State Secretary Åslaug Haga
Ministry of Foreign Affairs

Norway's Petroleum Activities. The Foreign Policy Agenda.

The Norwegian Atlantic Committee
Leangkollen, February 3, 1998.

1. Norway is in a privileged position. At a time when most Western governments are fighting unemployment and budget deficits, we are experiencing a shortage of labour, while substantial surplus revenues are being transferred to the State Petroleum Fund. Our unique situation can largely be attributed to developments in the Norwegian petroleum sector.

2. As proper Lutherans we are, however, keenly aware that nothing is purely a blessing. We recognize that our society as a whole has changed dramatically. We are concerned that economic values are becoming more important to us than human values.

3. The vulnerability of the open Norwegian economy has increased in keeping with the expansion of our petroleum sector and rapidly growing revenues. Our economy has become more dependent on international developments as a result. Oil price and currency fluctuations, economic cycles in Europe and North America, unrest in the oil-producing Middle East, even the weather situation in major petroleum-consuming regions, can have significant impact on our economy.

4. The economic implications of our petroleum activities are well understood. But what effect has the oil age had in a foreign policy context ? How, and to what extent, has the petroleum sector influenced the Norwegian foreign policy agenda? What are the foreign policy challenges facing us as the World’s second largest exporter of oil after Saudi Arabia, and one of the largest suppliers of natural gas to western Europe? Have we compromised our established ideas and ideals of Norwegian foreign policy in order to sell “black gold”? From yet another perspective, one might very well ask to what extent Norway has become a more interesting actor in international affairs due to our production of strategically important commodities.

5. At present, supplies of energy are abundant and stable. The international oil market is awash with oil and the West European market for natural gas seems to be saturated, at least for some time. So why be concerned by strategic aspects and security policy implications? I believe there are two reasons why we should. Firstly, because all projections for the next two decades show considerably tighter energy markets, particularly for oil, and increased dependence on Middle East producers. Secondly, because the precedents of recent history underline precisely the security and foreign policy implications of the petroleum sector in the modern age.

6. One of the most important lessons we can learn from history is how the western world failed to understand the new geopolitical realities of the oil age. The consequence was a gross miscalculation of the intentions and ambitions of the major OPEC countries. For the western world, with modern societies based on the availability of cheap oil, the price of miscalculation and confrontation was very high indeed. But the economic effects were also high for the non-oil producing developing countries.

7. What had happened? The post-war economic reconstruction of the European OECD countries was based on rapidly expanding oil consumption. Increasing demand was partly covered by a doubling of domestic production between 1950 and 1973. However, growing demand was mainly supplied by a ten-fold increase in oil imports. The OECD countries' combined dependence on imports grew from 28 per cent to 67 per cent in this period. Warnings about the negative policy implications of this high risk dependency were not lacking, and not only from western oil industry analysts. Also OPEC representatives expressed increasing concern that their most important, non-renewable natural resource was being unjustly underpriced. But the views and threats from the oil producers were not taken seriously.

Efforts by the USA in the late 60's and early 70's to involve their European and Japanese partners in a joint approach to energy matters, aroused very little interest. There was a widespread belief that the producers needed to sell their oil and that the only buyers were the industrialized countries. So it was only after the Arab oil producers' embargo in connection with the Yom Kippur war that Western countries fully realised the importance of developing a common energy policy stance. The oil embargo of 1973-74 was followed only a few years later by the oil price surge of 1978-79 due to Iranian production cutbacks in the aftermath of the Khomeini revolution.

The rapidly increased oil prices led to economic dislocation and adjustment as revenues were transferred from oil importing to oil exporting nations. OPEC’s oil market influence became a source of painful economic and social readjustment. High inflation rates, rapidly growing unemployment, currency imbalances and the enormous debt burden of the developing countries became the legacy of the oil price shocks of the 1970’s. The dramatic oil price collapse of 1986, which was provoked by unrestrained OPEC-production, also had destabilising and detrimental effects on the world economy.

8. How relevant are these experiences to current foreign policy? My view is that the experience of history clearly underlines the importance of foreign policy in petroleum politics. For one, petroleum markets are clearly influenced by political events. Political disturbances in the Persian Gulf are, for example, immediately translated by market actors into financial terms. The macro-economic implications for both producers and consumers alike can be immense. Secondly, macro-economic dislocation can also have political side-effects, and can lead to a mobilisation of public opinion and demands for “action” to redress the situation. In such cases, governments will of necessity make use of foreign policy to protect or promote vital national economic, social or political interests.

