Norway . . . still a striking model to admire

WINTER WONDERLAND: There is plenty of good ski-ing at Geilo, a mountain village halfway between Oslo and Bergen
WINTER WONDERLAND: There is plenty of good ski-ing at Geilo, a mountain village halfway between Oslo and Bergen
Opinion by Energy Voice

I worked in Norway for a year and am a frequent business visitor there. I took a sabbatical year from Aberdeen University to work at a research institute in Oslo, where with an old friend Terje Lind I wrote a book on Norwegian Oil Policies.

That sold very well in the 1980s and is still often referred to in academic articles, although is now very much out-of-date.

I enjoyed living in Norway, with the notable exception of the cost of living. The work was very interesting and my colleagues very helpful, with some of whom I am still in contact.

My elder daughter Ruth was conceived in a lovely wooden house overlooking the Oslo Fjord. We enjoyed the cross-country skiing in the winter and I played football for Stabaek, who are now in the Norwegian first division, in the summer.

Alex Salmond, our esteemed First Minister, must regret his many claims about the Northern Arc of Prosperity, embracing Ireland, Scotland, Iceland and Norway. Iceland has suffered disastrously from the financial crises and the Irish economy has had to be bailed out by EU partners.

Norway, however, is the shining exception. I share the FM’s admiration for the way successive governments have managed the country’s oil and gas industry – as I believe most energy economists do. Norway is frequently, and rightly, held up as a model of how small countries should manage their hydrocarbon reserves.

The first thing Norway did right was to agree on a policy of moderate oil and gas production, in other words producing much less than was technically possible in order to extend the life of the industry.

The main policy instrument was the Government’s ability to delay approval for new field developments, particularly gas. This policy has worked successfully, although Norwegian oil production has passed its peak – as in the UK – and is currently declining at about 5% per year.

Norway produced just under 100million tonnes of oil in 2011, equivalent to just over 2.1million barrels per day, 90% of which was exported. Gas production was on a similar scale of about 106billion cu.m, of which 85% was exported.

A good indicator is the reserves to production ratio (R:P) which compares the proven reserves with annual production. Norway’s current oil R:P ratio is 8.5, which implies that the current production can only be sustained for another eight or nine years. However, the gas R:P ratio is much higher at 19.2.

In comparison, the UK’s oil R:P ratio is only 5.8 and gas 4.5. The UK is now a net importer of both oil and gas, and it seems certain that situation will continue to worsen.

Successive UK governments have been criticised for encouraging the maximum possible levels of production as possible in the 1980s and 90s but as an economist I can understand that.

The UK economy is ten times larger than that of Norway and there were massive economic benefits from oil and gas production during that period . . . as there still are.

Another very important policy in Norway is the Oil Fund, more correctly known as the Government Pension Fund which was set up in 1990 . . . much later than is generally realised.

A significant proportion of the government’s tax and royalty income from the oil and gas industry is invested in this fund, which is intended to be used for future generations when the oil and gas run out, or at least are on a much smaller scale than today.

The latest valuation puts the Oil Fund’s assets at about £400billion. It has suffered recently from a relatively high exposure to European company stocks but hopefully will recover from that.

I have analysed similar funds, commonly known as sovereign wealth funds, and believe that Norway is indeed a very good model. There are similar funds in the Middle East, notably Kuwait and Qatar, but they are much more opaque and it is difficult to understand what they do.

There are other examples which seem to me to be run corruptly. I could give names but I am sure that our esteemed editor would delete them for legal reasons.

I have no doubt that there isn’t any corruption in the Oil Fund in Norway. There is considerable political debate about the use of the fund in the country but for me it is an excellent model.

Tony Mackay is MD of energy economists Mackay Consultants