PUBLISHED BY OIL GAS DENMARK — 2017
JOBS
WELFARE
SECURITY
ENERGY
SELF-SUFFICIENCY 2050 INTERVIEW MARTIN NÆSBY “Denmark can be self-sufficient with oil and gas all the way to the fossil independent society.”
THEME: THE NORTH SEA AGREEMENT Lars Christian Lilleholt: “The North Sea Agreement is a win-win.” The industry: “The agreement is a good beginning.”
THE BATTLE OF THE BILLIONS FROM THE NORTH SEA: “The North Sea is unconditionally good business for Denmark.”
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EDITORIAL
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xtended decline and doubt about the future for Danish oil production was in the spring turned to cautious optimism when the Government presented the North Sea Agreement, which secures re-building of Denmark’s largest gas field, Tyra, against a minor lift in deduction and depreciation conditions. The agreement is extremely important. It shows that when the state accords easing of rules, the incentive is increased for companies to invest – and yet more important, that this to a very high degree is something that benefits the Danish society. As Lars Christian Lilleholt states in this Magazine, the Government had not entered into this agreement had it not been sure that it was to the benefit of the Danish tax payers. It is a step in the right direction but we are not there yet. Even though Tyra is a key field, the North Sea contains a large potential of oil and gas, which reaches far beyond, no matter whom operates the fields in the North Sea. But why should we produce oil and gas at all when we are in the midst of a green transition? The answer is: Because we need oil and gas in Denmark for many years to come. As you can read in this Magazine, we are much further away from the green transition than is commonly imagined. It is still only a fraction of the total energy consumption in Denmark which originates from renewable energy sources - and yet smaller is this share when you talk about the global consumption. This is not because we do not want to - but because it takes technology which is not yet available, to get there. Therefore, a stop for production of oil and gas from the North Sea will not mean a lower consumption. We will still drive cars and fly, and therefore we must, without own production, import the energy from other oil producing countries. There is no contradiction between oil and gas and green transition. Green transition is ongoing. We are in the process of a transition whereby more of the energy we consume will come from renewable energy sources and where the goal is that we must be fossil fuel independent by 2050. Why not harvest the benefits of the Danish oil and gas production from the North Sea as long as we need it? We have the resources to be self-sufficient for many years. We could set the goal to be self-sufficient with oil and gas until 2050, where the target is to be independent. It is hard to see who should oppose to that goal. This would evidently be a huge benefit to Denmark. Firstly, because the North Sea is good business for Denmark. Over the last 50 years the North Sea has contributed more than 400 billion kroner to the Danish society. Secondly, because the oil industry has created about 35.000 jobs in Denmark – people who are directly employed in the industry or in one of the many associated trades which are dependent on a Danish oil industry. Thirdly, because the North Sea provides security of supply. Energy is the lifeline in modern society; therefore, it has huge value for a country to be self-sufficient in energy. Denmark can – as the only EU country. We need the oil and gas, and the production in the North Sea provides obvious benefits to Denmark. It would be a tokenism to claim otherwise. Therefore, I think that Danish self-sufficiency in oil and gas towards 2050 is a good suggestion for a long-term energy policy.
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MARTIN NÆSBY Managing Director, Oil Gas Denmark
2 OIL GAS DENMARK 2017
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THEME
THE NORTH SEA AGREEMENT
CONTENT
THE NORTH SEA AGREEMENT — MINISTER LARS CHRISTIAN LILLEHOLT:
SECURITY OF SUPPLY — NICOLÓ SARTORI:
“The North Sea Agreement is to the benefit of both the companies and the Danish tax payers”
“Danish self-sufficiency is an important international asset” Page 23
Page 8
THE NORTH SEA'S BILLION INCOME:
THE GREEN TRANSITION — STILL SOME WAY OFF:
“If no companies will invest, then the state will loose”
“2,4 million Tesla batteries give 10 hours of energy”
Page 20
Page 30
OIL GAS DENMARK 2017 3
INTERVIEW WITH MARTIN NÆSBY, MANAGING DIRECTOR, OIL GAS DENMARK
The North Sea can deliver self-sufficiency towards 2050
We will need oil and gas for many years to come and the North Sea holds large resources. Therefore, if we do it right, Denmark can continue to be self-sufficient all the way to the fossil independent society, and at the same time get the advantages of tax income, jobs and independence from energy imports – says Martin Næsby, Managing Director of Oil Gas Denmark. Text ULLA LENA — Photo PER GUDMANN
4 OIL GAS DENMARK 2017
THE NORTH SEA AGREEMENT
S
everal years of decline in the Danish oil and gas industry was replaced by cautious optimism when the Government and DUC in the spring entered into an agreement entailing a nine-year tax credit against a full re-building of the Tyra gas field. The field was planned to be shut down in 2018 because the platform is subsiding and a re-building would not be financially viable under the tax conditions which have been in place since 2003. The industry has for a number of years pointed out that the companies in the North Sea could no longer make new large investments profitable, and therefore they had not materialized. The decline culminated with the message from Maersk Oil, that the Tyra field would be closed if nothing happened. Following a long process, the result was, as is now well known, the North Sea Agreement. THE NORTH SEA AGREEMENT – A NEW BEGINNING Martin Næsby is pleased with the re-building of Tyra, however, he also has a bit of resentment since the agreement was not unfolded even more, as there is so much more to go for in the North Sea. He hopes that the North Sea Agreement will become a new beginning for production of oil and gas in the North Sea. “The North Sea Agreement is above all important. The re-building of Tyra is crucial. The field contains large quantities of gas, which would otherwise be lost, and the infrastructure in the field is a key for large parts of other production from the North Sea. Therefore, it is a good agreement which will benefit Denmark. However, I would have liked that the tools contained in the agreement had been unfolded much more. We are after all dependent on oil and gas for at least another 30 years. Therefore, we should aim at self-sufficiency and give the operators the tools necessary to achieve this goal. The North Sea Agreement also shows that the agreement in monetary terms comes back fivefold to the state. The agreement cost 5 billion kroner, however will be able to return 129 million barrels from Tyra and 29 billion kroner to the state – imagine what it could be if we made the same calculation for the whole North Sea potential of 3 billion barrels”, says Martin Næsby with reference to the analysis “The Future Oil and Gas Sector in Denmark “ made in common by the Government and the industry. It shows that there is a potential of 3 billion barrels oil – which is almost equal to what has been recovered over the last 50 years. Earlier in the year the industry itself calculated that a combination of immediate depreciation and a larger deduction would give the state an additional income of more than 200 billion kroner because the credits would mean that a much larger portion of the potential would be utilized. “I would immediately look at these figures if I were responsible for the country’s economy. The resources belong to the society and is an incredibly large amount – however, as long as they remain in the underground they do not create value for the societal economy. Denmark needs the oil and gas in the North Sea for the next 30 – 50 years. If we do not produce that oil and gas we must procure it from abroad – and then Denmark misses tax income as well as the advantage of being self-sufficient and independent. I would therefore urge that the tools of the North Sea Agreement are unfolded because the agreement very clearly shows that the frame conditions are crucial in relation to how much oil and gas we produce in Denmark. I therefore see the agreement as a new beginning – as a new North Sea version 2.0.”
