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- ONS 2022
– A report addressing global energy issues, written by Nick Butler
Nick Butler is an energy economist and visiting professor at King´s College, London. He worked for BP, serving as Group Vice President for Policy and Strategy Development from 2002 to 2006, and subsequently worked as Senior Policy Adviser to the British Prime Minister Gordon Brown. He has served on the International Advisory Boards of Statoil (now Equinor) and of Yale University. He is a Vice President of the Hay on Wye Literary Festival and a regular contributor to the Financial Times and Nikkei Asian Review. Nick is the chief editor of the ONS Energy Agenda.
50 years after the discovery of the Ekofisk field transformed Norway’s economic prospects and ushered in an era of rising living standards and industrial success, the outlook is clouded. Oil production has peaked, reserves are limited and the sharp fall in oil and gas prices has put a question mark over future prospects. Across Europe consumption of hydrocarbons has fallen as concern has grown about the risks associated with climate change. Prosperity and employment levels in Norway seem threatened. The question is whether decline is inevitable or whether there is an alternative approach which can allow Norway to move from one half century of success to another.
The last few months have reminded us, in the harshest way, that isolation is impossible in the modern world and that globalisation brings costs as well as benefits. With all the attractions of open trade and travel come the viruses which can kill and the economic recessions which can destroy jobs and livelihoods.
The energy world is as connected as any other part of the economy. Prices are set by global patterns of supply and demand. Even the strongest participants in the market have seen their expectations overturned in the last nine months. Saudi Arabia, Russia and the United States each produce more than 10 million barrels a day of oil, but in the face of a sustained surplus of supply over demand and even with support from other producers, the most they can do is to attempt to limit the extent of the price fall. Meanwhile the global climate recognises no borders and the environmental consequences of accumulating emissions will affect us all.
The realistic recognition that we cannot live in isolation is not, however, a counsel of despair. Extinction is not inevitable. The end of isolation does not mean that we have lost the ability to make choices. Every country is subject to what happens beyond its borders but each country can make choices on how to respond in its own interests and in the interests of the world as a whole.
After five decades of great success in developing the Continental Shelf, the context in which Norway has thrived is changing beyond recognition. The development of the NCS began at a time when both oil and gas were considered scarce. According to the Club of Rome report published in 1972, supplies of natural resources were likely to be exhausted by 1990. The bulk of the supplies which remained were held by countries which were beginning to recognise the political leverage which the perceived scarcity of resources gave them. The embargo imposed in the autumn of 1973 did not succeed in shaking Western support for Israel, but it reminded the oil importing countries that dependence could be dangerous. The development of the North Sea and Alaskan resources was sustained by the determination to minimise dependence and to reduce the risks to energy security. In the 1980s development of natural gas from NCS was explicitly encouraged as a means of reducing reliance on the supplies of Soviet gas through the newly constructed Yamal pipeline.
The transformation which has occurred over the last decade has taken us from that sense of scarcity and insecurity to an age of plenty. In 1974, when ONS was held for the first time, global oil reserves amounted to some 650 billion barrels. Since then despite almost 50 years during which consumption rose from 60 million barrels a day to 95 mbd last year, those reserves have risen in quantity by 266 per cent to 1733 bn bbl according to the latest edition of the BP Statistical Review. Advances in technology have enabled the industry first to find and then to develop a growing volume of resources.
For most of the last decade the trend in prices for both oil and gas has been downward. In the spring of 2014 a barrel of Brent crude cost more than $ 100. The price now, despite the loss for political reasons of most of the previous production from Venezuela, Iran and Libya is around 60 percent lower despite some recovery in the early summer. Without the self imposed constraints on production accepted by the OPEC states, Russia, Kazakhstan, Mexico and others which have taken 10 million barrels per day off the market the price would be even lower.
The main cause of the shift has been the development of a new source of supply on a scale unimagined little more than a decade ago. The production of oil from shale rocks in the US has grown from minimal levels before 2010 to over 8 million barrels a day last year.
2020 is an exceptional year and the demand for oil will no doubt revive as the global economy recovers. But prices are not likely to rebound as quickly.
