The Fuse

Norway Hit Hard by Low Oil Price, Outlook Remains Bright

by Matt Piotrowski | August 12, 2015

Low oil prices are hurting producers in all major regions, with some getting pummeled more than others. Norway, which produces just under 2 million barrels per day (mbd), is not experiencing the social and political turmoil seen in Iraq, Venezuela or Russia, but it is still taking major hits from the precipitous drop in prices as a result of oil’s integral role in the country’s economy.

In an article this week, Bloomberg went so far to say that for Norway, $50 oil is worse than the 2008 financial collapse. “When the financial crisis brought the global economy to its knees, Norway was largely unscathed,” Bloomberg wrote. “But oil under $50? That’s another story.”

Bloomberg’s headline might be a bit overblown. While the Scandinavian country is indeed under stress, it has also taken major steps to cushion its economy against downward price shocks, and its oil sector has a promising future, albeit one largely determined by oil prices in the medium term.

While Norway is indeed under stress, it has also taken major steps to cushion its economy against downward price shocks, and its oil sector has a promising future, albeit one largely determined by oil prices in the medium term.

Norway’s energy security

Norway is in a peculiar, and somewhat enviable, situation of being truly “energy independent,” meaning domestic supply far exceeds demand, and it exports large amounts of oil and gas while remaining free of import dependence. In fact, the amount of oil produced in the country is some seven times greater than consumption. Consultants at Wood Mackenzie note that it is the most energy independent country in the world based on the ratio of domestic production to demand.

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This advantageous situation not only insulates Norway from global supply disruptions, but also helps endow it with a significant trade surplus. However, there are drawbacks, which the country is currently experiencing. The surplus has left Norway’s economy heavily dependent upon revenue from the oil sector, putting its labor market and fiscal condition under strain. GDP is stagnant with virtually no growth, while unemployment has risen from 3.3 percent last summer to 4.3 percent as of May. While this is a worrying trend, the country is still in a much better economic situation than most of the rest of Europe. Moreover, the government’s debt-to-GDP ratio is a modest 26 percent—again, much better than other parts of Europe (see: Greece, Italy and Portugal)—putting it in a relatively fiscally secure situation even if oil prices remain low for an extended period of time. Also providing economic stability is Norway’s sovereign wealth fund, which is supported by government revenue from the oil sector.

Still, it’s important to contextualize the scope of oil’s impact for Norway’s economy. It has the highest crude oil reserves in Western Europe, and crude oil accounts for more than half of the country’s export revenues, about a quarter of GDP, and some 30 percent of the government’s revenue. Currently, Norway exports almost 80 percent of the oil it produces, with more than 90 percent of those volumes sent to customers in Europe.

Globally, Norway is ranked as the world’s second most energy secure country in the Oil Security Index, a metric published by Securing America’s Future Energy (SAFE) and Roubini Global Economics, as the country has taken considerable steps to reduce its vulnerability to fluctuations in oil and gas revenue. Norway has worked to diversify its economy and reduce its oil demand, helping it weather the current situation and prevent an economic crisis similar to what some other producers are facing.

Norway has worked to diversify its economy and reduce its oil demand, helping it weather the current situation and prevent an economic crisis similar to what some other producers are facing.

“Norway does still face the structural economic issues of sectorial distortion that haunt oil exporters, and low global oil prices not only slash the income from its biggest export but also threaten the investment that may be needed to reverse its long-term production decline,” says the new report on the updated Oil Security Index rankings. “Despite these challenges, Norway stands out as a positive example for oil exporters.”

Current production averages around 1.91 mbd, with output expected to stay around this level for the medium term. The country, whose output was as high as 3 mbd as recently as a decade ago, continues to struggle with structural declines in old mature fields, with small start-ups currently offsetting some of those losses.

But there are bright spots. While some development plans have been postponed, including those for the large Johan Castberg field in the Arctic, Statoil’s Johan Sverdrup field, discovered in 2010, is moving forward and should come online in 2019 and produce as much as 0.6 mbd, putting Norway’s production at 2.4 mbd in the middle of next decade. Output could even grow higher. According to Wood Mackenzie, Norway holds 10 billion barrels of oil equivalent that has not been developed, 60 percent of which has potential for commercialization.

The potential bounty from these reserves is massive. Companies would rake in $22 billion, and the Norwegian government would earn $84 billion in tax receipts, according to Woodmac. These estimates were compiled one year ago when Brent crude prices were still high, so they will likely be revised downward, but they reflect the country’s potential.

Government pension fund an important cushion

The country’s economy has diversified over the years, but still needs to take steps to further reduce vulnerability to fluctuations in the oil price. Besides oil and gas, manufacturing, agriculture, fishing, and forestry are key industries in Norway, but they cannot provide enough relief—as noted, unemployment is on the rise.

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The biggest resource the government has to cushion against economic shocks is its sovereign wealth fund, which now holds an enormous $900 billion for the country’s population of 5 million. All of the government’s revenue from the oil sector—which includes taxes, direct proceeds, royalties, along with dividends from Statoil—go into the fund. Despite the fund’s large holdings, it can spend only 4 percent per year (as the fund’s prime goal is to pay pensions in the future), but there is talk of dipping further into the reserve this year given the strain on resources. The fund provides both financial and energy security, but is limited in relieving short-term stress.

Reducing oil demand

Norway has also taken aggressive steps on the demand side to reduce its domestic consumption of oil. These measures bolster the North Sea producer’s economic stability. Norway’s oil consumption is not particularly high—averaging around .22 mbd. Consumption per capita is a third less than in the U.S. But despite low demand, the government is encouraging the use of electric vehicles by waiving sales taxes, providing access to bus lanes, and other enticements. Consequently, Norway has become the global leader in EV sales, which now make up roughly 20 percent of new vehicles. Widespread electric vehicle use gives a boost to the country’s electricity sector, which makes heavy use of renewable energy.

Norway’s importance for global oil markets

Although output has dropped by more than a third in the past decade and it mainly feeds the European market, where demand is declining, Norway holds a relatively high significance for the global oil market. Two of its crude streams, Ekofisk and Oseberg, make up almost half of North Sea Brent—the world’s main pricing benchmark.

Despite declining production in the North Sea, Brent pricing has kept its relevance, and has actually grown in importance as U.S. marker West Texas Intermediate (WTI) is land-locked and somewhat disconnected from global markets. There was talk of adding crudes outside the North Sea to the Brent benchmark if production there continues to decline. “Dwindling production raises the concern that supply shocks to the four crude streams could increase price volatility of the world benchmark,” according to the U.S. Energy Information Administration.

The Norwegian Petroleum Directorate has taken efforts to mitigate declines in the Oseberg and Ekofisk fields and has boasted of remaining reserves in the two key fields.

This discussion has faded for now, but will likely resurface if there are more problems with the four North Sea crude streams that make up Brent, including the two from Norway. Against this backdrop, the Norwegian Petroleum Directorate has taken efforts to mitigate declines in the Oseberg and Ekofisk fields and has boasted of remaining reserves in the two key fields. Norway’s oil industry will need to amplify investment in spite of lagging oil revenues to make this goal a reality.

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