FOCUS ON THE CO2 EMISSION Why should we develop oil and gas production in Denmark at all, when we are in a transition towards more renewable energy and the Government has the ambition to be fossil fuel independent in 2050? That is a question Martin Næsby is often confronted with. “The short answer is that we need oil and gas in Denmark as well as globally – today and in 25 years. The latest figures I saw from IEA show that today renewable energy sources such as wind and sun cover only 1,3 percent of the total energy demand and in 2040 that figure is about 6 percent. Denmark is one of the front runners in the green transition. We have come relatively far given that wind is now the source of about 42 percent of our electricity production. However, in relation to being independent from oil and gas there is still a long way to go. Therefore, we need other energy sources – including oil and gas. That does not mean we should chance it and consume indiscriminately – not at all – however, we must relate to the facts. During the long transition period, we must find out how we can reduce CO2 emissions through energy efficiency, because that is where the problem lies. We simply must get more out of the energy we consume”, he says and points out that the climate will be the loser when one thinks and debates very polemically rather than more realistically. “We must stop thinking in terms of “them” and us” when we talk about green and fossil energy. There is in reality no difference, however there surely is a lot of political power in making it seem as if there is. We need the transition to more renewable energy, however the need for energy does not disappear because the renewable sources are not yet able to supply us. Here, our industry enters the picture, and you can do a lot of good, if you think in terms of efficient solutions. If for instance you could replace the coal fired power plants in Eastern Europe with gas, the CO2 emission would be somewhere between 30 and 40 percent lower. It would be unwise not to do that, even if you would rather have wind and solar energy.” SELF-SUFFICIENCY TOWARDS FOSSIL INDEPENDENCE As long as Denmark needs oil and gas we can choose either to produce the resources from the North Sea or import from other oil and gas producing countries. For Martin Næsby the advantages with own production are so obvious that he thinks we should aim at self-sufficiency with oil and gas towards the fossil independent society. “Tax income, jobs and security of supply. That is what the North Sea has created for decades. If we do not produce ourselves we will lose these advantages at the same time as we become critically dependent on other countries as energy suppliers to Denmark. My opinion is, that as long as there is a socioeconomic gain by producing oil and gas in Denmark – which there is as long as there are companies interested in investing – then we must go the extra mile to make it happen. The advantages are simply unmistakable. Imagine if Denmark could supply itself with the necessary oil and gas all the way to the fossil independent society, and hereafter other sources of energy would take over. That would be grand”, Martin Næsby ends. •
OIL GAS DENMARK 2017 5
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MINISTER FOR ENERGY, UTILITIES AND CLIMATE LARS CHRISTIAN LILLEHOLT:
“THE NORTH SEA AGREEMENT IS A WIN-WIN”
THE NORTH SEA AGREEMENT
The North Sea Agreement is to the benefit of both the companies and the Danish tax payers, and the minister finds, that we must go far to produce the resources we have. Text ULLA LENA — Photo ULRIK JANTZEN
8 OIL GAS DENMARK 2017
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THE NORTH SEA AGREEMENT
“
Society wins, the companies win, and we maintain a large Danish oil and gas production. And if the Government had not thought that the agreement was in the interest of the Danish tax payers, we had not made it.” This is how clear the Minister for Energy, Utilities and Climate Lars Christian Lilleholt puts it when he comments on the North Sea Agreement which was entered during the spring between the Government, Socialdemokratiet, Dansk Folkeparti, Det Radikale Venstre and SF. For a period of nine years the tax conditions are relaxed for the oil companies against a full re-building of the Tyra Field, which is a central part of the Danish infrastructure in the North Sea. During the fall of 2016 it was announced that the field would be closed because the platform was subsiding, and that based on the tax conditions in place since 2003, it would no longer be economically feasible for Maersk Oil to make the necessary full re-building to continue production. THE AGREEMENT IS A FINE BALANCE BETWEEN INTERESTS Therefore, the minister is pleased that an agreement was landed, which on the one hand secured a full re-building, but which on the other hand was also made in a way so the agreement was to the benefit of society. “Re-building Tyra had a very high priority. The precondition for continued production, and creation of possibilities for recovery of finds which otherwise could not be developed was that a solution was found for the Tyra Field – which is a central hub in the infrastructure in the North Sea. It was important with an agreement which secured the right frame conditions in relation to being able to continue oil and gas production, at the same time as it should be done in a way which takes the Danish tax payers into consideration. Therefore, the agreement which was made, is quite unique”, says the minister referring to calculations by the Government showing that the relaxation is costing about DKK 5 billion, whereas the income to the state is up to DKK 26 billion. The agreement is also constructed in such a way that if the oil price increases over a longer period, the companies must pay back the relaxation. ”There are many interests surrounding this agreement. It was finally landed in a fine balance between just exactly the consideration there is between on the one side to secure that the companies have an incentive to invest more, at the same time as the tax payers and the Danish state can accept
10 OIL GAS DENMARK 2017
it. An amount of two-digit billions will be invested in the North Sea. That is a massive investment in which the state takes its relative share, however it is the companies, which will bear the largest share of the project.”, says the minister who is also satisfied with the possibility the agreement gives for third party increased access to the production facilities in the North Sea. That means that new entrants to the North Sea can get the possibility to utilize the infrastructure which is already established and owned by the other companies. THE NORTH SEA OIL AND GAS MUST BE PRODUCED Even if the re-building of Tyra in the first place was crucial to the Government, the minister has an ambition which goes further than that. He hopes that both the North Sea Agreement and the strategy for the North Sea, which the Government pre-
Whether that means that more initiatives will be made in the North Sea the minister cannot say anything about. As a starting point the frame conditions were decided in the Service Review in 2013 and latest adjusted in the North Sea Agreement in 2017. “We have now taken an initiative here (The North Sea Agreement, red.) and released the oil and gas strategy, and then we will of course listen to what kind of signals there are. The Government is positively considering this area as important. With the agreement, we support the continued existence of a strong oil and gas industry in Denmark and an appropriate exploitation of the subsoil”, says the minister. “It is crucial that we recover the oil and gas there is. To drill for oil and gas is subject to large uncertainties, and we must secure that it (Denmark, red.) is still an attractive area to invest in. I noticed there was much
“To be independent does not mean, that oil and gas is not still in use, also in Denmark, also after 2050 – and especially up to 2050” LARS CHRISTIAN LILLEHOLT
sented just prior the summer break, will create more activity in the North Sea because the Danish oil and gas industry contributes to the Danish welfare. If there are economically viable quantities of oil and gas in the North Sea, they must be produced. He states: “With the oil and gas strategy we have sent a very clear and explicit signal that we want oil and gas in Denmark. That we see both fiscal advantages and possibilities for being net exporter of oil and gas for many years to come. That is crucial for security of supply for gas in the longer term, at the same time as it gives good income for the Danish state. It contributes to maintaining our welfare. When the Danish state is in the situation we are in today, it is not the least the result of the large income from the North Sea over many years. More than DKK 400 billion have been the contribution to the Danish state. If there are economically viable oil and gas quantities, which we hope there is in the North Sea, they must be produced. The North Sea strategy is not only about the Tyra field, but generally about how we exploit the resource potential in the North Sea best possible, and how we maintain the competencies we have”, says Lars Christian Lilleholt.
