NORWAY'S ENERGY PART III: OPEN (OR CLOSED) FOR

C O N F I D E N T I A L OSLO 000138

SIPDIS

SIPDIS

EUR/NB (MMCDOWELL),DEPARTMENT OF COMMERCE (LMARKOWITZ),
DEPARTMENT OF ENERGY (EROSSI,TSARKUS,JGIOVE),INR/I
(SMCCORMICK),EEB/ESC (LWRIGHT); COPENHAGEN FOR ERIK HALL

E.O. 12958: DECL: 03/06/2018
TAGS: ECON ENRG EPET PGOV SENV NO
SUBJECT: NORWAY'S ENERGY PART III: OPEN (OR CLOSED) FOR
BUSINESS?

REF: A. OSLO 126

B. OSLO 128

Classified By: DCM Kevin M. Johnson, Reasons 1.4 (b) and (d)

1.(C) Summary. Norwegian country managers of U.S. energy
suppliers and producers are voicing concerns over GON
policies, regulations and political moves, which they believe
may threaten long-term Norwegian Continental Shelf (NCS)
development. Directors of the state agency Norwegian
Petroleum Directorate (NPD),while painting a picture of
robust NCS licensing opportunities for foreign firms, also
note declining reserves and real concerns of a disinterested
Norwegian society which may eventually turn its back on
future NCS development. End Summary.

Taxes Galore, High Infrastructure Costs
--------------

2.(C) Energy suppliers and oil/gas producers noted challenges
presented by the Norwegian tax regime. Complaints against
high Norwegian taxes are nothing new: energy companies face a
78% tax (28% standard corporate tax, 50% energy industry
tax). The transparency of doing business in Norway, and the
currently escalating oil and gas costs, have counterbalanced
high operating costs. Many U.S. businesses bemoaned the
Norwegian government's high ex-pat taxes, one ex-pat employee
costs approximately the same as three Norwegians. Increased
taxes place external stresses on U.S. energy companies and
suppliers, given the enormous demand for trained, skilled
energy field professionals, the small domestic population
(4.6 million) and near non-existent unemployment (less than
2%).

3.(C) Some energy producers blame increased operating costs
and over-regulated health and safety standards as the reason
why several projects are not moving forward, despite record
oil/gas prices. For example, ConocoPhillips' plans to enter
into a second phase of its decades old Ekofisk project has
been put on hold, due to high infrastructure costs. One
country manager noted that stringent GON safety requirements,
particularly involving rigs, prompt some major U.S. companies
to balk at new projects. For example, a rig outfitted to
legally do business in the UK, Norway's neighbor, must
undergo costly and time-consuming retrofitting to comply with
tough Norwegian safety regulations.

Ms. Haga, Tear Down Those Blocks!
--------------

4.(C) There are increasing fears among suppliers and
producers that Petroleum Minister Haga and Environment and
International Development Minster Solheim are vying "to be
the environmentally greenest." Minister Haga faces industry
criticism that, although highly intelligent and an astute
politician (she leads the Center Party, a junior coalition
partner),her policy is "directionless," and inviting too
many environmental NGOs into the licensing round public
comment process. Moreover, her seeming focus on alternative
energy, and lack of concern with the "traditional"
hydrocarbon industry, is viewed as alarming. (Note: Despite
criticism, private energy industry leaders applaud the
Minister's quarterly top management forum, which gathers
industry leaders and bureaucrats for frank, candid
discussions--though many confess that little real action
results).

5.(C) Access to the NCS, given StatoilHydro's operatorship
dominance (Reftels A and B),continues to raise alarms from
oil/gas operators. It is widely believed that Nordland VI
and VII will be largely awarded to StatoilHydro. One country
oil/gas producer manager, familiar with doing deals in
developing countries, was flabbergasted that the GON
practices "discretionary transparency," where the government
awards licensing round winners to whom it subjectively likes
best. The GON is unabashedly candid about its practice to let
certain companies in, or keep others out, based on those it
considers play by its rules. Suppliers voice concerns that
the recent GON buy-in of AkerKvaerner, the largest supplier
to the Norwegian Continental Shelf oil/gas industry, may also
lead to future closed markets for rival U.S. suppliers.

