North Sea oil: A tale of two countries

Back in the 1980s, for a whole golden decade, it seemed that the sun would never set on the prosperity North Sea exploration brought to the United Kingdom and Norway. Both nations gratefully cashed in on a new gold rush ushered in by the alignment of two factors. First, the price of oil had rocketed since the global political shocks of the Arab-Israeli War of 1973-4 and the Iranian Revolution of 1978-9. Second, while consumers sought an alternative to dealing with the inflated markets of the Middle East, rapid exploration of the North Sea’s continental shelf meant that economically viable oilfields were coming on stream at considerable pace.

With the energy crisis of the 1970s a thing of the past, Time magazine reported that “the world temporarily floats in a glut of oil”. The Institute of Fiscal Studies stated that “the growth of North Sea oil revenues is the most important fiscal development in the British economy in the 1980s”. In fact, during the 1980s, taxation on oil from the North Sea delivered to the UK’s Treasury (when adjusted for inflation) an average of £18bn per annum, or 10 per cent of its entire income. As a direct result of tax revenues and state investment in oil generated from the North Sea, Norway was able to consolidate its economic independence and resist joining the EU.

What the two countries did with their surplus revenue has effectively mapped their economic futures for half a century. As the UK’s former Secretary of State for the Environment (and later Defence) Michael Heseltine said recently, Britain under Prime Minister Margaret Thatcher “squandered the windfall” on short-term consumerist policies such as subsidised housing and mortgage tax relief policies. Heseltine says he would have preferred to see the money invested in a ‘sovereign wealth fund’, a state-owned financial instrument for securing long-term benefits for the nation’s citizenry.

This is exactly what Norway did, investing its surplus revenues in the so-called ‘Oil Fund’ which owns 1 per cent of the world’s stocks, is valued at more than US$1tn and, according to The Economist, is the largest fund of its type in existence.

Today, the economic fortunes of the two countries differ vastly: in terms of GDP per capita Norway is currently the second wealthiest country on Earth (after Luxembourg), while the UK comes in 20th, with a GDP per capita of almost exactly half of Norway’s - US$52,291 (£38,961) compared with $102,907 (£76,686) (projected figures for 2022).

In his book Before the Oil Runs Out, author Ian Jack makes the point that luck plays an “especially big part in dictating how near a tribe, a village or a country lies to a workable carbon deposit”. Even if this is the case, the fact remains that the UK and Norway share a level playing field. According to the Natural Resource Governance Institute, “The two countries have equivalent geology and a similar resource base – the North Sea Basin is effectively split down the middle between them. The UK and Norway both began offshore exploration and production in the mid-1960s with the first oil discoveries made in 1969. Since then, both countries have produced similar amounts of hydrocarbons: the UK has produced 42.8 billion barrels of oil equivalent (boe) and Norway 40 billion boe. That the two countries should be so far apart in terms of their current prosperity comes down basically to the British spending their profits while the Norwegians saved theirs. In Aberdeen, the self-appointed oil capital of Europe, during the early 1990s recession a piece of graffiti appeared saying: “Dear God, give us another oil boom. Next time we won’t p*ss it up against the wall.”

Although never one of the great geopolitical rivalries, the relationship between the United Kingdom and Norway has had its moments. If you disregard the Norse invasions of Britain during the Viking Age, you still need to go back two centuries to the so-called ‘Gunboat War’ of 1807-1814 to find military hostility between the nations. It’s said that diplomatic relations were strained, and questions raised in the House of Commons when in 1911 a Norwegian expedition led by Roald Amundsen became the first to reach the Geographic South Pole, in doing so beating the British Captain Scott’s Terra Nova expedition by a month. But Norway’s neutrality during the First World War, coupled with it receiving an invitation to establish a government-in-exile in London during the second, indicates a healthy relationship between the two. There have even been signatures put on documents outlining what the post-Brexit relationship will look like.

