Norway and the Global Challenges

Distinguished guests, Ladies and Gentlemen,
It is a great pleasure for me to be here in Stavanger and share with you some thoughts on the global challenges confronting the Norwegian petroleum policy.

The oil and gas industry has always been international. This was also the case for the Norwegian petroleum sector, when we started our offshore activities some 35 years ago. At the time we had more freedom to develop a truly national petroleum policy.

Since then the world has changed dramatically. Let me mention:

• Liberalised energy markets and capital markets
• Consolidation trends with mergers and acquisitions bringing on a different set of players on the global energy arena.
• The growing influence of international structures, such as the World Trade Organisation (WTO), OECD and the EU
• Increased concern for stability in the oil and energy market
• Intensified international competition

The trends above illustrate that any government has to take on board the consequences of a more integrated world economy. Thus, It will be a greater challenge to pursue national policy objectives since governments in their industrial policies will have to adjust to the global economic environment. For a small and open economy like Norway this is particularly valid.

Having said that, this does not mean that Norway has given up her major principles in the petroleum policy. Our petroleum policy has a long-term perspective and will continue to be based on the following:

• The petroleum resources shall give the highest possible value creation and ensure welfare and employment.
• We shall reconcile the role of being a major energy producer with being in the environmental forefront.
• Support the internationalisation of our oil industry.

Faced with a constantly changing environment, it is a challenge to make sure that these principles are adhered to. In the following I would like to point out some of the major challenges we as a petroleum producing country have to deal with.

Deregulation of the gas market in the EU
At present, the European gas market is in a major process of being opened for more competition. This is both due to structural changes in the business environment of the gas sector, and the adoption of the EU Gas Directive. Increased competition in the gas market may result in new types of gas sales commitments, in addition to the traditional long-term take or pay contracts. Further, a liberalised gas market in Europe will affect national energy policies and instruments established to fulfil energy policy aims.

Norway has always stated its main aim of remaining an efficient, stable and long-term supplier of natural gas to the European market. Our present position in this respect is the result of the active management of the gas resources by the authorities. On this basis, it is the objective of the Govern-ment to include the Gas Directive in the EEA Agreement.

However, we need a transitional period of five years to implement it in our national legislation. This is, in particular, due to the need to ensure an optimal allocation of committed, but as yet unallocated gas sales amounting to about 20 per cent of all gas that we have sold.

Furthermore, necessary adjustments to our resource management system will also be considered during the transitional period.

Let me also take this opportunity to stress that increased competition in the European gas market will imply new opportunities for Norwegian companies in the European gas sector. Norway now has about 45 percent of the remaining gas reserves in the European Economic Area. This will give Norway a good position to be an important and long-term stable supplier and player in the European natural gas arena also in the future.

In this connection, I would like to mention that negotiations are taking place between Norwegian and Polish companies for gas export to Poland through a new pipeline. The negotiations are to be finalised by the end of this year.

The oil market
In the oil market, we are also faced with the impact of external events and world economy trends. However, this is a situation that is not new to us. The oil market has always been subject to volatility due to abrupt changes in supply and demand. And OPEC has throughout our production history played an important role to balance the market.

The sudden fall in the oil price two years ago reminded us how vulnerable we are to the fluctuating oil price. Investments were dramatically curbed and the overall activity level suffered.

Such volatility has a serious impact on the world economy and the management of the petroleum resources. This in turn affects the security of supply.

This is why Norway implemented unilateral production restraints in 1998. Since then the market situation has improved considerably. As of July 1st Norwegian restrictions were abandoned, and we are now producing at full capacity. However, if there once again should be a need to restrict supply to balance the market, the Government is willing to consider this.

Norway emphasises good relations to both consuming and producing countries. The consumer-producer dialogue that was started in 1991 is considered an important measure. In our opinion, exchange of views and information contributes to more stability in the energy markets. We are now taking part in the preparations of the next dialogue meeting, which will take place in Saudi-Arabia in November.

