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Norwegian oil&gas industry in excellent state

Norwegian  oil&gas industry  in excellent state
IT IS two years since ONS was last held in Stavanger, and it is an opportune time to review what has happened in the Norwegian oil&gas industry since then. Most of it has been good news.

IT IS two years since ONS was last held in Stavanger, and it is an opportune time to review what has happened in the Norwegian oil&gas industry since then. Most of it has been good news.

The SNP Government in Scotland gazes admiringly at Norway across the North Sea – and with good reason. The country’s management of its oil&gas industry seems, to me, to be an excellent model.

I worked in Norway for a couple of years in the late-1970s and wrote a book on “Norwegian Oil Policies” in the 1980s; it still sells a few copies a year. I was very positive then about the industry’s management and still am 30 years later.

Norway’s proven oil&gas reserves are of a similar magnitude to those of the UK. However, ours have been largely depleted. In contrast, Norway adopted a policy of moderate development and has held to that approach to this day.

UK oil&gas production is now declining at an alarming rate – more than 10% per year – and we are now net importers of both oil and gas. In contrast, Norway is a major exporter of both and will continue to be for the next 20 years.

The annual revenues from oil&gas have given a massive boost to the Norwegian economy, which is why First Minister Alex Salmond and his SNP colleagues frequently cast envious eyes as draconian expenditure cuts are implemented by the London Government.

The big difference is that Norway’s population is just less than five million, whereas the UK’s is about 60million. Successive UK governments adopted policies to develop our oil&gas reserves as quickly as possible. I believe the UK economy benefited substantially from that in the 1980s and 1990s, but a consequence has clearly been the current massive declines in UKCS output.

The population of Scotland is similar to that of Norway, and this begs the question: would an independent Scotland have pursued similar economic policies? I very much doubt that.

A notable feature is Norway’s Petroleum Fund (now know as the Pension Fund) – in which the Oslo government has invested “surplus” funds from the tax revenues from the industry over many years rather than spending all current expenditure, as happened in the UK

As a result, Norway has the second largest sovereign wealth fund in the world (after Abu Dhabi), with assets valued at more than £300billion. The fund will underpin the Norwegian economy for many years to come.

Nevertheless, all is not perfect in Norway. Oil production peaked in 2001 and is declining at about 5% per year. The reserves:production ratio is only 8.3, implying that Norway will only be able to continue producing oil at the current level for another eight years.

By my calculations, the volume of Norwegian gas production will exceed oil output during 2010 – and may have already done so – and the former will become much more important over the next few years.

Norway is lucky that 95% of its power needs are met by hydro-electricity and therefore most of the oil and gas can be exported.

However, the gas export market is weak at the present time and I believe that will continue for the next few years. That said, Norway’s main export customer is the UK, and that should provide stability.

One of the few disappointing developments in the country has been the decision to diversify into LNG from the Snohvit field, in the Barents Sea, which to date has been technically and financially very disappointing.

Another disappointment has been the overseas performance of Statoil, the previously state-owned oil company which is still 63% owned by the state. Does anyone remember BNOC and Britoil in the UK? President Obama and others may believe that BP is our national company, but it has long been in the private sector. Norway has long resisted full privatisation.

Statoil has difficult challenges ahead, like virtually all international oil companies. It has long enjoyed preferential treatment in Norway but, faced with declining domestic production, is understandably keen to compensate for that by finding or acquiring overseas production.

However, its foreign track record to date has been poor, with the exception of the Shah Deniz field in the Caspian Sea, and a few other successes.

These are only mild criticisms in the overall context of the Norwegian industry’s success. Capex in 2010 is forecast to be about £12billion – more than double the UKCS equivalent.

The SCDI’s latest annual survey of Scotland’s oil&gas-related exports ranks Norway as our fifth largest market, with total sales of £298million.

That is a surprisingly low figure to me given the geographical proximity, similar operating environment and high labour costs in Norway.

Nevertheless, many Scottish-based companies are exhibiting at ONS and there are clearly real opportunities to increase our market share.

Tony Mackay is MD of economists Mackay Consultants

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