New oil
projects are being scrapped in Norway amid falling production and low oil
prices.
Long
held up as the model for managing oil abundance, Norway has painstakingly sought
to prevent the problems that occur with other natural resource-based
economies, such as corruption, slow economic growth, currency appreciation,
and subsequently, deindustrialization.
Since
1990, Norway has diverted much of its oil earnings to a sovereign wealth
fund, which has become the world's largest. The money, reaching
$890 billion as of June 2014, amounts to $178,000 for every Norwegian
citizen. The sovereign wealth fund helps Norway avoid some of the problems
associated with the "resource curse" by investing capital abroad.
But more importantly, the money is set aside to be saved and invested to help
the country plan for the eventual decline of oil production, with the
intention of transitioning to a more diversified economy that can take oil's
place.
The
early cracks in Norway's petrol-based economy are beginning to show, perhaps
quicker than many predicted.
Energy
analysts have explored in detail how the ongoing decline in oil prices - down
40 percent since June - might affect oil exporting countries like Russia,
Iran, Venezuela, and other OPEC members. But even Norway, the model for using
natural resources to build a modern wealthy economy, is not immune to the
price fall.
Statoil,
the mostly government-owned oil company, has seen its share price cut in half
since July 2014. It is idling several offshore rigs as oil prices drop. Three
rigs - the COSL Pioneer, Scarabeo 5, and Songa Trym - will be suspended
until the middle of 2015 because of lower profitability. "These measures
are necessary due to the overcapacity of rigs compared to the assignments we
are prioritising. This situation is unfortunate, and we are doing what we can
to minimise the extent of the suspensions," Statoil procurement head Jon
Arnt Jacobsen said in a statement.
To make
matters worse, costs of developing new fields have been steadily
rising. "The boom is probably over. But we're not looking at a steep
decline in investment or production," Norway's oil minister Tord Lien
told Reuters
in May 2014. "The costs are rising too high and too fast. The Norwegian
costs have risen a little bit more than elsewhere." Since those
comments, oil prices have tumbled. Norway may in fact see a steep decline in
investment.
Lower
oil prices could force more than $150 billion worth of investments to be put
on hold worldwide, according
to an assessment by Norwegian firm Rystad Energy. Statoil is deferring a
decision on investing $5.74 billion in the Snorre field, an offshore oil
project in the Norwegian Sea. Also, Statoil's Johan Castberg field, an
estimated $16-$19 billion oil field in the Barents Sea, will be tabled for
the time being. These costly projects won't generate a sufficient return
given today's prices.
But the
oil price decline is only accelerating a trend that is already underway. Even
with high oil prices Norway was facing a tougher future due to years of
waning oil production. Since 2001, Norway's oil production
has fallen by almost half, from around 3.5 million barrels per day down
to about 1.8 or 1.9 million bpd in 2014.
The
decline in investment is already pinching the labor market. Around 10,000
Norwegian oil workers have been laid off as the industry pares back spending,
accounting for 10 percent of the sector's total workforce, the Wall
Street Journal reports. Oil workers are threatening
to strike unless the government steps in to stem further losses.
And the
way forward is murky. Despite its best efforts, Norway's economy is
overwhelmingly dependent on oil, which accounts for more
than half of the country's exports. Other export industries have struggled
to develop as costs are too high - a classic symptom felt in countries
suffering from the resource curse.
But
resuscitating the sector may be difficult. With such a high cost environment,
it doesn't make sense for many companies in Norway to invest in new projects.
Spending could
drop by another 18 percent next year as project economics look poor.
Conversely,
without investment, new production will not materialize in the coming years,
leading to further deterioration for the sector as existing fields age and
decline.
To be
sure, Norway has its almost $1 trillion sovereign wealth fund to fall back
on, so it is not as if its citizenry will be thrust into poverty anytime
soon. Still, Norway may need to begin building a post-oil economy sooner than
it thought.
