Minister of Petroleum and Energy Marit Arnstad

Competing for industry recources

Offshore Northern Seas Stavanger, 26 August 1998

Good morning, ladies and gentlemen

1. Introduction

On the threshold to a new century, I will take this opportunity to reflect on some of the challenges facing petroleum host nations in competing for industry resources in the years to come.

2. Norway in the energy picture

I want to start out by emphasizing the importance of the oil and gas sector to Norway.

Last year, oil and gas represented about 37 percent of overall exports and 16 percent of the gross national product. The sector generates nearly 20 percent of government income. The Norwegian economy's dependence on the petroleum sector has been reduced over the last years, but still it is an important relationship.

The Norwegian resource base is comfortable. Norway has 50 percent of the remaining oil and gas reserves in Western Europe. Only 18 percent of what we expect to recover have been produced to date. This underlines the importance of a long term perspective in the Norwegian petroleum activities, both for the host nation and the investors.

Nearly all of our natural gas export goes to the EU, supplying about 14 percent of the consumption in this region. This may rise to close to 20 percent early next century. The import dependence of Western Europe will increase substantially in the first part of the next century. In light of this, Norway will remain an important country to Europe from an energy strategic point of view.

3. Oil market developments

Abrupt fluctuations in oil prices or the activity in general have direct and immediate consequences for the Norwegian economy. The low oil prices over the last few months is of course a concern to the industry, as well as the Government.

It would not be prudent to address this important audience without having some thoughts on the present oil market situation.

In my view it is characterized by uncertainty and unrest.

While prices averaged around 20 USD a barrel the two previous years, the development in the oil market has led to prices around 12 USD a barrel today, even after substantial cuts from oil producing countries - Norway among those. As a contribution to stabilize prices, we cut production from 1 May, by approximately 100 000 barrels a day. However, so far in 1998 the production has in fact been more than 100 000 barrels a day lower than estimated, even after the production cuts have been taken into account.

The efforts made by oil producers have so far not been enough to take prices to reasonable levels. However, prices seem to have stabilized.

The main reason for the price drop was, as I see it, the economic crisis in Asia and a substantial excess supply of crude. This in turn led to a major stock build-up and a fall in prices.

Today's low oil prices do concern us and we recognize the stock situation and the effect on prices. The situation is serious, as global stocks are at levels which are among the highest during the last decade. The stock position creates a situation in which minor changes in the supply-demand balance have a potentially high impact on prices. This is well beyond what is normal in the market.

However, the near term outlook indicates a tighter balance in the months to come. The reason is mainly that substantial volumes have been removed from the market and will continue to be held from the market. This will have an effect on the stock position. We would expect a lower-than-normal stock build in the third quarter, and a larger stock draw than normal in the fourth quarter. In turn, this will affect prices. I expect the oil market to stabilize at a higher level and prices to strengthen somewhat over the next six months.

However, we also recognize the significant uncertainty related to the oil market developments, which could put pressure on or support prices:

· Asia; the economic outlook for Asian countries indicates that the unrest will calm down. Most experts now expect the economic development in Asia to recover and there is even scope for growth next year, although not in the range experienced in the first half of the 90's.

· Iraq; volumes from Iraq have been strongly increasing this year. The outlook indicates a slow down in the growth of Iraqi production.

· Last but not least - the weather could have an impact on the supply/demand balance.

Even though the oil market will be characterized by uncertainty and unrest also in the future, I have a hope that we now will experience an upward trend.

Let me then reflect on some consequences of low oil prices.

The immediate effect of low oil prices is loss of revenues.

The cash flow to the industry will be reduced. The same applies to the State revenues. This will have consequences for the Petroleum Fund.

The present situation will have consequences for the exploration activities. Continuing low oil prices will also affect development activities - although in a somewhat longer term. This may also result in an earlier and more distinct fall in the total investment level on the Norwegian Continental Shelf.

We also see finance market reactions to the present situation in the oil market and the international economy. Such reactions may again adversely affect the Norwegian business community and have consequences for the economic policy in Norway.

