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10 March 2022

Boom time in Norway as the West cracks down on Russian oil

Norway is often viewed as a “green” country, but oil is central to its economy, and the country is making hay during the current crises.

By Nick Ferris

Sanctions are piling up on Russia, and a measure that seemed unimaginable only a couple weeks ago – the ending of Russian oil and gas imports – is now very much on the table. Just this week, the US announced a ban on Russian fossil fuels, the UK has said it will end Russian oil imports this year and the EU has published plans to wean itself off Russian gas before 2030.

A full global ban on imports of Russian coal, oil and gas would lead to soaring consumer prices and potentially trigger a global recession, analysts are warning. But there would also be winners if this were to happen. In Europe, Norway would be at the front of the queue to step in if the continent were to start refusing hydrocarbons from Russia.

“All producers outside Russia are set to benefit,” says Jorge Montepeque, a former director at commodities analysts S&P Global Platts. “The US, Middle East and Norway are all countries that will see enormous returns as the world moves away from Russia.”

Right-wing political parties in Norway have already called for more oil-exploration licences to help meet European demand. The deputy leader of the left-wing SV party Lars Haltbrekken has, however, pointed out that even if exploration were allowed, the years-long process of bringing a new discovery into production would take too long to make a difference.

Regardless of whether any new production comes online, Norway is set to profit hugely from soaring oil and gas prices, which together represent 40 per cent of the country’s exports. These winnings come on top of massive profits already made as a result of Europe’s energy crisis. In September 2021, the country reported record oil and gas exports worth NKr78.5bn ($8.8bn), with oil income doubling and gas income increasing seven-fold compared to the previous year. By December 2021, Norway gas exports alone were worth NKr95.1bn ($10.6bn), in what was the sixth month in a row of record gas exports.

Norway is a top supplier of European oil and gas
Source: Eurostat

The Norwegian oil major Equinor, one of the largest oil and gas producers in the world, also recorded a vast profit of $33.7bn for 2021, ten times greater than the corresponding figure of $3.4bn in 2020. The company reported quarterly profits of $15bn in the fourth quarter alone, and plans to pay out $10bn to shareholders this year. 

The situation, said Nettavisen, one of Norway’s most-read news sites, has been a “party for Norwegian gas”, with exports in September able to “fund the entire welfare budget” that month. Another article published by NRK, Norway’s state broadcaster, went so far as to describe Europe’s energy crisis as “really good for the Norwegian wallet”. 

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Considering these profits in the context of the ongoing cost of living crisis, makes some uncomfortable. “Norway is making huge profits from energy poverty in Europe at the moment,” says Aled Dilwyn Fisher, from the NGO Friends of the Earth Norway.

All profits made from oil and gas extraction in Norway are subject to a 78 per cent windfall tax. The money raised then goes directly to the Norwegian sovereign wealth fund, which now holds $1.3trn in assets, equivalent to $240,000 for each of Norway’s 5.4m citizens, with a stake in 1.3 per cent of all of the world’s listed companies. The record profits reported by Equinor also largely end up going back to the Norwegian people since the state has a 67 per cent stake in the company. 

The government is allowed to spend around 3 per cent of its fund each year, which in turn contributes to around 20 per cent of the government’s budget. This largesse is in stark contrast to the more laissez-faire UK, where no oil fund exists, and taxes on extraction are much lower.

The effective tax rate has averaged 18 per cent on oil in the UK, compared with 31 per cent in Germany, 33 per cent in Denmark and 46 per cent in Norway, shows research from Juan Carlos Boué at the Oxford Institute for Energy Studies. From 1990 to 2017, the UK government collected £181bn in revenues. If the tax rate on extraction had been the same as Norway’s, Boué estimates, the UK would have made about £437bn.

On the one hand, Norway’s plentiful gas supplies are a bonus for Europe; without them dependency on Russian fossil fuels would be even higher. But from a climate-action point of view the picture is more complicated because the country has no plans to move away from extracting oil and gas in the long term. Indeed, the government issued 53 licences to explore for new fields in January 2022.

There is a sense of “Norwegian exceptionalism” in oil, says Fisher, which sees the country justify more production through a narrative that Norway’s fossil fuels are somehow “better” than those produced elsewhere. This is based on a number of arguments, including the fact that democratic Norway is seen as a more reliable partner than autocratic competitors, that the country’s massive electric vehicle sales and hydropower capacity make it a “green leader” at home and that superior Norwegian technology means that less methane – a greenhouse gas with up to 25 times the warming effect of CO2 – is emitted during production. 

Such arguments ignore the International Energy Agency’s warning last year that for the world to be on track for net zero by 2050, “no new oil and natural gas fields are needed”, not in Norway nor anywhere else. 

Further, a number of Norway’s new oil and gas developments are controversially situated in the Arctic. The Johan Castberg oil field, for example, lies off the country’s northern coast. It is set to be operated by Equinor from 2023, with plans for it to produce a total of 550m barrels of oil equivalent until 2049, shows data from analytics firm GlobalData. Equinor is also developing another field, Wisting, which at 300km off Norway’s northern coast would be the northernmost oil development in the world. It is set to come online in 2028, and produce 430m barrels of oil equivalent until it reaches its economic limit in around 2053, says GlobalData. 

The year 2053 is three years after the date by which the UK, the EU and Norway plan to reach net zero emissions. Norway’s buoyant oil and gas sector is at risk of overreaching itself if the world gets its act together on climate change. 

“With current high oil and gas prices, all these new developments will definitely be profitable,” says Knut Einar Rosendahl, professor in economics at the Norwegian University of Life Sciences. “But if global climate policies suddenly started to take the 1.5​​°C target seriously, then the oil price would decline, and these new fields risk becoming stranded assets.”

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