December 2016 /// Vol 237 No. 12

Columns

Oil and gas in the capitals

Norway at 50 years

Dr. Øystein Noreng, Contributing Editor

Early November, Norway celebrated the 50th anniversary of the first drilling for oil. The jubilee provides an occasion for assessing the experience, how Norway has handled its oil wealth, what oil wealth has done to Norway, and what the lessons are for the future.

As a starter, Norway’s oil policies have, on the whole, been successful, at least seen from a Norwegian perspective, and that is what matters. The success has been facilitated by luck; Norwegian ingenuity and wisdom do not make up the whole story, and the record is not perfect.

In the early 1960s, Denmark and Norway were approached by international oil companies that wanted to drill for oil and natural gas. Denmark, without much hesitation, gave an international consortium monopoly rights to its continental shelf, Norway showed caution, based on a tradition of resource protection in fisheries and hydropower. The concern was knowledge; nobody knew what the resource base might be and what effects petroleum activities might have. The first licenses were awarded in 1965. After seismic studies, exploratory drilling commenced in 1966. The first find was made in late 1969. In the meantime, legislation had been passed to provide for state participation in all new licenses.

In 1972 the NOC, Statoil, was established, together with the Norwegian Petroleum Directorate, a supervisory and regulatory body. The same year, the government imposed a policy of industrial cooperation and transfer of knowledge. The Norwegian government required foreign oil companies to use domestic goods and services, to invest in joint industrial ventures and to transfer knowledge. The venture policy was unsuccessful, but the procurement policy quickly raised the local content to high levels. The knowledge policy contributed to technological change that reduced costs and established Norway as one of the leaders in petroleum technology. The programs were part of a government strategy to enable the domestic service industry to take a high share of a part of a value chain that often slips from oil exporters.

Before 1970, Norway had no indigenous oil or oil services industry; but there was consensus that it needed to develop one. As market forces, alone, were seen as insufficient, government intervention was considered indispensable. Legislation required oil companies to use Norwegian goods and services whenever competitive, followed by provisions to transfer competence and cooperate in the development of new technology. Foreign oil companies were enticed to engage in industrial ventures not related to petroleum, and in joint ventures with Norwegian research institutions to develop petroleum relevant technology. In 1994, the trade agreement with the European Union discontinued these policies. By then, the Norwegian petroleum cluster no longer needed infant industry protection. Subsequently, the petroleum cluster also has expanded through exports. With the downturn of investment activity since the oil price decline in 2014-2015, the cluster provides expertise to other sectors of the economy.

The government strategy to enhance knowledge was a major driver for the systematic development of competence. The necessary conditions were a skilled work-force and private businesses willing to take the risk.

Against this backdrop, there is a general contentment in Norway after 50 years of petroleum activities. At the outset, there were fears that the offshore oil industry would cause environmental disaster, harming the fishing industry, that the international oil industry would dominate the country, and that petroleum revenues would make the economy excessively dependent. Strict supervision involving workers has prevented the worst environmental damages, so far. International companies have a marginal role in the petroleum industry and no say in politics. Instead, Statoil, dominates the industry and has considerable political influence. The Norwegian economy is highly dependent on the petroleum industry, not only due to export earnings and government revenues, but also because of employment in the service and supply sector.

For any emerging oil producer, it makes sense to show restraint and learn the rules of the game before embarking on full-speed development. In Norway, there was an awareness that it is difficult to control an industry without knowing its intricacies. From that perspective, the establishment of Statoil and the transfer of knowledge were wise choices. Instead of powerful international oil companies, Statoil got the leading role. Within a few years, Statoil had the expertise to match foreign contenders. Indeed, it was, for decades, a highly successful learning machine for its own staff, as for the supply and service firms. To some extent, it still is.

Nationalized energy companies often start as a solution that turns into a problem, so with Statoil. After the 1979–1980 oil price rise, prospects were that Statoil might represent a quarter of the economy. Therefore, part of the producing assets were transferred to a separate state body that channels revenue directly to the Treasury. 

Since the merger with Norsk Hydro in 2007, Statoil manages close to 80% of the activity in the Norwegian petroleum industry. This concentration of power may be excessive and harmful to innovation. In spite of fiscal measures to attract newcomers, the level of pluralism and competition remains unsatisfactory.

Norway likely has a resource base to continue petroleum activities for another 50 years. The prerequisite is that costs must decline. One culprit is the fiscal system that makes the landowner government assume 90% of the risk and capture most of the profit. Lower petroleum taxes would give incentives to the industry to cut costs and enhance innovation. There is also need for more competition; therefore, a larger international presence is required. wo-box_blue.gif

The Authors ///

Dr. Øystein Noreng is a professor at BI Norwegian Business School. He has been an advisor or consultant to the International Monetary Fund; The World Bank; the governments of Canada, Denmark, Norway, Sweden and the U.S.; and energy companies, including Statoil, PDVSA and Saudi Aramco.

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