interest in the 7th round among oil companies. That shows that Denmark has competitive frame conditions, and that tells me that we shall maintain confidence in that the political system does not just change frame conditions from one moment to the next. I believe it has significant importance for the oil and gas industry, that there is stability in the political system, such that there is confidence that the rules applicable also will apply for the duration of the investment life cycle. Therefore, I am also pleased that this agreement ended up being so broadly supported”, says Lars Christian Lilleholt. DANISH FOSSIL INDEPENDENCE The target is that Denmark is fossil fuel independent in 2050. But, according to minister Lars Christian Lilleholt, that does not mean that there shall be no oil and gas in Denmark at all. “To be independent does not mean, that oil and gas is not still in use, also in Denmark also after 2050 – and especially up to 2050. I do not expect that the notion that the entire world is independent of oil and gas in 2050 will hold true, not in 2030 nor in 2050”, ends the minister. •
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“I hope the North Sea Agreement is the first step” INTERVIEW WITH STEEN BRØDBÆK, SEMCO MARITIME AND JOHN SØRENSEN, RAMBOLL OIL & GAS
12 OIL GAS DENMARK 2017
THE NORTH SEA AGREEMENT
The North Sea Agreement sets the frame conditions for the oil companies, however it has also enormous importance for the many supplier companies, whose livelihood depends on the Danish oil production. The Magazine has met two of them and asked them to evaluate the North Sea Agreement. Text ULLA LENA — Photo ROBERT ATTERMAN
E
ven if the North Sea Agreement is mostly about depreciation and deductions for the companies holding a license to produce the oil in the North Sea, the agreement has an equally big importance for all the supplier and service companies who depend on the demand for their goods and services from the oil companies. Supplier and service companies are those who deliver anything from engineering consultancy, manning services and advanced technology to helicopter service, cleaning and catering. This is where most of the jobs in the industry are placed. As a rule of thumb eight jobs are created in the supplier industry for every job in an oil company. Common for them all is that they are totally dependent on investments in new projects by the oil companies. Ramboll Oil & Gas and Semco Maritime are two of those companies. Ramboll Oil & Gas has 600 employees and delivers design and engineering work to the installations. Semco Maritime has 1,150 employees and sells engineering work and manning services for offshore production. THE AGREEMENT SHOWS THE POLITICAL WILL TO LOOK UPON THE NORTH SEA AS A RESOURCE Like many other companies in the Danish oil and gas industry, the publication of the North Sea Agreement was met with joy. “As a starting point, I am really happy. The agreement shows that there is a will to look upon the North Sea as a resource for Denmark”, says Steen Brødbæk, who highlights that it has been long in the making with a lot of uncertainty for the industry. John Sørensen agrees. “It has been a very important agreement for Denmark to get in place”, he says, and mentions that the infrastructure in the North Sea can now be retained intact. “The alternative was commencement of liquidation of the Danish oil and gas production. Denmark will still need oil and gas in the energy mix together with renewable energy, and the agreement has large importance for Denmark’s independence from imported energy. Likewise, we are pleased with the view to a much-needed supplement to the state finances.” Despite both, as a starting point, are pleased with the agreement, Steen Brødbæk says that it is only possible to evaluate the agreement when it becomes clear what it will actually entail. He had hoped that the agreement had a broader scope than Tyra – because the potential in the North Sea is larger than that – and he would also have liked to see actions which could attract new operators to Denmark. “The reason we are not running around with the arms in the air thinking we can walk on water, is that I do not see actions neither in relation to marginal fields nor to get new companies to Denmark”, says Steen Brødbæk as he encourages politicians to look towards e.g. England.
OIL GAS DENMARK 2017 13
THE NORTH SEA AGREEMENT
THE NORTH SEA AGREEMENT IS THE FIRST STEP “We can see from our English entity that the incentives in England, with regard to exploration and approval of new projects, are actually elements which help pushing a broader part of the industry into motion. The North Sea Agreement is a strong foundation to build on, however I certainly hope the agreement regarding Tyra is only the first step. That the Government wanted to get this agreement in place prior to looking towards the ensuing elements”, says Steen Brødbæk pointing out that it is urgent. “We are in a hurry. We cannot wait too many years before the other issues are in place. Up until now we have actually seen that neither 6th nor 7th license round has created jobs, or projects which will create jobs”, says Steen Brødbæk and mentions further that in England infrastructure also came first. John Sørensen agrees and finds that the sale of DONG Oil & Gas can give rise to renewed optimism. And he continues “The industry very much hopes that the sale of DONG Energy’s oil and gas business to Ineos will contribute to enhancing the activities. The new owners must have a reasoned belief that it is a good deal to take over the fields and kickstart some of the projects which previously were shelved. It will for instance be interesting to see whether they can succeed in making good business from the minor finds with the new agreement”. THERE ARE TWO PATHS TO FOLLOW Irrespective of what happens in the Danish oil industry, there will be a continued demand for oil and gas in Denmark well into the future. Therefore, both John Sørensen and Steen Brødbæk are of the opinion that it would be unwise if Denmark should miss the very large value which is created in the North Sea.
