Nick Cunningham writes: 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 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 and the transfer to a more diversified economy.
The early cracks in Norway’s petrol-based economy are beginning to show more quckly than many predicted. Statoil, the mostly government-owned oil company, has seen its share price cut in half since July 2014. Several offshore rigs have stopped drilling. To make matters worse, costs of developing new fields have been steadily rising. Since oil prices have tumbled. Norway may see a steep decline in investment.
Lower oil prices could force more than $150 billion worth of investments to be put on hold worldwide. 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 billion to $19 billion oil field in the Barents Sea, will be tabled.
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 barrels per day in 2014.
The decline in investment is already pinching the labor market. About 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. Oil workers are threatening to strike unless the government steps in to stem further losses.
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. 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. Without investment, new production will not materialize in the coming years, leading to further deterioration for the sector as existing fields age and decline.
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.
