Address to Energy Policy Conference 1998

Good morning Ladies and Gentlemen, and thank you for inviting me to your conference.

The Energy Policy Conference here at Sanderstølen has become perhaps the most important informal meeting place in Norway for decision makers in the oil and gas industry. At this years 25th anniversary the organisers in the Energy policy Foundation of Norway deserve compliments for having built and maintained the strong interest in - and high quality of this conference.

Since I am speaking before an international audience I should emphasize that the oil and gas business is of extraordinary importance to Norway. Oil and gas made in 1996 up close to 40 percent of overall exports, 15 percent of GDP and generated near 20 percent of government revenues. This shows us how dependent the Norwegian economy is on the petroleum activities.

The Norwegian economy’s dependence on the oil sector has been reduced over the last years, but still – as you understand – it is a vulnerable relationship. Abrupt changes in oil prices or production activity in general, have direct and immediate consequences on Norwegian income. The recent changes in projected oil and gas investments, result from technological developments allowing us to extract more resources from the existing wells, and cost overrun. This creates pressure into the mainland economy in a situation of labour market constraints and rapid growth. As such it is a challenge to the government to control the investments in the petroleum sector in order to maintain a balanced growth in the economy.

Looking back over the last quarter-century this conference has existed, I can only conclude that your industry has lived through a highly interesting period.

25 years ago, when the first conference was held, the international oil industry had experienced nationalizations of petroleum resources in OPEC countries. The Arab-Israeli war in October 1973 was recent history and crude oil price hikes were underway. Later on the revolution in Iran and the war between Iran and Iraq were to have profound impacts on the oil and gas industry.

These events are only a few - all be it dramatic examples of the fact that the oil and gas industry has had to live with and adjust to the impact of political events and developments, perhaps more so than any other industry.

This is still true although the challenges - and opportunities - of today are different from 25 years ago.: The passing of the cold war, the demise of the Soviet Union, and with it superpower tension and rivalry, as well as the triumph of free markets as models for organising society have all changed the global political agenda.

Today, concern for the environment, human rights and global trade and economic integration are issues which have moved to the top of the international political agenda. Companies and people who want to be successful in the oil and gas industry must always pay attention to the political issues of the day.

THE ENVIRONMENT

Environmental issues and in particular emission of greenhouse gases and the threat of climate change is one area of particular concern for my government and which certainly will have a great impact on the oil and gas industry.

Global warming is one of the most challenging problems for the world today. It is a vital environmental problem as possible consequences could be an altering of the global climate leading to for instance less stable weather conditions and a rise in sea level. It is a serious economic question as most of the greenhouse gas emissions are closely linked with key economic activities. It is a global issue where global co-ordination and global solutions are called for. It is a long term question - where we have to take into account the well being of future generations. And finally it has serious income distribution implications where countries' right to economic development must be taken into account.

Considering these challenges I am very pleased that two months ago, 160 countries agreed to the Kyoto Protocol to the UN Framework Convention on Climate Change. The developed countries committed themselves to reduce their greenhouse gas emissions by 5,2 per cent in the years 2008-2012 as compared to their 1990 levels. This is a milestone in the effort to successfully combat climate change. Projections show that if no action was taken, the emissions from the industrialised countries would have increased by 36 per cent over this period. The agreement consequently implies a reduction of 30 per cent compared to business as usual.

Norway is prepared to cut our emissions significantly. Furthermore, we will continue to play an active and constructive role in the ongoing negotiations. In the process leading up to the Kyoto Protocol, Norway's position was that an agreement needed to include the following elements:

1. an ambitious overall reduction target (a total reduction of 10-15 per cent for the developed countries)
2. a comprehensive approach, including all greenhouse gases and sinks
3. flexible implementation mechanisms, such as emission trading and joint implementation
4. differentiated commitments, taking into account each country's specific circumstances.

In other words we needed an agreement that was ambitious, cost efficient and fair.

Let me now give you my view on some of the elements in the Kyoto Protocol.

Although I am very pleased that an agreement was reached, the reduction level is not as ambitious as one could have hoped for. It is important to recognise that this agreement is not the solution to global warming, but a first step.

