AND GAS SECTOR ON THE DANISH SHELF

In its forecasts, the Danish Energy Agency estimates a potential of 1,209 mmboe (exploration and tech-nological resources) during the remaining lifetime of the shelf in addition to the commercial reserves of 1,242 mmboe and conditioned resources of 469 mmboe5. Thus, there is an up-side of approx. 70% driven by new exploration (approx. 40% of the up-side) and a boost in extraction through technology development (the remaining approx. 60% of the up-side).

High oil prices over time make it more attractive both to explore and develop new technologies. Thus, the development of oil prices has shown historically to be important for the level of activity in the sector. Short-term adjustments of oil prices have, however, only low effect on the level of activity due to the long-term investment horizons of the sector. There

must be an expectation that the oil price has found a new structural level before investments either are increased or reduced.

Political framework conditions for the sector are also important for the companies’ willingness and ability to invest in exploration and extraction. Ex-amples from both Norway and the UK show that changes of the framework conditions may have a significant short-term and cash effect on the level of activity.

The UK has several times seen that the authorities have used changes of the tax system with a view either to stimulate exploration and development of fields or to increase the tax income levels. In the draft budget for 2011 the government wanted to in-crease the level of taxation. A study made by Oil & Gas UK among oil companies in connection with the draft budget showed immediately that approx. 25% of all planned projects had a reduced probability of being implemented, which would mean a loss of 15,000 jobs and 310 mmboe of production towards 2020. This has contributed to the government pre-senting a partial rollback of the tax reform in the budget for 2012.

In Norway, the authorities in 2005 introduced a sys-tem of cash payback of the tax effect of exploration costs. Already in the following licensing round (TFO 2006)a the following year, the number of license ap-plicants increased by approx. 50% and the level of investment increased by 75% in relation to explora-tion and concept studies.

4. UTILISATION OF THE POTENTIAL ON THE DANISH SHELF


5 Conditioned resources include projects for expansions of discoveries and new fields or further expansion of existing fields, where the technical or commercial basis is not yet in place for a final decision on expansion. 6 TFO (assignment in areas, defined in advance)

THERE IS AN ADDITIONAL POTENTIAL OF RESOURCES ON THE DANISH SHELF BUT A REALISATION REQUIRES NEW INVESTMENTS IN TECHNOLOGY AND EXPLORATIONHISTORICAL AND FUTURE PRODUCTION VOLUME OF OIL AND GAS, MMBOE

1980 1990 2000 2040203020202010

2011

NOTE: 1972 TO 2011 ARE BASED ON HISTORICAL DATA, 2012 TO 2042 ARE BASED ON FORECASTS OF THE DANISH ENERGY AGENCYSOURCE: THE DANISH ENERGY AGENCY

Technological resources

Exploration resources

Oil production

Gas production

150

100

200

50

22 23

4.2 INVESTMENT IN EXPLORATION AND A BOOST OF EXTRACTION CAN GIVE A CONSIDERABLY SOCIO-ECONOMIC PROFIT

A realisation of the estimated additional resource potential of the Danish shelf (up-side of the 1,209 mmboe) will have a significant socio-economic val-ue with the current oil and gas prices. Compared to the basis scenario (see chapter 3), realisation of just half of the Danish Energy Agency’s estimated potential of 1,209 mmboe increases the tax-related contribution by approx. DKK 3 billion in 2022, and employment will increase by approx. 2,800 jobs.

A significant part of the value creation - by realis-ing the potential will not occur until the period 2022 to 2042. Here, the additional continuous annual tax contribution will amount to approx. DKK 5 billion and the sector could employ additionally approx. 5,000 persons (still assuming that only half of the potential estimated by the Danish Energy Agency is realised).

Realisation of the potential will mainly occur through the present infrastructure as future discoveries are expected to be too small to be able to warrant in-dependent platforms. Hejre must thus be expected to be the last big development on the Danish shelf. Most of the present production facilities on the fields have, however, an advanced age and thus a limited remaining lifetime. Therefore an element of time pressure is present, and possible postpone-ment of investments in exploration and technology development must be compared to the possibility of continued life extension and utilisation of existing infrastructure.

In any case, optimizing the level of activity and so-cial impact of the sector requires a varied assess-ment and debate. The current analyses point out the importance of ensuring a healthy balance between the short-term and long-term social revenue base.

THE DANISH OIL AND GAS SECTOR’S DEVELOPMENT AND SOCIAL IMPACT (1992-2022)THE DANISH OIL AND GAS SECTOR’S DEVELOPMENT AND SOCIAL IMPACT (1992-2022)

Ø 5,0

Ø 4,6

Investments

Operation

3,12,61,71,30,80,4

3,94,35,0

5,86,57,07,17,17,27,17,07,17,17,17,06,9

6,1

4,63,8

2,8

5,3

1,20,80,4

3,53,94,6

5,25,96,46,56,46,56,56,36,46,56,46,36,2

5,5

4,13,5

2,8

4,8

2,62,21,6

Total tax receipts estimated to DKK 135 billion

TOTAL TAXES AND DUES FROM OIL AND GAS SECTOR (ADDITIONAL CONTRIBUTION)DKK BILLION

EMPLOYED IN RELATED INDUSTRIES (ADDITIONAL CONTRIBUTION) EMPLOYEES IN THOUSANDS

SOURCE: THE DANISH ENERGY AGENCY WOOD MACKENZIE; QUARTZ+CO ESTIMATE

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IF THE NECESSARY INVESTMENTS ARE MADE AND IF JUST 50% OF THE ADDITIONAL RESOURCE POTENTIAL IS REALISED, IT WILL GIVE A CONSIDERABLE ADDITIONAL SOCIAL CONTRIBUTION.

RYESGADE 3ADK-2200 COPENHAGEN

DENMARK

the danish oil and gas sector’s …...the average expected size of discoveries is approx. 6 times...

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