Neighboring needs

Since oil and gas started flowing from the Norwegian and UK sectors of the North Sea, the two countries have had an amicable and frequently profitable relationship. For various technical reasons, much of Norwegian output has flowed into the UK from where it has been sold to third-party customers, and the UK has become a long-term customer for Norwegian gas.

The fact is that Norway has the gas and the UK has the market.

However, the two countries often have governments of different political complexions and see their North Sea assets in different ways.

In the 1980s, the development of Sleipner field in Norway became a major issue between the two countries. The then state-owned UK gas utility was found by its political masters to be considering a long-term contract that would have been Britain's biggest-ever import deal carrying with it a balance-of-payments effect that would have lasted for years and affected exchange rates. The deal was vetoed with the resulting upsurge in the development of UK smaller gas accumulations to meet the market need and limit imports. And that was at a time when gas was classed as a premium fuel and not allowed into the electric power-generating market.

Quit simply, Norway doesn't have the same pressures to develop and find markets for its gas as does Britain, which has a large home demand for energy and which will increasingly rely on gas imports.

A regulatory trap

However, although it is a long-standing gas customer, the deregulated British gas market operates around short-term trading. The result is that Norway might have the gas, but short-term UK contracts don't provide the right conditions for Norway to embark on massive infrastructure investments.

Statoil ASA might be a very big fish in the Norwegian pond, but as international oil companies go, it's a tiddler compared with Royal Dutch/Shell Group and BP PLC. Statoil's $15 billion capitalization doesn't allow it to make substantial investments in gas projects without long-term contracts. It needs 15-year deals to make financial sense; however, capacity restrictions at the St Fergus terminal in Scotland-where Norwegian gas is landed-mean that 3-month contracts are on offer and prices are seldom fixed beyond a 6-month term.

The result is that the Norwegian industry is at risk of stagnating growth while the UK market is at risk of not getting enough supplies. So while Statoil remains essentially a state-owned company, there is little prospect of its gas reserves falling into the hands of a company that would have the capitalization to build its own transnational gas delivery network.

The answer would appear simple. The two governments should get together and develop a joint policy. But while they might be friendly, they are not that friendly, and both are free-marketeers. Norway might be able to leave the lights on all the time, but it is possible that they could be dimmed in the UK.

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