Precise takes a look at Norway's offshore energy sector and the decisions they're making now for their future generations.
It’s said that if a person can’t learn from their first mistake, they likely won’t learn from making the same mistake thereafter. Enter stage right – the Norwegian offshore energy sector. Industry insiders are warning that it’s doing exactly the same thing it did during the last big oil slump – namely cut projects and sack workers – which left companies unprepared for the rebound in the 2000s. Or are they prudently waiting for the next big thing?
In May 2014 the Norwegian oil minister Tord Lien warned the country’s oil boom was “probably over. The costs are rising too high and too fast. But we’re not looking at a steep decline in investment or production.”
And then, two months later the oil price tanked. In the last half of the year the country’s energy companies laid off (or made plans to lay off) 12,000 or 10% of its offshore workers, according to Reuters.
The head of the country’s oil directorate sent off warning flares. “We must not end up in the same position as around 2000, when too many had been laid off and we spent almost 10 years getting back the people,” said Betne Nyland. “I don’t think the oil companies have learned anything from back then.”
Let’s take a trip back 17 years. It’s 1998 and prices of oil per barrel are sitting at $10. Norway’s oil industry believes there is only one course of action – drastic cost cutting. The country has long enjoyed a reputation for being one that can resist the urge to binge on its ‘oil-spoils’. It invests the vast majority of its oil revenue into a giant sovereign wealth fund, now worth around $800bn. This money has been declared the property of future generations. It does not want to spend bad money after good so it thinks it is being prudent by shutting down operations and losing workers. Let’s not forget that Norway has the world’s best paid oil workers, with average annual salaries of almost $180,000 (according to recruitment agency Hays Oil and Gas).
But then in 2000 prices rebounded. It took the country so long to rebuild and turned out to be such an expensive process that cost inflation ran at seven percent a year for most of the next decade. The impact of the cost cutting decision continued even as oil prices then surged, with per unit operating costs rising more than four-fold. That meant well before the current price slump returns had begun falling.
Analysts expect to hear more cost cutting announcements from Statoil, the country’s dominant state-controlled company, on Friday. This would be additional to the plans announced last year where it revealed it would be reducing capital spending by $5bn over three years. The problem is that it needs oil to return to prices of $110 a barrel to finance investments and dividends from its cash flow. And that doesn’t look likely to happen anytime soon.
This could have profound effects on the rest of the Norwegian industry, made up of smaller firms. “They behave a little like a herd of sheep,” Runar Rugtvedt, the head of the oil and gas section at the Federation of Norwegian Industries said. “There’s too much of a herd mentality out there instead of estimating projects independently.”
However the country is reluctant to depend on its oil and gas profits – as exhibited by the massive future generations savings account. It doesn’t want to fall into financial obscurity when the resources run out, something Bjorn Vidar Loeren of the Norwegian Oil and Gas Association thinks will happen in 50 years to oil and 100 to gas.
His prediction could account for the industry bringing out the 1998 playbook instead of investing money to cover the current price slump. “Norwegian politicians have been very clever, very disciplined, so the day the oil age end(s) there will be money that can be converted into something else (new industries). I think it is a fair concept to share the revenues from oil over a number of generations rather than spending everything up front.”.