The Protocol opened up for a more fair distribution of burdens than what seemed possible just a few months ago. By differentiating countries' individual targets, the Protocol to some extent takes into account national circumstances. Furthermore, differentiated commitments as set out in the Protocol, also makes it easier to include developing countries at a later stage. A fair agreement must recognise that poorer nations have a right to economic development.

The Protocol contains flexible elements that could significantly reduce the mitigation costs. In this respect it is important that the Protocol covers all six greenhouse gases. Furthermore, an international "emissions trading" regime can be established allowing industrialised countries to buy and sell excess emission credits among themselves. The operational details for these schemes are, however, still to be elaborated. And last but not least a "clean development mechanism" will enable industrialised countries to finance emission-reduction projects in developing countries and receive credits in doing so. Moreover this last element may also prove helpful in transferring technology from industrialised to developing countries. And, since new and cleaner technology generally have lower emissions of local pollutants, this "mechanism" may prove to have very useful environmental side effects.

The Government has stated that tradable permits and joint implementation should be supplementary to national measures. Moreover, the Norwegian position - that the Protocol should require implementation of domestic measures as well - won broad accept and is now reflected in the Protocol.

In the long run we must work hard to cut our emissions even further. A major challenge will be to address the emissions from the developing countries. In a few years from now, emissions from these countries are expected to amount to more than half of the global greenhouse gas emissions - a problem that will be further amplified if carbon intensive industries move to developing countries as industrialised countries cut back on their emissions. Common action is needed if we are to address this question successfully. Wealthy countries must be prepared to transfer funds to developing countries if the latter are to fulfil their future obligations. Norway is prepared to do so - and we will continue to play a constructive role in this area in order to bridge the gap between the industrialised and the developing countries.

The Kyoto agreement implies significant challenges for the Norwegian economy. The Norwegian commitment implies a reduction in greenhouse gas emission of 5 per cent compared to our current emission level. This is especially challenging considering that business as usual projections indicate an increase in greenhouse gas emission of about 18 percent from 1990 to 2010. We must consequently not only implement measures that will prevent increased emissions in the years to come, but actually reduce our emissions compared to our current emission level.

The mitigation cost necessary to reach our emission target could be quite significant. Nearly all our electricity is hydro-based so no options for low cost fuel switching in the electricity sector are given. The main cost for Norway, however, is not related to the cost of reducing emissions, but to the expected reduction in our petroleum wealth. As countries implement their obligations, they are likely to cut back on their demand for fossil fuels. Consequently demand for oil will diminish and the oil price will drop. The total cost for Norway is thus greater than to most of the other developed countries. This is, however, a cost we are prepared to pay so that future generations will have a better place to live.

To fulfil our obligations we must all be prepared to contribute. Significant measures must be introduced in all sectors of our economy - including processing industry, road and ship transport, energy use and the petroleum sector. Ability to adapt to necessary changes is definitely called for.

The Kyoto Protocol will have significant implications for the energy sector.

Our energy policy is a key area if we are to fulfil future environmental obligations. Moreover it is of vital importance for our industrial and technical development. It is necessary to slow down the growth in our energy use. In the long run a more efficient use of energy with the aim to reduce overall consumption is called for. The government has stated that in an average year, Norwegian Energy supply is to be based on renewable sources, mainly electrisity produced from our waterfalls.

In order to minimise the costs of fulfilling our obligations according to the Kyoto Protocol it is important that the industry at an early stage knows what will be expected of them. The government is already on its way with a follow up of the Kyoto Protocol. A paper to the Parliament on the Kyoto agreement will be presented in March, together with a parliamentary bill on green taxes. To secure cost efficiency within Norway, we will work out a reduction plan that identifies possible options to reduce our emissions and their associated costs.

For the petroleum industry the Kyoto Protocol will have significant consequences. The most important implication will probably be a drop in fossil fuel prices. The agreement is likely to affect different fossil fuels differently. For instance coal as the most carbon intensive fuel, is likely to see a large drop in price; while natural gas, the most benign of the fossil fuels, may actually experience a price increase. These price changes will lead to more uncertainty in your business environment. However, it is my opinion that the petroleum industry is well equipped to handle this uncertainty, as risk management has always been an integral part of your industry.

