Oil & Gas in the Capitals
The recent decision by Norway’ sovereign wealth fund to withdraw from petroleum stock has caused concern in the industry. The impression is that the move was made under pressure by Norway’s powerful green lobby, whose goal is to close down Norway’s petroleum activities, regardless of consequences. The reality may be more mundane, however.
From oil to finance. The original intention behind the Fund, in 1992, was to shelter Norway’s domestic economy from the oil price risk and volatility that on several occasions had presented sweet temptations to overspend, followed by bouts of sour austerity. Almost ten years later, in 2001, as the Fund began to grow and make money on its investment, it reasonably appeared as an alternative income source to the petroleum revenues. Keeping the shelter function, there was a political agreement to limit the outtake from the Fund, i.e. the transfer to the budget, at 4% of the Fund’s total value—estimated to represent the normal rate of return on the Fund’s total value.
Under the following center-right and center-left governments, that limit was never reached. Indeed, until 2008, the outtake was minimal; Norway’s budget was in balance with hardly any use of oil money. The financial crisis made the difference, spurring a higher outtake from the Fund, but still well under the 4% ceiling. During the years of historically high oil prices (from 2004 to 2014), the Fund’s market value grew, measured in current Norwegian kroner, NOK, from 1 trillion to 6.4 trillion, so that the ceiling was raised every year.
In 2016, the Fund reached a turning point and made a qualitative change; for the first time, as oil prices fell, investment income exceeded petroleum income. The Fund had turned into a financial endowment rather than a petroleum-based asset. The outtake ceiling was lowered to 3% of the Fund’s market value. The right-wing government decided to transfer 2.7% of the Fund to the 2017 budget.
During these years, critical voices had warned that oil prices might fall as easily as they rise and that the Fund, therefore, should pull out of oil stock. The argument was, and is, that it is unwise to put the eggs back in the same basket where they are delivered. Even if Norway has become rich because of oil, it is not necessarily wise to invest the proceeds in the same industry. The Fund is not owned by private investors, who might take high risk in search of quick profits, but by the Kingdom of Norway, aiming at a reasonably high return with reasonably low risk over a very long period of time. From that perspective, the decision to pull out of oil and gas stock may be sensible. The decision concerns about 6% of the Fund’s total value.
With a large oil industry, the Norwegian economy is, in any case, highly exposed to oil price risk. In case the current relatively high oil price of about $60/bbl should not prevail, but decline to e.g. $40/bbl, Norway’s oil industry would suffer, but not the Fund, stripped of oil and gas stock. In the contrary case, if oil prices should surge to e.g. $100/bbl, the Fund would gain by the transfer of government oil revenues. From that perspective, divesting oil and gas stock may be a win-win decision. It has nothing to do with the green lobbies, but justified by price concerns. In Norway, many observers think that the current oil price is not sustainable and that the recent OPEC rollover will spur investment in unconventional oil, as well as renewables. Another concern is the position of the U.S. dollar, given the growing U.S. budget deficit. In the rest of the world, the dollar is not just a dollar, but a dollar multiplied by an exchange rate. That risk affects oil operations outside the United States, not the least in Norway with a currency floating between the dollar, the euro and the oil price.
Offshore operations. Norway has more problems. Higher oil prices are spurring optimism and greater willingness to invest in the industry. Since the 2010 border agreement with Russia, the Barents Sea has been the exploration priority. Results are mixed. Oil company interest has waned. Although conditions in that part of the Arctic are not extreme, with moderate water depths and wind, the issue is the resource base. The first oil field of the region, Goliat, is shut down because of safety problems, to the embarrassment of the operator, Eni.
The one bright spot is Statoil’s announcement that it will, finally, move ahead with Johan Castberg field, discovered in 2011. Recoverable oil reserves are estimated at nearly 600 MMbbl. The field is 240 km northwest of the Melkøya LNG plant in Hammerfest, and 100 km north of Snøhvit field, at a water depth of about 400 m. Initially, development cost was estimated at NOK 120 billion, or $15 billion, with a break-even of $80/bbl. The December 2017 development concept has a cost estimate of about NOK 50 billion, or $6.2 billion, with a break-even of $35/bbl. The concept is a subsea production facility with wells connected to a floating FPSO, with tankers taking the oil to the market.
Johan Castberg field is the northernmost prospect to be developed in the Norwegian Barents Sea. In case the oil should be transported by pipeline, the FPSO might eventually be replaced by a more advanced subsea production facility, permitting completely automatic and digitalized operations. Indeed, digitalization, and subsea completion and production systems, may open a new chapter in Norway’s oil history, cutting costs and extending its resource base.
So far, petroleum tax reform is not on the table, although the UK, in 2016, reduced marginal tax for offshore petroleum activities from 75% to 40%. Norway’s petroleum tax is still 78%, but oil companies can deduct 88% of capital investment. In addition, newcomers benefit from exploration compensation. 
