Watcher in the wings

19.05.2015
The willingness to act is the key, not resources, says Hans Henrik Ramm. He was 15 when Norway held its first offshore licensing round, and has since followed events as a political player or with a sharp eye through his Behind the news service.
  • Bjørn Rasen and Sverre Christian Jarild (photos)

Hans Henrik Ramm

Pundit Hans Henrik Ramm rejects all the dramatic statements about Norway’s need to shift from oil to “other things”. He points out that the nation has managed a 50-year upturn very well, and can also deal with a lengthy downturn in a good way.

 

Ramm comes sauntering in from the side, as so many times before, puffing thoughtfully on a cigar. Yet another oil conference is about to start.

The Norwegian Oil and Gas Association is holding its annual meeting to confirm the industry’s significance and discuss possible dark clouds which might have appeared over the past year.

Ramm emits a final puff and goes in, to be greeted by chair Tor Arnesen and his colleagues. “We’re actually waiting for the prime minister, but we’re happy to begin with you, Hans Henrik,” says Arnesen with a smile and a handshake.

Drawn into the world of oil through politics, Ramm studied science “for a time” but was also interested in journalism and society.

“Immediate gratification won out, and I got a job with [right-wing newspaper] Morgenbladet,” he explains. “I was only 19 when I became Storting [parliamentary] correspondent.

“That allowed me to work on pretty much any subject I liked – and see my story make the front page. It was a fantastically exciting time.”

After military service, as a reporter on the armed forces newspaper, he “changed sides” when the Conservative group in the Storting called him in as one of its secretaries.

“There were two of us at the time, doing a job which employs 30-50 people in the main parties today,” Ramm observes.

He was made responsible for the “hard” issues – finance and industry. “And thereby for oil, which had become very important when I started there in 1973.” 

 

Established

That was one year after Statoil and the NPD had been established, and two since the Ekofisk field began production in the Norwegian North Sea.

Deciding what kind of state oil company the young petroleum nation needed had been a lengthy process, with Storting representatives getting involved late but heavily.

Two far-reaching White Papers were published in 1974, and one – Report no 25 to the Storting – warned that oil revenues could be substantial and that spending them would cause changes.

Ramm shares some of his views during our conversation, which takes place in the Sky Bar of Oslo’s tallest hotel – offering a view of the new opera house and other buildings which stand as monuments to Norwegian prosperity.

He recalls the recommendation from the Ministry of Finance that, were these oil revenues to have any purpose, they must be used to purchase goods and services from abroad.

Norway’s own production of goods would accordingly decline, and the country faced a transition from manufacturing to the provision of services.

“A number of people wanted to ensure that change wasn’t too rapid,” Ramm says. “So we got a debate about the pace of oil revenues, and thereby of the industry as a whole. Few foresaw at the time that we’d develop a big and important supplies sector.”

Maritime industries represented economic cornerstones in Norway at the time. Oil was something remote, which few Norwegians talked about.

While some had perhaps read a bit in the papers about things happening in the North Sea, public discussion did not really take off until Ekofisk was found in late 1969.

“Everyone then naturally became interested,” Ramm recalls. “Norway was far from being a wealthy country, but people were optimistic.” 

 

Debate

Within five years, a political debate was in full swing about how much production Norway could tolerate if the level of social change fuelled by its revenues was to stay at an acceptable level.

Another controversy in the 1970s concerned the role of the new state oil company. In Ramm’s view, the organisation of Statoil was a compound of politics and business.

That had occurred because Labour took over in 1971 from the centre-right coalition led by Per Borten. “Finn Lied and Arve Johnsen made big changes to the proposals from the civil servants for structuring the planned state company,” says Ramm.

Lied was Labour’s industry minister, while Johnsen served as the deputy minister who later became Statoil’s first chief executive.

Ramm points out that Norway already had Norsk Hydro, a major industrial group at the time, the forerunners of Saga Petroleum, and a multitude of other companies keen to be involved in oil.

“A general view existed that we didn’t possess enough capital and that no room existed for so many enterprises. Great interest existed in the Storting for creating a new national company.

“The representatives were then thinking only of acquiring a strong operational organisation, while the civil servants wanted one which could handle the state’s negotiated rights.”

Both the Conservatives and Labour had studied how this should be done, and both envisaged a new company with a combination of public and private ownership.

Once in government, however, Labour decided to merge these concepts and base the new state oil company on the rights secured by the state, with full public ownership. State power and rights were thereby used to build up Statoil.

