Major Norwegian oil discovery

Kjersti Haugland, Senior Economist at DNB Markets

(17.08.2011) There have been several major oil discoveries on the Norwegian shelf this year. As the Norwegian economy is heavily dependent on the oil sector, the discoveries – and hope of more to come - will serve as a boost to the long-term growth outlook.

By Kjersti Haugland, Senior Economist at DNB Markets

The major discovery in the North Sea called Aldous is even larger than previously envisaged. The 200-400 million barrel estimate, announced on the 8th of August, was more than doubled yesterday. This adds to the significant Skrugard discovery announced in April. 

Largest discovery since mid-eighties:
In April a major breakthrough in the search for oil in the Barents Sea was reported. The Skrugard discovery was estimated to contain 250 million barrels of oil. Two weeks ago another significant finding was reported, this time in the North Sea. The Aldous discovery was estimated to amount to 200-400 barrels. Yesterday this estimate was more than doubled, and Statoil (one of the stake-holders) has announced that in combination with the Avaldsnes discovery it is between 500 million and 1.2 billion barrels of oil equivalents. It may be among the ten largest findings in the North Sea, and could be the world's largest discovery in 2011.
 
Norwegian economy dominated by oil: Since the start of oil production in 1969, the Norwegian economy has become increasingly dominated by the oil sector, as indicated by the graph below. In 2009 nearly half of Norway's export value was crude oil, gas and pipeline transportation. The oil and gas sector contributed to one fifth of GDP. Oil production has passed its peak however. The investment share has been on a declining trend since 1993.
 
Oil discoveries boost long-term outlook: High activity on the Norwegian shelf will not only serve oil companies. A significant share of Norway's enterprises is suppliers to the oil sector. In addition there are important positive spill-over effects to other businesses, like retail trade, hotels and restaurants etc. Norwegian employees have received their share of the significant rise in oil prices throughout the past decade in the form of significantly higher wage growth than among our trading partners.

Graphs illustrating the Norwegian oil and gas sector and government structural deficit
 
It may take almost a decade before the new discoveries materialises in production, but when it happens the government will receive revenues that will be invested abroad through the Government Pension Fund. Currently, the value of the fund is about NOK 3 000 bn (to compare, Norway's GDP was NOK 2 500 bn in 2010). To provide a gradual phasing-in of oil revenues and a rate of spending that can be sustained for several generations; politicians comply with a fiscal rule. In "normal times" the spending of the oil revenues through government budgets is limited to the expected return (estimated to 4%) of the Fund. We expect the price of oil to increase further, to 150 dollars per barrel in 2015, due to limited supply from non-OPEC countries combined with high demand growth from emerging markets. In other words: There is reason to expect that fiscal policy will contribute solidly to boosting growth for years to come.