Norway - Playing for High Stakes

The potential for a significant disruption in oil supplies from Norway were heightened today (24th June) with the announcement that, in response to strike action from two offshore unions, the Norwegian Oil Industry Association (OLF) intends to impose a lockout from 24.00 on Monday 28th June. Should this go ahead, this could ultimately result in an almost complete shut-down of oil and gas production on the Norwegian Continental Shelf, where output is currently running at 3.3 million b/d of oil and 7.3 bcf of gas. So far strike action has seen production of around 400,000 b/d taken offline.

The current situation could have significant repercussions for an already tight oil market where prices have recently eased following Saudi Arabia’s decision to increase supply. Norway is the world’s third largest oil exporter, behind Saudi Arabia and Russia, with an average of just over 3 million b/d exports in 2003.

Coming at a time of booming prices, any prolonged shut-down will also have a significant impact on the revenues of the Norwegian Government and the oil companies involved on the NCS. If a complete shut-down ensued, Wood Mackenzie calculates that, on a daily basis, net revenue losses will be over US$130 million or US$900 million per week.

Due to the high (78%) tax rate and the fact that nearly all of the companies with significant production are in a tax paying position, the majority of the impact will fall on the government exchequer. In addition, the Norwegian government has substantial direct equity stakes in the Norwegian fields. Wood Mackenzie calculates that the loss to Norwegian government revenues would be US$110 million per day with the remaining US$20 million per day loss being suffered by the companies operating on the Norwegian shelf.

The main companies affected will be Statoil and Norsk Hydro where we calculate the impact could be around US$6.4 million and US$3.5 million per day respectively. Of the foreign oil companies ExxonMobil would suffer the biggest impact with an estimated loss of US$3 million per day.

In the past, situations similar to the present have been resolved without significant supply disruptions with the Norwegian government stepping in to force a settlement. Given the significant potential impact on oil prices, Norwegian government finances and company revenues the overwhelming balance of probability is that this will happen again.