14 OIL GAS DENMARK 2017
“It has been a very important agreement for Denmark to get in place. The alternative was commencement of liquidation of the Danish oil and gas production” JOHN SØRENSEN — RAMBOLL OIL & GAS
“There are two paths to follow. We can say that we will not produce in the North Sea thereby missing out on income for the state, jobs, self-sufficiency and export possibilities within this area. However, we can obviously not base energy production entirely on renewable energy, in that case we should import fuels, especially gas from other countries. Russia has a crucial role to play in Europe. We can also create possibilities for investments in our own energy resources, which will secure the jobs, tax income and independence which we have had for very many years. This is what I think would be the absolutely best solution for everyone in Denmark”, says Steen Brødbæk, and John Sørensen ends up by stating that he therefore hopes that as many projects as possible will end up with Danish suppliers when they before long will be tendered – where also foreign companies will be invited to bid. “We really hope, that the new agreement will mean that we can retain the many jobs for instance in Esbjerg where every tenth job is connected to the oil and gas industry. We have a great interest in securing that the right knowledge and competencies continue to be present enabling the operators also in the future to draw upon a well-functioning local network of suppliers.” •
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THE NORTH SEA AGREEMENT
Theme: The North Sea Agreement The Government made the North Sea Agreement during the spring together with Socialdemokratiet, Dansk Folkeparti, SF and Radikale Venstre, which in a window of nine years gives the industry various economic credits against a full re-building of the Tyra field. Read the elements of the agreement and view what the minister and the industry expect the agreement will mean.
16   OIL GAS DENMARK 2017
Opinions about the agreement
Patrick Gilly — Maersk Oil At Maersk Oil we are pleased with the agreement reached and we consider it an important step towards realizing the significant potential that the Danish North Sea still represents. For Maersk Oil and our DUC partners, this realization begins with the full redevelopment of the Tyra facilities, a major project for which we expect to take a final investment decision by end 2017. The redevelopment of the Tyra facilities can be the catalyst for the extension of the activities in the Danish North Sea, which in turn would help protect jobs and provide the Danish State with valuable tax income and energy self-sufficiency for years to come.
Jørn Bue Madsen — NorSea Group Denmark That the North Sea Agreement has fallen into place is fantastic for Esbjerg as well as the oil and gas industry. Now we can see light at the end of the tunnel after some rough years. We do not expect that the agreement will have a spillover effect on NorSea Group Denmark and other suppliers until the other half of 2018. But of course, when the activity in the North Sea begins again, we expect an increased demand for our services and thereby also an increase in employment.
Facts about the North Sea Agreement Ole Ingrisch — Esbjerg Havn It is tough times for operators, shipowners, suppliers and service companies in the oil and gas industry. The uncertainty still prevails. The North Sea Agreement gives the industry the breath of air that is needed for the companies to turn their focus towards the re-building of Tyra field. We feel that in the Esbjerg Harbor, where companies are preparing themselves for the tasks ahead.
Tom Nielsen — Esbjerg Erhvervsudvikling I am relieved because it has been difficult years for the industry. With this agreement, a completely different and positive atmosphere has come to Esbjerg – a belief that there is light at the end of the tunnel. It is not because much has happened yet – but the mere fact that an agreement has been made has completely changed things. I have met companies which have had investments ready and waiting, who have said, that as soon as an agreement has been made, they will go ahead. There are also companies informing us that now they will be coming to Esbjerg.
The North Sea Agreement was entered 22 March 2017 between the Government, Socialdemokratiet, Dansk Folkeparti, SF and Radikale Venstre. An investment window is created covering the years of 2017 – 2025 during which the frame conditions are improved through: •
The hydrocarbon deduction is raised from 5 percent to 6,5 percent for a six-year period
•
Deductions in the hydrocarbon tax is raised from 15 percent to 20 percent annually
•
The time for deduction of the two deductions above is changed from the time of commissioning the investment to the time of payment
Consequently, DUC will complete a full re-building of the Tyra facilities in the North Sea. Third party access to the infrastructure in the North Sea will be improved, and a pool of 100 million kroner is established to cover green initiatives in relation to oil and gas recovery. If the oil price increases to at least 75 US Dollars per barrel, the companies must pay back the credits to the state. The parties estimate that with a full re-building of Tyra facilities, an additional 129 million barrels oil will be produced. The Government has calculated the value of the credits to be about 5 billion kroner and an additional income to the state of 26 billion kroner. SOURCE: MINISTRY OF FINANCE
OIL GAS DENMARK 2017 17
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Are tax incentives in the North Sea good business for the state? Pros and cons have taken up space in the columns of the newspapers over the last year. Two of the foremost voices of the debate each give their take on how Denmark gain the most out of its resources.