4. Establishing an energy policy

To compete for industry resources the host nation needs to establish a viable energy policy.

Prospectivity which can be transformed into a comfortable resource base, is the fundamental condition for investors. In addition to geological prospectivity, factors such as access and distance to the markets, energy prices and access to technology are important to both the host nation and the industry. The degree of predictability and stability of the political regime, and the framework conditions formulating acceptable commercial incentives will also be decisive for investors' willingness to invest in energy activities.

With this as a starting point, there is no firm recipe on how to formulate an efficient and suitable petroleum policy. The individual situation of each country is the basic premise in this respect.

In the relationship between the host nation and the industry, however, some elements are of particular importance:

· a good resource management to achieve efficient exploration, development, production and marketing of the petroleum resources;

· how to share the values created between the participants; the government take system, and

· integration of environmental ambitions in the energy policy.

I will address these in turn.

A. Resource management

Most host nations are owners of the petroleum resources. This gives them the right and obligation to manage these resources in a sustainable way.

The commercial investors are of crucial importance in obtaining a good resource management. The policy must therefore be formulated in a manner so as to balance the government's interests with those of the industry.

We need to establish flexible, but at the same time predictable terms and conditions for the activities.

Most governments will have a view on the rate of depletion of the energy resources. This is an important element in the government's resource management. Measures to obtain this may or may not be welcomed by industry. The objective must be to deplete the resources at a reasonable pace. Possible consequences for the efficiency in the sector in general must be carefully evaluated.

The licensing policy is the foundation of the depletion policy. In order to mature the different regions and produce the resources in an efficient manner, new licensing should take place at even intervals. This strategy has been chosen in Norway.

The licensing policy is not, however, an appropriate means to regulate short term fluctuations in the activity level. Further, the licensing policy should not be affected by short term price fluctuations or short term fluctuations in the activitiy level in general. A step-wise approach will secure the depletion of the resources over a long period of time.

Further, in the offtake of petroleum - like for instance natural gas - specific policies may be necessary in order to secure a good resource management.

The management of our offshore petroleum resources requires the active involvement of the Government in strategic decisions affecting development and supply of natural gas. This is to obtain the best possible overall result.

Also when it comes to matters concerning safety, work environment, and environmental issues in a broader sense, the host nation wants to establish specific policies.

These examples of areas where government policies are important are meant as illustrations. The list could be extended and will vary from region to region depending on the situation in the host nation in question.

A. Government take

How to divide the benefit created in the oil and gas activities is truly the art of balancing different interests.

Contrary to many issues of resource management, government take leads - at least partly - to a parting of interests between host nation and industry. This is because both the State and the industry are seeking their ample share of the income from the activities. The challenge is to create the right balance.

A fundamental aim of host nations is to maximize the value created from the petroleum activities, normally obtained through taxes and royalties. This requires efficient and cost-effective exploration, development, production and marketing of the petroleum resources. High value creation leads to increased profit for the industry, and to increased taxes. In this sense, industry and Government have common interests. On the other hand, an inefficiently formulated government take system will have negative effects on the efficiency of the sector as such.

The government take system will split the values created from the activities between the host nation and the industry. Consequently, the government take system must be formulated so as to channel a reasonable part of the profits to the state. At the same time, industry must in the long term be secured a share of the profits big enough to receive their continued interest to participate.

I trust that a good dialogue between the government and the industry is particularly important to secure and maintain the trust in the government take system and the way it develops over time.

In Norway, the production level for oil and gas has been increasing over the past few years. Investment levels are high while the cost level has been reduced. Although we currently see low oil price levels I am, however, not prepared to initiate a debate on the fiscal terms for the energy activities in Norway at this stage.

A. Energy and the environment

Environmental concerns are also an integrated part of a country's energy policy.

We should realize that in a broad sense poverty is our most important environmental problem. It is also a fact that poverty cannot be fought without, among others, the use of energy.

At the same time, however, the use and production of energy creates environmental problems.