Environmental concerns
In my introduction, I indicated that government policies are influenced by the work of international organisations and commitments to international agreements and conventions. This is particularly true for the environment.

The implications of the Kyoto Protocol, for instance, entail ambitious targets for a reduction of the Norwegian emissions of greenhouse gases. The petroleum sector is responsible for around 20 per cent of our national emissions. This means that the petroleum sector will have to make substantial contributions.

Later this year, the Sixth Conference of the Parties (COP6) under the Kyoto Protocol will take place. The aim is to get in place a framework for the so-called Kyoto mechanisms as well as a strong compliance regime.

This is important in order to ratify the Kyoto Protocol and to secure a cost efficient implementation of it. I can assure you that Norway will do her very best to secure a positive outcome of the COP6.

In the petroleum sector we have for many years seen a close and fruitful co-operation between the authorities and the industry based on the firm belief that the best environmental results can be obtained through co-operation between the various stakeholders. MILJØSOK is an excellent example of such co-operation and I am looking forward to receiving the final report from MILJØSOK phase II later today.

Now let me turn to more specific challenges for the industry on the Norwegian Continental shelf:

The Norwegian Petroleum Resources
It is often argued that the Norwegian oil and gas industry is in decline. The question is often raised how we as a nation can sustain our standard of living and industrial development after the petroleum is gone. Even though this is a relevant question, let me point out that the petroleum sector is and still will be one of the most important industries of Norway for many years to come.

Firstly, we have developed an industry that has proven to be internationally competitive.

Second, after some 30 years of production, the Norwegian resource base is still quite comfortable. So far, we have only produced 21 per cent of the expected petroleum resources. Of the remaining 79 per cent, we expect the gas reserves to last for about 80-100 years and the oil reserves for about 20-30. While parts of the Norwegian shelf are maturing, major discoveries are still made, particularly in the Norwegian Sea.

The main challenge is to make sure that we obtain maximum value of these resources. In order to succeed, we have to make sure that the Norwegian Continental Shelf is competitive. This means that we must be able to produce the reserves cost efficiently and provide a reasonable return on the investment for the industry as compared to other petroleum provinces.

The competitiveness of the Norwegian Shelf
We have, over the last few years, seen a dramatic restructuring of the global Exploration and Production industry. Largely driven by the dramatic fall in the oil price in 1998, the oil companies world-wide have been introducing cost cutting measures and consolidating their positions. A number of mergers and acquisitions has resulted in fewer oil companies, but some of them have grown substantially.

The supply industry has also been affected by these structural changes. The acquisition of Umoe by ABB, and the current discussions of a merger between the oil and gas activities of Aker Maritime and Kværner illustrate this point.

Consolidation trends combined with more specialised suppliers entering the scene, provide a potential for a more cost efficient utilisation of the resources. However, these trends also mean that competition intensifies. With a stronger financial base, more focused strategies and with more markets available to them, the players, and in particular the majors, have strengthened their position vis-à-vis the host nations.

It is therefore a challenge to maintain pluralism on the Norwegian Shelf and reap the benefits of diversity and specialisation within the industry. In the North Sea for instance, there is a need for players with expertise in marginal field developments and tail end production.

The frontier areas of Norwegian Sea will require the major oil companies to raise capital and develop adequate technology for more complex operations in deeper waters and rougher environments.

This need for pluralism has been addressed in the recent White Paper, which opens up for new players and licensees:

In this context, the government now also invites downstream companies as licensees on the Norwegian Continental Shelf, in addition to smaller oil companies and the supply industry.

Quite a few new companies have already indicated that the Norwegian Continental Shelf is of interest to them. I'm happy to say that the Ministry has entered into a dialogue with a broad set of prospective players on the Norwegian shelf. We aim to pre-qualify these companies in time for them to be able to participate in the upcoming North Sea Awards 2000 to be announced in mid-September. Companies would then have to submit their applications in mid-December. The awards are planned to take place during the first quarter of 2001.

We are also planning a 17 ^th> licensing round. We hope to be able to invite for nominations for that round in the spring 2001, in order for the awards to take place during spring 2002.

