Plummeting oil prices have pushed Norway, one of the richest and happiest countries in the world, to rethink its future and its exporting strategy. Aleya Begum reports.
As the world commits to more climate-friendly targets and policies, and as the renewable energy sector becomes increasingly competitive, many fossil fuel producers are facing the question of whether the latest crash in oil and gas prices is the end of a boom cycle or the end of an industry. Those working in the sector – a cyclical business by nature – have weathered worse.
However, this time things are a little different. The die-hard confidence of latter years has waned as global climate consciousness kicks in and companies and countries alike are having to rethink their strategies. In Norway, where oil and gas-related sectors make up around 75% of the country’s exports, the question is one that is at the forefront of the public and private debate.
In his 2015 annual address, the governor of the Norwegian central bank, Øystein Olsen, highlighted that after 40 years of prospering on oil and gas, Norwegians are transitioning from a “unique place” to one of “adapting and restructuring”. Norwegians, who have enjoyed a strong economy for the best part of two decades and been cushioned from the financial crisis of 2008 – and the global slowdown since – on the back of high oil prices, are now faced with a new reality and must adapt, he said. Many have taken heed of his words, and in the two years following, businesses, banks and the government have rallied to diversify the economy.
Shippers set new sails
The Norwegian maritime industry, a large chunk of which serves the offshore oil and gas sector, is among those setting new courses. The country’s west coast has been hit particularly hard – the region is home to a tight-knit community of designers, builders and operators of some of the world’s most sophisticated offshore vessels that support a wide range of high-tech equipment suppliers. 2015 saw the number of ships and drilling rigs in lay-up go from zero to 100, and a five-year trend of growing revenue for the sector reverse. This decline continued in 2016 and is expected to do so in 2017 too.
For state loans provider Eksportkreditt, since 2005 the two main sectors that is has supported, in terms of volume, have been oil and gas maritime vessels and equipment for drilling rigs. Between them, they accounted for over 95% of loans issued.
“Those two segments are almost gone in terms of new contracts right now,” says director of lending, Ivar Slengesol.
While oil and gas operators slash their spending, many yards are re-thinking their own directions, diversifying their offering, and transferring their know-how to serve new markets. Key to new business models are revenue streams generated by non-traditional vessel types.
“We have seen the big Norwegian shipyards securing contracts in completely different markets,” says head of communications at export credit agency (ECA) Giek, Allon Groth.
“Whereas they were mainly building offshore vessels previously, now they are building passenger ferries, cruise ships certified for arctic waters, offshore wind farm support vessels and specialised high-tech fishing vessels.”
Two prominent examples of this are the Vard and Kleven shipyards. Vard launched its diversification strategy in 2015 and recently reported that it had secured six contracts and one letter of intent for expedition cruise vessels in the last 18 months. Vard has also seen new project opportunities from the fisheries, repair, conversion and maintenance sectors.
Meanwhile, family-owned Kleven has diversified well too. The yard is building four high-end stern trawlers for owners in Germany, France and Spain, a cable-layer for technology company ABB, two live-fish carriers for local owners, two new explorer ships with Norwegian cruise line Hurtigruten, and a second mega-yacht for a New Zealand businessman. It has also completed a first of its kind deep-sea diamond mining vessel for De Beers.
“Underwater mineral exploration is a new segment for Kleven. Our offshore experience and expertise in this field has led to the development of this unique vessel,” said company CEO Ståle Rasmussen at the time of receiving the order. In its latest corporate reports the company says both its Norwegian yards are now filled up to 2019 with orders for fishing and passenger vessels, along with its traditional offshore vessels.
Other examples include Havyard and Ulstein. Havyard reported last year that in the last 18 months, its deliveries included offshore wind support vessels, icebreakers, a live salmon carrier and a stern trawler. Meanwhile, Ulstein says its design team is working on new applications for existing designs, as well as on new vessel designs, including casino and family cruise ships for the Chinese market.