The oil market will always be volatile with speculation compounding political uncertainty but it is hard to see any sustained increase in current prices given the volumes of oil now waiting to come back onto the market. The shale business in the US is vulnerable with many participants relying on revenue to service debt. As we have seen this year the amount of drilling is highly variable and the rig count fell by more than two thirds from 670 at the end of 2019 to less than 200 at the end of July 2020.
But as prices creep back from the lowest levels drilling activity can easily be restored and production can rise again. That fact, along with the financial imperatives facing OPEC producers and others who have lost income because of both production cuts and price falls, sets something of a ceiling on prices.
The age of plenty has reached the gas market as well. Prices were already low before the pandemic began in each of the three key international markets – the US, Europe and North East Asia. What was expected to be the “golden age of gas” has turned in the words of the IEA into a glut.
Europe, the destination for most Norwegian supplies, illustrates the shift which is taking place. Demand for both oil and natural gas has fallen over the last decade, because of modest economic growth and efficiency gains but also because of public policies favouring renewables such as wind and solar.
The new European Green Deal, proposed by the Commission in December and incorporated in the post COVID economic renewal plan agreed by the Council of Ministers in July, will accelerate the decline in use of all hydrocarbons. Coal consumption is already 40 per cent lower than it was 8 years ago. Countries such as the UK and France once overwhelmingly reliant on coal have seen consumption fall to minimal levels. German coal use is set to be eliminated by the end of the 2030s at the latest. The pressure on the remaining coal use – mainly in Eastern Europe – is intense and under the Green Deal will be reinforced by payments to encourage the closure of coal mines. Gas demand has not grown and oil use has dropped by 7 per cent over the last decade.
As demand falls, supplies are more plentiful than ever. In the gas market Russia will soon have an extra supply line, Nord Stream 2, bringing gas into Northern Europe, and America with its own demand now largely saturated will be seeking to export its excess supplies, including the associated gas produced alongside shale oil. President Trump’s stated ambition of building as many as 11 new LNG terminals in Europe to receive supplies from the US may never be realised but American gas will be urgently seeking international markets as will gas from Central Asia, North Africa and the Eastern Mediterranean.
In such circumstances the competitive pressures to secure market share will be intense. The competition between oil produced from shale in the US and more conventional supplies from Russia, Saudi Arabia and the other oil producing states was instrumental in driving oil prices down this year even before the economic impact of CV19 was evident. That competition will not be removed as the global economy revives.
In an age of plenty Norwegian supplies carry two significant advantages which can at least partially offset the differential in production costs between supplies from the NCS and from onshore developments in the countries around the Persian Gulf.
In an age of plenty the simple economic assumption would be that the lowest cost producers will always win. But oil and gas markets are more complicated. The prospect of ever greater dependence on Middle East production has worried importing countries for the last 50 years. After four unresolved wars in the last 50 years, instability in the region remains a serious threat to global energy and economic security. US self-sufficiency has changed the geopolitical map of the energy market. Europe continues to import around 14 million barrels per day – mainly from Russia but energy security is now primarily a challenge to Asia. Last year more than half of all internationally traded oil was consumed in China, India, Japan and the other emerging market economies of the East. China alone imported 12 million barrels of crude each day. The volumes involved are set to grow as the centre of global economic gravity continues to move Eastward. The straits of Hormuz, once the choke point for supplies from the Gulf to Europe and the United States, now sees daily trans shipments of over 20 million barrels per day of oil. Up to 90 per cent of those shipments are destined for Asian markets.
The geography of the market may have altered and there may be no shortage of potential physical supplies but the immediate risks to the continuously daily flow of supplies which are crucial to the maintenance of economic life are still real and still inextricably related to the political instability of the Middle East. At the end of 2019 a single, low level rocket attack attributed to fighters in the war in Yemen damaged facilities at the Saudi oil complex in Abqaiq and took up to 5 million barrels per day of oil off the market for a period of weeks. A more serious attack, or a more open conflict between Iran and Saudi could do much more damage, potentially disrupting the market for an extended period.
The desire to maintain energy security puts a premium on the continued supply of both oil and gas from Norway.