Might perhaps economic and national security in the energy field be best left to market forces? I think not. If we do, we would risk repeating history by not taking sufficient account of the realities of the international energy scene. One of these realities is that fossil fuels account for 90% of the world’s commercially traded energy. 70% of the world's oil reserves are in the Middle East. Yet another reality is that around 60% of the OECD’s oil imports come from OPEC countries, some two-thirds being supplied by Saudi Arabia, Iran, Libya and Algeria.

Despite the generally favorable current international supply situation, the fact is that oil will continue to account for a high proportion of energy use, and that dependence on oil from the Middle East is increasing. Vital energy resources are thus beyond the national control of most consumer countries. The 1991 Gulf War illustrates the implications involved. President George Bush summed up why it was necessary to stand up to Iraq’s leader Saddam Hussein in in his quest to control the oil reserves of the Arabian Penninsula when he stated that "oil is the lifeblood of modern society".

9. The relationship between the energy sector and foreign policy is complex and intricate. The dividing line between industrial actors and governments is becoming increasingly difficult to draw. Rather than clear distinctions, we more often than not see grey areas of overlapping responsibilities and interests. What is obvious is that Norway’s position as an important petroleum nation presents us with challenges of a foreign policy nature involving the Ministry of Foreign Affairs.

From the very beginning of the Norwegian petroleum era, it was clear to us that petroleum activities could not be seen in isolation from foreign policy. However, it would be mistaken to conclude that oil and natural gas activities have changed Norway's foreign and security policy orientation. Norwegian foreign policy fundamentals remain constant. At the same time it is obvious that in important areas we have acquired new tasks and new interests. This implies that Norway now finds itself in a somewhat more exposed foreign policy situation than before.

This is not solely due to the fact that Norwegian petroleum production is dependent on international markets. It is also a fact that the Norwegian petroleum industry, building on technical and commercial success at home, have embarked upon a process of increasing internationalisation. Norwegian petroleum companies and equipment manufacturers are finding new areas of endeavour. This is a very positive development. But it is also one that raises new foreign policy issues. One issue of great importance is the human rights dimension of internationalisation. While one perhaps may argue that markets are polically neutral, the same can definitely not be said about a company’s physical presence in a foreign country.

Norwegian companies will increasingly need to carefully examine the various dimensions affecting their international operations. Unfortunately, it is a fact that an important part of the world's petroleum resources are concentrated in countries where political institutions, democratic traditions and respect for human rights are weak. Host governments’ respect for human rights and environmental standards are two emerging foreign policy areas that will increase in importance in years to come. Companies will need to closely scrutinize such conditions before, during and after localization in far-flung countries.

The question is not whether or not the Norwegian petroleum industry should take part in internationalization, but how it should meet the challenges. This is why the government has established a consultative group under the chairmanship of the Ministry of Foreign Affairs to act as a forum where industry can discuss problems related to international activities. The Norwegian government will support Norwegian businesses abroad, keeping a close eye on our fundamental foreign policy objectives. Among these is the universal respect for human rights and high environmental standards. I also believe that it is in the long-term interest of the companies in the petroleum sector to be sensitive towards these issues.

10. What can the international community do to ensure stable and secure petroleum supplies. This is a foreign policy question of the utmost importance. I firmly believe that energy security and stability can only be achieved through the interplay of market forces and international political cooperation. This can be exemplified by the energy and foreign policy cooperation between Norway's closest allies and economic partners, the OECD industrialized countries. Bilateral and multilateral cooperation mechanisms have been devised in order to deal with our common energy interests. Our participation in the IEA is well established. As the only major petroleum-exporting country, Norway has a special contribution to make, and we are determined to build on the foundations we have laid in this organisation. The essence of the common energy objectives, or “the shared goals” as they are termed in the IEA, is a joint commitment to continue to strengthen short and long-term energy security among the member states. In addition to traditional strategies, the IEA is fully involved in energy related environmental questions and climate policies, and in pursuing active energy diplomacy in relation to important, non-member energy consumer and producer countries.

11. Cooperation need not only be limited to traditional allies. The previously strained relationship between the IEA and OPEC is now largely a thing of the past. The two organizations have established contacts in many areas of common interest and concern, something that would have been unthinkable only ten years ago! Today OPEC admits that the IEA cooperation is an important element of stabilisation and predictability in the international oil market. The IEA, for its part, recognises the contribution that OPEC can make to ensuring stable oil supplies. Increased production by several OPEC producers during the Gulf War was instrumental in preventing yet another upsurge in oil prices

12. Norway has been at the forefront in promoting contacts, dialogue and confidence-building between oil producing and oil-consuming countries. Norway was an early advocate of dialogue with the Organisation of Arab Oil Producing Countries (OAPEC) in the early 1980’s. The global energy inter-relations advocated by Norway in the early 1990’s provided a new platform for political and technical contacts between oil producing and consuming countries. In fact, the process of global energy policy inter-relations has led to a widening of the energy dialogue. It is no longer a question solely of OPEC - IEA relations, but of energy relations on a global level.