THE BATTLE OF THE BILLIONS FROM THE NORTH SEA Text ULLA LENA — Illustration RASMUS SAND HØYER
O
n 22 March, the Government published the North Sea Agreement and the Finance minister in that connection said that “a temporary easing of the tax rules was necessary to save the largest gas field in Denmark, the Tyra field”. The Government had calculated that an easing that costs the state about five billion kroner can give the state an additional income of up to 26 billion kroner. A couple of weeks earlier the Environmental Economic Council published a report with the diametrically opposite conclusion. The tax in the North Sea could advantageously be increased – and if that meant that the companies would no longer invest in the North Sea then that was a sign that “it was no longer profitable to produce oil and gas in Denmark”. How can you come to such completely different conclusions? The Magazine has met two of the prominent persons in the debate, Environmental Wiseman Lars Gårn Hansen, and former professor Dr. Emeritus Ole P. Kristensen. Their positions are clear. “Denmark shall not produce oil if it is only profitable with tax incentives”, says Lars Gårn Hansen. Ole P. Kristensen disagrees and does not find that you can talk about subsidies in an industry which through the hydrocarbon tax pays more taxes than comparable industries: “It is fundamentally wrong to term a relief as a subsidy for an industry, which pays more in tax than other industries. And as
20 OIL GAS DENMARK 2017
long as there are companies who wish to invest in the North Sea it is unconditionally good business for Denmark”, he states. THE DANISH OIL BELONGS TO THE STATE The Subsoil Act defines that in Denmark the subsoil and the resources therein belong to the state. That means that the Danish treasury wants the highest possible economical result from the oil and gas present in the subsoil. However, it is not the state itself who produces the oil. It is private companies, such as Maersk and Hess, who perform the task for the state. They have been granted a license from the state to produce the oil, and they operate on ordinary commercial terms. The oil companies must, like all other companies, have a satisfactory return on the, typically very large, investments they make. In short, they must make money. The industry has in this connection pointed out that the considerable uncertainties must be taken into consideration when evaluating especially the level of the return on investments. The uncertainty is first and foremost that investments in exploration and production are very large, and secondly have a very long lifespan. Therefore, the basic condition is that companies attempt to forecast oil price, success rate in exploration and several other issues over a time span of 20 to 30 years.
“If you overestimate the resource rent and tax too hard, no companies will invest and the state loses” OLE P. KRISTENSEN
THE DISCUSSION IS ABOUT “THE RESOURCE RENT” The resource rent is an economic concept, which is used to explain that there can be an extraordinary profit from an activity – after all costs and a normal return have been deducted. The term is often used in connection with natural resources like minerals or fossil fuels. “IF YOU OVERESTIMATE THE RESOURCE RENT, THE STATE WILL LOSE” The Danish tax model is built upon the notion that when the companies have received a certain share of the profit, then the state can tax the extraordinary profit as much as it wants. That is done through an additional tax, the hydrocarbon tax.
The logic is in theory, that taxation of the resource rent will not affect the companies’ investments negatively because the company is satisfied with having covered its immediate cost and achieved a normal rent. The model is called the neutral taxation – and to have the intended effect it is necessary to know the level of the resource rent, that is the size of the extra profit, which is to be additionally taxed. This is a balance that can be to the advantage of both the state or the companies, Ole P. Kristensen explains. “If you underestimate the resource rent the state can end up cheating itself. If you overestimate the resource rent and tax too hard, no companies will invest and the state loses,” he explains. Most experts, politicians and industrial companies recognize the principle that the state must receive its share of the additional profit if there is one. However, the agreement ends when it comes to evaluating whether the so-called “neutral taxation model” works in practice. While Lars Gårn Hansen says that the neutral taxation model works fine in practice because it is easy to isolate the supernormal profit, then Ole P. Kristensen holds the diametrically opposite view because the model does not take into consideration the large uncertainties under which the oil companies operate – and therefore the resource rent is overestimated and the taxation is too hard resulting in the absence of investments.
OIL GAS DENMARK 2017 21
”THE UNCERTAINTY IN RELATION TO RECOVERY OF OIL AND GAS IS ENORMOUS.” Lars Gårn Hansen finds that the model can consider both oil price fluctuations and a number of those uncertainties under which the oil industry operates. “It is possible to calculate which resource rent taxation the current tax rules will produce under different oil price scenarios”, he says and continues. “There are clearly large differences in the actual conditions, however, when you calculate the resource rent you will look at what has been invested, what is the normal profitability and deduct all costs, and then look at what is left. Then you are in a position where the operator has had all costs covered and a normal
“Investments must go where they give the highest return” LARS GÅRN HANSEN
profitability from his invested capital”, he says and adds that in his opinion there is a much harder taxation in Norway, and therefore an easing should not take place in Denmark. Ole P. Kristensen is far from thinking it is as simple as that – and in his opinion neither that comparison with Norway is possible. “The uncertainty in relation to recovery of oil and gas is enormous. Partly because one never really knows how much is to be found and never on beforehand knows the cost – and partly on top hereof the uncertainty about the oil price in the future. He finds that the problem with the tax system is that the resource rent is subject to large uncertainty. “No one can honestly say that they know the resource rent – and it is not at all possible to compare the Danish and the Norwegian continental shelf, because the fields and the profits are much larger here (in Norway, red.)” he says and explains that there is no unambiguous result. ”IF THERE ARE COMPANIES WHO WISH TO INVEST, IT IS GOOD BUSINESS FOR THE STATE” As the two look so differently at the resource rent, they are neither agreeing on the conditions for a continued production form the North Sea. The Economic Wisemen estimate that the companies will receive a too large part of the resource rent, and therefore Lars Gårn Hansen calls it tax subsidies, and he evaluates that if the oil industry cannot do without subsidies the oil shall not be produced at all because the North Sea thereby is no longer a profitable business. Ole P. Kristensen on the other hand says that it is wrong to talk about subsidies – and that it is in all circumstances good business for the state to produce oil in the North Sea. ”This is not about subsidies. If for instance the state discriminated between companies in tax payment levels, then it could possibly be called subsidies. However, that is not the case here” he says and evaluates that profitability is present in the North Sea. “If oil and gas is being produced from the North Sea it is prof-
22 OIL GAS DENMARK 2017
itable and therefore socioeconomically profitable. The companies would not produce the oil and gas if it was not economically profitable. Even if the company had made an error of calculation so that they would possibly develop a deficit and go bankrupt, then the risk is entirely with the private companies which enter this business”, he says. ”INVESTMENTS MUST GO WHERE THEY GIVE THE HIGHEST RETURN” Lars Gårn Hansen can agree with the precondition that it is the companies that bear the risk, and that the state can therefore never lose money on the Danish oil production. He thinks that the capital – the money the companies invest in oil production – could be invested better in another place where an even better return could be created. Even if that means that companies cease investing in the Danish North Sea – and thereby say goodbye to the jobs created by the oil industry and the revenue earned by the state from the oil. ”Investments must go where they give the highest return. The point is, that there is capital and there is manpower which will end up being employed in a non-profitable industry. Then it is better this capital goes abroad and earns interest there. If you lure resources, in this case manpower, into employment which will only be present because additional tax-rebates are accorded, then it would be better these manpower resources were employed in places where no tax-rebates were given” he says. Ole P. Kristensen emphasizes that Denmark gets the best return on its resources by producing them, and that will only happen if the Danish North Sea is an attractive place for oil companies to invest. Contrary to Lars Gårn Hansen he therefore does not think that the oil companies get any rebate. “Yes, but there is no tax-rebate. The companies pay company tax and the employees pay income tax.” •
LARS GÅRN HANSEN
OLE P. KRISTENSEN
“Denmark has an important competitive advantage” Nicoló Sartori is scientist at the Istituto Affari Internazionali (IAI) and researches in among other the correlation between energy and security policy. He estimates that Danish self-sufficiency of oil and gas is a big advantage for the country. Text ULLA LENA
However, international politics remains highly unpredictable, and the deterioration of one of these scenarios may significantly affect the global oil & gas security of supply. Iran, North Korea and the still explosive situation in the Middle East – particularly in the light of the new approach adopted by the new US Administration - are among the hottest spots that can put at risk the stability of global supplies.
