Capital rationing and business cycles in the Norwegian petroleum industry

We analyse business cycles of oil and gas investment on the Norwegian continental shelf. Investment declined steeply from 2014 until 2017, following business cycle-induced cost increase and a subsequent dramatic drop in the oil price. Two competing hypotheses emerged in the literature, as to whether the downturn is transitory and part of the cyclical nature of the business, or if it is a permanent shock caused by the emergence of climate risk. We apply various techniques to extract the cyclical component of petroleum investment. The results show that the recent recession was not more severe in terms of duration compared to previous crises, and that it was transitory. However, the change in cyclical component from peak to trough was more extreme than anything observed previously. After an upturn of only two years and while the capital-intensive parts of the supplier industry were not yet recovered, in March 2020 the pandemic COVID-19 and oil price war caused another dramatic oil price reduction. We discuss the counter-cyclical tax policy passed by the Norwegian Parliament in light of the oil companies’ practice of capital rationing and an explicit aim of ensuring the survival of the supplier industry.Olje- og energidepartementet (OED

Project economics of offshore windfarms. A business case

This report examines offshore wind investment by oil companies by means of a transparent and pedagogic project economics analysis. We discuss financing and economic return. Offshore windfarms are organised as special purpose vehicle (SPV) companies. We analyse the economic interactions between the SPVs and the oil companies, and address financing and accounting issues. Finally, we present potential challenges to the petroleum resource authorities from this change in the European majors’ investment strategy. Unlike windfarms onshore, offshore windfarms did not see cost reductions for many years. The wind turbine generators moved farther ashore and on deeper water, and the life cycle cost was actually increasing. Apparently, we now see a dramatic change. In aggressive bidding for Contracts for Difference in the UK, we have seen the strike price fall from around GBP 150/MWh in 2015 to around GBP 40/MWh in the auction rounds in 2019 (in 2012 terms). A question is how this will impact profitability of new development projects. Does the reduction in the strike price reflect a reduction in project cost or a reduction in project profitability, or maybe both? We examine this with a transparent project economics analysis of the bottom-fixed Dogger Bank project, owned by Equinor, SSE Renewables and ENI. It is the largest offshore windfarm project in the world and is set out to generate 5% of UK electricity production.Olje- og energidepartementet (OED

Capital rationing and business cycles in the Norwegian petroleum industry

We analyse business cycles of oil and gas investment on the Norwegian continental shelf. Investment declined steeply from 2014 until 2017, following business cycle-induced cost increase and a subsequent dramatic drop in the oil price. Two competing hypotheses emerged in the literature, as to whether the downturn is transitory and part of the cyclical nature of the business, or if it is a permanent shock caused by the emergence of climate risk. We apply various techniques to extract the cyclical component of petroleum investment. The results show that the recent recession was not more severe in terms of duration compared to previous crises, and that it was transitory. However, the change in cyclical component from peak to trough was more extreme than anything observed previously. After an upturn of only two years and while the capital-intensive parts of the supplier industry were not yet recovered, in March 2020 the pandemic COVID-19 and oil price war caused another dramatic oil price reduction. We discuss the counter-cyclical tax policy passed by the Norwegian Parliament in light of the oil companies’ practice of capital rationing and an explicit aim of ensuring the survival of the supplier industry

Option prices and implied volatility in the crude oil market

This paper studies the determinants of WTI crude oil call option prices with a special emphasis on the relationship between implied volatility and moneyness. Our first-stage regression estimates a quadratic approximation of implied volatility as a function of moneyness, while our second-stage regression investigates correlations between the estimated parameters and a list of explanatory variables. The first-stage regressions show a positive coefficient on the quadratic term, suggesting that the market exhibits ‘Implied Volatility Smile’ and hence violates the Black-Scholes predictions. The main results of our paper concern the determinants of these violations. We find that the curvature of implied volatility as a function of moneyness is: (i) positively and significantly correlated with basis and hedging pressure of the underlying crude oil futures contract (ii) positively and significantly correlated with various measures of transaction costs on the options market. We explore various explanations for these results. The paper also contains a variety of robustness checks, mostly related to the assumed functional forms.peerReviewe

Project economics of offshore windfarms. A business case

This report examines offshore wind investment by oil companies by means of a transparent and pedagogic project economics analysis. We discuss financing and economic return. Offshore windfarms are organised as special purpose vehicle (SPV) companies. We analyse the economic interactions between the SPVs and the oil companies, and address financing and accounting issues. Finally, we present potential challenges to the petroleum resource authorities from this change in the European majors’ investment strategy. Unlike windfarms onshore, offshore windfarms did not see cost reductions for many years. The wind turbine generators moved farther ashore and on deeper water, and the life cycle cost was actually increasing. Apparently, we now see a dramatic change. In aggressive bidding for Contracts for Difference in the UK, we have seen the strike price fall from around GBP 150/MWh in 2015 to around GBP 40/MWh in the auction rounds in 2019 (in 2012 terms). A question is how this will impact profitability of new development projects. Does the reduction in the strike price reflect a reduction in project cost or a reduction in project profitability, or maybe both? We examine this with a transparent project economics analysis of the bottom-fixed Dogger Bank project, owned by Equinor, SSE Renewables and ENI. It is the largest offshore windfarm project in the world and is set out to generate 5% of UK electricity production

The impact of COVID -19 on offshore wind project productivity – A case study

This study investigated productivity in an offshore wind project to understand the distribution of their value-adding and non-value-adding hours. A comprehensive literature review presented results on productivity in regular mega-projects, revealing a limited knowledge of offshore wind projects. From the first quarter of 2019 to the early second quarter of 2020, 62,447 realized activities, equaling 213,786 h, were sampled from a wind farm development project in the British sector of the North Sea. This data was then analyzed and presented through a descriptive statistic. The results showed a distribution of 21.21% value-adding (VA) and 50.09% non-value-adding (NVA) hours. With 20.9% of the total hours, the weather is the dominant cause of waiting time, followed by vessels and previous tasks. The findings further show the disruptions of the COVID-19 pandemic and its effects on productivity. It supports and expands on existing knowledge of causes for waiting time in offshore wind projects, ultimately providing the industry with an understanding of areas that need development to enhance productivity. The paper contributes to current knowledge by providing an understanding of productivity in offshore wind projects.publishedVersio