From the fourth licensing round in 1978, the company was awarded a 50 per cent stake in all new licences and also benefited from a “sliding scale” system

The latter allowed Statoil’s holding to be increased if a discovery was made. And the other licensees had to carry (pay) the company’s share of exploration costs.

According to Ramm, this had the effect that Hydro and Saga were required to pay these costs on behalf of competitor Statoil while also having their stake reduced in the event of a find.

“In that way, Statoil acquired what amounted in reality to a right to tax the other companies while it also developed as an operational organisation.”

Then oil prices shot up from 1973-74 and huge revenues began to flow in.

Ramm says that the mixing of business and politics in Statoil initially aroused little discussion. That debate was to blossom later.

The main concern of the non-socialist parties to begin with was the “stop at the beach” principle – Statoil should confine its activities to the NCS.

Questions were also raised about how heavily the company should become involved in petrochemicals, supply-base operation and seismic surveying.

The conclusion was that Statoil would be a wholly commercial enterprise and a fully integrated oil company with interests in petrochemicals, refining and marketing, as well as having opportunities to operate abroad.

In 1985, the state’s direct financial interest (SDFI) was established as a separate legal unit under Statoil management. The company’s licence holdings were split into two components, one which it retained while the other was transferred to the SDFI.

The associated rights to have exploration costs carried and to exercise the sliding scale were also acquired by the new entity. The sliding scale abolished in 1993. 

 

Manage

Ramm maintains that the civil servants envisaged a solution in the late 1960s which by and large resembled today’s Petoro, the state-owned company created in 2001 to manage the SDFI.

They did not want Statoil to have too many roles, but more than 30 years passed from the first discussions until Petoro was set up as a management company outside the ministry.

“It’s easy to be wise after the event,” says Ramm. “I think nevertheless that accepting the civil service proposal and creating a ‘Petoro’ would have given us a stronger Hydro and Saga.

“We’d also have had a different type of ‘Statoil’ with a bigger element of private ownership from the start, and thereby gained three strong oil companies competing on equal terms.”

Possessing three companies was incredibly important for building up the supplies industry, Ramm says. “And the golden age was the mid-1990s, when we saw the development of subsea technology, for example.”

Each of the Norwegian companies had a key industry partner at this time – Statoil and Kongsberg, Hydro plus Kværner and Saga with ABB, he adds.

“A trio of inspired teams competed with each other to find solutions. That’s been lost – first through the tragedy that Saga was consumed by Hydro and Statoil, and then the tragedy of Hydro being taken over by Statoil.

“The last of these mergers was one of the most unfortunate developments we’ve seen, because it eliminated diversity and created a company with a very dominant role.”

What he means by this is that the position of the NCS as one of the world’s leading offshore technology laboratories was weakened.

Statoil could no longer maintain the same exclusive and open relationship with specific suppliers, because it had to give more emphasis to safeguarding competition.

Ramm stresses that Statoil is naturally an excellent company which has contributed and still contributes much to technology development. But things could have been done differently. 

 

 Hans Henrik Ramm

“It’s easy to be wise after the event,” says Hans Henrik Ramm. “I think nevertheless that accepting the civil service proposal and creating a ‘Petoro’ would have given us a stronger Hydro and Saga.

Status

After attending the conference, where the prime minister, the political opposition and the industry have spoken, the pundit shares his thoughts on the current status of Norway’s oil sector.

The national mood is dominated by a sense of crisis, with discussions in many channels about what must succeed the nation’s petroleum business.

“It’s important that we manage to distinguish between the immediate future and the longer term,” says Ramm, who has heard most of the talk before.

He agrees that the industry and the nation have a problem in the short term: “During this cyclical downturn, petroleum investment is set to decline by 15-20, perhaps 25, per cent – with a risk of an even steeper drop in 2017-18.

“That’ll depend on oil price developments and strategic choices by the companies. How will the big players prioritise between investment, dividends and borrowing, for example? And when will they recover their ability and willingness to invest for the future?”

He is convinced that oil prices will recover – the question is when and by how much. “Then it’ll be business as usual, and we’re back on the long-term trajectory.”

Unlike the impression created by some of Norway’s leading politicians, Ramm believes the current downturn being experienced by the industry is unrepresentative of the long-term trend.

“There’s no need to start converting from oil to other areas yet, apart from limited changes because costs must be reduced. Finding other legs to stand on must come in addition.

“In historical terms, we’ve been through 50 years of growing activity. We now face 50 years of decline. And we’ve known that all along.