In this sense, the use of energy is both a part of the problem for us all and part of the solution to the global environmental difficulties.

In the industrialized world, energy efficiency measures need to be an important element of the energy policy. This establishes a joint challenge for the petroleum producing nations and the petroleum industry.

Efficient use of the global energy resources is both good to the national economy and to the environment. I would like to underline the industry's constructive and active participation in this process. Both industry and the Government are , however, obviously faced with difficult and demanding choices in this respect.

Norway is a large producer and exporter of petroleum with ambitions to be in the forefront in the strive for sustainability. The reconciliation of energy and the environment is therefore of particular importance to Norway.

Dialogue and co-operation with the industry is important for us to set the environmental goals and design policies and measures. The phase two of the so-called MILJØSOK is now started, and will be an important arena for a frank and open discussion both on environmental goals and on how to reach them.

We are, however, aware that setting high environmental goals often result in increased production cost.

Cutting back on environmental standards may be viewed as a solution to some host nations in order to attract commercial investors. Most host nations, however, do not consider this an alternative. On the contrary, it is our experience that host nations and companies realize that such an approach cannot be a responsible solution to the regional or global environmental challenges. I firmly believe that host nations and industry reacting proactively to future environmental challenges and strive towards sustainable development, will gain from this in the long run.

5. Investment level

During the last year we have seen that the oil companies' plans show a significant increase in investments as compared to earlier estimates. The increase is partly due to additional investments in some projects, partly due to timing effects as some investments will be realized earlier than expected, and last but not least, due to increased costs because of the pressure in general on capacity in the industry.

This situation with increased cost tendencies in several projects in the petroleum sector is worrying. I realize that there are several reasons for such overruns. Despite this, I am concerned about the consequences of such tendencies - if they materialize - both on the competitive position of the Continental Shelf and on the State petroleum revenues. The industry is competing for limited resources, a fact which influences the development of the whole industry.

I know that the industry - both the oil companies and the fabrication and construction companies - is working hard to reduce costs and achieve the NORSOK-goals in order to maintain our competitive position. I am confident that the industry will continue to work towards these goals.

However, we need to get a better knowledge of the causes of this increase. Four years after the NORSOK-initiative, it is necessary to evaluate this process, for instance as regards the relationship between cost-efficiency and safety.

I have decided to appoint a committee to evaluate the current oil and gas projects in order to have a better understanding of the increase in investments in these projects. Both the oil and the supply industry, as well as independent institutions and persons will be represented on this committee. This will secure a broad and independent assessment. I expect that the committee will finish its work by January next year.

6. Summary

The creation of value from the Norwegian petroleum resources is directly tied to the commercial companies' participation in the activities. Thus, it has been a main challenge for Norway to establish a balanced petroleum policy and legal framework.

Several aims and expectations are, however, conflicting. Our basic view has always been that there exists an acceptable level of mutual understanding between the roles, aims and expectations of the various participants. This is primarily due to the fact that communication between the authorities and the industry in my experience is good, and that the ability to respond prudently is present when changes, pragmatism and flexibility are required.

Norway expects to remain a prospective and attractive petroleum province for a long time. The companies being active here have been so for many years. They are in the forefront when it comes to geological insight, technological competence and financial strength. We want to secure the active participation of this industry in our petroleum activities also in the future.

Involving highly qualified national and international investors in our petroleum sector is to my mind representing a successful tool in achieving national aims. It is very encouraging that Norway over the years has developed three very competent and competitive national oil companies and a significant national supply industry. This industry is internationally highly competitive, which is also reflected through the establishment of INTSOK. I am happy to see that INTSOK is now well under way in its work.

Many new petroleum provinces are opening up for foreign investors and energy consumption of the world is expected to increase significantly during the next 20 - 30 years. This implies increased demand for our products, but also strong competition for industry resources.

We therefore see a large potential for an active future for this industry in Norway.

In Norway, the petroleum industry is faced with a stable political regime and a well-known legal framework.

We intend to maintain and further develop our competitive edge.

Thank you for your attention!