OSLO (Reuters) - Norway's energy boom is
tailing off years ahead of expectations, exposing an economy unprepared
for life after oil and threatening the long-term viability of the
world's most generous welfare model.
High spending within the sector has pushed up wages and other
costs to unsustainable levels, not just for the oil and gas industry
but for all sectors, and that is now acting as a drag on further
energy investment. Norwegian firms outside oil have struggled to
pick up the slack in what has been, for at least a decade, almost a
single-track economy.
How Norway handles this "curse of oil" - huge wealth that bring
unhealthy dependency in its train - may hold lessons across the
North Sea in Scotland, which votes on independence from the United
Kingdom later this year, relying at least in part on what it sees as
its oil revenues.
Norway had the foresight to put aside a massive $860 billion
rainy-day cash pile, or $170,000 per man, woman and child. It also
has huge budget surpluses, a top-notch AAA credit rating and low
unemployment, so tangible decline is not imminent.
But costs have soared, non-oil exporters are struggling, the
government is spending $20 billion more oil money this year than in
2007 and the generous welfare model, which depends on a steady flow
of oil tax revenue may not be preparing Norwegians for tougher
times.
"In Norway, job security seems to be taken for granted, almost like
it's a human right to have a job," says Hans Petter Havdal, CEO of
car-parts maker Kongsberg Automotive.
Kongsberg Automotive has only 5 percent of its workers left in
Norway, having moved jobs to places like Mexico, China and the
United States, and keeping only high-tech, automated functions at
home. It says it is struggling with high labor costs and even
problems such as excessive sick leave.
"It's a bit discouraging that the sick leave in Norway is twice the
level of other plants," Havdal said. "That is to me an indication
that something is not as it should be."
With per capita GDP around $100,000, the Norwegian lifestyle has
become such that the work week averages less than 33 hours, one of
the lowest in the world, and while unemployment is low, there is
large underemployment, made possible by benefits.
In 2012, a new word entered the Norwegian lexicon - to "nave", or
live off benefits from welfare agency NAV.
"Approximately 600,000 Norwegians ... who should be part of the
labor force are outside the labor force, because of welfare, pension
issues," says Siv Jensen, the finance minister.
Company executives and some government officials say Norway needs to
limit wage increases to productivity, limit oil cost growth, cut
taxes like neighbors have done and spend less of the oil money. Some
say it should even depreciate its currency.
The Scottish National Party's argument in favor of independence has
centered on the promise that Scotland can replicate the success of
Norway's oil economy, creating a sovereign wealth fund for future
generations, while public coffers would be only half as dependent on
oil and gas.
Unfortunately for Scotland, the glory days of British hydrocarbon
production are already in the past, with North Sea output down
around two thirds since its peak.
A net oil and gas exporter until the turn of the century, Britain
will import almost half of its hydrocarbon needs this year, mostly
from Norway, rising to two-thirds by 2026, the government has said.
TURN FOR BIG OIL
The fortunes of the oil industry, which accounts for a fifth of
Norway's economy, have shifted abruptly as the global oil sector
slammed on the brakes.
Costs are spiking and capital spending has been so high that energy
firms are selling assets to pay dividends. With oil prices seen
falling this year and next, appetite for capital expenditure is low.
Investments, which tripled over the past decade, are now seen
declining in the years ahead, confounding earlier expectations for a
steady increase, while oil production remains flat, despite years of
heavy spending.
Energy companies are cutting some of their most innovative projects,
a big worry as the sector has relied on cutting edge innovation to
offset its high costs.
The government puts the best face on this, but admits times are
changing.
"The boom is probably over. But we're not looking at a steep decline
in investment or production," says oil minister Tord Lien. "The
costs are rising too high and too fast. The Norwegian costs have
risen a little bit more than elsewhere."
Shell has called off a multi-billion dollar gas project that was
seen as a step towards platform-free offshore production after costs
on the pilot project hit seven times the initial estimate. It would
have placed all equipment on the seabed, including compression, and
would have powered it from the shore, a huge technological step.
Statoil, the state-owned national champion, has slashed spending,
eliminating advanced projects like an Arctic rig that would have
been able to operate in two-meter thick ice.
"Cutting back on capital spending is hurting innovation," says
government oil regulator chief Bente Nyland. "When you're cutting
back, you're focusing on your production (and) your income ... This
will have a long-term impact because you have to make decisions on
projects now."
Norway is the world's seventh biggest oil exporter, and it supplies
a fifth of the European Union's gas, a critical position as tensions
with Moscow over Ukraine raise concerns about Russian supplies.
It also boasts the world's highest GDP per hour worked, according to
the OECD, but labor productivity has declined since 2007, and since
2000 its unit labor cost has risen around six times faster than in
Germany.
NO GOING BACK
Handelsbanken economist Knut Anton Mork said Norway must act if it
is to avoid decline.
"The oil boom has ended," Mork said. "Norway needs to rebalance to a
more sustainable level, which can be done either through a nominal
depreciation or through an internal devaluation of wages.
"Absent necessary adjustments, Norway after oil may face a
structural crisis similar to that in Finland after Nokia."
Industry-leading mobile handset maker used to account for nearly a
fifth of Finland's exports and a quarter of its corporation tax
before its rapid decline as rivals cornered the market in
smartphones.
Neighbor Sweden, meanwhile, cut sickness and unemployment benefits
and lowered income, wealth and corporate taxes. Its tax burden has
fallen by four percentage points of gross domestic product, now
making it lower than France.
But such wage adjustment in Norway is unlikely in the near term, and
unions dispute that the country has a competitiveness problem.
Industrial workers nearly went on strike in April until last-minute
concessions.
"We haven't been in a situation since the second world war that we
had any cutbacks on rights we have negotiated," said Stein-Ragnar
Noreng, CEO for consultancy KPMG's Norwegian unit.
"There is no sign of willingness from unions or the government to go
into any kind of discussion. This could be very dangerous because
investments will go down."
Knut Sunde, director of employer interest group Area Trade and
Industrial Policy, also sees little chance of much change:
"It's a high-cost country and will always be, so there's no dreaming
about ever coming back to the good old days when Sweden was
expensive and Norway was cheap. We'll never go back."
(Additional reporting by Henrik Stolen in Oslo, Sakari Suoninen in
Helsinki and Karolin Schaps in London; Editing by Will Waterman)
