Norway's Statoil and Aker Solutions and their partners reached an important milestone on Thursday with the startup of the Asgard subsea dry natural gas compression facility — the first of its kind — in the Norwegian Sea. The startup is a major step in the offshore oil and natural gas industry's quest to move key units in the production of oil and natural gas to the seabed.
Because energy often sits near the center of geopolitical debates, advancements in energy industry technology — or even the pace of advancements — often have geopolitical ramifications. This is perhaps most true in Europe.
Developing more complicated resources — either deeper, more remote or more geologically difficult — and sustaining production at aging oil and natural gas fields are the current challenges in the North and Norwegian seas. Moving the production facilities to the seabed, in time, could help do both.
However, such projects cost money, and because energy prices look to remain low indefinitely, advances in similar subsea technologies will be delayed. In the late 2000s and early 2010s, experimentation, new technologies and investments were common in the oil and natural gas industry, because oil prices — and revenues — were higher. The Asgard natural gas compression project was approved in 2010, when oil was about $75-$80 per barrel.
The project is designed to offset the natural decline in reservoir pressure in the Asgard complex's Midgard and Mikkel fields. Typically, compression units are placed above water, but by placing them under the sea, closer to the fields, they can boost natural gas flow earlier and increase and accelerate natural gas production overall. It will enable Statoil and its partners to recover an additional 300 million barrels of oil equivalent and extend the life of the fields until 2032.
Moving the installation of natural gas compression units to the seabed is perhaps the most important and most difficult step in Statoil's "Subsea Factory" concept, in which all processing units, including storage and power systems, are on the sea floor. This concept is important for the long-term development of new oil and natural gas resources being discovered farther away from the shore and in harsher conditions.
Statoil will have another breakthrough in October when its subsea natural gas compression project is put into operation at Gullfaks Sor. Although that project is smaller than Asgard, it compresses wet natural gas, whereas Asgard separates wet natural gas into its dry natural gas and condensate components before compression, mixing them afterward.
These projects are not cheap. When it was sanctioned, the Asgard project's breakeven price was $40 per barrel — which is not far from where oil prices are now and is certainly a price point that oil could fall below in the near future. Royal Dutch/Shell announced the delay of its planned Ormen Lange subsea compression pilot project before prices fell in April 2011. It would have been the third subsea compression unit to come online and would have marked another milestone in power transmission and distribution.
However, as we have seen with the shale oil and natural gas industry in North America, technological gains made in a high-price environment can drive drown production costs as the technology matures so that it remains economical in a lower-price environment later. Subsea processing is a new technology that is just being put into operation. Its maturation should enable more projects to move forward, even in the current low-price environment. However, if the pace of sequential improvements and new breakthroughs should slow down, the subsea factory concept's timeline likely would be pushed into the future.
Norway is one of the most important energy providers to the European market. In 2014, Norway exported 140 billion cubic meters of natural gas — about one quarter of Europe's imports — to the region. As natural gas production declines in the North Sea for the United Kingdom and the Netherlands, Brussels is hoping that future Norwegian natural gas will offset the production decline in order to help Europe reduce its reliance on Russian natural gas.
Russia sees falling North Sea production as an important opportunity. In June, Gazprom announced its Nord Stream II pipeline project, which will deliver 55 billion cubic meters of natural gas directly to Germany through the Baltic Sea. The Nord Stream I pipeline project clearly had the goal of supplying Germany without transiting natural gas through Ukraine. The purpose of the Nord Stream II pipeline, however, is to increase Russia's overall export capacity to Europe — especially in northwestern Europe, where it could seize a greater market share.
The shift in Gazprom's — and by extension, Russia's — strategy is a result of Brussels' pressure on the energy giant's monopolistic tendencies in Europe. Brussels' ability to enact legislation to control Gazprom's ability to break up the European market into parts has forced the company to readjust its strategy to one in which Russian natural gas can be delivered anywhere in the Continent at any volume and beat anyone on price.
By building its capacity to send natural gas to northwestern Europe, Gazprom is able to use its spare production capacity — an estimated 100 billion cubic meters at the end of 2014 — to flood the market. This discourages investment into new, expensive production systems such as those farther north and in hostile environments in the Norwegian Sea, including Asgard and potential shale development in the United Kingdom. In a sense, Gazprom is ramping up its ability to slow down many of these projects, which could in turn push the development of Norway's new prizes in the Norwegian and Barents seas even further into the future. Of course, this is a double-edged sword for the Russians, who could use these technologies in their own offshore Arctic developments located in harsh, remote locations.
This is no different from the strategy Saudi Arabia, the United Arab Emirates and Kuwait are using in the Gulf. These producers hold the keys to OPEC's spare oil production capacity. Their reluctance to scale back production levels — and insistence on increasing them — as tight oil production increases in North America is primarily meant to contain the phenomenon to North America.
Russia's new strategy has put Brussels in an interesting position. The European economy remains sluggish, and low energy prices can help it get on track. However, Brussels is at risk of becoming even more reliant on Russian natural gas in the future. The natural gas (and oil) may be cheaper, but it places many EU countries, especially those in the east, in a precarious situation.
The one tool the West can use to combat Russia's persistent grip on Europe's energy market is the continued development of relevant technologies, such as Asgard's subsea natural gas compression facility. In the world of energy geopolitics, technology is a key weapon on the battlefield; those who have it win, and those who do not lose. And as we have seen from advances in hydraulic fracturing and horizontal drilling in the United States, the sudden development or expansion of technology can have concrete and significant geopolitical effects that require a response from traditional energy-producing powerhouses — including, at times, pre-emption.
