Chapter 6: The Vikings are welcome!

As the likelihood of finding new elephant fields at home diminished during the 1990s, Norwegian oil companies and suppliers began to see international activity as a long-term financial security blanket. While the Norwegian shelf would remain their base long into the next century, it would increasingly assume the aspect of a stage from which to advertise prospecting and production skills that had global applications. The Norwegians’ bold embrace of highly automated floating and subsea production technologies and advanced reservoir management techniques had the dual effect of heightening recoverable reserves at home and turning heads abroad.

Strategic Alliances
Statoil was naturally among the most extroverted, entering into a strategic exploration alliance with BPAmoco and engaging itself in more than two dozen countries, most notably Azerbaijan, retracing the steps of the Swedish Nobel brothers with a share of production in the vast Azeri-Chirag-Guneshli (ACG) field and promising exploration activities elsewhere in the Caspian Sea. In Nigeria, Oil Minister Jibril Aminu greeted Statoil executives by declaring, “The Vikings are welcome!” In addition to its many stakeholder interests around the world, Statoil began production in 1997 in China’s Lufeng field  the first foreign operatorship for a Norwegian oil company.

Norsk Hydro, for its part, established an alliance with PetroCanada, thus becoming an active participant in the exploration and development of the Grand Banks region off Newfoundland. With their experience in the deep, harsh waters of the North Sea, Hydro and several Norwegian supply companies were valued partners in developing both the colossal, iceberg proof Hibernia platform and the ambitious Terra Nova FPSO. When Hibernia oil began to flow in 1997 it represented Hydro’s first production outside northwestern Europe. The Terra Nova ship was designed to stay moored even during a 100-year storm, and to be moved only if threatened by major icebergs  a prospect taken seriously in a part of the Atlantic Ocean not far from where the Titanic went down.

Off Angola, in tandem with Elf, Norsk Hydro brought its deepwater expertise to bear on a fast-track FPSO development in the Girassol field below 1400 metres of water. Another aim was to crank up exploration off Angola and Namibia so that it would approach the level of the company’s North Sea exploration activities. In Venezuela, the company’s horizontal drilling skills were helping to extract heavy oil, while in the Russian Arctic, among a variety of activities, Hydro joined a consortium with Gazprom and its offshore subsidiary Rosshelf to develop a Barents Sea field estimated to contain three trillion cubic metres of recoverable gas. The Norwegian offshore construction and supply industries also broadened their horizons, marketing abroad the technologies and expertise built up over more than three decades of activity in one of the world’s harshest environments.

Rich and famous
Ordinary Norwegians, who had remained on guard against that creeping sense of invulnerability which proved so catastrophic in the 1980s, remained buoyant even as the money stream narrowed somewhat. “Despite falling oil prices”, The Economist magazine reported in 1999, “their economy has gone on growing at an average of more than 4 per cent over the past five years . . . Norway has the lowest unemployment rate in mainland Europe (bar Luxembourg), at three per cent. Its GDP per head at purchasing power parity is third highest in the world, ahead of all the other Nordics . . . . “By any standards, Norway is exceptionally rich.”

Private consumption, which had surged in the mid1990s, showed no sign of tapering off amid lower oil prices. Housing prices grew by as much as 20 per cent a year; growth was equally lively in the market for that luxury item most coveted by Norwegians: the cottage. Small cabins with no electricity or plumbing sold for hundreds of thousands of dollars. “Record numbers of people are travelling abroad, and the Norwegian dream consists not of a house, not of a summer cottage, but of a house and two summer cottages, one in the mountains and one by the sea”, reported the Los Angeles Times.

Fortunately, economists said, there was a major difference between the country’s purchasing habits during the late 1990s and the conspicuous consumption of the 1980s. For one thing the former was less debt driven: the prosperity was well founded and the prospect for further economic growth was solid. Despite high salaries, Norway had moved up steadily in international competitiveness rankings and now stood in the top tier of European nations.

Cautionary note
One cautionary note was that despite efforts by the government and the business community to diversify Norway’s economic activities, the petroleum sector’s share of gross national product continued to grow. It rose more than three percentage points in 1996 alone, reaching 15.6 per cent. This was an issue of some concern to those who thought Norway should grow more economic legs to stand on, but the fact that oil income had soared in the mid 1990s was not a sign of doldrums in other sectors. The non-offshore economy was also growing, with excellent results in fish farming and fishing, automotive parts, metals production, furniture, lumber, tourism, defence and aerospace technology and computer software, to name a few areas of Norwegian industriousness. Prime Minister Bondevik complained that international analysts routinely oversimplified the Norwegian economy by labelling it “oil dependent”.

In the government’s own books, revenues were relatively broadly based. Through the 1990s, the state derived less than 20 per cent of its revenues from petroleum activities. That meant the state was less than half as dependent on oil as it was in the heady days of the early 1980s. In raw purchasing power, the Chapter 6: The Vikings are welcome!1 billion in oil proceeds for 1997 packed nearly double the punch of the state proceeds in 1980.

Norway, in fact, was one of the few countries in the world with a fat state budget surplus  despite offering its citizens free health care, free university education and a wealth of other benefits. The government was determined to provide every elderly Norwegian who wished it with a private room in a retirement home. Some local authorities made it possible for ailing residents to convalesce on the Spanish Costa del Sol, or even to spend their final years there. Women who became pregnant could take up to one year’s paid leave. Norway and Denmark, meanwhile, were friendly rivals in a yearly competition to lead all industrialized countries in development aid to the Third World on a per capita basis. 

