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More Norwegian Gas for Europe?

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Northwest Europe’s natural gas market is dominated by a duopoly of sellers: Russia and Norway. Historically, they have considered each other's interests and the wish of German buyers to diversify risks and purchases. Their interaction has been marked by both competition and reciprocity. Price competition has been damped by strategic understandings with buyers. Russia, although it has larger proven reserves and perhaps lower costs, long appeared to understand that it was not allowed to take the whole market. Norway appeared satisfied with a lower share in a stable and predictable gas market, where Russia was a factor of stability. Since war began in Ukraine in February, that is history. From this perspective, Vladimir Putin’s war appears not only as a crime, but also as a stupidity. It could open the door for Norway to become Europe’s largest gas supplier, if political support can be built for this in Norway and, most important, if there's a clear signal of long-term demand from the EU.

The European Commission has come to the fore in recent years with an ambitious net-zero energy policy to eliminate fossil fuels, including gas and especially Russian gas. In EU politics, energy is subordinate to climate action.

So far, EU energy policy has been unsuccessful in its promise to provide clean, reliable and affordable energy. It has given Europe the world's most expensive, albeit relatively clean, energy. Consumer protection, supply security and price moderation have not been prominent objectives for the EU. In addition to the war in Ukraine, declining Dutch gas extraction has put Europe's energy supply at risk.

In the current turmoil, national governments — in Belgium, France, Italy, Portugal and Spain — have taken the lead in sheltering household consumers and small businesses. The commission wants to overcome the electricity crunch by investing more in windmills, a power source with a utilization rate below 30%, meaning that the critical factor is the amount of wind, not capacity.

In Germany and the UK especially, costly and unreliable energy supplies cloud the economic outlook. As a result, there is growing pressure in the UK to exploit shale gas, and Germany is considering reopening abandoned coal-fired power plants.

Norway’s Potential

In the longer term, Norway has the potential to step up oil and gas exploration and to develop any new discoveries. However, this presupposes domestic political agreement to continue and perhaps increase the pace of Norwegian petroleum activities. In order to avoid a setback for the oil and gas industry amid the Covid-19 crisis, the Norwegian parliament with a large majority voted for tax relief. The measures safeguarded supply chains and industrial capacity. Oil and gas investment fell by a few percent in 2021, but is expected to increase again from 2023.

Norway cannot replace Russia’s full historical gas export volumes, but it could emerge as Europe’s largest gas supplier. It could take a larger share of the gas market in Northwest Europe, primarily in Germany, Poland and the Czech Republic, and perhaps in the Baltics and Finland as well. Norwegian gas could replace enough Russian gas to prevent the power sector from returning to coal.

Here, access is facilitated by infrastructure and by markets in large cities and industries. Infrastructure is now in place for Norwegian gas to reach Poland and the Baltic states. Depending on resources and the market, Barents Sea gas could also be landed by pipeline on the coast of Northern Norway, go through Finland, and connect with the Baltic networks and Poland. Maintaining and developing petroleum industry capacity is essential, considering Norway’s huge maritime territory, which measures 2 million square kilometers — larger than the entire Gulf of Mexico.

About half of the area is assumed to have sedimentary rocks with a petroleum occurrence. Measured by exploratory drilling, the Norwegian Continental Shelf is not a very mature oil and gas province. In almost 60 years, only some 1,200 wildcat wells have been drilled. The Norwegian part of the North Sea is notably less explored than the UK part. The central and northern parts of the continental shelf, i.e., the Norwegian Sea and the Barents Sea, have been explored even less. The government estimates the remaining volume of liquids and gases is at least comparable to that extracted since 1970. High oil and gas prices enhance the potential.

The Market Is the Question

The resource base indicates that Norway could remain a significant oil and gas exporter for at least a couple more generations. The question is the market.

Short-term measures to increase gas exports include the reopening of the Melkoya LNG port, damaged by fire in September 2020. This will perhaps allow Norwegian gas production to reach 115 billion cubic meters this year. Developing smaller deposits adjacent to producing fields will raise output marginally beyond that, but a larger expansion will depend on new investment. Exploration will need to accelerate and infrastructure will need to be developed, possibly with new LNG facilities. This can happen only at a cost and would require several years.

Again, the questions are the market, the state of relations between Europe and Russia, company interest and Norwegian politics. The time horizon is at least five to seven years for a durable increase in Norwegian gas volumes.

Several factors create uncertainty: In Norway, environmental lobby groups oppose any expansion of oil and gas activities. They are in the minority, but they are powerful in a fragmented political system dependent on coalition governments.

There are also legitimate economic concerns. Norway’s sovereign wealth fund — valued at about three times the GDP — is well balanced and lessens the financial imperative for expanding oil and gas production. Instead, risks of overinvestment and falling oil and gas prices make a case for caution. Also, even if the sovereign wealth fund can provide a buffer against sudden changes, fear of economic overheating and of monoculture argues against quick expansion of the oil and gas industry. The risks of industrial accidents, pollution, fishing impacts and environmental damage are relevant as well.

The key question, though, is whether Europe really wants Norwegian gas. How much? For how long? At what prices? Until recently, getting rid of natural gas before 2050 has been a major objective of EU and UK energy policies. That has provided a disincentive for Norway and other countries to explore for oil and gas. Has there been a change of mind on this? From a Norwegian perspective, 2050 is a brief time horizon for a strong revival of an industry (almost) condemned to death. How much risk do the EU and UK assume that Norway should take?

It could be argued that, in the current context, additional carbon dioxide emissions from Norway would merely replace Russian CO2, but how would EU energy policy respond to eventual political change in Russia? Are the EU and the UK — not to mention the industry — prepared to modify their climate targets to encourage an expansion of Norway’s oil and gas industry?

Norway can help Europe's access to energy, but only over time. Russia's war in Ukraine is changing the economic, climate and security policy conditions for gas trade in Europe and for Norway. The question is whether the EU and UK can, in practice, provide settings for long-term investment in energy that is not solar, wind or nuclear.

Øystein Noreng is professor emeritus in Petroleum Economics and Management at BI Norwegian Business School in Oslo, Norway. The views expressed in this article are those of the author.

Norwegian Continental Shelf Area Status, March 2022

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Topics:
Gas Supply, Policy and Regulation
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