August 28, 2018

ONS 2018 – looking to the future with a reminder of the past

Posted by Andrew Bradshaw
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Stavanger in Norway is the home of the international oil and gas industry this week as the city hosts the ONS conference and exhibition. 

ONS is a great show and Stavanger really gets behind the event, traditionally hosting a music concert and fireworks display down by the harbour at the finale. Stavanger’s harbour area is extremely pretty with its tall, multi-coloured buildings and good restaurants and bars. And if you can get on one of the old fishing vessels hired during the week for corporate events it’s a really special experience.

ONS is a good time to compare the Norwegian and UK oil industries as there is so much interaction between the two. In the short term, both seem to be on an upward path thanks to a rise in the oil price and increased efficiencies, which are reducing overhead costs.

But any comparison of the Norwegian and UK oil and gas industries inevitably throws up the bigger question around the differing approaches both countries historically chose to managing the revenues accrued from the exploitation of their natural resources.

When Norway started making money from oil it set up a sovereign wealth fund called the Government Pension Fund Global. This is the world’s largest sovereign wealth fund with an estimated value of $1 trillion and an average ownership of 1.4 percent of every listed company in the world.

The make up of the Norwegian fund was called into question recently. At the end of last year, there was a suggestion that it should move away from its reliance on oil and gas stocks and focus on other sectors because of the potential for over exposure to oil price volatility. Just a few days ago, a government-appointed commission recommended against such a move, stating that oil and gas was the fund’s best performing sector in the second quarter of this year. The matter will be considered by the Norwegian parliament in due course.

In the UK we took a different approach to our oil revenues. Instead of setting up such a fund, successive governments in the U.K. have used oil revenues as a way of reducing non-oil taxes.

Earlier this year, the Institute for Public Policy Research estimated that if the U.K. had invested its revenues from North Sea oil in a sovereign wealth fund in the 1980s, it would have been worth more than £500 billion today. It also noted that North Sea oil raised £166 billion in taxes from 1981 to 1990.

It has been suggested that the government in the late 70s did consider establishing such a fund but the challenging economic conditions in the U.K. at the time were a deterrent. It’s also worth remembering that in its early days the North Sea was thought to have a shelf life of about 10 years or so. Nobody expected us to be still producing oil some 40-odd years later. So the opportunity to create a wealth fund was lost and never resurrected.

Our industry has given us so much to be proud of over the years. We produce some of the finest engineers in the world. Our technical achievements are envied across the globe. But when it comes to how the U.K. has handled its revenues from oil, a trip to Norway will always invite questions about what might have been.