In general - what is the importance of security of supply for a country or a region like the EU? The EU dependence on external energy sources accounts to 53% of total consumption, and it is particularly relevant in the case of oil (90% of the oil consumed is imported) and in the case of gas (66%), where the progressive decline of internal production (i.e. from the Netherlands) may lead to a rapid increase in the gas supplies needed from abroad. For these reasons, the guarantee of secure flows of these strategic resources into the European markets becomes a key priority for both EU and national institutions, despite the situation of oversupply that currently characterizes the global oil & gas markets. Concerns are particularly high in the gas sector, due to the still limited number of external suppliers of the EU (basically Russia, Norway, Algeria, Qatar, Nigeria and Libya) and the still underdeveloped and internal gas market.
European self-sufficiency is one of the elements of the European Energy Union. Why is self-sufficiency of energy important in a world globalized in all other ways? European self-sufficiency is today an impossible objective. The dependence of the European economic and industrial systems on fossil fuel, as well as our reliance on imported oil and gas supplies are too high to imagine Europe to become rapidly self-sufficient in the energy domain. What can be done, at the European level, to mitigate the risks related to the security of supply is: 1) progressively reduce the share of oil & gas in the total energy mix – basically through the introduction of RES (Renewable Energy Sources, red.) - but being aware that a significant share of the energy demand will be met only thanks to hydrocarbons (i.e. oil products for transports; gas for generation); 2) maximize the efforts to diversify the portfolio of external suppliers, particularly in the gas domain, which are still very limited and concentrated (Russia, Norway, Algeria, Qatar). The opportunities, in particular thanks to the expanding LNG market, are relevant for the EU to try to increase the number of exporters and improve the security and resilience of its supplies.
How do you see the actual political situation in this regard? In the last few years, commercial/industrial dynamics seem to affect the functioning of oil & gas markets much more than political ones. Despite the tensions between the West and Russia, the turmoil in Venezuela, the diplomatic crisis in the Gulf between the GCC (Gulf Cooperation Council, red.) countries and Qatar, and enduring conflict situations in producing countries such as (northern) Iraq, Libya, Sudan and Nigeria, the conditions on the markets remain stable and the prices low. This is mainly due to the new industrial and technological patterns introduced by the US shale revolution, which significantly altered the functioning of the supply side of the market, now much more elastic than in the past.
What does it mean for a small country like Denmark to be self-sufficient with oil and gas? Denmark has an important competitive advantage, both in political and economic terms, deriving from its self-sufficiency in the oil and gas domain. Of course, Denmark is not a large consumer like Germany, Italy or France, and the implications of the dependence on external supplies would be in any case more limited than those countries. But if you look, for instance, at the security supply concerns (as well as the relevant price differentials) of the small Central and Eastern EU members vis-à-vis Russia, this clearly shows how Danish domestic production is certainly an important international asset for the country. •
NICOLÓ SARTORI
OIL GAS DENMARK 2017 23
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ENERGY! Energy is the lifeblood of the modern society. We consume energy when we transport ourselves, when we travel and when we cook, charge the phones, work with our computers – and indirectly when we shop consumables which are produced and transported using energy. Freight is together with air transport and petrochemicals one of the areas where the demand is increasing, and where it is difficult to find an alternative to replace oil. We demand more energy than ever before – despite we have become a lot more energy efficient in our consumption because the cars go further on less fuel, we insulate our houses better, and the industry produces more efficiently. But what is energy? What are the pros and cons of the energy sources we have at our disposal today – and where will the energy of the future come from?
The world wants more energy It is falling in the EU and rising in Asia – and overall the demand for energy in the world is rising by one percent per year towards 2040. The quantity of wind and solar energy will be more than doubled – and nevertheless oil and gas will constitute more than half of the energy we consume in 20 years (IEA 2016). While the energy demand has been falling in Europe and USA since 2000 and is expected to continue the downward trend with 0,4 and 0,2 percent respectively towards 2040, the picture is different in Asia and particularly in India. Population growth and increasing prosperity means the demand for energy in India will rise by 3,3 percent per year. The energy demand in India will thus be more than doubled in 2040, where India is also evaluated to be the most populous country in the world (IEA 2016). Overall the demand for energy in the world will increase by one percent per year towards 2040, where it will be 17.866 Mtoe (Mtoe is in colloquial language equal to the amount of energy in one million tons of oil (IEA 2016). The cause of the increase in the global energy consumption is that we globally become more and wealthier.
The energy demand in India will be more than doubled in 2040 The demand for energy in the world is expected to increase by 1 percent per year The energy consumption in Europe will decrease with 0,4 percent per year Renewable energy like sun and wind are expected to cover only 6 percent of the total energy consumption in 2040 SOURCE: IEA — 2016
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ENERGY SOURCES
Strengths and weaknesses Biofuels
Coal PRO
PRO
Has a high energy density.
Is available and has no CO2 emittance.
CON
Where will the energy come from? Today oil and gas together constitute half of all the energy the world demands – while sun and wind energy only deliver energy corresponding to 1,3 percent of the global demand. Even if the renewable energy sources like sun and wind will increase dramatically with about 7 percent every year until 2040, total supply from these sources will in 2040 only constitute about 6 percent of the world’s total energy mix (IEA 2016). Demand for all other energy sources will also increase – least for coal, which as the most polluting fuel measured in CO2 emissions will only increase 0,2 percent per year. In EU, the demand for coal will be more than halved in the period – and the same trend will prevail in USA and to a lesser extent also in China, whereas in India the demand will be almost tripled. The gas demand will increase markedly in China, USA and EU, where gas, as a fuel emitting much less CO2, will replace coal (IEA 2016).
