NORWEGIAN OIL AND FOREIGN POLICY;
NUPI & Vett & Viten . 140 pages. Norwegian Foreign Policy Studies no.68 1989.
Ole Gunnar Austvik:
Norway's Economic and Political Dilemma
Norwegian international oil policy is formulated in the border-land between national economic considerations, cost ratios and domestic- and foreign policy aspects. In this introduction, we shall define precisely a few of these variables and quantify them.
In the course of the last decade, Norway has become very dependent on the revenues from oil and natural gas production. In 1985, the value of the petroleum production and exports represented 18.7% and 37.6% respectively of the gross national product (GNP). Its share of the actual export of goods was about 50%.
In 1986, when the oil prices fell from an average of 27.6 to 14.2 dollars a barrel and somewhat more in Norwegian kroner as a result of the fall in the exchange rate for the dollar, the value of the production fell by about 30 billion Norwegian kroner.(1) It then amounted to about 11% of the GNP. The share of the total exports fell to about 29% of the GNP, and the trade surplus of 41 billion kroner was turned into a deficit of 18 billion kroner.(2)
Table 1. Net cash flow from the petroleum sector and
the State's total tax revenues 1983-89.
Billion Norwegian kroner.
Year Net cash flow Total Tax Percent
1983 31 153 20.3
1984 39 170 22.9
1985 39 195 20.0
1986 25 209 12.0
1987 8 216 3.7
1988 3 229 1.4
1989* 10 230 4.3
* Estimate. Net cash flow is the sum of paid taxes and royalties and from 1985 includes net payments from central government direct participation in petroleum activities (SDØE). Total taxes exclude social security and pension premiums but include SDØE. Source: National budgets. .
Fig. 1 shows the share of the petroleum sector in the GNP since the beginning of the Norwegian oil age in 1974. It is clear that the oil price, calculated in Norwegian kroner (the price in dollars multiplied by the exchange rate for Norwegian kroner in relation to the dollar), is of great importance for these figures, as well as for the petroleum sector's share of the total exports (shown in Fig. 2). From 1980 and up to 1985, the oil price was at its peak and Norway experienced a "bonanza" from the North Sea. The price fall in 1986 came, however, as the opposite, considering the great importance that it had for Norwegian economy.
Table 2. Norwegian oil and gas production, 1981-88
Oil Gas Total
1977 3.5 3.1 16.7
1978 17.0 14.9 31.9
1979 18.8 21.6 40.4
1980 24.5 26.0 50.5
1981 23.5 25.2 48.7
1982 24.5 24.4 48.9
1983 30.6 24.5 55.0
1984 35.1 26.3 61.4
1985 38.4 25.5 63.9
1986 42.3 25.7 68.0
1987 49.5 29.9 79.4
1988 56.6 29.8 86.4
Source: Norwegian Petroleum Directorate.
This is reflected, inter alia, by the development of the tax revenues from the sector (Table 1). While they in 1985 cor-responded to about 24% of the total tax inflow, the share fell to 5%. The importance of the petroleum sector for the Norwegian national economy and the great effects which changes in the oil price level thereby have for the planning of economic policy in Norway mean that today it seems to be a recognized problem that we must live with a large degree of uncertainty. This is in itself a great challenge. In addition, Norway must define an economic policy in which the oil revenues can be made use of in such a way that alternative, competitive industry can be built up, to decrease the dependency on petroleum revenues as well.
Will be included:!
Fig. 1. The petroleum sector's share of the GNP. Source: Fact Sheet 1988.
Fig. 2. Oil and gas exports: Share of total exports (services included). Source: Fact Sheet 1988.
Oil fields and production plans
The Norwegian continental shelf covers an area which is several times larger than mainland Norway. Until now, all production has taken place south of the 62o parallel of latitude, an area of 140,000 km2. However, this is only a small part of the shelf. For example, the area disputed with the Soviet Union in the Barents Sea is larger (about 160,000 km2). When the sea areas are included, Norway is actually one of the largest countries in western Europe and the most important one as a supplier of energy.
Proved reserves south of the 62o parallel are about 3700 million tons
of oil equivalents (estimate in January 1985), two thirds are natural gas.
Half of the gas reserves are in the Troll field. The largest oil
field are Statfjord, Gullfaks and Oseberg. ???? The distribution
of the reserve basis between oil and gas, as new areas are charted, is
expected to rise in the same ratio as the proved reserves are distributed
today, meaning that Norway increasingly might become a gas nation.
Map of the Norwegian Sea and the North Sea.
In the 1980s, oil production showed an even increase, while gas production stayed at the same level (Table 2). Total production reached a provisional peak of 78 million tons of oil equivalents (mtoe) in 1987. Norway's own consumption of petroleum products is around 8 million tons. Consequently, almost 90% of the Norwegian production of petroleum is exported.
According to existing plans, the production of petroleum will increase to around 110 million tons of oil equivalents in 1992. The increase will be due to a higher oil production, mainly from the Gullfaks and Oseberg fields. Thereafter, the production will decline towards the year 2000. However, there seem to be reasons to expect that decisions about starting new projects will be made in the period, so that the production profile will increase further before it again begins to decline.