Norway hosted a meeting at ministerial level at Solstrand, just outside Bergen, in 1992. Oil ministers and senior officials from OPEC and IEA, as well as other countries participated. The Solstrand-meeting focussed in part on the emerging energy problems of Russia and Eastern Europe, and contributed as a confidence-building measure aimed at integrating these countries in a wider process of political and technical cooperation. The fifth meeting in a row was sponsored by India in December 1996. Norway and Brazil were co-sponsors of the meeting, which introduced major Asian countries to the dialogue process. The sixth ministerial meeting will be held in South Africa later this year, with a focus on African energy policy issues in a global context.

Norway shall continue its commitment to the the global energy policy dialogue process. With our position outside the European Union, I believe that Norway is well-placed to play a constructive role as a promoter of dialogue and cooperation in the energy sector. We believe that an inclusive approach, as opposed to confrontation, contributes to greater energy market stability for all.

13. The economic ties with the rest of Western Europe have always been of great importance for Norway. Some eighty percent of all Norwegian exports are dependent on these markets. Over the last two decades these ties have been further strengthened by the trade in oil and natural gas. Norway has almost 50% of the oil and natural gas reserves of the European Economic Area (EEA) countries. There is no doubt that Norwegian petroleum resources are significant for Western Europe. The current picture is dominated by the implementation of the long-term contracts for natural gas supplies to the major EU energy consuming countries. Norway will be supplying the EU with approximately 18% of its natural gas consumption early in the next century.

14. Although we all have an interest in emphasizing the commercial nature of these relationships, we should not forget that the present energy relationship also has deep roots streching back to the turbulent international energy policy situation of the 1970’s and 1980’s. The industrialized countries of Europe are highly dependent on external energy supplies. European efforts to diversify sources of energy supply led in part to growing dependence on imported natural gas. European dependence on Middle East oil was reduced by importing gas from Algeria and the Soviet Union, as well as from Norway. In the context of the Cold War, this too, was deemed an unacceptable political risk. Norway was encouraged to commercially develop its huge natural gas reserves, especially the Troll field, in order to increase supplies to meet growing European demand. Larger supplies from Norway also meant less demand for supplies from other, less secure, exporters.

In fact, looking at the history of Norwegian-European energy relations, we see how foreign policy and commercial considerations often co-incided, to the mutual benefit of both Norway and the individual European countries. Mutual interest, or interdependence, is a fundamental aspect of sustainable energy security. This too, is a lesson from the era of international energy policy conflict.

15. The Norwegian Government is pursuing an active European policy. We are giving priority to safeguarding our national foreign policy objectives in relation to the changes that have taken place - and continue to take place - in Europe.

One of the issues at stake concerns developments in important energy markets in the EU where Norway has crucial national interests. Here too, foreign policy enters into the political fray. Liberalisation of the natural gas market and the gas market directive is a considerable challenge to us. As a natural gas producer and exporter, we have our own interests, while the EU is mainly pre-occupied with increased competition and lower prices for consumers. However, a major and sufficiently appreciated concern, was to ensure that the the effect of the natural gas market directive should not hinder long-term natural gas supplies from Norway, and thus weaken the EU’s energy security.

16. During the Cold War, both the Baltic Sea Region and the Barents region were areas of confrontation and potential instability. Now, important changes are taking place. Co-operative structures such as the Council of the Baltic Sea States and the Barents Council have been established to strengthen economic, political and cultural ties for the benefit of all the countries involved.

17. Norwegian "oil and natural gas" diplomacy, as a leading Norwegian newspaper phrased it recently, has played a particularly active part in the political processes for stimulating economic reform and development in the Baltic Sea area. Two weeks ago the heads of government in the Council of the Baltic Sea States initiated a study of the legal, financial and regulatory frameworks needed for a sustainable development of national energy systems in close cooperation with their neighbours. The initiative is based upon the declaration by the Nordic Prime Ministers in June last year, when they agreed to realise their vision of sustainable energy systems in the Baltic Sea area. An important part of their plan was to stimulate the use of natural gas and look into the possibilities of establishing a commercially viable natural gas network covering all countries in the Baltic Sea Region. If this vision becomes a reality, it will enable the newly independent Baltic states to diversify their energy supplies and move away from over-dependence on a single source for vital supplies of natural gas and oil.

18. The Barents cooperation is also giving high priority to joint efforts in the energy sector. The region offers numerous opportunities for making greater use of renewable energy sources, as well as oil and natural gas. Although the petroleum sector has not been included as a joint activity under the Barents cooperation, there is no doubt that the most important stimulus to economic growth will be in the development of offshore and onshore petroleum resources in the region.