Has a high CO2 emittance and contains large quantities of Sulphur which are difficult to remove.
Can only cover a relatively small energy consumption.
Oil
Wind
CON
PRO
PRO
Has an extremely high energy density, and cannot easily be substituted by other energy sources in the transport industry.
Has no CO2 emittance and is renewable. CON
Is unstable and cannot be stored.
CON
Has a relatively high CO2 emittance.
Hydro PRO
Gas
Has no CO2 emittance and is renewable.
PRO
Is suited for substitution of coal, which emits about 30 percent more CO2.
CON
Demands moving water and cannot be stored.
CON
Gas emits CO2.
Sun
Nuclear PRO
PRO
Is very stable and does not emit CO2.
Has no CO2 emittance and is renewable.
CON
CON
The waste problem.
Is unstable and cannot be stored.
SOURCE: IB CHORKENDORFF
OIL GAS DENMARK 2017 27
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Our energy consumption is increasing and fossil fuels still account for 81 percent of the energy demand in the world. Therefore, it is important to develop renewable energy sources – both the known and the new. Not all energy sources are equally good – and we are not at all as close to the green transition as many imagine. The Magazine has met professor and head of the Villum Center for the Science of Sustainable Fuels and Chemicals, Ib Chorkendorff, for a conversation about energy.
THE GREEN TRANSITION:
STILL SOME WAY OFF Text ULLA LENA & SUNE KRØGER — Photo PER GUDMANN
“
So, what is energy and where should we get it from? For instance, you consume 100 watt right now when you sit here quietly” says Ib Chorkendorff, professor in physics at DTU and head of The Villum Center for the Science of Sustainable Fuels and Chemicals. At this institute research takes place in sustainable technologies and the challenges the transition to more renewable energy poses. However, he is in no doubt that this is the right direction. “Right now, we get all our energy from fossil fuels, at least 80 percent of it, which is why it is important to do something here”, says Ib Chorckendorff. PROSPERITY WILL CAUSE THE ENERGY CONSUMPTION TO INCREASE The most important reason for the necessity to look for alternative sources of energy is according to the professor that population growth and a constant strive for increasing prosperity will cause the energy consumption to increase markedly. “It is important to recognize that energy is connected to prosperity. Right now, we are using 18 Terawatt (Joule per second. Red),” he says and explains that there is a measure for increasing prosperity. It is called the Human Development Index, and some countries are already comfortably high in the index, while others are striving to get up there. “Some population segments in the top in the industrial world are scoring high. They have a high Human Development Index and
30 OIL GAS DENMARK 2017
have a comfortable life; however, we are also consuming a lot of energy. The interesting thing is these bubbles (a population chart, red). That is the population in India and China. They are major countries wanting to go up to the top of the Human Development which they are working hard at. Therefore, the world’s energy consumption will increase to an expected 30 Terawatt in 2050” “WE HAVE BUILT OUR WELFARE ON OIL” So, with this large increase in our demand for energy, from where should it come – and are all sources of energy equally good? Ib Chorkendorff points at advantages and disadvantages of the different sources of energy. “All fossil fuels (coal, oil, red.) have a high energy density” he says and explains that the energy density expresses how high the energy content is per volume or mass, and is therefore an expression of the efficiency of each energy source. “Oil is really easy and cheap. We have built our welfare on cheap oil. Diesel and gasoline are very high in both energy contents per volume and per weight which is fantastic in a transport industry where it must be carried along. It is also easy to transport. It can be transported from the Arabian Gulf onboard tanker vessels without major problems. Gas is also excellent but it has a very low energy density per volume. Coal also has a high energy density, however it is somewhat impractical to use as fuel directly in your car. You would not like to load coal into your car, would you?”, he asks and continues that coal, oil and gas as is well known
have a downside. They emit CO2, which together with other gasses contribute to global warming. “The main problem with all three kinds of fossil fuel is that they emit CO2” he says. However, there are differences between them in relation to how problematic they are. “Natural gas is the cleanest, oil the next and coal is rather dirty. Coal contains quite a lot of Sulphur, which must be extracted which cost money – and therefore it is not always done. Oil can be cleaned somewhat easier through the refineries by catalytic processes. But coal is not easy to clean.” “Therefore, we have so to speak been blessed with some very useful energy sources. I think that has been fantastic and on which we have built our high technological level. We have had a lot of energy, now we must change. We can see the end of fossil fuel supply, which has also caused too much pollution. There is maybe another 30 years in oil, 60 years in gas and coal 120 years, and that may even be pessimistic. However, the good news is that we have an abundance of renewable energy.” BIOMASS IS AN OLD TECHNOLOGY To be able to reduce the use of fossil fuels, our consumption must be covered by other sources of energy – such as wind, sun and biofuels. The professor tells us that there is a big difference in their efficiency as suppliers of energy, and that for instance biofuel is an important but insufficient energy resource to cover the future energy needs.