Renewable and clean energy have also been a new area of focus, and Norway is currently exploring options in solar and offshore wind. Despite its abundance in fossil fuel reserves, Norway powers its domestic market predominantly with renewable energy. This has resulted in a skilled renewable industry at home, which is now becoming increasingly more international.
“In terms of industrial development, solar is a very young industry, with potential,” says Slengesol.
Offshore wind is also becoming increasingly important, as vessels from oil and gas look to offer their services for the installation and maintenance services of wind turbines and associated power cables. Norwegian companies have been successful in securing work on projects off the coasts of the UK, Germany and Belgium.
“In offshore wind we see a bit of a critical mass now of suppliers. It is a growing opportunity for some of the Norwegian offshore suppliers, from the smaller low-tier ones to the larger multi-billion-kroner companies,” says Slengesol.
Oil enters a new era
Having enjoyed an abundance of fortune from rocketing oil prices, the oil and gas sector had become somewhat complacent regarding costs. Project development expenses were on a continuous upwards spiral. As drilling depths got ever deeper, so too did the pockets that paid to bring that oil up. As the price of oil came down, costs were forced in the same direction. Major projects with billion-dollar price tags went back to the drawing board, as an industry that was used to burning cash as fast as its fuels was forced to sober up.
One outcome has been the turn-around from the use of complex tailor-made operation solutions to standardised ones. Ordering standardised parts can allow companies to pre-stock components and sign contracts faster, letting them ramp up production more quickly and economically. Last year, state oil company Statoil announced it had used the same oil well design and components to drill three reservoirs for the price of one, helping it to make unprofitable wells profitable. Earlier this year, the company said it had more than halved its average breakeven price for its next-generation portfolio to US$27 a barrel, compared to around US$70 in 2013.
Consequently, it is back in the market with some projects that had been on hold. It recently awarded contracts for the first phase of development for Johan Svedrup – one of the five biggest oil fields off Norway, discovered in 2011, with estimated resources of 1.9 billion to 3 billion barrels of oil equivalent. The company says costs for this phase are currently estimated at Nkr99bn (US$11.6bn), a Nkr24bn reduction from 2015. Meanwhile, full field investment numbers now range between Nkr140 to 170bn, compared to Nkr170 to 220bn in 2015.
The operator has also cut development costs by half on its 400 million to 600 million barrel Johan Castberg field, and says it can now turn a profit at less than US$50 a barrel. The company is currently planning around Nkr170bn of new investments due to be operating by 2022.
In an interview with local newspaper DN earlier this year, Statoil CEO, Eldar Saetre, said that the company’s portfolio of projects contains the highest degree of profitability he’s ever seen in his 36 years there, even though oil prices are still roughly half of what they were when they peaked just a few years ago.
Despite the savings, the cuts have come at a cost themselves. With projects being streamlined both in terms of staff and services, Statoil has been dealing with serious safety problems at several of its installations. The company is under pressure from both state authorities and unions to resolve them. While the management team has promised to improve conditions, relations with labour unions have hit new lows.
Mergers and acquisitions (M&A) between companies within various parts of the value change have consolidated the market. The coming together of French engineering, procurement and construction (EPC) contractor Technip and US oilfield equipment company FMC Technologies last year is expected to be the first of many and speculation is currently rife around the merger of Norway’s Aker Solutions and US Halliburton.
“When two parts of the value chain merge together and make a standard solution, this can further reduce costs. With so much focus on cost we now expect more M&As. It is necessary to be competitive in the market,” says Nordea’s head of trade finance sales Norway, Annie Sebergsen.
“There is a lot of speculation and discussions going on around several Norwegian oil service companies being bought up by international companies.”
While oil and gas has struggled, its closest competitor in terms of export value, seafood, has been posting record growth over the past few years. A rival to oil and gas drilling for Norwegian waters, the sector reported Nkr91.6bn-worth of exports in 2016, a 23% increase over the year before, and the second record year in succession.