Fig. 3. Possible and decided Norwegian oil production,
1980-2000. Source: Heum (1987).
The increase in oil production that we are now experiencing is to a certain extent a result of the "oil option policy" pursued in the first half of the 1980s. This strategy was adopted by Norway during the negotiations about new gas contracts. Briefly, the intention was that, if high gas prices were not accepted, Norway would let the gas remain in the reservoirs and would instead expand oil fields. Partly as a result of the fact that the gas customers did not accept this price policy and the market was weaker than expected, no gas contracts of importance were signed in this period.
Fig 4:. Variable costs of Norwegian oil and natural
Source: Herskedal & Kristiansen (1987)
However, the policy contributed to the making of large invest-ments in oil extraction, which is leading to an increased capacity ? in the period 1987-92. In consequence of these plans, production will rise from the 1986 level of about 1 million barrels per day (about 40 million tons) to around 1.6 million barrels per day (about 60 million tons) in 1990, i.e. an increase of about 50% in 5 years.
Owing to the problems in the gas market in the first half of the 1980s, market and foreign policy factors have already influenced Norwegian production policy, also on the oil side. Today, the oil market may perhaps entail a more cautious investment in oil production. After the new price policy for Norwegian gas introduced with the Troll Agreement in June 1986, there may be possibilities of increased investments in gas production in addition to the already signed Troll developments.
The consequences of price changes for the petroleum production will be different for fields in which the investment has not already been made, in relation to the fields in which it has been made. If the investment is already done ??? as long as prices exceed the variable costs (mainly operating costs) in the field.
Table 3 shows an assumed development in the variable costs for different Norwegian fields in the North Sea. Seven out of nine oil and gas fields in operation or under expansion will be able to cover their costs until 1990 with oil prices of around 10 dollars a barrel. The largest fields - Statfjord, Ekofisk, Gullfaks and Oseberg - will be able to cover their costs even with a price of 5-6 dollars a barrel. Only the Odin and Heimdal gas fields require oil prices in the magnitude of 10-15 dollars per barrel in order to cover the variable expenditures.(3)
Table 3 also shows that each field becomes steadily more marginal as reservoirs are emptied, implying that the costs per unit are rising.
For fields in which the investments have not already been made, the price must, however, also cover capital costs along with variable costs and profits. At 1983 prices, the average costs for all North Sea fields were estimated at 12.50 dollars a barrel. More than 70% of this was capital costs. According to Lorentsen, Roland & Aaheim (1984), the average costs in the Norwegian sector were about 2 dollars lower than in the British sector, mainly on account of lower capital costs (Table 3).
Table 3. Capital and operating costs in 1983 dollars. Fields in production or under development
Prod. Transp. Total Prod. Transp. Total costs
Norwegian 5.43 2.04 7.47 2.28 1.76 4.04 11.50
British 7.32 2.41 9.73 1.66 1.92 3.58 13.30
All fields 6.55 2.26 8.81 1.91 1.85 3.76 12.57
Source: Lorentsen, Roland & Aaheim (1984).
The higher capital costs in the British fields are assumed to be due to geological differences and to extraction from a larger number of small and more expensive fields. The tax system may also be important in this connection.
These cost figures must not be regarded as absolute, since they are dependent on factors such as how the depreciation period is defined and on estimates of the sizes of the reservoirs. But they may be used as a rule of thumb, to illustrate the level of the two types of cost in the expansion of the North Sea fields. However, as we have already mentioned, it is necessary to realize the large variations which exist between the fields.
Foreign policy considerations
Accordingly, Norway is interested, from both the revenue and the cost points of view, in having a price for oil at a "reasonably" high level. But, at the same time, Norway is economically, politically, historically and culturally part of the oil consuming western world.
The western world is best served by a high and stable production at "reasonably" low prices. The desire for security of supply is in correspondence with Norwegian interests as an oil exporter, as regards having reliable purchasers. The desire for low prices, however, is in direct opposition to Norwegian interests.
However, Norway is not well served by prices that are so high that our western trading partners suffer a serious, economic decline. This may damage the Norwegian economy by giving rise to a falling off in other Norwegian exports that is greater than the gain from high oil prices; at any rate, it may make the economy more vulnerable and even more oil dependent.
But it is not only the actual level of the oil price that is important. Stability and predictability in the oil market are also elements of considerable interest as regards the Norwegian economy and politics. However, these are interests which by far the greater number of actors in the oil market have in common and thus do not require the same weighing up as for the price level.
Strengthening OPEC will increase the power of the Arab states in the oil market and thereby their influence in all oil producing countries. A stronger Organization will also, by extending its control over the world's most important energy market, increase the general Arab influence internationally. The important countries and organizations which Norway collaborates with in connection with energy, security and foreign policy, such as the IEA and NATO, have, to greater or lesser extents, interests which are opposed to the interests of OPEC.
