NEWS ANALYSIS: The Norwegian central bank’s decision this week to keep interest rates low is rooted in a sobering but now widespread prediction for the Norwegian economy: After years of robust growth fueled by high oil prices and abundant gas, investment in those valuable offshore resources is likely to take a dive. Some analysts and politicians go so far as to warn that Norway’s oil era is drawing to a close.
Discussion has flown for years over what Norway will do when its oil runs out. Several new major discoveries have instead been made in recent years, but rising costs are making it more expensive to extract the oil. Now talk is flying over the consequences of a decline in oil activity, as signs emerge that the companies investing in the oil business are paring back.
Investments in the country’s most important industry are expected to fall by as much as 10 percent next year, according to forecasts from the central bank (Norges Bank), while state statistics bureau SSB predicts a decline of as much as 15 percent. Norway’s conservative government coalition thinks oil revenues will simply flatten out, and is budgeting for that. The prognosis from SSB released last week suggests the fall will much more dramatic.
SSB predicted oil investment next year of NOK 182.4 billion, NOK 49 billion less than the oil companies’ own estimate for this year’s record-high investment of nearly NOK 232 billion. The current investment tempo was never expected to last forever, or keep growing, but some shipyards are already sending out alarms. Some specializing in offshore oil installations will have empty orderbooks by the end of the year. Calls went out earlier this week for Statoil, for example, to send more of its business to Norwegian offshore suppliers, but Statoil needs to accept the best bids no matter where they come from.
Øystein Dørum, chief economist at DNB Markets, called SSB’s figures “disappointingly low.” If SSB proves to be right, “it will affect the Norwegian economy, no doubt about that,” Dørum told news bureau NTB. Harald Magnus Adreassen, chief economist at Swedbank First Securities, was far more pessimistic, predicting the decline in oil investment means many Norwegians will lose their jobs, and even more will struggle with uncertainty over the own jobs. Hans Olav Syversen, a Member of Parliament for the Christian Democrats who leads the Parliament’s finance committee, declared that “Norway’s era as an oil nation has peaked.”
Some in the oil service sector are already seeing tougher competition for offshore contracts and new times in the oil branch. “Only the best will survive,” Tor Ole Talgø, an oil service entrepreneur whose firm GMV produces various machinery and products for the oil companies, told newspaper Dagens Næringsliv (DN). Until now, life as an oil service provider has been one big party, but Talgø says he now senses a change and predicts tougher times for his company that has 71 employees and revenues of NOK 143 million last year. “I started noticing four months ago that the market is getting tighter,” Talgø told DN. “There more competition for contracts and prices are lower.”
Meanwhile, gas prices keep falling for several reasons and the costs of offshore exploration and production have risen so high that it’s threatening the profitability of new oil and gas discoveries off Norway. Ane Galdishol Brevig, a 28-year-old engineer for German oil and gas company VNG, told DN that she hopes she’ll still have a job in Norway’s offshore industry until she retires. “I think it’s worrisome that the costs on Norwegian oil fields have risen so high,” Brevig told DN. She’s been working offshore on the Pil discovery off Kristiansund, where VNG found an estimated 170 million barrels of oil in April. The area is full of oil, but the question now is whether it will be profitable enough to extract it.
Areas of Norway that have been built up around the offshore industry, not least Stavanger but also Bergen, Kristiansund and northern cities like Hammerfest, are most vulnerable to an oil industry downturn. Thousands of jobs are at stake and real estate markets are likely to suffer. Roger Bjørnstad, chief economist for Samfunnsøkonomisk Analyse thinks lower oil investment will hit Rogaland County hard. No other area of Norway has seen housing prices rise as high as in Rogaland, Bjørnstad noted, and the higher they rise, the harder they fall.
Many hope Norway is facing more of an economic correction than crisis, with central bank boss Øystein Olsen insisting that overall outlooks are positive for “moderate growth.” He thinks growth will resume in 2017, that private consumption will continue to rise and that the mainland economy will grow by as much as 3 percent in 2017.
Meanwhile, the decision to keep interest rates low, for a longer period of time, may help offset next year’s decline in oil investment. Other work goes on towards diversifying Norway’s economy, and making it less reliant on oil and gas.
And there are areas of optimism around Norway. The counties of Hedmark and Oppland in eastern Norway scored highest in employer organization NHO’s recent economic barometer released earlier this month. It’s based on employers’ predictions for business and hiring, and inland business is viewed as stable and growing, especially in the area around Lake Mjøsa. “They’re not included in the big upturns, but not in the downturns either,” Christel Kvam, regional director for NHO, told DN. The inland construction business is still busy, and most see ongoing moderate growth.