For all this long history of entente cordiale, in the world of North Sea oil not everything is as it seems: a subplot of contrasting fortunes is being played out against a backdrop of both countries’ outwardly visible commitment to a greener future. On the face of it, Norway’s green energy credentials are impeccable, with 98 per cent of its domestic power coming from renewable energy sources. The Norwegian government says that “electricity production in Norway is for the most part based on flexible hydropower, but both wind and thermal energy contributes to the Norwegian electricity production”.

This energy mix allows Norway to export most of its fossil fuels, with the country (based on World Factbook estimates) dispatching some 1.25 million barrels per day (or roughly twice that of the UK). With the recent opening of the Johan Sverdrup offshore oilfield (see panel), this figure is predicted to increase sharply in the near future and, according to American analyst S&P Global, “Norway’s new oil bonanza holds lessons for Britain”. The article is openly cynical, accusing Norway of bragging about its green credentials while “the Scandinavian petrodollar state still depends on exporting oil and natural gas for its long-term prosperity”. Even so, the authors can’t bring themselves to condemn Norway’s approach as ‘greenwash’, pragmatically seeing Norway as Britain’s bellwether: “The UK government should take note and support more exploration in British waters,” as part of a North Sea revival.

The Johan Sverdrup oilfield – dubbed ‘a new monster from the deep’ by the BBC – is significant in that it is increasingly being seen as an indicator of the role oil will continue to play in Norway’s economy. This can be seen in the light of a statement from the country’s central bank governor Oeystein Olsen in 2020, in which he said that “the outlook for offshore activities on the Norwegian shelf has also become more uncertain”. Olsen contended that while a half-century of oil and gas production “has made Norway one of the world’s wealthiest nations”, the country has become too heavily dependent on oil prosperity, and “it is now time to make more room for other industries to grow”. While this could be taken as a veiled reference to the success of Norway’s domestic alternative energy policies, Olsen also warns that any transition from an oil-dependent economy would have to be gradual to allow other sectors the “chance to adapt”.

If, as Olsen says, the future level of oil demand is coming into question as governments address the issue of combatting climate change, forecast production levels at Johan Sverdrup would seem to indicate that it’s all right to export the stuff so long as you don’t use it at home. As one commentator said: “Norway appears to have cleaned up its act, but it’s just a case of ‘drug user turned drug dealer’.”

With today’s ultra-low interest rates and tumbling stock markets brought about by the Covid-19 heath crisis, there seems plenty of room left for a U-turn as Norway is faced with the prospect of reining in public spending from its economically stagnating – albeit temporarily – sovereign wealth fund.

Meanwhile, Britain’s domestic energy mix has a far higher dependency on oil than Norway’s. According to the UK government Department for Business, Energy & Industrial Strategy, “over half of the UK’s electricity comes from clean sources including wind and solar energy. However, oil and natural gas are still required for heating, cooking and transport, and vital to the production of many everyday essentials like medicines, plastics, cosmetics and household appliances.” The statement goes on to admit that this scenario “is likely to remain the case over the coming decades as the UK transitions to low-carbon solutions”.

Speaking at the launch of a government review aiming to ‘lead the way on tackling climate change’ Business and Energy Secretary Alok Sharma said that the oil and gas sector “will continue to be needed for the foreseeable future as we move toward net-zero carbon emissions by 2050”.

As with Norway, the UK’s much trumpeted intention to clean up its act at home is highly visible in any amount of government publications, strategy documents, news conferences and white papers. The fact remains that despite the stated commitment to zero carbon emissions by 2050, in 2020 the UK became a net exporter of oil for the first time in 15 years, while industry body Oil and Gas UK (OGUK) predicts that oil and gas will still provide two-thirds of total primary energy by 2035.

The picture is further confused by the recent closure of mature North Sea fields and massive falls in oil prices in the wake of Covid-19 – in April, US oil futures actually went negative for the first time in history, with the result that producers were effectively paying people to take it off their hands. OGUK said this would mean “more insolvencies and consolidations in the market”, in a sector worth £12bn and supporting over a quarter of a million jobs in the UK. For now it’s pinning its hopes on a government North Sea Transition Deal.