In addition to a licensing system reflecting a new reality, it is also a prerequisite that framework conditions are attractive with regard to political stability and a sound business environment.

This represents a growing challenge. Today, the flow of capital is free, and the international petroleum industry now has access to large reserves in Africa, in the Caspian area and the Middle East that were not available a decade ago. As a result, host nations are faced with increased competition for foreign investment - and with the challenge of maintaining a competitive and sustainable domestic industry.

To meet this challenge the Norwegian Government has taken several steps:

The White Paper mentioned above underlines the willingness and interest of the Government to simplify procedures and regulations to bring down the overall cost level.

We also recently established a committee to evaluate the tax system. The Government is now discussing the committee's report.

This being said I would also stress that we are very eager to create an atmosphere of co-operation and open exchange of views between the Government, the oil companies, the supply industry and the unions. I recently appointed a high level group consisting of these parties.

This group shall consider all aspects related to the petroleum activities with the aim to agree on strategies and solutions that are sustainable for all parties. Questions regarding framework conditions, technology, working process, internationalisation, etc will be subject to discussions in the group.

Eventually, it is essential that we organise our petroleum activities in such a way that we can ensure maximum value creation. This is why we are currently discussing the state's role in the petroleum sector. This is a very complex issue and the work will not be finalised until later this year.

The Prime Minister has already deliberated this issue in his speech, so I will not comment this any further.

Internationalisation
In the past the supply market in Norway was constantly growing. It peaked in 1998 with about 9 billion USD investments. In the future, the Norwegian supply marked is expected to be smaller, in the order of 5-6 billion USD 1Exchange rate: 8.75, but still quite significant.

The future of our own supply industry will depend on its ability to compete for a fair share of the domestic market as well as obtaining contracts in the international market.

The latter is a market of about 180 bill USD, of which we now only have a share of between 1 and 2 per cent. In a longer term, it must be a fair ambition to have 4 to 5 per cent of the international market.

We are currently working seriously to improve working relations with international oil companies operating world-wide, national oil companies and leading supply companies.

With the Norwegian Shelf maturing, there will eventually be limited possibilities for growth for our two large oil companies Norsk Hydro and Statoil. All the majors and many other international companies are present in Norway, and they are competing on an equal footing with Norwegian companies. Consequently, it is vital for Norsk Hydro and Statoil to go international, acquire new acreage and utilise their experience and competence in other areas of the world. If not, their basis for future activity would decline.

It is interesting to note that Norsk Hydro and Statoil already have acquired important positions in demanding markets, such as Angola and Nigeria, Canada and in the Caspian. Iran is also coming up as a candidate for Norwegian investments. The magnitude of Norwegian investment in exploration and production abroad is already substantial and it is growing rapidly.

Conclusion
To conclude, there is no doubt that the world economy is growing more inter-related. This is a major challenge for developing national energy and industrial policies and for international co-operation. This is a challenge faced by most countries, and we hardly have all the answers yet.

Still, I think there is good reason to be optimistic about the future:

Firstly, for a small country like Norway, I think we will benefit from a system with transparent rules and guidelines for international trade and investments. This is why the Government plays an active role with regard to the WTO for instance.

Secondly, the key to success and sustainable development lies primarily within the industry itself. After all the Government can only be a facilitator. As long as there is a significant resource base on the Norwegian Shelf, there will be a need for new investments and industrial activity.

The Norwegian oil and gas industry has demonstrated the will and capability to go international. I am confident that new technology developed by the Norwegian industry will prove successful, not only on the Norwegian Continental Shelf, but also elsewhere in the world. By constantly upgrading our skills and competence, and organising our petroleum sector in an efficient way, we can ensure further value creation and meet any international competition.

Thirdly, there is nothing saying that the need for hydrocarbons will diminish in the foreseeable future. Its use may be altered as new sources of energy emerge. However, with the flexibility shown by players in the petroleum sector, I am confident that this industry will prevail for a long time.

Thank you for your attention.