Norway's petroleum activities and related industry development

Publisert under: Regjeringen Solberg

Utgiver: Olje- og energidepartementet

Mexico 15 October 2014

 

  • Minister, Excellencies, Ladies and Gentlemen: Muchas gracias por la invitacion a Mexico. Estoy muy feliz por estar aqui! 
  • It is an honour for me to speak to such a distinguished audience. I am very happy to be in Mexico, which is what I tried to say in Spanish. 
  • However, I think it is better for all parts if I continue this speech in English.  
  • I have been invited to talk about how Norway developed a competent and internationally renowned service and supply industry - on the basis of our petroleum resources.  
  • Let me start with the context and the broader picture. 
  • The petroleum activities have been crucial for Norway’s economic growth, and in financing the Norwegian welfare state. Over 40 years, petroleum production on the shelf has added around 1560 billion US dollar to the Norway’s GDP. 
  • We have put some of the value created into a Sovereign Wealth Fund. Every Norwegian holds today proximately 170.000 dollar in this growing fund. 
  • Our petroleum sector key statistics in Norway’s economy are impressive:

-          23 percent of total value creation

-          30 percent of state revenues

-          50 percent of export value, and

-          29 per cent of total capital investments.

 

  • The oil and gas industry has generated jobs and activity all over the country. More than 200.000 jobs are related to the petroleum industry. This is a large number in a small country such as Norway, with only 5 million people.  
  • Let me give you a snapshot of our upstream oil and gas activities today. Norway is the 10th largest exporter of oil and liquids and the 3rd largest exporter of gas in the world. We produce 1,9 million barrels liquids per day and export 107 bcm of natural gas a year. With a small population, almost needless to say, almost all our production is exported. 
  • We have:

-          77 producing fields – all offshore

-          more than 8000 km of offshore pipelines with landing points in 4 countries in Europe – the world’s largest such system

-          54 active companies at the Shelf, including all the Supermajors.

-          high exploration activities – ca 40 wells drilled every year

-          the world largest offshore market – 30 billion US dollar

-          significant resources left under the seabed. We’ve produced in 40 years, but - and this is important for me as minister of petroleum and energy - still only 40 percent of our resources are produced.

 

  • We have Norwegian based companies playing important roles in oil and gas projects worldwide.  
  • Let me share with you important aspects of our petroleum policy. An approach that have made the Norwegian oil and gas to be a success story.  
  • The oil and gas resources belong to the Norwegian people. Therefore, the resources are managed for the benefit of the Norwegian society as a whole. This has been the guiding principle for the Norwegian oil and gas policies ever since we started planning the first exploration well in the 1960s. 
  • In line with this, the right to subsea petroleum deposits is vested in the State. The companies get ownership of the resources first when they pass the topside of the installation. Then they are allowed to sell the production. The State’s compensation is secured through the fiscal framework conditions. 
  • In order to reach its policy goal and to retain national control over the sector, The State regulates the activities. 
  • Our overall policy target is to create maximum value from the resources and, at the same time, secure the state a large part of the net income from the sector.  
  • In addition, we have a strong focus, and a good track record, on health, safety and environment on the Shelf over the last decade. This is also an important precondition of the companies’ licence to operate. 
  • Let me share some highlights on our thinking when shaping our policies and regulations. 
  • First, we have taken benefit of world class technology and competence. The Norwegian petroleum adventure would not have been possible without the presence of foreign oil companies.  
  • Second, the industry needs a stable, predictable and sufficiently attractive framework in order to invest human resources and capital in a host country. If not, extra risk premiums will be introduced in their project valuation – and the companies will choose to invest elsewhere.  
  • In general, there is, and has been, a broad political consensus on the long term Norwegian petroleum policy since the early days in the 1960s. This has created stability and predictability in our system, which is of crucial importance not least for the competitiveness of the Norwegian Continental Shelf, and hence, also for sound resource management. 
  • Stability is not the same as static. Policies and measures have changed due to new realities on the Shelf or in the global petroleum industry. Adapting to changing realities is very important to create maximum value.  
  • In the upstream activity, the State interacts with the private sector in different roles. 
  • Clarity of the different roles in the sector is crucial. Without clear division of labour and responsibility the needed transparency in policy making will not be possible. Such transparency is needed for the industry to make good decisions. 
  • Our control of the sector is secured as a regulator through involvement in all phases of oil and gas activities. Including opening of areas for exploration, licensing, approval of developments and production plans.  
  • At all these milestones impacts need to be assessed. Public consultation is an important part of all relevant processes. Transparency is a crucial part of good policy making. 
  • We strive to secure government take from the sector in a way that does not reduce value creation. 
  • As a resource owner, the State uses two main instruments in order to capture the economic rent in the sector:
    • Company taxation for oil companies
    • State direct ownership through the State’s Direct Financial Interest.

