The internal rate of return on the scandalous Martin Linge field has gone from plus to minus, and the oil price needed to make a profit has risen from 61 to 67 dollars per barrel. The Minister of Petroleum and Energy believes that the field must now be completed and put into production.
– This field should never have been developed. This will probably be a loss-making project because we have to focus on the world winning over the climate crisis, says Lars Haltbrekken, in the Storting’s energy and environment committee, from SV.
He and the committee have just received a letter from Minister of Petroleum and Energy Tina Bru (H) in which she answers a number of questions that have been asked about the scandalous project Martin Linge in the North Sea.
The question came after it was recently stated in the draft state budget for 2021 that the price tag on the Martin Linge field will be an additional NOK 3.56 billion more expensive.
The price tag has now roughly doubled from the original estimate – the total bill has grown from NOK 31.0 billion to NOK 60.8 billion (in 2020 kroner).
The field, for which Equinor took over operator responsibility from Total in 2018, has had major problems and is very delayed. Production was supposed to start in 2016, but was postponed again this year, this time until 2021.
There are several causes for all the problems. While the platform chassis from Kvaerner was delivered on time, the platform deck from the Samsung shipyard in Korea was full of defects and very delayed. There was also a fatal accident at the yard during construction.
Recent oil figures: Major new exceedances in the Barents Sea and the North Sea
Recent figures: Plus has become minus
The Minister of Petroleum and Energy points out that updated figures have been received from the operator Equinor. They show a clear deterioration in the calculations, compared with the figures that the ministry presented to the Storting a year ago:
- The balance sheet price, the oil price required to get a positive return on invested capital, has risen from 61 to 67 dollars per barrel in the last year.
In comparison, the oil price is now around 43 dollars per barrel.
– This is a bet against the Paris Agreement, because this is an oil price that is above the price in the sustainability scenario that the International Energy Agency (IEA, journ.anm.) Recently published, says Haltbrekken.
He refers to the recent forecast report where the IEA estimates the oil price in 2025 and 2040 in different scenarios.
With today’s policy, they estimate an oil price in 2025 of 71 dollars, which will lift Martin Linge into a plus, while the other two scenarios end up with an oil price of 59 and 57 dollars per barrel in 2025, respectively.
With a sustainability scenario that the IEA has calculated, an oil price that is below what the Martin Linge field needs is expected.
The Minister’s letter also includes another figure:
- The Linge development is now expected to have an internal interest rate before tax of på0.1 per cent, compared with +2.21 per cent in October last year, given Equinor’s assumptions.
If such an internal rate of return existed at the time an investment was to be approved, the answer would probably be no from an oil company.
Given that the project is just around the zero point, Haltbrekken points out that the state ends up with a loss and the companies with a small plus:
– Here, the company ends up in the red due to the deductions in the petroleum tax system. It is high time to do something about the tax system, says Haltbrekken and continues:
– As long as we do not get a breakthrough so that no new permits are granted for exploration or development, the parliamentary majority must at least be strict enough to demand a stress test against the Paris Agreement and the climate goals on all projects.
Read on E24 +
This yard benefits from the billion crack on Martin Linge: “But for AS Norway it is not positive”
The Minister of Petroleum wants the field completed
In the letter to the Energy and Environment Committee, the Minister of Petroleum concludes that, despite the situation, the field must be completed:
«The implementation of the Linge development has not been successful. This is something everyone involved is losing out on. The most important thing now is to get the field into production safely and securely, at the same time as the entire industry learns from the mistakes that have been made in the project implementation “, writes the Minister of Petroleum and Energy.
“There are great resources and values in the field. The present value of the Linge project, seen from today, is high. The field is therefore economically viable in the future. Whether future income from the field will be large enough to provide a positive return on invested capital will, however, depend on the development during the production period “, Bru writes further.
The Martin Linge scandal is growing: Billions must be used to re-drill Total wells
Can be even more expensive
It is not yet clear what the total price for the Martin Linge project will be. Equinor now expects completion and production to start in 2021.
“Increased scope of work for the completion of the platform and strengthening of the project organization has contributed to the cost increase from last year”, writes the Minister and continues:
“Conditions have been uncovered that must be improved to ensure safe start-up of the platform, including related to insulation on heating cables and pipe system,” the minister writes.
Equinor announced earlier this autumn that they will drill three more gas production wells because the wells pre-drilled by Total are not considered safe enough.
The cost of these three new wells, as well as the two that were already planned to be drilled, are included in the calculations in the state budget.
However, it does not cover the cost of plugging the three Total wells:
“Costs related to permanent plugging of the three wells that are to be replaced by new wells are in the usual way included in the operator’s reporting to the ministry as termination and disposal costs,” the minister writes.
Bru points out that operating and decommissioning costs are not included in the investment estimate, which is presented in the budget.
“The wells are considered by the operator to be safe as they stand now.”