International demand for fresh fish is rising, but the industry has also benefitted from a weaker krone and higher prices in salmon due to a lice epidemic eating into supply. The price of a single salmon rose above that of a barrel of oil in January last year – a historical moment for both of Norway’s key industries. The Norwegian seafood industry site iLaks.no noted that with 4.5kg of gutted and packed salmon trading at Nkr65 per kg, the price of an average 4.5kg salmon was Nkr292. Meanwhile, the price of a barrel of Brent crude oil at the time was down to US$30, or NKkr262.
The seafood boom has drawn attention from across the board.
“We are seeing a lot of transfer of expertise from the oil industry to other industries. What we see growing the fastest is seafood. Advanced supply ships that were previously used for operations on oil platforms are now being used for operational support for fish farms,” says Sebergsen from Nordea.
Meanwhile, like many of the other banks, senior advisor for trade finance at Danske Bank, Anette Stavem Høgmoen, says Danske is increasingly focused on building up a solid knowledge base in the sector.
But the surge in price has meant sales volumes for a range of seafood exports, including salmon, trout, mackerel and Klippefisk, has fallen. Sales to Europe, its biggest export market, are down 6% year-on-year, while sanctions on Russia have meant a steep drop in that market too.
Further afield, the Chinese market is high on the Norwegian radar after diplomatic ties between the two countries normalised in December last year. The relationship, and subsequently significant trade, between the two had been frozen since 2010 after China didn’t take too fondly to Norway awarding dissident Liu Xiaobo the Nobel Peace Prize.
Norway has recently announced that talks on a free trade deal between the two countries were expected to start before the end of the year, after Norwegian Prime Minister Erna Solberg led a trade mission to Beijing in March. In April, the Norwegian minister of fisheries, Per Sandberg, said the two countries had signed an agreement on imports and exports of foodstuffs.
Norwegian seafood leaders believe that within a few years, their exports to China could reach Nkr2bn.
The state perspective
For Giek and Eksportkreditt, the slow market for oil and gas projects has been a two-fold issue. They have had to figure out how to minimise losses on projects that had already been financed, while also continuing to support new projects. They have responded through restructuring existing financing deals, offering new framework options and targeting new sectors.
“On many existing loans we are the largest guarantor. The ability to repay has been significantly weakened among ship-owning companies, so what do you do with these companies and the overcapacity that you have today?” asks Groth from Giek.
The maritime sector, which was already struggling from oversupply on the shipping side from sluggish global demand and over-enthusiastic newbuild order books, saw offshore vessels join the party. Most of the ship-owners have had to renegotiate with their creditors, including Giek, and have restructured their debt. With a focus on long-term sustainable solutions, the negotiations have been through several rounds of discussions over months, with some still to be fully resolved.
“We don’t want to achieve short-term quick fixes – that doesn’t work anymore. We must address the underlying problem, which is overcapacity. So, we need fewer ships – there is no way around this,” says Groth.
“We are trying to be as constructive as we can but at the same time we have to balance our expenditure and our income. We have to make sure Giek doesn’t sustain losses that could have been prevented. It’s a very difficult market situation, no doubt.”
On the plus side, the Norwegian shipyards’ ability to diversify into new markets has been “admirable” says Groth, and the new business, which has meant new learning for Giek too, is welcome: “I think the bottom line for us is we have to adjust and learn to do new things and come up with flexible solutions to very new needs that we haven’t seen before.”
As the political agenda behind climate policy continues to shift back and forth, Norway will do well to continue to push its diversification strategy. For now, the country remains heavily dependent on natural resources, with seafood and aluminium as its second and third-largest export sectors after oil and gas – everything else is relatively small in comparison.
“That’s quite unique for a developed and advanced economy to have an export industry and economy that’s heavily weighted in natural resources,” says Slengesol.
“There have been good policies and initiatives but we still need to think harder on how to make this transition happen as it’s such an enormous task.”