Political stability is one advantage. The second is the relatively low carbon content of Norwegian resources. In Europe in particular the emergence of carbon taxes – adopted most recently in Germany and likely to spread in one form or another across the European Union over the next decade if the Green Deal is confirmed – will undoubtedly offer an advantage to Norwegian production. Natural gas from Norway for instance transported through pipelines is responsible for far less carbon emissions than gas arriving in the form of LNG from Qatar. Projects to allow production facilities in the NCS to be powered from shore using renewable sources could reduce the carbon impact of Norwegian resources still further.
Norwegian oil and gas therefore have a good chance of retaining a share of the European market for some time to come if production costs can be kept under control. Existing producing fields can, with the application of ever advancing technology, produce more. Late life activity can extend for many years even if the absolute volumes which are recoverable will be limited.
The development of these additional resources will depend on the cost calculation and in the case of the next generation of potential supplies on the political decisions of the Norwegian people about the environmental impact.
The reality, however, is that Norway’s experience as a producer of oil and gas is moving gradually towards the point where the volumes involved and the employment and revenue which can be generated, will become smaller year by year. The level of direct employment in North Sea activity is of course limited but the multiplier effect of investment and the flow of tax revenue into public and private expenditure creates many many thousands of additional jobs. Without such revenue the ability of the country to maintain its current social model is questionable.
Of course Norway has a Sovereign Wealth Fund which is the envy of most other countries in the world, including the UK whose energy wealth has already been spent. That Fund could be run to maintain current living standards but the element of prudent insurance it provides would be lost. Maintaining current spending ahead of current income would create an illusion of strength. In a competitive world Norway needs a secure economic base which encourages the development of skills and high quality jobs.
The next opportunity lies in renewable energy. Norway already meets the bulk of its own electricity needs from hydro. The question now is whether the country can extend its role in the European and wider global energy market, through the development of wind power and by helping to create new sources of supply which can alter the energy mix and reduce emissions in areas where electricity is not a viable option. There is no doubt that Norway has the ability to generate power – from hydro and increasingly from offshore wind. The challenge is to win a share of the market.
The growth in demand for renewables is strong and is reinforced by the aspiration, now endorsed by a growing number of countries worldwide including France, Sweden and the UK to achieve zero net carbon by 2050. The renewables sector, however, is highly competitive with low barriers to entry and with the involvement of state backed enterprises particularly from China.
Wind along with solar power represents the first generation of renewables. In the first half of this year, despite the spread of the CV19 pandemic, global investment in solar and wind proved more robust than investment in oil and gas. Norway is already a leader in the technology of floating wind farms which can operate in deeper water where the winds are stronger, and is constructing the world’s largest offshore wind farm on the Dogger Bank in the North Sea.
Wind and solar will continue to grow but other solutions are going to be necessary to deliver a low cost energy transition in areas where electricity is not a viable way forward such as freight transport, the heating market and industrial energy consumption.
The next generation of renewables will be dominated by hydrogen, produced either from hydrocarbons with the carbon extracted and stored or through an electrolysis process powered by excess supplies of wind and solar generated electricity. The development of hydrogen is central to the European Green Deal and has recently been adopted as a key plank of German energy policy.
Hydrogen is an infant industry and Norway is well placed because of its existing skills and experience to participate as the technology develops, and is then deployed first in Europe and then worldwide. Because of its advantage over batteries in terms of energy density hydrogen could be used in the shipping sector and in the freight business which at the moment lorries are one of the main sources of the growth greenhouse gas emissions across the world. Some vehicle manufacturers including Hyundai and Toyota also see the potential for hydrogen powered cars although this will require material reductions in costs if fuel cells are to compete battery powered electric vehicles. Hydrogen could replace the use of natural gas in the heating market and it could play crucial roles in industry – for instance in the production of steel or ceramics where the high temperatures required make electrification difficult.
These possibilities all require both further technical advances to improve the energy efficiency of the processes involved and the updating or replacement of existing infrastructure. Just as solar and wind have benefitted over the last decade from supportive public policies which create demand and reward investment in supply so hydrogen now will require support to test the possibilities at scale.