19. Relations with Russia are a central element of Norwegian foreign policy.

A solution to the delimitation issue in the Barents Sea will provide new opportunities for cooperation between Norway and Russia. Parallel consultations are now being conducted on both the delimitation issue and on finding an acceptable cooperative structure in the petroleum sector, something that could be of great interest once the delimitation issue has been solved. When our two foreign ministers met a few weeks ago, it was agreed to make new efforts to speed up the negotiations.

20. Russia's gradually increasing openness towards the West has given us an historic opportunity to deal with energy questions. It is often said that the energy sector is of paramount importance to the Russian economy. The energy industry is therefore crucial to the success of Russian reforms and to our ability to help Russia become integrated into international economic and political cooperation. The meeting this Spring between the energy ministers of the G-7 countries and Russia, will be one further step in this direction.

We must make Russia a political partner in international energy matters. Even as commercial competitors we have a common interest in ensuring the development of stable energy markets and in ensuring suitable conditions for the expansion of natural gas consumption. Furthermore, Russia can contribute to ensuring a stable political framework in the important petroleum province of the Caspian Sea area.

21. The Caspian area is one of the most recent additions to the major petroleum provinces of the world. The newly-independent Caspian countries, in particular Azerbaijan, are determined that the development of their petroleum reserves and foreign western involvement will strengthen their sovereignty and independence, while at the same time providing a basis for economic and social progress. The British-Norwegian BP-Statoil group, together with companies from other countries, including the USA, are now engaged in both exploration and development work in Azerbaijan. Norwegian participation in these efforts not only provides international growth opportunities for the Norwegian petroleum industry, but also exposes Norway to new foreign policy issues in this region where we historically have not been present. Not the least among these is the need to support Norwegian businesses in Azerbaijan. To do this, we have decided to establish an embassy in Baku later this year.

22. Many of the countries of Central- and Eastern Europe have come a long way in preparing their societies for closer political and economic ties with the West. Again we see how energy is playing an important role. Energy sector reform and development of a more diversified, efficient and less polluting energy system is part of this overall reform process. In the foreign policy contacts Norway had with these countries after the fall of the communist regimes, it is difficult to find one example where requests for supplies for Norwegian natural gas were not brought up with either our Foreign Minister or Prime Minister. The agreement with the Czech Republic last year on deliveries of Norwegian natural gas is a good example of how commercial partners can enter into an agreement which is also fully in line with government foreign policy objectives.

23. In the post-World War II period, Norway has built its security and economic development on close foreign policy cooperation with the United States of America. Our petroleum interests and our engagement in international energy cooperation have been very important aspects of this. The USA, which has been a net importer of oil for most of the post-war period, purchases a substantial portion of its oil import needs from the Norwegian continental shelf (about 6%). Equally important, seen with Norwegian eyes, is, however, the strong American commitment to energy security issues within the OECD/IEA, and on the regional and global levels. American petroleum companies have been active on the Norwegian Continental Shelf from the very beginning of our oil era. The participation of the American oil industry has also given US authorities a better understanding of Norway as a partner in international energy affairs. Again, mutual interests have been well-served through co-operation.

24. Climate change is a major global issue with profound implications for the way the world produces and consumes energy. The agreement in Kyoto was a unique and important step in the direction of a better environmental and energy future. The implementation of this historic agreement represents an enormous challenge: to reduce the emission of climate change gases while at the same time providing energy for all human activities.

Three issues are of particular importance as regards foreign policy. Firstly, tradeable quotas must be applied in such a way that we ensure genuine emissions reductions. Secondly, it is important to ensure that joint implementation results in benefits both as regards climate change and as regards development in the countries where environmental projects are carried out. And thirdly, the private sector must itself be involved in implementing the agreement, both nationally and in cooperation across national borders. This is definitely a challenge also to the petroleum sector.

Summary conclusions

In conclusion, I would like to emphasize two points.

Firstly, that international energy policy is a clear foreign policy concern. It follows that Norwegian foreign policy must - and does - concern itself with the political ramifications of the energy market relations. Foreign policy is an instrument for the promotion of national interests. Among those interests is maintaining a stable international environment for economic growth and development. Our petroleum policy can contribute to this. Stability in the international petroleum market is important for both consumers and producers.

Secondly, the increasing scope of Norwegian petroleum activities exposes Norway to new foreign policy issues and challenges. Whether we like it or not, the international activities of Norwegian companies will increase the need for an active Norwegian government monitoring of the foreign policy ramifications. How we deal with those ramifications is another matter. But we must at the very least be aware of the issues and potential problems involved.