Thus, by interaction with OPEC, Norway may, to some extent, be regarded as lacking in solidarity by the other western countries and may meet with criticism, both in Europe and in the USA, even though it is understood that the interaction is being engaged in from wholly rational, national, Norwegian economic interests and is being kept within the framework of our other foreign policy obligations, such as our collaboration with NATO. This creates restrictions on a Norwegian approach to OPEC, and it will be necessary to find a balance between our interests and the rival interests of different countries and organizations.(4)
The pressure on Norway form the IEA and OPEC will probably vary in strength according to how the oil market in particular and the energy markets more generally develop. In a tight market situation, one can expect the IEA to place more stress on security of supply and moderate prices than in a weak market. Correspondingly, OPEC will probably assign greater importance to Norway in a weak market than in a tight one, as shown in 1985. On account of the situation as regards alliances and community of Norway's interests with the other western countries in the sphere of security policy, a tense situation as regards security, locally or globally, will presumably also make it more difficult to collaborate with OPEC in raising oil prices than in a more relaxed situation.
Opinions to how necessary it is to please other western countries and OPEC's expectations of Norwegian oil policy will be important parts of the international framework of Norway's freedom of action in the field. As long as Norway is an oil producer of a certain size, one can expect that demands will be made on Norwegian foreign policy in this sphere (privately or official-ly). Norway must presumably come to terms with the fact that pressure must come from one quarter or another. On account of the relatively frequent changes in the market, however, the policy should be flexible enough to provide room for changes when the market changes and conflicts arise.
Norwegian international oil policy up to 1988
Up to May 1988, official Norwegian, foreign oil policy followed what was called a "purely commercial line". That is, it was not desirable to declare officially that political evaluations were included in its design. Thus, it was long considered that the best market policy was not to have any, on the whole. As a "free rider" in the market, Norway was then also in the best possible position; she could increase her production and at the same time reap the price benefits deriving from other countries' production reductions. Norway could maintain that the petroleum policy was formed on commercial grounds.
In the first half of the 1980s, however, conditions in other countries were already affecting Norwegian production policy. The petroleum policy was politically influenced, for example, by the British rejection of the Sleipner Agreement and by the exclusion of natural gas production and the speeding up of oil production on account of sales problems with natural gas at (too) high prices on the continent (the so-called oil option policy, mentioned earlier).
It was gradually perceived to be even more difficult to declare such a "purely commercial line". This was partly due to the importance which OPEC gradually attributed to Norway and other producer countries outside the Organization. The fact that the Organization called attention to the importance of individual producer countries for the market developments probably made such countries more important in the market than their respective market shares alone would suggest, and it politicized these countries' roles as oil exporters. Through the avowed support for the Organization in 1986 and the making of the Troll Agreement with France the same year, it was officially declared that Norwegian petroleum policy was no longer only commercial but was also politically influenced and determined.
As support for OPEC, the Norwegian Government withdrew 80,000 barrels per day from the market in the last two months of 1986. In January 1987, they decided to reduce production by 7.5% in relation to production capacity. In the fall of 1988, this initiative is still in force. In its present form, Norwegian policy is accordingly one-sided in design and limited in time and thus including what we have pointed out before about flexibility. Officially, this initiative is called unilateral, but it is really, one supposes, bilateral as regards OPEC; Norwegian partnership is made conditional on a certain policy being pursued by the Organization, by assuming that it can do something that will mean that prices are stabilized at a certain "acceptable" level.
1. Time lag which is implied in the natural gas contracts meant that the halving of the oil prices entailed only a 10 % reduction of the natural gas prices in 1986 (Austvik, July 1987). When the fall in oil prices had full effect on gas prices (in 21987), this corresponds to a further annual loss of revenue of about 10 billion kroner.
2. About 50 % of the detoriation in the trade balance was due to lower petroleum exports. The rest was due to a poorer balance between the remaining exports and imports, mainly a great increase in imports.
3. Much of this is, however, due to high transport charges.
4. However, it is important to understand that among members of both OPEC and the IEA divergent interests and views of the oil market are to be found.
R e f e r e n c e s:
Austvik, Ole Gunnar, "Oil Prices & the Dollar Dilemma", OPEC Review, no. 4, 1987.
Austvik, Ole Gunnar: "The Western European Gas Market: A Security Price Premium for Norwegian Gas?" NUPI Report, no. 110, July, 1987.
Herskedal, F. & Kristiansen, F., 1987: "Oljepriser og mulig produksjonsstans for felt på norsk sokkel" (Oil prices and a possible break in production for fields on the Norwegian Shelf), Industriøkonomisk Institutt, Bergen, notat no. 100.
Heum, Per, 1987: "Stabilization Efforts in an Independent Oil Exporting Country - The Case of Norway", Industriøkonomisk Institutt Paper No. 4, May 1987. ISSN 0801 3772.
Lorentsen, , Roland, K. & Aaheim, , 1984: "lønnsomhet og kostnader ved olje- og gassproduksjon i Nordsjøen" (Profit-ability and costs in the production of oil and natural gas in the North Sea), Økonomiske Analyser 84/2, December.
Oil and Energy Department: "Fact Sheet 1988".
Oil Directorate, sundry years: "Annual Report".