The petroleum sector must be prepared to take its fair share of the emission reduction. I know that the petroleum industry is aware of their responsibility, and will do its utmost to develop and implement technology that contributes significantly to the reduction of greenhouse gas emissions. Ambition and nice words must lead to action.

Norway has for several years employed many measures to reduce our greenhouse gas emission from the petroleum activity. Much has been achieved, but we still have a long way to go. In this respect I believe that, MILJØSOK, the new arena for co-operation between the industry and authorities on environmental issues within the petroleum sector, may lead the way. It is my hope that this co-operation may serve as a model not only within the petroleum sector, but for other industries as well.

HUMAN RIGHTS

I will now turn to the issue of human rights and social development.

The cold war belongs to the past. However, while superpower tensions have eased, new conflicts have emerged and sadly many old ethnic conflicts are still with us.

The dramatic political changes of the last decade have nevertheless created new opportunities for social and economic development in parts of the world which have seen discouragingly little progress in these areas. The challenges confronting us should not be underestimated. Poverty is still wide-spread. And there is a challenge of how to combine necessary economic growth particularly in the underdeveloped parts of the world with a global sustainable development.

Many would argue that the objective of a company is commercial, not political. That business must be conducted within existing national laws and in a socially responsible manner. And that one of the most important contributions a company can make to social and material progress is to perform their business activities as efficiently as possible - applying the same principles and concerns abroad as at home - providing jobs, income and personal developments for individuals and taxes for the host nation. Many multinational companies seem to take the view that they should stay politically neutral and should not interfere in controversial national issues.

A more viable approach is to get involved, to take a moral stand and not turn a blind eye when basic human rights are violated.

The question is not if, but how a company can or should use its influence to address human rights issues in the communities around its operations or in the country more widely. Companies - and multinationals in particular - that play a major economic role in a country have in recent years come under increasing pressure from human rights groups and others to speak out against human rights abuses or even disinvest - particularly when international complaints to governments have fallen on deaf ears.

Oil companies cannot choose where oil may be found; geology dictates this for them. It may be in the context of dictatorship, of open or latent civil war, or of widespread governmental violation of human rights.

If for a resource based industry there is no choice where the oil is, there is a choice what projects to pursue. The responsible choices for a company with significant employment and investment already committed on the ground are different from one considering a new venture.

For example, Amnesty International takes no view on boycotts or disinvestments, nor does it criticise companies engaged in legitimate business in countries of whatever political complexion or behaviour. But, backed by increasingly critical public opinion, they do believe that companies have a responsibility to use their influence to protect human rights and promote democratic processes.

Companies make judgements about the economic and political context of the country in which they operate or plan to operate. In future, human rights considerations will also need to be an explicit determinant in corporate decision-making. And the existence of human rights principles in codes of conduct will increasingly be a criterion on which external judgement of corporate performance will be based. Adherence to such principles could be a force for good. Silence or inaction will be seen to provide comfort to oppression and may be adjudged complicity.

The measure of success no longer relates simply to the provision of a cheap and secure source of energy, however much this remains essential for the economic development of most countries, whether as producers or consumers. It depends also on the manner in which that supply is provided.

Companies have an obvious responsibility to ensure that their own operations do not violate human rights or contribute to their violation.

A gap between corporate performance and society's values poses a considerable danger for companies in a better informed and more critical public opinion. Public opinion has changed faster than have the companies. Its expectations outstrip corporate response. In theory companies have a choice: to do nothing and keep their heads down in the hope of gaining possible commercial advantage and avoid offending a host government, or intelligently and responsibly to use their influence to contribute to an improved social development.

In practice the choice for the companies is different. It is either to take the initiative themselves, or to be dragged along by public opinion to recognise that human rights is indeed the business of the business.

Value judgements of the behaviour of a company are made by present and potential employees and their families, by shareholders, by customers, suppliers and communities. If a company offend against their values, the company risk losing their support. Therefore, the successful oil and gas company of tomorrow will recognise that good ethical business practise is also good business.