 

“We’ve managed the long upturn very well, and can deal with the lengthy downturn in a good way – without making it sound so terribly dramatic.”

 

The oil sector must cut costs. Once that is done, Ramm believes an oil price of USD 70-80 could be enough. “The industry can continue with a high level of activity, perhaps after some workforce downsizing.” 

 

Expertise

He is therefore concerned that the sector does not lose too much expertise, so that it has to struggle once the cyclical recovery begins. The industry has made that mistake before.

“I certainly worry it’s going to repeat the error and scare young people away. And the government is doing too little, standing by while field developments are postponed. These will accumulate to create a new bulge in activity.”

He notes that one peak included 10 projects simultaneously, created not least by delaying several developments from 2008 to 2011. They were then launched when oil prices were high.

The same happened in 2004, he adds. This is the third cycle of its kind since 2000, with the industry acting like somebody with bipolar disorder as oil prices fluctuate.

Ramm believes the level of activity needs to be supported during downturns. If the crisis becomes too deep and affects the national economy, development projects will be postponed again.

That was what happened a few years ago, leading to another bulge in activity which the industry is currently struggling to escape from. 

 

Tax

Ramm’s principal complaint is the tightening in the tax regime introduced in 2013, which reduced oil company opportunities to make tax deductions.

A government proposal in the revised national budget to cut the level of uplift in the special petroleum tax from 7.5 to 5.5 per cent over four years was strongly attacked by the industry.

“The finance ministry’s theory is that the capital-based deductions are too favourable, and thereby undermine cost-awareness,” Ramm explains.

Noting that this view is sharply contested by other experts, he believes the government should reverse the change as soon as it can – and, indeed, introduce measures to improve recovery.

“That’s been promised to the Storting, and must be done as quickly as possible, both to support activity and to secure time-critical resources in mature fields.”

He points out that many project opportunities on the NCS demand such a big commitment by the companies in both organisational and technological terms that they are not taken.

That applies particularly to small fields and improved recovery in a late phase of a field’s producing life – tail production – and to exploration in frontier areas.

“In other words, everything that’s tough. The British have grasped this long ago, and introduced tax deductions for various demanding fields. We must do the same here if we want to get the resources out.” 

 

Emissions

The other side of the coin is what the world can tolerate in terms of emissions. Norway’s public debate on this issue has become far more polarised for or against oil.

Ramm is more than happy to address the climate issue. “The key issue is how much of the fossil resources are usable. If we get a big transition from coal to gas, there’ll be even more room for petroleum.”

He points in this context to reports from the International Energy Agency, which show that the world will need 95 per cent of today’s level of oil and gas output in 2035.

That requirement will have fallen to 76 per cent by 2050, with global demand for petroleum declining gradually. These forecasts build on expectations about political decisions, which are often far from rational and permit too much consumption of coal.

Another and much discussed contribution to the debate is an article in Nature on how oil and gas production breaks down by region and country.

The authors maintain that, providing all output is cost-effective, no room would exist for petroleum supplies from the Arctic.

Ramm dismisses this claim because it rests on average costs for all parts of the high north, while Norway can operate much more cheaply in its part of the region.

The interesting aspect of the article is its demonstration that a cost-effective adaptation to the 2°C target will give less space for coal and more for petroleum.

It actually shows that success in cutting the use of coal would allow oil consumption to remain at roughly the present level until 2050, while gas usage could rise by 50 per cent.

Norway cannot maintain 95 per cent of today’s output in 2030, even with full activity, Ramm says, and therefore believes that business as usual is fully compatible with the climate goals.

“Oil and gas must be provided regardless,” he points out. “In that case, it’s better that it gets produced in Norway with the our operating parameters.”

He feels that the policy of taking symbolic action – which is supported by a minority in Norwegian politics – has too dominant a place.

In his view, the climate debate should pay more attention to influencing demand for coal. This can be done by exploiting emission trading and tax systems, or by promoting alternative energy.

“How much oil and gas is to be produced should be determined by demand, which is decided in turn by climate policy,” Ramm argues.

“Attacking the supply side would undermine the whole delivery of energy. That’s not particularly effective, and the world could become dangerous if energy supplies fail. This also has a moral aspect.”

 

Hans Henrik Ramm

“Attacking the supply side would undermine the whole delivery of energy,” maintains Hans Henrik Ramm. “That’s not particularly effective, and the world could become dangerous if energy supplies fail. This also has a moral aspect.”