University of Stavanger Business Schoolhttp://www.uis.no/MohnTwitter: @Mohnitor

Norwegian petroleum: Prosper or perish?Klaus MohnProfessor

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Guest lecture at the Norwegian University of Life SciencesÅs, 27 March 2014

An intriguing industry

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Geology, technology, economics, and politics

An industry that makes a difference

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Source: Ministry of Finance, Statistics Norway, Oslo 2022.

A significant role in the Norwegian economy

Macroeconomic key figures 2012Oil and gas share in…

Seven winter olympic games…… every year

GDP23 per cent

Total export52 per cent

Government revenue30 per cent

Total fixed capex29 per cent

40 years of prosperous progress

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Source: Norwegian Petroleum Directorate, Norges Bank Investment Management, author’s calculations (GPF projections).

Substantial revenues for industry, households – and politicians

NCS oil and gas productionMMBoepd

Government Pension Fund - GlobalTotal capital (NOK trn; nominal)

0

1

2

3

4

5

1970 1980 1990 2000 2010 2020 20300

2

4

6

8

10

12

14

16

1970 1980 1990 2000 2010 2020 2030

???

The oil price matters…

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Source: Norwegian Petroleum Directorate, Norges Bank Investment Management, author’s calculations (GPF projections).

… for demand, supply, and future price dynamics

Oil price reviewBrent blend, USD/bbl (@2012 prices)

0

30

60

90

120

150

1970 1975 1980 1985 1990 1995 2000 2005 2010

4-fold increase since 2000 Impact on demand

Income effect Substitution effect Policy response

Impact on supply Conventionals Unconventionals

New technologies

The oil price matters…

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Source: Statistics Norway, Norwegian Petroleum Directorate, Reuters EcoWin.

… for NCS activity, production, revenues – and costs

NCS oil and gas investments……and the oil price (NOK bn; USD/bbl)

0

50

100

150

200

250

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Pipeline transportOnshore processingProducing fieldsField developmentExplorationOil price (USD/bbl)

0

20

40

60

80

100

120

140

0

1

2

3

4

5

1970 1980 1990 2000 2010 2020 2030

NCS oil and gas production…… and the oil price (mmboe/day; USD/bbl)

High attention on spending effects

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Responsible revenue management and fiscal sustainability

Source: Norges Bank, Ministry of Finance.

Less focus on resource movement effects

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Source: Ministry of Finance.

Significant repercussions to the mainland economy

Demand from the petroleum sectorRatio to mainland GDP (%)

Competitive position under pressureWages per hour, manufacturing industries

0

5

10

15

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Goods inputInvestmentLabour cost

0

50

100

150

200

Nor

way

Bel

gium

Sw

eden

Den

mar

kFr

ance

Ger

man

yFi

nlan

dN

ethe

rland

Aust

riaIre

land

Italy

Spa

in UK

Cze

ch R

Pola

nd

IOC returns fall short of expectations

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Source: http://www.statoil.com/IR.

Unimpressive share price developments

IOC revenues fall short of expenditures

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Source: Wall Street Journal.

More capital is required for each barrel of production capacity

IOC production falls short of promises

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Production growth versus targeted growth last four years

Source: Enskilda Securities (Oil companies’ E&P budgets, 20 August 2013).

IOC cash-flows fall short of investments

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Source: Goldman Sachs Investment Research.

Only BP funded its capex with cash-flow in 2013

Investment choked by financial markets

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Source: Citibank (chart).

Increasing focus on cash-flow management and capital discipline

“Leaking profits”Return on capital employed for major oil companies

Shareholder skepticism Production short of targets Sky-rocketing costs Erosion of returns

Worries over oil price outlook Weak economic growth New floods of supplies Policy uncertainty looms

Business model under pressure Scarcity and access dilemmas «Carbon bubble» challenge

“Cash is King!”

Longer-term oil industry challenges

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Source: Mitchell, John, Marcel, Valerie and Beth Mitchell. 2012. «What next for the oil and gas industry?». Chatham House. October 2012.

Will the world turn its back on fossil fuels?

Energy and climate policies Role of oil in transport Eastward bound energy Shale gale globalisation Emerging technologies Access, returns, and risk Changes in OPEC behaviour

Concluding remarks

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Build resilience, prepare for change

Energy is getting more expensive Oil price outlook is very uncertain The oil price matters for activity

Boom arrested by market concerns New shocks and cycles in the cards IOC business model under pressure

Uncertain outlookBrent blend, USD/bbl (@2012 prices)

Source: Mitchell, John, Marcel, Valerie and Beth Mitchell. 2012. «What next for the oil and gas industry?». Chatham House. October 2012.

University of Stavanger Business Schoolhttp://www.uis.no/MohnTwitter: @Mohnitor

Thank you for your attention!Klaus MohnProfessor

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