8 Economic considerations, deliveries and employment

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1 8 Economic considerations, deliveries and employment The following are the most important issues in the socio-economic impact assessment for the Ivar Aasen field project: What socio-economic profitability will development and operation of the Ivar Aasen field generate and how will the profits be distributed between the State and the oil companies? What impacts will the Ivar Aasen field development have on the level of investment on the Norwegian continental shelf and on the need for labour in the offshore sector? What goods and services will be delivered by Norwegian business and industry in connection with the development and operation of the Ivar Aasen field? What impacts will the development and operation of the Ivar Aasen field have on the national level of employment? These issues will be discussed in the following. The assessments of economic conditions, deliveries and employment were carried out by Agenda Kaupang (2012). 8.1 Investment and operating expenses An estimated total of just over NOK 24.3 billion (2012 currency) will be invested in the Ivar Aasen field over a sixyear period from 2013 to 2018 (Det norske 2012). A preliminary estimate shows that additional decommissioning and removal costs will amount to more than NOK 3.5 billion (2012 currency). Operating expenses for the Ivar Aasen field will vary somewhat from one year to the next, depending on periodic maintenance of wells and subsea installations. Average operating expenses for field installations and wells, including tariffs and power supply, will amount to around NOK 1,230 million per year (2012 currency). 8.2 Socio-economic profitability of development and operation Revenues from petroleum production on the Ivar Aasen field The commercially recoverable resources in the Ivar Aasen field are estimated at 18 million Sm 3 of oil and around 5.2 billion Sm 3 of gas. These resources represent great value for the Norwegian society. Total revenues from the Ivar Aasen field have been estimated on the basis of the planned production profile for the field and prudent assumptions relating to future dollar rates and future oil and gas prices. Based on those assumptions, total revenues from production on the Ivar Aasen field will be as shown in Figure 45. Please note that both production volumes and prices are associated with uncertainty. This applies to price expectations in particular. Figure 1 Revenues from the Ivar Aasen field over time (million NOK, 2012 currency)

2 It is clear from Figure 45 that, from the expected production start towards the end of 2016, production revenues from the Ivar Aasen field will increase steeply to NOK 8.5 billion (2012 currency) in 2017, and peak at 11 billion (2012 currency) in The production revenues will then drop gradually until 2028, when it is expected that the field will be abandoned. It is possible, however, that new production technology and phasing in of additional reserves in the area will change this picture. Total revenues from production on the Ivar Aasen field are estimated at NOK 68.2 billion (2012 currency) over a 12-year period from 2016 to 2028, approximately 85% of which will be from the sale of oil. As mentioned, this picture may change as a result of new production technology and the phasing in of additional resources in the area, which would increase both production and revenues in relation to what is currently envisaged The costs of petroleum production on the Ivar Aasen field The costs of petroleum production on the Ivar Aasen field consist of the cost of investments in the production platform, wells, subsea installations and pipelines, and the cost of operating these installations. In addition, tariff costs will accrue related to the use of the Edvard Grieg field's production systems and power supply, use of the Grane pipeline for transport of oil and use of the SAGE pipeline system on the UK continental shelf for transport of gas. Figure 46 gives a picture of the cost side of the project. Figure 2 Investment and operating expenses for the Ivar Aasen field (million NOK, 2012 currency) (tariffs are included in OPEX) Figure 46 gives a picture of the total costs of the project after deduction of approximately NOK 0.7 billion (2012 currency) for NOx tax, area fees and CO 2 tax. From the point of view of the oil companies, these taxes and charges are on a par with other operating expenses, and they contribute to limiting emissions of environmentally harmful gases. From the point of view of the State and society as a whole, however, they are a source of income on a par with other taxes, and they do not affect the calculation of socio-economic profitability. The figure shows that the investment element will dominate completely during the first six years. From 2017, operating expenses and tariff costs play a dominant role. Total investment and operating expenses for the Ivar Aasen field during the period are estimated at NOK 44.4 billion (2012 currency) Net cash flow from the Ivar Aasen field The total revenue figures Figure 45 and total cost figures Figure 46 can be combined to provide us with an overview of net cash flows from the Ivar Aasen field for each year during the period from 2012 to 2029 as shown in figure Figur 47. The figure also shows how these cash flows are divided between various costs (hardly visible), State taxes, and net cash flow to the oil companies participating in the project.

3 Figure. 3 Net cash flows for the Ivar Aasen field broken down by year (million NOK, 2012 currency) The figure shows negative cash flows from Ivar Aasen during the investment phase from 2012 to Pre-tax cash flows become positive from In total this results in a net cash flow from the Ivar Aasen field of just over NOK 23.7 billion (2012 currency) for the period The Norwegian society will thus be left with considerable revenues even after all costs have been deducted. A break-down of net cash flows shows that 0.7 billion (2012 currency) will accrue to the State in the form of environmental taxes/ area fees, NOK 15.9 billion will be paid in corporation tax to the State while just over 4.1 billion will be revenues to the oil companies participating in the project Socio-economic profitably of the Ivar Aasen field The socio-economic profitability of an investment project is often assessed in terms of net present value, where the project's future revenues and expenses are discounted to the date of the project sanction and compared. In order to calculate the net present value of future revenues and expenses, a socio-economic discount rate is used that, in principle, should be the same for all investment projects Norway is engaged in. The Ministry of Finance has set the socio-economic discount rate (real rate of return) to 4%, with the addition of a risk premium, which, in the case of petroleum projects, is set to 2%. This discount rate is meant to express society's requirements for a real rate of return in the form of future revenues on the funds invested in the project. In the case of the Ivar Aasen field, the net present value of future revenues and expenses is estimated at almost NOK 12.9 billion 2012, including environmental taxes/area fees. Based on ordinary calculation criteria, a development of the Ivar Aasen field is thus clearly profitable in socio-economic terms. Most of the total net present value will accrue to the State. Corporation tax from the oil companies alone will amount to NOK 10.1 billion (2012 currency) or 78% of the socio-economic net present value. In addition, the State will levy NOK 0.4 billion in environmental taxes/area fees (2012 currency), leaving the State with a total of just over 10.5 billion (2012 currency) or almost 81% of the net present value of the project. The remaining 2.4 billion (2012 currency), or just over 19%, will accrue to the oil companies participating in the project. 8.3 Impact on the level of investment on the Norwegian continental shelf The development of the Ivar Aasen field is planned to take place during a period of high investments costs in the petroleum sector. Figures from the Norwegian Petroleum Safety Authority show that annual investments of almost NOK 120 billion (2012 currency) have been made in latter years. The investments in the Ivar Aasen project will amount to NOK 24.3 billion (2012 currency), but will only raise the investment level in the Norwegian petroleum activities by between 2 and 3.8% during the period No official forecasts have been prepared for the years after 2015.

