Norway's Central Bank Fears An Oil Price Spike
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Tsvetana Paraskova
Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…
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Norway's Central Bank Fears An Oil Price Spike
Rising oil prices have helped the finances and economies of the big oil-producing nations a lot. Western Europe’s largest oil and gas producer, Norway, is no exception.
Norway’s economic growth has been solid for nearly two years, the labor market has been improving, and investment on the Norwegian Continental Shelf (NCS) has recovered and is on the rise.
Yet, the governor of Norway’s central bankâ€"which has just raised the key interest rate for the first time in seven yearsâ€"is somewhat concerned with the prospect of oil prices hitting $100, as some analysts have started to suggest, expecting a further tightening in the oil market with the U.S. sanctions on Iran and with Venezuela’s plunging production.
Norges Bank Governor Øystein Olsen is worried that if oil prices were to hit $100, companies could abandon cost restraints and pl unge the industry in another cost spiral that would lead to the next bust.
“There could be a danger that when the oil price gets too high we’ll end up back in the situation where there’s too little cost awareness in the industry,†Olsen told Bloomberg in an interview this week.
“The Norwegian petroleum sector would benefit from less volatility over time,†he noted.
Still, Olsen sees encouraging signs from the industry that companies won’t return to unchecked spending if oil prices return to triple-digit territory.
Oil companies have so far vowed to keep costs in check, despite the fact that higher oil prices have helped them to turn in significantly higher upstream profits and raised their cash flows. Many companies are still planning investments and costs assuming oil at $50-$60 a barrel, and it seems that they will not be carried away by the current uptrend in the price of oil.
Kristin Færøvik, Managing Director at Lundin Norway AS and chair of the powerful oil lobby in Norway, told Bloomberg that companies are not losing control over costs, despite the rising oil prices.
Related: Brent Oil Breaks Its Post-Crash High
“Most of us are aware that we mustn’t contribute to a cost spiral like the one we had in 2013-2014,†Færøvik told Bloomberg, noting that the oil industry should maintain the new ways of keeping costs in check, including increased collaboration with the supply chain.
The firms’ higher cash flows are creating more investment opportunities, she said.
After several years of declining investments on the Norwegian Continental Shelf, investment is likely to increase substantially in the coming years, Norges Bank said in its Q3 Monetary Policy Report this month.
“The expected increase reflects the marked rise in oil prices since the beginning of 2016 and the substantial cost-cutting measures oil companies have implemented in recent years. Owing to th e rise in oil prices and cost cuts, break-even prices for new development projects are now far below oil spot and futures prices,†Norway’s central bank noted.
Petroleum investment offshore Norway is expected to increase by 2.5 percent year on year in 2018 and by more than 15 percent between 2018 and 2020, followed by weak growth in 2021.
Investment in development of new fields and in producing fields dropped by nearly a third between 2013 and 2017, with the decline cushioned by the giant Johan Sverdrup in the North Sea, Norges Bank says.
Johan Sverdrup is planned to start production in late 2019 and will be the main contributor to Norway’s rising oil production until 2023.
Spending on exploration offshore Norway also slumped between 2013 and 2017, but now the central bank expects investment in exploration “to show a solid rebound between 2017 and 2021, driven by the decline in drilling costs in recent years and prospects for an oil price of between U SD 60 and USD 80 ahead.†Related: How Much Does The U.S. Spend On Defending Global Oil Supplies?
There is still much oil to be discovered offshore Norway, the Norwegian Petroleum Directorate (NPD) says, estimating that the undiscovered resources are equal to around 40 Johan Castberg fields. Johan Castberg in the Barents Sea is estimated to have recoverable resources of 450-650 million barrels of oil equivalent, field operator Equinor says.
North Sea’s giant Johan Sverdrup will support Norwegian oil production through the early 2020s, but from the mid-2020s onward, production will start to decline, “so making new and large discoveries quickly is necessary for maintaining production at the same level from the mid-2020s,†Torgeir Stordal, Director exploration at the NPD, said in the directorate’s 2018 resource and exploration report in June.
Higher oil prices will support company investments in exploration and field development offshore Nor way, possibly contributing to sustaining oil production from the shelf in coming years. The risk with $100 oil, however, is companies forgetting restraints, setting the stage for another price crash.
By Tsvetana Paraskova for Oilprice.com
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T svetana Paraskova
Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…
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