Norway also has the capacity to provide Europe with the Carbon Capture and Storage facilities which will be needed if hydrogen is to be developed from hydrocarbons. Norway already has more experience of any European country in CCS through the Sleipner project, and a full scale development of the industry including the establishment of a complete chain covering both supply and demand, infrastructure and az clear regulatory framework is underway through the Northern Lights project.
At the moment the development of hydrogen is focused mainly on the use of natural gas. For Norway that offers the prospect of securing a new market for the countries extensive gas reserves. That is a good place to start but technical progress, and tightening European regulatory standards could overtake “blue hydrogen”. Instead “green hydrogen” needing none of the costly process of capturing or storing carbon could come to dominate the market. To achieve a lasting competitive advantage Norway needs to be a leader in both.
The energy transition, however, is not just about production. The shift in the energy mix will in the end be made by consumers. If Europe is to reach net zero by 2050 it will need new vehicles and transport systems including eventually new low carbon aircraft, new ways of storing energy which improve efficiency, new ways of managing the use of energy in buildings and industry and new supply systems including advanced grid technology to link the sources of clean energy supplies to eventual users.
This will create a substantial network of industries and supporting services and again Norway is well placed to be a leader. Many of the necessary skills build on expertise are already present in the Norwegian energy sector.
Such a leadership position, however, is not guaranteed. The desire to identify the industries of the future and to create jobs applies in every country and will be reinforced by the need to respond to the current recession and the lasting economic impact of CV19. Competition will be intense.
In the 1970s, thanks to the work of Arve Johnsen, Jens Christian Hague and many others, Norway developed its own base of skills to ensure that the development of the NCS was not dominated by imported labour and technology. It did so by adopting a rare degree of cooperation across the business world.
In the new world which is now emerging, a comparable degree of coordination and cooperation will be essential. The industry is diverse and in contrast to the experience with oil and gas is not likely to be concentrated in a single national champion. Solutions, however, are likely to involve more than one technology and the ability to provide solutions through coordinated efforts will be key. The existing oil and gas industry will play a role but the renewables sector serves different markets and to succeed will need its own version of what in the 1970s was called the “Norwegian model”.
The financial dimension
In addition there is the question of financing the transition. Michael Liebrich, one of the world leading experts on energy finance, states the transition is a complicated issue for investors who are being asked to make investment choices in a fast moving and highly uncertain environment. In contrast to the oil and gas sector where they can rely on well established global companies to interpret and manage risk and uncertainty, they are faced with a host of small ventures each with its own favoured solution.
Norway’s existing experience, its knowledge of the energy sector and the detailed processes involved in the transition is well placed to create the specialist financial institutions which can bring all the resources needed by potential investors and capital, both from Norway and elsewhere. Worldwide the development of the low carbon economy over the last decade has been dramatic but even with nuclear and hydro added in renewables only account for 15 per cent of global demand. The next phase will require much more investment and the creation of many more successful enterprises to follow successful pioneers such as Ørsted.
Achieving “net zero” is a goal now well within reach for Norway, and if there is sufficient political will for Europe as a whole. The process will not be simple and there will be no instant transition, but the choices and the pathways are becoming clearer. Such achievements, however, will mean very little if the rest of the world continues to produce high levels of emissions. Climate change cuts across all borders. Creating a clean Europe in a dirty world does not in itself solve anything. Europe is only 10 per cent of global emissions now – a figure falling year by year as economic growth in Asia and other emerging economies rebalances the global economy to the East. On the latest evidence 36 per cent of current global emissions are generated by China and India and another 30 per cent by the other emerging economies of Asia, Africa and Latin America – many of which continue to rely on coal for the bulk of their energy needs. The International Energy Agency projection on the basis of current public policies suggests that by 2030 Asia alone will account for more than half of all global emissions.
While Europe has reduced its emissions by almost a fifth since the turn of the century the process of change across much of the rest of the world remains slow. The new steps being proposed in Europe carry some cost, and could result in industrial sectors which are energy intensive relocating to areas where costs and regulatory standards are lower. The idea of imposing border adjustment mechanisms – ie tariffs – on goods from countries which do not share Europe’s commitment to dealing with climate change is already under serious discussion. The risk is that such a step would provoke retaliation and trade conflict while doing little to benefit the climate.