Norwegian business and industry have turned their gaze far beyond our national frontiers and are now involved in business operations all over the world. Most business sectors and large enterprises have their own international strategies and trading partners. Many companies have also invested in other countries and cooperate closely with foreign companies and authorities. The fact that Norwegian business and industry are doing so well in international competition and trade has many positive aspects. Greater financial involvement can in itself help to pave the way for new ideas in the human rights area as well. At the same time, this poses a number of challenges for both companies and public authorities, and I think it would be useful for both parties to confer on some of these issues. This is why the Government has decided to establish a special forum for dialogue with the business sector.

The forum is a consultative body comprising representatives of the ministries concerned, trade and employee organizations, human rights organizations and relevant research institutions. The Consultative Body, which will be headed by the Ministry of Foreign Affairs, is intended to serve as a forum for discussion of problems encountered by business and industry in their activities abroad. The first meeting of the Consultative Body is to be held tomorrow.

A political-level committee has been established which will also deal with these problems. It is made up of the state secretaries from the Ministry of Foreign Affairs, the Ministry of Trade and Industry and the Ministry of Petroleum and Energy.

We will also strengthen the capacity of the Ministry of Foreign Affairs to provide information on human rights issues to companies considering potential financial involvement. We are currently establishing a unit in the Ministry to handle such inquiries.

These measures should illustrate our readiness to take part in consultations with companies and trade organisations to consider the many difficult aspects of questions concerning human rights.

The internationalization of our petroleum industry represents a particular challenge for Norway as an oil nation. Norwegian companies in this sector need to be able to operate internationally in order to develop their technologies, market position and competitiveness.

In other words, it is not a question of whether the Norwegian oil industry is to take part in the internationalization process, but of how the challenges that this poses for the industry should be tackled. It is an unfortunate fact that the bulk of the world’s petroleum resources is concentrated in countries where political institutions, democracy and human rights are not firmly established. However, under favourable conditions, the petroleum industry and the revenues it generates could promote the political and economic development of these countries. Unfortunately, it is not hard to find tragic examples of the opposite.

Today, Statoil and other Norwegian companies have a substantial international involvement. In this connection, it may be worthwhile recalling that the guidelines for Statoil’s activity were drawn up by the Government and the Storting. The Storting has decided that the state oil company is to operate commercially on a par with private companies. However, Statoil has been encouraged to maintain close contact with the authorities and base its activities on the views of the Storting as regards the approach of Norwegian business and industry to issues regarding human rights and the environment. This means that the Government expects the state companies to show vigilance, particularly in these sensitive areas.

EUROPEAN INTEGRATION

I will finally turn to the area of European co-operation and integration.

The integration process in Europe has changed this continent in a way that is almost unprecedented in a historical perspective. Norway is participating in this integration process as a party to the EEA Agreement.

Norway is, however, closely linked to the European Union as regards geography, culture, history and trade. All our gas exports are supplied to the European Union and almost all our oil exports.

Norway is obviously dependent on countries within the European Union to buy our oil and particularly our gas. However, I would also put it to you that seen from the other side, Norway should be considered a very valuable supplier of petroleum to the European Union. Take for example Germany and its gas supply. It would have been quite a challenge for Germany to replace Norwegian gas supplies from other sources. To date, I feel that we have had a mutually very fruitful co-operation with our European partners.

I sincerely hope that our good energy co-operation with our European partners will continue. The Norwegian government has over the last three decades in working with the industry, built up a considerable understanding and knowledge of the oil and gas industry. I hope that the European Union in its working with oil and gas issues will further develop its appreciation of an efficiently functioning oil and gas industry.

CLOSING REMARKS

Today I have been speaking of some of the challenges facing the oil and gas industry with regard to the environment, human rights issues and changing economic rules. I hope I have left the impression that I see an industry faced with opportunities and challenges. World economic growth, new production provinces and markets opening up for the international oil and gas industry and industry advances in the shape of new technologies and lower cost, tell a story of a resilient and healthy industry. I have no doubt that the oil and gas industry with all its resources of people, competences and capital will meet the new challenges coming from the areas of the environment, human rights and the call for broader participation in social developments and challenges stemming from new international economic rules.

Thank you for your attention.