University of Stavanger Business Schoolhttp://www.uis.no/MohnTwitter: @Mohnitor
Norwegian petroleum: Prosper or perish?Klaus MohnProfessor
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Guest lecture at the Norwegian University of Life SciencesÅs, 27 March 2014
An intriguing industry
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Geology, technology, economics, and politics
An industry that makes a difference
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Source: Ministry of Finance, Statistics Norway, Oslo 2022.
A significant role in the Norwegian economy
Macroeconomic key figures 2012Oil and gas share in…
Seven winter olympic games…… every year
GDP23 per cent
Total export52 per cent
Government revenue30 per cent
Total fixed capex29 per cent
40 years of prosperous progress
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Source: Norwegian Petroleum Directorate, Norges Bank Investment Management, author’s calculations (GPF projections).
Substantial revenues for industry, households – and politicians
NCS oil and gas productionMMBoepd
Government Pension Fund - GlobalTotal capital (NOK trn; nominal)
0
1
2
3
4
5
1970 1980 1990 2000 2010 2020 20300
2
4
6
8
10
12
14
16
1970 1980 1990 2000 2010 2020 2030
???
The oil price matters…
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Source: Norwegian Petroleum Directorate, Norges Bank Investment Management, author’s calculations (GPF projections).
… for demand, supply, and future price dynamics
Oil price reviewBrent blend, USD/bbl (@2012 prices)
0
30
60
90
120
150
1970 1975 1980 1985 1990 1995 2000 2005 2010
4-fold increase since 2000 Impact on demand
Income effect Substitution effect Policy response
Impact on supply Conventionals Unconventionals
New technologies
The oil price matters…
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Source: Statistics Norway, Norwegian Petroleum Directorate, Reuters EcoWin.
… for NCS activity, production, revenues – and costs
NCS oil and gas investments……and the oil price (NOK bn; USD/bbl)
0
50
100
150
200
250
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Pipeline transportOnshore processingProducing fieldsField developmentExplorationOil price (USD/bbl)
0
20
40
60
80
100
120
140
0
1
2
3
4
5
1970 1980 1990 2000 2010 2020 2030
NCS oil and gas production…… and the oil price (mmboe/day; USD/bbl)
High attention on spending effects
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Responsible revenue management and fiscal sustainability
Source: Norges Bank, Ministry of Finance.
Less focus on resource movement effects
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Source: Ministry of Finance.
Significant repercussions to the mainland economy
Demand from the petroleum sectorRatio to mainland GDP (%)
Competitive position under pressureWages per hour, manufacturing industries
0
5
10
15
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Goods inputInvestmentLabour cost
0
50
100
150
200
Nor
way
Bel
gium
Sw
eden
Den
mar
kFr
ance
Ger
man
yFi
nlan
dN
ethe
rland
Aust
riaIre
land
Italy
Spa
in UK
Cze
ch R
Pola
nd
IOC returns fall short of expectations
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Source: http://www.statoil.com/IR.
Unimpressive share price developments
IOC revenues fall short of expenditures
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Source: Wall Street Journal.
More capital is required for each barrel of production capacity
IOC production falls short of promises
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Production growth versus targeted growth last four years
Source: Enskilda Securities (Oil companies’ E&P budgets, 20 August 2013).
IOC cash-flows fall short of investments
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Source: Goldman Sachs Investment Research.
Only BP funded its capex with cash-flow in 2013
Investment choked by financial markets
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Source: Citibank (chart).
Increasing focus on cash-flow management and capital discipline
“Leaking profits”Return on capital employed for major oil companies
Shareholder skepticism Production short of targets Sky-rocketing costs Erosion of returns
Worries over oil price outlook Weak economic growth New floods of supplies Policy uncertainty looms
Business model under pressure Scarcity and access dilemmas «Carbon bubble» challenge
“Cash is King!”
Longer-term oil industry challenges
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Source: Mitchell, John, Marcel, Valerie and Beth Mitchell. 2012. «What next for the oil and gas industry?». Chatham House. October 2012.
Will the world turn its back on fossil fuels?
Energy and climate policies Role of oil in transport Eastward bound energy Shale gale globalisation Emerging technologies Access, returns, and risk Changes in OPEC behaviour
Concluding remarks
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Build resilience, prepare for change
Energy is getting more expensive Oil price outlook is very uncertain The oil price matters for activity
Boom arrested by market concerns New shocks and cycles in the cards IOC business model under pressure
Uncertain outlookBrent blend, USD/bbl (@2012 prices)
Source: Mitchell, John, Marcel, Valerie and Beth Mitchell. 2012. «What next for the oil and gas industry?». Chatham House. October 2012.
University of Stavanger Business Schoolhttp://www.uis.no/MohnTwitter: @Mohnitor
Thank you for your attention!Klaus MohnProfessor
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