The Gathering Storm: Reduced Oil Production, Disinterested
Americans...and Norwegians?


--------------

6.(C) Declining oil production and some marked lack of
foreign interest in certain fields, coupled with Norwegian
indifference, raise concerns from GON officials. Oil
production for the NCS has sharply declined to approximately
2.5 million barrels per day, from last year's 3 million. The
20th licensing round (with project license award date in
March, 2009, focusing on deep waters in the Norwegian and
Barents Seas) has attracted cautious U.S. interest (Note:
The NPD argues that less majors and more (non-US)
independents are focusing on small and mid-sized fields.)
One industry expert speculated that fewer U.S. independents
are interested in "marginal" Norwegian projects (less than 50
million barrels) due to the heavy Norwegian taxes and
operational costs involved. In addition, some U.S.
independents balk at Norwegian legal requirements, mandating
that all NCS work must be done through a Norwegian office.
Major projects are more desirable, with long-term projections
of higher reserves adequately addressing the enormous
Norwegian infrastructure costs.

7.(C) NPD directors revealed that GON plans to aggressively
maintain production levels (most particularly oil),admitting
a current steeper oil decrease than anticipated. The GON
faces tough challenges, as major oil fields, such as
Statfjord, and Ekofisk, are aging. Within 6 years, it is
projected that 50% of energy exports will be from gas. The
NPD aspires to increase oil production through tax
incentivized recovery rate technologies and increased R&D,
adding 5 million barrels of oil into its 2015 estimates.

8.(C) NPD officials were clearly troubled by perceptions
that the Norwegian population does not wish to continue with
oil/gas exploration. The officials expressed worry that
Norwegians focus more on promoting anti-climate change
agendas than realizing the crucial role energy exports has
for Norway, which is the third largest exporter of gas, and
fifth largest of oil, globally. One NPD director went so far
as to suggest that Americans "help them" educate the
Norwegian public as to the importance of being active in
future oil/gas field development, particularly as energy
projects take many years of lead time. These fears are
recognized by the private sector: one country manager of an
energy producer mused that if no significant new acreage is
opened up by 2010, all significant finds will have been
investigated and U.S. companies, saddled by infrastructure
costs, will move out of Norway.

Open For Business, or Closed on Day One?
--------------

9.(C) Despite such concerns, NPD officials point out that
interest from the major producers in the 20th licensing round
is evident by numbers: an astounding 301 blocks were
nominated (with each nominating party restricted to 15
candidates). Most blocks will not become actual applications,
which one country energy producer manager suggested was
"smart maneuvering" by Minister Haga. Namely, by getting
more NGOs involved in the licensing block nominating process,
most of the nominated blocks (which realistically would have
otherwise been found unfeasible by the GON) would be denied
publicly, showing the GON's "open commitment" to a strong
environmental policy. All parties stress that the 20th
licensing round is the first time the GON made public
nominated blocks, and ultimate results from the engagement of
various NGOs are too soon to judge.

Biting the Hand that Feeds You?
--------------

10.(C) Comment. U.S. energy producers and suppliers doing
business in Norway, worry that the GON will be its own worse
enemy. Troublesome tax rates, which seem to discourage
domestic operation expansion, and high operation costs are
turning some majors off from expanding existing projects, and
are discouraging mid-sized U.S. independent producers from
even entering into Norway. The NPD recognizes this trend,
and seem frustrated with GON politicians--and, most alarming,
with the apparent indifference of the Norwegian population to
encourage future energy development. Success could
inevitably be the worst enemy of Norway, as both the private
sector (and most tellingly, government officials) are
concerned that future NCS development will cease, not from


lack of resouces, but from, ironically, public disinterest.
End Comment.
WHITNEY