The Petroleum Fund
Despite the oil price blues, public confidence remained high, in part because money had begun piling up in the government petroleum fund. Established by an Act of 1990, the fund received its first transfers in 1996 for fiscal 1995. Its income represents the central government’s net cash flow from petroleum activities, as well as the return on fund investments.

The fund was set up as a nest egg to help cover the pensions and other needs of future generations of Norwegians. By law every krone of state income that was not needed to balance the state budget had to be stashed away in the fund, initially in the form of gilt-edged government securities. The whole exercise represented a strategic “transfer of wealth from the North Sea”, in the words of Knut N. Kjær, the fund’s chief manager. This new repository tended to cool the debate as to whether Norway should deplete its continental shelf resources quickly or slow the tempo so that future Norwegians would also benefit. A new issue, however, was how much of the state’s oil money to stash away for unborn Norwegians and how much of it to spread around in today’s population. Soon, yet another debate emerged. It had been agreed that the securities market was a safer repository of oil wealth than the sea floor, given the long-term uncertainty of oil prices. But what about the rate of return? In the era of skyrocketing stock markets during the late nineties, it was becoming increasingly apparent that investing the entire bounty in bonds, however high-grade, might not be the wisest course.

Against this backdrop, the Norwegian state relaxed its restrictions on fund investment from the beginning of 1998, allowing up to 60 per cent of the fund to be placed in international equities. About 40 per cent of the fund was invested in equities at market value as of June 30, 2000, and the remainder in bonds. By then, the value of the fund was approaching 3 billion. But the fund paid the price in the post 9/11 global stock exchange slump, posting its first year-on-year deficit since its inception. By early 2004, however, boosted by high oil prices, a favourable exchange rate and a global market recovery, the fund’s value would total well over Chapter 6: The Vikings are welcome!10 billion. By mid-2007 it had exceeded NOK 1900 billion (over 50 billion), making it the second largest fund of its kind in the world after Japan.

Barely a year later, of course, the outlook was far less rosy, as the so-called credit crunch morphed into global recession or worse. The fund announced a 7.7 per cent loss on investment for the third quarter of 2008, the worst performance in its history  but it had still grown in size thanks to record transfers from central government, Norges Bank said. However, the fund “is in a unique position in today’s market, and we are making record-high purchases in the equity market in 2008,” Yngve Slyngstad, executive director of Norges Bank Investment Management, told the Associated Press. “It is possible for us to have a long time horizon for our investments. The market we are now in suits us very well. We are a large buyer in a market with a lot of sellers.”

Noting that it was still worth more than NOK 2000 billion (86 billion), Mr Slyngstad said the fund, managed by the central bank, was probably the largest equity investor in Europe, owning about 1.25 percent of all shares, with holdings in 7000 companies worldwide. The fund also had 0 billion on hand to begin buying real estate for the first time from 2009. As at 30 September 2009, the fund’s market value was NOK 2,549 billion. Monies once allocated into the fund cannot be used except under extraordinary circumstances authorized through a parliamentary resolution. The Central Bank unit managing the fund is charged with getting the highest possible return within preset guidelines. There are ethical and geopolitical guidelines on the kinds of shares to be selected, and the more volatile markets are expressly off-limits.

	Artist’s impression of Snøhvit

Snow White
The history of the colossal Snøhvit (“Snow White”) project, the first offshore development in the Barents Sea, is a perfect example of the offshore industry’s persistence in never losing sight of the “big picture”. Statoil discovered Snøhvit on the Tromsø Patch in the Barents Sea in 1984. An attempt was made in the early 1990s to establish a basis for developing the area, starting with the initiation of a planning process, including environmental impact assessments, in 1991.

At this stage the plans embraced an offshore field development and a gas liquefaction plant at Slettnes on Sørøya near Hammerfest that would sell liquefied natural gas to the Italian market. However, Statoil halted the planning process at this point, citing cost and market factors. Plans for LNG exports based on gas resources in the Snøhvit area were not abandoned, but development costs needed to be reduced.

A new solution for developing the field was proposed, with a landfall on Melkøya island outside the town of Hammerfest and subsea production installations remotely operated from land. Planning resumed in 1997, with a new proposal submitted to the ministry in the following year. This included both new impact assessments and upgrading of preparatory work done in the previous development process. On behalf of the licensees, Statoil submitted a plan for development and operation of the field in September 2001, and this was approved by Norway’s parliament in March 2002.

Construction of the LNG plant started in the first half of 2002. Costing about $7 billion overall, excluding costs associated with LNG ship construction, the plant alone created something like 200 permanent jobs and innumerable spin-offs. Huge volumes of gas deep beneath the Barents Sea were to be piped ashore, cooled down and shipped by special carrier to Spain and the USA. Shipment was expected to continue for more than 20 years.

By February 2006 the Polar Pioneer drilling rig had completed drilling of ten wells, which were scheduled to come on stream after completion of the Melkøya LNG plant. Production at the plant started in September 2007  yet another milestone in this vintage year for Norwegian industry! “Snøhvit” was now Europe’s first export facility for liquefied natural gas  and the first major development on the Norwegian continental shelf with no surface installations. No fixed or floating units are positioned in the Barents Sea; instead, the subsea production facilities stand on the seabed at depths of 250-345 metres. A 143 km pipeline connects the field with the Melkøya processing plant. The first phase of the Snøhvit project covers the Snøhvit and Albatross fields, which lie about 140 kilometres northwest of Hammerfest. These came on stream in 2007. The Askeladd part of the development is not due to come on stream until 2014-15. Although the field is believed also to contain oil reserves worth about NOK 20 billion, the oil is difficult to extract profitably, and Statoil has no plans to do so. In any case, the start-up of gas production from Snøhvit was an additional obstacle to development of the oil zone.