Term Paper on "Future Norwegian Policy Oil and Gas"

Term Paper 13 pages (4262 words) Sources: 1+

[EXCERPT] . . . .

Future Norwegian Oil and Gas Policy

Norwegian Oil Policy: The Development and Maintenance of Efficient Fiscal and Regulatory Policies

Management Summary

Oil and natural gas have helped run this world for the twentieth and twenty-first centuries. It is hard to imagine a world without oil and gas, yet the natural reserves we know of around the world are rapidly depleting. How will this decreasing resource size affect oil and gas policy in the nations of the world? One major nation that has profited immensely off of its oil reserves has been the northern country of Norway. After oil was discovered in the 1960s, the country went on a major oil profit spending spree, which then resulted in a recession in the 1980s and 1990s when global oil prices plummeted. To protect the nation from being so vulnerable in terms of oil prices and profits, Norway has since come up with a solution to help keep oil profits in line as part of the national budget without over-spending. With the national government enjoying much of the oil profits, they have set up an oil fund which aims to help keep money around for future generations in the form of a guaranteed pension fund. This strategy has begun to be adopted elsewhere in the world and has proven a way for Norway to keep control of its oil profits without spending overzealously.

Historical Review of Norwegian Oil

Until late into the twentieth century, Norwegians had relatively little idea what black gold awaited them under the North Sea. Oil was found in the North Sea in 1969, with production beginning in the middle of 1971 (Erikson 2006). This set off a wave of massive oil production profits in the region. However, "From the beginning, before the first drop of oil emerged the oil and gas reserves within Norwegian jurisdiction were defined by law as common property resources, thereby clearly establishing the legal rights of the Norwegian people to the resource rents," (Gylfason 2008, p. 1). This guaranteed that most of the oil profits would stay within the Norwegian government, to be used by the people and for the people. It was a very ambitious strategy, one which later had a few bumps in the road, but later worked itself out. In terms of actual regulatory strategy, Norway proved tough on oil regulations. The model of the 1970's Norwegian policy rested on "tight government control, a high degree of state participation and high taxes" (Noreng 2000, p. 1). Yet, even with tight regulations and high taxes, the country was in a top bargaining position. The strong political climate of the region gave it an advantage over other oil producing regions in the midst of internal and external struggles; "In the 1970's and early 1980's, political stability, rising oil process and promising geology gave Norway a strong bargaining position in relation to the international oil industry, especially as many OPEC countries nationalized their oil industries," (Noreng 2000, p. 1). This then allowed the country to implement high taxes and tariffs combined with extremely strict licensing procedures and stiff regulations. Such a policy worked very well within the context of the Norwegian mainland, and the policy, although strict and disliked by many foreign oil powerhouses, was thought of as a success.

However, recent research has show that the massive oil fields in the region have reached their peak and have begun to deplete. Many within the field believe that "The resource base in the North Sea is mature, with finds getting smaller and more difficult and with a rising share of natural gas," (Noreng 2000, p. 1). Some research has found that oil production out of Norway's various fields reached a peak in 2001 and has since been declining, (Hook & Aleklett 2008). Out of all of the field types, large scale fields, small fields, natural gas liquids and condensate, large scale fields were the ones declining the fastest. According to research, the giant oil fields have been declining an average of -13% a year after their initial peak production year of 2001 (Hook & Aleklett 2008). Condensate fields have even been reported to have declines as much as -40% annually (Hook & Aleklett). This is a looming reality which will soon have a major effect on the nature of Norwegian oil policy as well as the Norwegian economy as a whole.

Yet, despite falling assets, Norway is still the third largest gas producer in the world. In fact, it supplies a large portion of the European Union with its gas and oil needs. Germany, France, the Netherlands, Belgium, Spain, Austria, the Czech Republic, Italy, Poland, and the United Kingdom all receive a massive percentage of their oil from Norway's reserves, (Engebretsen 2007). The country has also been opening new building projects to implement new pipelines into the mainland of Europe, also attesting to Statoil's desire to grow despite recent disappointing numbers (Engebretsen 2007). Even in the midst of a declining oil reserve, "Total oil production in 2004 was about 3.2 million barrels / day, and the net export of oil about 3.0 million barrels/day," (Engebretsen 2007, p. 1). These results in massive profit numbers reserved for use by the Norwegian government. Even today, there are over 50 oil fields in production in and around the North Sea (Erikson 2006). This attests to the sheer magnitude of the fields discovered in the North Sea, and shows that despite a decline in oil production -- Norway is not nearly finished with its production just yet.

Although oil production is decreasing, this is just one single aspect of Norway's production within natural gasses as a whole. In fact, production of petroleum is expected to gradually increase until around 2011, when it is then expected to decrease slowly afterwards, (Erikson 2006). Research then forecasts a serious decline by 2030 (Hook & Aleklett 2008). This is following a similar pattern to the 2001 peak and decline of general oil production. However, gas production is expected to continue to expand until around 2013; "From representing approximately 35% of the Norwegian petroleum production in 2006, gas production is likely to represent a share of more than 50% by 2013," (Erikson 2006, p. 4). This leaves many to have high hopes in the continuing success of Norwegian gas policy and its mission to help preserve its oil wealth for future generations to come. With the success of gas production, there are still much more profits to be made; "While Norwegian oil production has peaked and is declining, gas production is still increasing and this is important because there is particular concern within the EU about gas security," (Stern 2006, p. 1). This then shows how Norway's most valuable resource will continue to shape both foreign and domestic policy for years to come.

Review of Petroleum Policy

Once Norway had struck black gold, the country went through a long and painful learning process on how to control and manage its oil profits. In the beginning of the Norwegian oil boom, large petroleum profit spending in the early years of oil production was typical and a major staple within Norwegian oil policy within a fiscal context. Much of this money was spent on plumping up the economy and social programs, which much of industry itself could not have done; "Actually, [they] spent a large share of [their] expected petroleum wealth in the 1970s and 1980s. Welfare schemes were expanded significantly," (Erikson 2006, p.5). Spending of oil profits was conducted as if the oil reserves would never dry up. This also led many Norwegians to attempt to use such large oil profits as a way to make up for the failures of other industries which would have normally contributed to the national budget before. There were temptations "to use oil policy as a balancing factor to offset failures in industrial policy and economic policy," (Noreng 1980, p. 247). Together, these all lead to massive spending of oil profits within the first few decades of the initial oil boom in the North Sea.

Yet, in 1986 global oil prices per barrel dropped dramatically. This resulted in a severe recession in the 1980s leading into the 1990s in Norway (Erikson 2006). Norway had exhibited too great of a dependence on the profits of oil production within the construction of the national budget and overall financial health of the nation; "In 1985, the value of the petroleum production and its 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%," (Austvik 1989, p. 1). When the price of oil fell in the mid 1980s, it fell drastically. In fact, "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 in the fall in the exchange rate of the dollar, the value of the production fell by about 30 billion Norwegian kroner," or about 11% of the GNP, "(Austvik 1989, p.1).… READ MORE

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