As we move from debating the risks associated with global warming to identifying solutions, the need for “climate diplomacy” is increasing. European consumers are unlikely to support the radical steps required to achieve net zero over the next three decades unless those steps are seen as part of a common endeavour. Transforming the energy mix will achieve little unless the shift is global.
The search for global deals over the last two decades has been partially successful but even the Paris Agreement, the greatest achievement so far, is only partial and in many ways vague. Smaller, but more substantive steps are needed to translate aspiration into real and lasting reductions in emissions. The pursuit of technical breakthroughs will remain competitive but there is much scope for scientific cooperation in the key areas. Universal solutions may be unattainable given political differences and entrenched national interests but coalitions of the willing could advance particular positive developments. In the energy world the “willing” include significant parts of the private sector as well as Governments. The recent moves by companies such as BP, Shell, Total, Engie, Repsol and of course Equinor suggests that the European corporate energy sector understands the challenge of climate change and is ready to act. Effective energy diplomacy could bring together the complementary forces of public policy and private capital in pursuit of a common objective.
Climate diplomacy is important and will become even more necessary as time passes and the world approaches the point at which the consequences of climate change become more evident. Norway is uniquely placed to lead that diplomatic effort – unthreatening, experienced in convening complex negotiations, knowledgeable about all aspects of the energy business, and most important of all committed throughout society to constructive solutions.
One key part of Norway’s energy future should be the development of an institutional structure which, working with others publicly and privately to provide a channel through the detailed issues in the climate debate, can be discussed and resolved. That includes the development of the next generation of low carbon technology which can reduce the costs of the transition, the development of greater knowledge about the relationship between atmospheric carbon concentration, and weather conditions and the agreement of mechanisms by which the necessary precautions can be taken to plan against the risks of the extreme weather conditions which appear to be early indicators of the climate change to come. Until the necessary steps to reduce emissions have been taken, adaptation to the actual and potential impact of climate change on specific regions and communities must be part of the story. This is true in Stavanger and in many other areas of Norway as well as in low lying countries such as the Maldives and Bangladesh.
The last half century has been something of a golden age for Norway. Oil and gas brought unexpected riches, the benefits of which were not frittered away but saved and invested in a fund for the future. The establishment of a national industrial base to support the development of the North Sea brought new skilled employment and contributed to a reinforced sense of national achievement and standing in the world. Last year Norway’s per capita income was the second highest in the world, exceeded only by Luxembourg.
It is not surprising therefore that as the end of the oil and gas era comes into view there is a sense of apprehension and uncertainty – a concern that the trade balance, jobs, living standards, welfare provision and the livelihood of individual communities are in jeopardy. The nervousness is understandable, but the outcome is not inevitable. Transition and the changes it will bring do not have to be negative.
The Norwegian economy of 2030 or 2040 will look different but that does not mean that there will be fewer jobs or less wealth.
Norway holds many of the skills which Europe and the wider world now need. The country has the experience of having built an industrial infrastructure responsive to the needs of the times – an act of creation few expected to succeed. And most important of all Norway shares and has already set an example in beginning to transform the rhetoric of “transition” into reality. Norway is already the environmentally cleanest country in Europe as measured for instance by the number of electric vehicles and the use of hydro as a source of electricity.
The opportunity exists to build on what has already been achieved. The transition will not be simple or instantaneous, but the potential is beginning to take shape. After decades of success, apprehension about the future is understandable but the imperative for change in the way we produce and use energy means that great opportunities exist.
At this difficult moment with the world struggling to cope with the COVID pandemic and the resulting economic downturn with jobs being lost and normal life on hold, optimism is out of fashion. Current events, however, have not changed the underlying reality of the energy market and the imperative need for low cost, low carbon solutions.
In the 1970s Norway was able to take its future into its own hands, and as a result has enjoyed success beyond anything which could have been imagined at the time. By its actions Norway was able to determine its own fortunes. Times change and offer new challenges and new opportunities.The future is not preordained. Norway’s energy future over the next half century lies in the hands of the Norwegian people.