Norway Looks Beyond Oil Boom

Ever since Norway’s North Sea mother lode was discovered Christmas Eve 1969, this coastal boomtown has been the laboratory for the global oil industry’s every challenge, from deep-sea drilling and submerged pipelines to worker safety and marine-life protection.

Now, with production peaking and the most abundant wells nearing exhaustion, Norwegians face a new test of their skill in husbanding a nonrenewable resource: how to scale down dependence on a diminishing commodity without suffering a corresponding loss of their huge national wealth.

With oil prices at a nine-year high and reserves expected to last 40 more years, stewards of the state oil enterprises are under little immediate pressure to plan so far into the future.

But traditional frugality and concern for the country’s long-term welfare compel Norwegians to wrestle today with what will be a problem only in a distant future. And that eye on the far horizon may preserve today’s high living standard for generations who will outlive the oil bonanza.

Norway has extracted only about 30% of its known oil resources in the three decades since it became a major player with the lucrative North Sea find. But the oil that’s left is mostly in depths, distances and quantities that make its extraction less likely to produce profits of the magnitude to which the country has become accustomed.

Of course, the higher the price of oil, the more worthwhile such costly extractions become. That is one reason Norway joined with Mexico and the Organization of Petroleum Exporting Countries in recent production cutbacks that have succeeded in driving world crude prices to $30 a barrel.

But the country can’t count on those high prices. To cushion the inevitable depletion of existing oil fields, oil companies and government strategists have turned to natural gas to make up the difference and are contemplating partial privatization of the state-owned behemoth Statoil to boost investment in exploration and technology.

“Oil production peaks with this decade, and natural gas is very much the fuel of the future,” says economics professor Oystein Noreng. He adds that Germany, one of Norway’s biggest oil customers, will be converting its industries to natural gas as it phases out nuclear power in the next 20 years.

Norway has twice sustained severe economic downturns brought on by the oil crises of the early 1970s and mid-1980s, which encouraged diversification and a practice of saving for a rainy day, Noreng says. Still, oil accounts for 13% of gross domestic product and 35% of exports. Any repeat of the price crash of 1998, when oil briefly fell below $10 a barrel, raises the risk of production cuts and income losses.

The government in Oslo is expected to lay out a timetable for privatization this spring, with an initial public offering of Statoil likely in 2001. But officials must first decide how best to boost the company’s value. Some are advocating a merger with other state oil assets spun off from Statoil two decades ago to form State Direct Financial Investment. Recombining SDFI assets would make Statoil the world’s fourth-largest oil company and boost its value to as much as $63 billion.

Part of the motivation for opening up the oil industry here is Oslo’s plan to reduce investment from a staggering $9 billion a year to $625 million by 2010, explains Jan Hagland of the Norwegian Petroleum Directorate, a state-owned think tank that charts development strategy.

New Industry in Dismantling Old Rigs

Scaling back from today’s production heights also will impose costs that were unforeseen when the first drilling platforms were sunk into the North Sea bed 30 years ago, as international agreements oblige companies to dismantle obsolete rigs and tow the components ashore.

That need to restore the sea floor to its original condition has spawned a decommissioning industry, transforming one problem in the twilight years of a finite resource into at least a partial solution.

Several marine salvage companies here and in other coastal cities have built or ordered vessels designed to “decapitate” the drilling platforms from the submerged metal support structures known as jackets. The intact platforms, or topsides, can then be relocated to tap more productive wells, including those in the far-flung oil fields of the Caspian Sea and the coast of Greenland, where Statoil has turned its sights in search of potential growth opportunities.

One sunset service emerging in this oil industry version of the Klondike is a full recycling option offered by Marine Shuttle Operations Inc., a Norwegian affiliate of a Houston company of the same name. MSO plans to use ballast and robotic technology to create a fully automated shuttle that will lift off the topsides, ferry them to new locations, then return to pluck the intact jackets by vertically submerging and latching on to the metal structure as if it were a backpack.

Only 14 of the North Sea’s hundreds of oil platforms are ready for removal, but as the reserves are exhausted over the next few decades, the market for topside and jacket removals will grow rapidly. Marine Shuttle project director Douglas Smith estimates it will cost the oil industry $20 billion to clean up after itself in the North Sea, with the cost of each topside decommissioning estimated at $2 million.

Because of the state’s dominant role in Norwegian oil, as much as 80% of the cost will have to come from government coffers, providing incentive for Oslo to find cheaper alternatives--such as the shuttle--to existing dive-and-dismantle operations that cannot salvage the jackets and that involve more risk to personnel.

Investment in technology to create more environmentally friendly drilling and transport equipment has developed another prospering and promising sideline that will keep Norwegians employed long after their oil reserves are exhausted.

This country of 4.4 million, already the world leader in undersea pipeline construction, is developing equipment to increase recovery yields, process below the sea’s surface and load oil onto tankers directly from mobile extraction units, Hagland says.

Investing to Protect Future Generations

Norwegians’ best defense against the decline of the industry that has made it the world’s fourth-wealthiest country is the national Petroleum Fund, created a decade ago to invest profits from the exploitation of a resource that is viewed as belonging to all Norwegians, not just the current generation.

The Petroleum Fund, managed by the national Norges Bank, takes the budget surplus provided by the oil boom and invests it in foreign stocks and bonds to generate income. The state-owned fund, worth more than $25 billion and expected to triple in value by 2003, guards against spending too freely on public sector services in boom years only to have to lay off droves of state workers when the economy goes bust.

Parliament created the oil fund in 1990, but the state had its first budget surplus only in 1995, says Knut Kjaer, Norges Bank executive director. Until then, oil income was used to pay down Norway’s staggering foreign debt from the tough years before North Sea riches could be exploited.

“The Petroleum Fund is an instrument designed to prevent all this surplus being taken into the economy, because the consequence would be overheating” and suppression of growth in the private sector, Kjaer says. “Extracting oil that belongs to the public is like taking money from a bank account. It’s not income; it’s a transfer of wealth. Norway’s bank account just happens to be in the North Sea.”

Norway already spends 8% of its gross domestic product to finance its pension system. That budgetary burden will double this decade as the number of retirees rises faster than fresh infusions into the work force, says Norges Bank’s information director, Poul Henrik Poulsson.

Despite the preventive medicine being practiced on the oil-dependent economy, some economists warn that the measures still are not extensive or effective enough.

Only 10% of Norwegian workers were employed in government jobs before the oil boom, compared with 25% today, and that proportion could rise to 50% by 2020, says Tor Steig, director of economic policy at the Confederation of Norwegian Business and Industry.

The government will need to pay out $200 billion from the Petroleum Fund just to cover pensions before the new baby boom fostered by today’s oil wealth begins to deliver the taxpaying work force needed to finance their elders’ pensions, Steig says.

“When you have all this wealth, there is less incentive in the short term to reform the system,” he says. “Only when oil prices are falling is there much interest in developing the exposed sectors. You need to reevaluate economic policy every 10 years, so perhaps it is fortunate that we seem to have a crisis at least once a decade.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

North Sea Crude

Oil production from Norway, Western Europe’s largest producer and eighth in the world, is expected to peak at about 3.5 million barrels a day in 2005 and then gradually fall off. A look at Norway’s crude oil production, past and future, in millions of barrels a day:

2020

(estimated): 2.7 million barrels a day

Sources: Dept. of Energy, Energy Information Administration, International Energy Outlook & International Petroleum Monthly

Researched by NONA YATES/Los Angeles Times