Norway turns on production tap as crude collapse erodes revenue

[OSLO] Norwegian oil companies are turning on the spigots to counter plunging crude prices.

That may be a welcome news for the government of western Europe's biggest oil producer, which next year is planning to dip into its massive wealth fund for the first time to cover budget shortfalls and stimulate the slowing economy.

Production is running ahead of forecasts from the Norwegian Petroleum Directorate, beating August and September estimates by 13 per cent and 12 per cent, respectively. The NPD, which had predicted oil output would fall this year, now says it will likely instead rise for a second year, following more than a decade of decline. That's adding production into an oversupplied market where Opec and Russia are also increasing output. "To arrest that decline is really a remarkable thing," said Malcolm Dickson, an analyst at Edinburgh-based consultant Wood Mackenzie Ltd.

The Norwegian government is struggling to cope with a 40 per cent drop in crude prices over the past year. The Conservative-led coalition is spending a record amount of the nation's oil wealth to plug budget deficits and stimulate the economy. The offshore industry, set for the biggest fall in investments in 15 years, has already announced more than 25,000 job cuts since the beginning of last year.

While helping state coffers in the short term, increasing production at today's low crude prices could mean a drop off in income for the government and potentially its wealth fund in the years ahead. The fund's managers, including central bank Governor Oeystein Olsen, are already warning the investor won't be able to meet its 4 per cent return target over the next 15 years to 20 years amid record low interest rates.

Norway's oil output could rise by about 2 per cent this year, according to Wood Mackenzie. Output is benefiting from new fields that have been developed during a decade of booming investment, analyst Harry Paton said. But it's also gaining amid less maintenance downtime as companies lower spending and some producers extract as much as they can to make up for lower income.

Norway's excess barrels are flowing into a global market that the International Energy Agency predicted on Tuesday would remain oversupplied next year as Iranian exports are set to recover and demand growth slows on a weaker outlook for the world economy.

Norway's natural-gas production has also beaten expectations along with oil. Gas sales totaled 9.26 billion cubic meters in September, compared with an estimate of 8.31 billion cubic meters, according to the NPD. Higher gas sales are probably linked to lower Russian exports, Teodor Sveen Nilsen, an analyst at Swedbank AB, said in a note to clients.

Even as higher production increases the state's income, barrels sold at today's prices could have fetched more at a later date, given that prices recover. Still, the Norwegian government could be well served securing that income now as new climate regulations and renewable-energy advances may weigh on the price of oil, Nordea Markets analyst Thina Saltvedt said.

"It might be better to extract the oil now than in 20 years," she said. "We may not need that much oil then."

BLOOMBERG