“You can get 0,4 watt in average per year on energy crops (biofuels, Red.), an offshore windmill will give 4 watt per square meter, which is ten times as much, with solar energy you can probably get 24 watt per square meter at 20 % efficiency. Even if we planted energy crops all over Denmark we could only satisfy 2/3 of the energy consumption in Denmark and there would not be food for the 5 million Danish people and the 25 million pigs we produce per year. Biomass is an ancient technology from before the oil. We cut trees in the woods, however, we did not use so much energy. There would not be many trees left if we should do with biomass”, Ib Chorkendorff concludes and continues with wind: “WIND ONLY DELIVERS 6 % OF OUR CONSUMPTION” ”We hear a lot about wind energy, and it sounds fantastic which it actually also is. 42 % of our electricity is today covered by wind. However here it is necessary to caution. Things often get mixed up and people say that with 42 % - then we are almost there. We are not. Because the 42 % of electricity is only equal to 6 % of our total energy consumption” he says and points out that more energy from the sun must also be part of the solution, however it is still expensive. “The problem with all renewable energy is that it is still too expensive. Windmills have always been subsidized and still are. Sun and solar cells have been too expensive, they have not been economically viable and are still not, however they continuously become cheaper. Wind is becoming economically viable. Solar en-
OIL GAS DENMARK 2017 31
ELECTRICITY – SPLIT – HYDROGEN - ELECTRICITY “ It is thus necessary to think about how to store electricity - energy in a smart way. This can be done by means of chemical energy using electrical energy to split water into oxygen and hydrogen. The energy is then stored in the hydrogen. If I store the hydrogen I can in principle react it in a fuel-cell and get electricity back. That is what we are seeking. Firstly, we must learn how to split hydrogen from water in an efficient way, which can be done today but it must be better yet. Another way to store the energy would be to hydrogenate CO2 with hydrogen to for instance alcohol, gasoline and methane, which last one can be used directly in the natural gas systems. We have a couple of natural gas storages in Denmark which can keep Denmark running for 20 to 30 days. These could be extended at the same time, as the other fuels are relatively easy to store. CO2 could in the beginning come from single sources, and in the future biofuels will be a significant source, since it will be difficult to extract it directly from the atmosphere. This is the vision we have for 2050”, says the professor and continues that we are further from the green transition than many may think we are. WE ARE FAR FROM THE GREEN TRANSITION “We are far from. We are on the way to get the full electricity demand covered, however that is still a relatively small part of our total energy demand. Many things must be converted to run on electricity. For example, if we think about replacing all the gasoline and diesel cars, that would be some transition. How many hydrogen cars are there today? A handful perhaps, and electric cars are few and far between. Additionally, long transit transport such as air traffic still must have the same fuels as today, and we must replace all chemicals and products made from CO2. So, we are at the very start of this transition”, says Ib Chorkendorff and further explains: “I am a scientist, and some of the processes I have talked about ergy gives a lot of energy. In Denmark, we get 120 watt per square meter per day in average. Considering that we live to the north we actually get quite a lot.” 2,4 MILLION TESLA BATTERIES GIVE 10 HOURS OF ENERGY When the wind is not blowing and the sun is not shining we have a problem, says the professor. We still need energy and therefore, it is a challenge to find an efficient way to store energy. His opinion is that batteries are not the solution. “Some say that we should just have a lot of batteries and electric cars with batteries. Tesla is a nice car, I would like to have one myself. But if you took all Danish cars, all 2,4 million of them, and replaced them with Tesla cars, the new model S with 100 kilowatt hour batteries. If they are all fully charged and we say we should run on the electricity we can get from those cars, then Denmark could run 10 hours. That is not viable”, says Ib Chorkendorff and continues that he does not either believe, that the solution is a better electricity grid with our neighbors. “Another argument is that we should just connect to our neighbors with cables enabling us to exchange electricity. However, it is necessary to study the weather charts to gauge how big the high pressures and low pressures are. When we for example have a good high-pressure system over Denmark in November it should be sunny, but it is not, more so, the sun is low in the sky and it is calm weather. That can last for two to three weeks, and it is perhaps also foggy. Therefore, we must have something which can cover the energy demand for those months”, says Ib Chorkendorff, and in his opinion the future energy is chemical.
32 OIL GAS DENMARK 2017
“Things often get mixed up and people say that with 42 % then we are almost there. We are not. Because the 42 % of electricity is only equal to 6 % of our total energy consumption” IB CHORKENDORFF— DTU
do not yet exist at all, so they must be invented. You must remember that even if you have developed a new technology it will take many years, maybe up to 10 years, before it is ready for general use and competitive,” the professor says and ends up with his perspective on the ambition to be fossil independent in 2050. “We want to be fossil free in year 2050, that is only 32/33 years away. This is not a long time, so it is really necessary to have a close look at having these technologies developed. Some of the technologies are not there yet, and those that are must be more efficient. Because energy saved is energy which shall not be procured elsewhere. Therefore, all good efforts must pull on the same yoke if we are to succeed.” •
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INTERVIEW
Gas plays a crucial role in green transition The climate benefit of replacing coal with gas is significant because gas burns cleaner. Less CO2 emissions and significantly less emissions of air polluters such as SOx and NOx give gas a significant role in the transition to more renewable energy. Therefore, gas is crucial, especially in the major cities in Asia, says Adam R. Brandt, Stanford University. Text ULLA LENA & IDA SØGAARD KNUDSEN
A
dam R. Brandt is Assistant Professor at the Department of Energy Resources Engineering at Stanford University. He is part of the research group “Environmental Assessment & Optimization Group” which has its focus on how to build tools that reduce the environmental impacts of energy systems, in particular greenhouse gas emissions from fossil energy systems. In 2014, Adam R. Brandt was the lead author on the research on methane leaks from North American natural gas systems with a team of energy researchers from American universities and from one Canadian university. The purpose of the research was to better understand the leakage rates as natural gas has been positioned as a potential bridge fuel. The method was comparison and reviewing of more than 200 scientific and technical references on the subject. Can you briefly describe natural gas as an energy source and its pros and cons? Adam Brandt: “Natural gas can provide heat and flexible power generation at relatively low cost and generally much lower air emissions than coal. This is increasingly important in urban areas, particularly in Asia. However, natural gas still results in climate impacts, resulting in the need to phase out its use over the coming decades”. Which role do you see gas playing in the transition of the current energy mix toward more renewables? Adam Brandt: “Gas turbines are quite low cost per unit of capacity, and can ramp production very quickly. Thus, it is likely that gas
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turbines will aid in grid support for some decades as renewable fractions increase. In fact, a high-renewable grid likely increases the value of these features of gas turbines”. How can natural gas release its potential as bridge fuel? What is required? Adam Brandt: “As a bridge fuel, the key will be in reducing the impacts per unit of power generated from gas. Because gas burns cleanly, this chiefly means reducing impacts before combustion (so-called “upstream impacts”). M ost importantly, leakage of methane needs to be reduced to ensure a reduction in climate impacts”. What is the advantage of substituting gas for coal? What to be aware of in the use of natural gas as energy source? Adam Brandt: ”Obvious benefits of coal-to-gas fuel switching include lower greenhouse gas emissions and much lower emissions of local air pollutants such as SOx, NOx, particulates, and metals. This is incredibly important in the mega-cities of Asia, where air quality has major impacts on human health and longevity.” Today, only 14 % (Including biomass) of the world’s primary energy demand is covered by renewable energy so oil and gas are still needed. What can be done to meet the demand and still focus on the sustainability? Adam Brandt: “A key focus on reducing coal use as quickly as possible. As we switch to more gas, an increasing focus on reducing impacts from the gas supply chain, like leakage, is another key focus. ” •
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