Earlier this year, the Institute of the North announced that it was organizing a policy trip to Norway, among other things to enable a closer look at the system Norway uses to encourage oil and gas development in the country. Given the timing — the trip was originally scheduled to occur during what became the month that the Legislature was in special session — and the participants — the delegation included several Legislators — the trip received a fair amount of press. The trip also received extensive criticism from Paul Jenkins and other so-called “conservative” commentators.
The trip later was rescheduled and takes place toward the end of this month. While Jenkins’ and other’s similar criticism of the effort unfortunately may have caused some to change their plans, I am continuing to go — at my expense — because I believe that Norway’s oil policy potentially has something significant to offer Alaska and warrants a closer look.
What can Alaska learn from Norway? One headline from this past week’s news helps explain. As reported by Bloomberg News,
“Norway Sees Longer Oil Era as North Sea Find Offers Hidden Giant.”
Norway may slow a decade-long slump in oil production after a series of discoveries …. Statoil ASA (STL) has made two offshore finds of more than 250 million barrels of oil equivalent in Norway this year. The country’s biggest oil and gas producer yesterday said … the North Sea [discoveries] are part of one “giant” oil field, and among Norway’s top 10 discoveries. … The Aldous and Avaldsnes oil discoveries located on the Utsira High may hold 500 million to 1.2 billion barrels of recoverable oil. …
Since output peaked in 2000, Norway has faced declining production due to maturing fields (though at a slower rate than Alaska). While the recent discoveries do not portend a new peak, they do promise significant increases from current levels. According to Trond Omdal, an analyst at Arctic Securities ASA in Oslo, “[p]roduction [from the new fields] could be 250,000 to 300,000 barrels a day, and given that Norway’s production last year was 2.1 million and this year has been below 2 million, that shows the impact.”
But what does a major discovery in Norway have to do with Alaska — and why does that reinforce my early decision to take part in the Institute of the North policy visit ?
The fact that the discovery is led by Statoil.
In other parts of the oil world where the state owns the resource, it is not uncommon for the state to take part in the upstream sector of the industry through the formation of one or more state-owned oil companies. One of the reasons for such an approach is to bring a focus to the exploration and development of the host state’s resources. While the interest level of investor oil companies in any given region may vary from time to time depending on opportunities elsewhere in the world, through thick and thin a state-owned oil company is expected generally to maintain at least one — and sometimes both — eyes on identifying and cultivating new exploration and development opportunities within the state’s own borders.
Norway has two such companies. The oldest is Statoil, founded in 1972 as a fully state-owned oil company. Today, Statoil is 67% owned by the Norwegian government — the rest trades publicly on various stock exchanges, including the New York Stock Exchange. While over the years it has spread its global reach — today Statoil operates in 34 countries and is the world’s largest deepwater operator — consistent with its roots and government mandate the company always has maintained an intense focus on the development of Norway’s resources.
The second is Petoro, founded in 2001 as Statoil was partly privatized and spread its wings internationally. Petoro is 100% owned by the Norwegian government and compliments Statoil’s international breadth by maintaining its focus entirely of developing Norway’s Continental Shelf.
Importantly, both Statoil and Petoro operate as full and contributing partners in the development of the projects in which they take part, usually as part of a joint team that includes major or other investor owned oil companies also owning interests in the projects. The state does not require a free ride, both Statoil and Petoro bear a proportionate share of the investment and costs, and receive a proportionate share of the revenues.
That, in turn, puts them in a very strong place in driving the development of the resource. As an investing partner — what in Alaska we refer to as a working interest owner — the state companies have the ability to identify new projects and a significant — and at times, determinative — voice in whether the projects move forward. Because Statoil is a taxpayer alongside others in the industry, it also is equipped to understand and articulate the adverse effects on development that are likely to arise from any changes the government may consider in fiscal policy.
In part this structure helps explain this week’s headlines from Norway. Together, Statoil and Petoro essentially operate as bird dogs for the development of Norway’s oil and gas resources. As other investors weigh their competitive options elsewhere, Statoil, to a significant degree, and Petoro exclusively, focus their attention on identifying and developing the next “hidden giant,” or less glamorously, the next development project or technology that will optimize the production of Norway’s resources.
No doubt for good and sufficient reasons, both at the time of statehood and, later when Prudhoe was discovered and leasing on the North Slope was at its peak, Alaska chose a different model. Instead of establishing an entity to invest alongside private industry and thus, positioned both to help drive development decisions and provide insight into terms that might facilitate continuing efforts, Alaska instead implemented a much more regulatory-oriented model.
In brief, rather than help drive development decisions as a partner, Alaska instead chose to serve as something of a back seat driver, attempting to direct industry through regulations and hearings. Moreover, rather than experiencing the consequences of the state’s regulatory and fiscal policies firsthand — as do Statoil and Petoro — Alaska instead chose to a significant degree to become reliant on Outside consultants to recommend what might work in attracting new investment. Not surprisingly, that approach has often missed the mark.
The consequences of each course are starkly captured by this week’s events. Norway is celebrating the discovery of two new fields which, once brought on-line, may produce an extra 250,000 – 300,000 barrels of oil per day.
This week’s Alaska Department of Revenue Weekly Update forecasts that Alaska’s average daily production for Fiscal Year 2012 will slip below 600,000 for the first time since the early 1980’s.
Briefly at one time, Alaska considered adopting a system which better aligned the state’s interests with the producers and involved the state to a greater extent as a full participant in the decision-making that drives investment in Alaska. But that was as part of the 2006 Fiscal Contract, and the Alaska Legislature threw out the baby with the bath water.
So, why am I going to Norway? Because I want to learn firsthand about how Norway encourages and drives continued investment in the development of its oil and gas resources, and whether Alaska can benefit from adopting some parts of the same approach.
A junket? Well, not for me; its serious business.
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