 

  • Both systems are carefully designed so that companies, in all licences, implement all projects that are profitable before tax - and these projects only.  
  • Why? Because the State as resource owner care for pre-tax profitability.  
  • With this design, companies have the commercial interest to choose the solution that is best for the State as well. This is a cornerstone in the Norwegian philosophy – to work with the forces of the free-market economy, not against them. 
  • The key elements of the tax system have been stable over years providing predictability for the oil companies. This has been an important reason for our success. 
  • Many resource rich countries have struggled to introduce large income from the resources into the economy.  
  • Since the 1990s we have had a system in place ensuring that the state’s yearly earnings from the resources are separated from the revenue in the State budget.  
  • This system has two legs:
    • a Sovereign Wealth Fund – the Government Pension Fund Global, and
    • The fiscal rule
  • All government petroleum revenues go into the Fund. The fiscal rule entails that no more than four percent of the fund’s total – the estimated annual return - can over time be spent over the annual national budget. 
  • This gives the government flexibility in fiscal policy should oil prices drop or the mainland economy contract. It also serves as a tool for managing the financial challenges of an ageing population and a future drop in petroleum revenue.  
  • The capital is invested abroad, in order to avoid overheating the Norwegian economy, and to shield it from the effects of oil price fluctuations.   

Building an industry

 

  • Now, I turn to how we went from having considerable petroleum resources off the coast of Norway – to developing our own world class supply and service industry. That was no coincidence. It was a wanted development from the Norwegian government. 
  • The NCS has been a “laboratory” for technological developments. With each field development, new challenges had to be conquered. 
  • With more than forty years of experience on the NCS, our industry is currently renowned worldwide for its state of the art technology, and ability to deal with complex challenges.  
  • That is why their services are in high demand in petroleum provinces around the world.  
  • The central question is; how did we get there?  
  • In order to answer that in the best possible way, I would like to begin by going back in time. 
  • The discovery of the big Ekofisk-field – our first – was announced just before Christmas 1969. This is probably the best Christmas present the Norwegian people has ever got, marking the beginning of a fantastic adventure.  
  • At the time, Norway was an industrialized society with an educated population, and was enjoying political stability. That was surely positive. 
  • But we had absolutely no experience with upstream oil and gas activities. 
  • What we did have, was more than 70 years of experience developing hydropower.  Hydropower was the key to electrify and industrialize a recently independent Norway.  
  • Developing energy resources was, in that sense, nothing new for Norway. 
  • Even more important, Norway had been a shipping nation for centuries. In the sixties, twenty percent of the world’s tanker tonnage was registered in Norway. 
  • We had shipyards all along our long coastline, building everything from small fishing boats to huge oil tankers.   
  • The oil embargo in the mid 1970s was in many ways a turning point for the Norwegian shipping industry, resulting in a long-lasting crisis. 
  • Many of the ship owners started to look for opportunities elsewhere – particularly at the dawning oil activity outside the Norwegian coast. Hence, the shipping industry became major investors in the new petroleum industry in Norway.    
  • There is no doubt that our experience and competence from that industry played an important role in the development of what is now our biggest success-story – the oil and gas industry. 
  • The most important tool to build Norwegian competence, and develop a national service and supply industry in the early years of the Norwegian oil and gas adventure, was the legal framework.  
  • In the fiscal system, we introduced tax incentives rewarding petroleum research in Norway. This system has been successful, as the oil companies – including the international majors – do a lot of their petroleum research in Norway.  
  • Particularly in the two first decades, we also introduced different regimes to incentivize training and technology transfer from the international oil companies – to Norwegian industry.  
  • We called them Technology or Goodwill-agreements. They contributed to domestic capacity building both in Norwegian research institutions and industry. These agreements were part of our concession system.  
  • In our petroleum legislation we introduced an article which specified that licensees should use Norwegian goods and services in their operations to the extent that they were competitive in terms of quality, service, delivery time and price.  
  • However, and this is important, the service and supply industry had to compete for each contract. 
  • The three major Norwegian oil companies at the time, Statoil, Saga and Hydro, supported and certainly also benefitted from the development of a petroleum supply and service industry – in their own backyard.

 

Conclusion

 

  • Minister, Excellencies, Ladies and Gentlemen, it is time to summarize my speech. 
  • The success story of the Norwegian petroleum sector is a result of dedication and effort from all actors involved – operators, suppliers, research institutions, and a sound and predictable framework.  
  • Norwegian petroleum activities have become our dominant industry, and have contributed to enormous value creation, jobs and ripple effects all over the country. 
  • The major development projects on the Norwegian Continental Shelf have had its technological challenges.  
  • The oil companies, research institutions and the service and supply industry have worked hard to bridge the technology gap, in order to make these projects economically viable - or even possible to develop at all. 
  • Together, they have built an extremely strong petroleum cluster in Norway through 40 years of challenges on the Norwegian Continental Shelf. 
  • I would also like to commend the international oil companies for using Norwegian industry in their operations around the world.  
  • They became familiar with the Norwegian petroleum cluster when operating on our shelf. These companies have had a major say in the international development of the Norwegian supply and service industry.
  • We have come a long way since the discovery of Ekofisk in 1969. Stavanger – the oil capital of Norway – was right in the middle of this development.  
  • The mayor at the time, Arne Retterdal, promised to make sure that the opportunities presented by the oil and gas industry would not be just “a short episode” – but an era – something that would last. 
  • I think it is fair to say that we have been quite successful achieving just that.  
  • Thank you for your attention!