Wage Shadows Looming Large Over Norway - Analyst Blog

A continuing impasse over the ongoing wage negotiations in Norway threaten its status as a stable energy producer. Norwegian oil unions – representing close to 16,000 employees working for oil companies, drilling operators and catering firms to the offshore sector – are dragging the stand-off in one way or another since the inception of May.

With the first half still rolling, the industry is already plagued by the year's third wage negotiation. We feel this may mar production and push the cost structure northward at a time when major players like Statoil ASA STO and Royal Dutch Shell plc (RDS.A) are postponing expansion plans and slashing planned capital investments.

For offshore players this could not come at a worst time when rig rates are slated to fall further just as a slew of new vessels ordered during the boom time are starting to arrive. Our apprehension stems from the fact that Norway is a major player in the oil and gas global arena.

According to the Energy Information Administration EIA, which provides official energy statistics on behalf of the U.S. Government, Norway is the third-largest natural gas exporter globally. Per the agency, Norway produced close to 4.0 trillion cubic feet (Tcf) of dry natural gas in 2013. Of this, net exports were 3.8 Tcf of natural gas, which, because of its modest domestic demand, was approximately 96% of its production.

In 2013, it fulfilled close to a quarter of the European natural gas requirements. The country is also has a favorable geographical position to fulfill European needs via its extensive export pipeline infrastructure, while the rest is exported as liquefied natural gas LNG. The largest recipients of Norwegian natural gas in 2013 were United Kingdom, Germany, France, the Netherlands and Belgium.

In such a scenario, investor apprehension is fueled by 2012 events when some 10% of Norway's offshore workers went on strike for 16 days. The strike greatly unsettled the price dynamics by slashing production of oil by 13% and natural gas by 4%. A settlement was reached only with the active intervention of the government in the face of oil and natural gas majors threatening a full lockout.

To add to the woes of oil and gas majors having substantial stake in Norway, the country is witnessing rising political pressure to force offshore producers to power offshore North Sea projects from clean sources in land. This is greatly contested by the energy majors lobby Norwegian Oil and Gas Association comprising foreign majors like BP Plc BP and Exxon Mobil Corp. XOM which have a considerable stake in Norway.

Our apprehension is also shadowed by the fact that forcing offshore projects to procure power from land-based clean sources would raise project costs at a time when Russian natural gas giant Gazprom concluded a deal to become a major supplier of natural gas to China.

Bottom Line

Ultimately we feel stable functioning of the Norwegian oil and gas industry is vital for U.S. in the face of continued Ukraine impasse. After all any act of active participation by the White House to solve the Ukrainian imbroglio may result in a swift response from the Kremlin in the form of higher gas prices which will only add to Europe's burden. This is due to the fact that Russia's state owned Gazprom supplies close to a third of the European requirement of gas.

The Ukrainian impasse may be relegated to the back burner as Sino-Russian close gas ties turns into the hotter issue. But on this Memorial Day Weekend, we would be paying close attention to see whether Europe could continue to depend on Norway to starve of Russian gas dictums.