4 8.4 Deliveries of goods and services Deliveries of goods and services in the development phase Based on Norwegian business and industry being competitive and having experience of previous development projects, Norwegian business and industry is invited to participate in delivering goods and services to the project during both the investment phase and production phase. On the basis of empirical figures and a calculation of averages for the investment phase, Norwegian value creation in connection with deliveries of goods and services for the development of the Ivar Aasen field can be expected to amount to just over NOK 13.4 billion (2012 currency), or approximately 55% of total investments over the six-year period from 2013 to Since the Ivar Aasen field development will take place during a period of high activity, the capacity of engineering firms, yards and equipment suppliers will be decisive for Norwegian business and industry's share of the deliveries. Figure 50 shows investments in the Ivar Aasen field development broken down by year for the years Figure 50. Estimated value creation represented by Norwegian deliveries of goods and services during the investment phase (million NOK, 2012 currency) From the point of view of business and industry, industrial production will dominate with a total value creation of around NOK 5.3 billion (2012 currency), while value creation from drilling will be NOK 3,4 billion and value creation from the petroleum activities will be just over NOK 2.4 billion (2012 currency). It can also be seen from Figure 50 that, while value creation in industrial production and oil activities will be greatest during the first four years of the investment phase, the greater part of the value creation in drilling will take place towards the end of that period Deliveries of goods and services in the production phase During the production phase, the greatest value creation in deliveries to the Ivar Aasen field will come from Norwegian business and industry. The Ivar Aasen field will be operated from and as an integrated part of Det norske's head office in Trondheim. Det norske plans to establish an operations centre with both an onshore and an offshore control room in order to ensure good communication with experts and that both Det norske internally and the various contractors/suppliers have sufficient capacity. As a minimum, the control room on the platform will be manned during periods when this is required, for example in connection with production start-up. The plan is to employ a crew of 23 in the day-to-day operation of the platform during start-up. The aim is to reduce the platform crew to 14 when the platform is on stable production and the initial period is over. Additional personnel will be mobilised for service, modifications and maintenance. Base services will be procured based on an assessment of the most expedient location for serving the platform's needs, probably in the Stavanger region. Coordinated shipments and collaboration with other players in the Ivar Aasen area may also be relevant. The scope of services will vary greatly according to what phase the project is in. Helicopter transport is planned to take place from Sola.

5 A limited number of spare parts etc. will be purchases from abroad. There will also be some tariff costs for gas. Total Norwegian value creation in an average year is expected to amount to almost NOK 800 million (2012 currency). This leaves Norway with a share of value creation of around 93% of deliveries during the production phase. Figure 51 shows this value creation broken down by industrial sector. Figure 51. Estimated value creation in Norwegian deliveries of goods and services during the production phase (NOK million, 2012 currency) A break-down of the value creation of around NOK 800 million (2012 currency) shows that the greatest share comes from industrial activity, followed by transport (including logistics), petroleum activities and building and construction (mainly well maintenance). 8.5 Impacts on employment The calculation of impacts on employment from the development and operation of the Ivar Aasen field uses a simplified input-output calculation model with impact coefficients taken from the Norwegian national accounts. The model is based on estimated deliveries of goods and services made by Norwegian business and industry broken down by industry and year, see section 8.4. On this basis, the total production value created by Norwegian business and industry as a consequence of these deliveries is estimated, together with the impacts on consumption as a consequence of spending, tax payments etc. by those who are employed. All these factors have an impact on employment. Note that the calculation is associated with uncertainty. The calculations are based on invested amounts and expectations concerning the Norwegian share of the investments. The result is a national impact on employment of nearly 14,700 full-time equivalent years over the six-year period Measured in full-time equivalent years, one third of the impact on national employment will relate to the supplier industry in connection with the development project, almost a third will relate to their sub-suppliers in various parts of Norway, and a corresponding figure will relate to the consumer industry. For more details, see Figure 52, which shows impacts on national employment during the investment phase, broken down by industrial sector and full-time equivalent years.

6 Figure 52. Estimated impacts on national employment in the investment phase. Full-time equivalent years. With respect to the impact on various industrial sectors, Figure 52 shows that, in the development phase, the greatest impact on employment relates to industrial activity, followed by the services sector and petroleum activities. In the production phase, the Ivar Aasen project's impact on employment is expected to correspond to 750 full-time equivalent years, about half of which will relate to direct production in the petroleum activities and supplier industry. Figure 53 shows direct and indirect impacts on employment during the production phase (average production year) broken down by main industry sector. Figure 53. Estimated impacts on employment in the production phase. Full-time equivalent years.