WESTERN EUROPE S MAJOR OIL AND GAS PRODUCERS: RETHINKING ENERGY POLICY

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• Release Decision: RIPPUB
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• Document Creation Date: December 22, 2016
• Document Release Date: August 31, 2010
• Sequence Number: 9
• Publication Date: November 1, 1984
• Content Type: REPORT

Directorate of ER-
Intelligence
Western Europe's Major
Oil and Gas Producers:
Rethinking Energy Policy
EUR 84-10218
November 19984(
COPY 3 9 0
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 Directorate of Confidential
Intelligence
Western Europe's Major
Oil and Gas Producers:
Rethinking Energy Policy
This paper was prepared by
Office of European Analysis.
EURA,
Comments and queries are welcome and may be
directed to the Chief, Western Europe Division,
Confidential
EUR 84-10218
November 1984
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Western Europe's Major
Oil and Gas Producers:
Rethinking Energy Policy
Key Judgments Thanks mainly to production from the United Kingdom, Norway, and the
Information available Netherlands, Western Europe currently is able to produce domestically 85
as of 15 August 1984 percent of its natural gas needs and about three-tenths of its oil require-
was used in this report.
ments. The governments of all three countries have maintained ultimate
control over oil and gas development, and all have sought to extract as
much tax revenue as possible from the energy sector. In other respects,
however, their policy approaches have differed:
? The United Kingdom generally has followed a rapid development policy,
seeing oil and gas production as an important prop for a weak economy.
? Norway initially took a go-slow approach for fear of disrupting its small
economy, although strategy recently has shifted toward boosting the pace
of development.
? The Netherlands began by stressing rapid development and depletion of
its gas reserves, in large part to fund government welfare spending. After
the 1973/74 oil crisis, policy became much more conservationist-to the
point of banning new export contracts-but has once again turned less
restrictive in the last few years.
We judge that oil and gas production has had a net positive impact on the
economies of all three countries, although there have been clear negatives
as well. The most obvious common benefit has been the large contribution
to export earnings and government revenue. Energy production also
appears to have given a strong boost to GNP growth in Norway and a
smaller boost to growth in the other two-larger-economies. The princi-
pal drawback of expanding energy production in all three countries has
been the negative impact on the manufacturing sector-mostly due to
exchange rate appreciation induced by the improvement in the energy
trade balance.
Western Europe will remain dependent on imports for close to half of its
total energy supply through the end of the century and beyond. In
particular, the region's critical dependence on imported oil-primarily
from the Middle East-will continue. Although this dependence has
declined dramatically over the last decade-from 59 percent of total
energy consumption to 32 percent-it remains high, and it may increase
somewhat after 1990. Oil production increases in Norway probably will not
offset declines in the United Kingdom while oil consumption could begin to
pick up again, due to economic growth and the fall in real oil prices since.
1980.
iii Confidential
EUR 84-10218
November 1984
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Gas import dependence definitely will rise even if no more Soviet deals are
signed. In 1990 gas imports will account for about 30 percent of gas
consumption and 5 percent of total energy consumption with three-fourths
of these imports coming from the USSR as the new Soviet pipeline goes
into full operation. There is little doubt that Moscow will be willing and
able to supply additional gas-building more pipelines if necessary-and
will be able to undercut the prices offered by alternative suppliers. While
the West Europeans do not really want to take this route, we believe they
would prefer additional Soviet gas either to much higher priced domestic
gas or to increased reliance on OPEC. Although another pipeline would
boost Soviet gas's share of energy consumption above 5 percent, the West
Europeans would probably argue that this would be offset by a decline in
their imports of Soviet oil.
Norway's giant Troll field is Western Europe's only real hope of covering
its future gas needs from indigenous sources. While the oil companies are
confident that the technical problems of developing a field in 300-meter
water depths can be overcome, it will take more than a decade of work to
achieve full production. Thus, even if development began now, it would be
near the turn of the century before Troll could make a major contribution
to West European gas supplies. Moreover, full-scale development will not
begin until there is a firm contract for the gas; active negotiations with gas-
buying companies on the Continent are not yet under way, although they
are scheduled to begin in 1985.
In our view, the key to reaching agreement on the sale of Troll gas will be
Norwegian marketing flexibility. If the gas price is to be low enough to at-
tract buyers, we believe Oslo will have to implement a less burdensome tax
system for Troll, thus bearing more of the risk associated with an uncertain
energy market. Even with an easier tax regime, Oslo would still garner
substantial revenue from Troll, and if energy prices rise as expected in the
1990s it could reap huge proceeds. We think that this fact, coupled with
the fear that Troll gas could be shut out of the West European market if
development does not begin soon, could push Oslo to compromise on the is-
sue.
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Key Judgments
Production and Consumption Trends for Oil and Gas
1
Consumption
2
Oil and Gas Import Dependence
2
Oil and Gas Policy
5
The United Kingdom
6
Norway
9
The Economic Impact of Oil and Gas
13
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Scope Note Probably the most critical energy issue facing Western Europe is the extent
to which the region's oil and gas import dependency will worsen over the
next 10 to 15 years. A key factor in determining the eventual outcome of
this issue will be the policy decisions made by the United Kingdom,
Norway, and the Netherlands-the main oil and gas producers in the area.
This paper is intended to fill gaps in previous analyses by providing a fairly
detailed study of the evolution of energy policy in these three countries, in
the hope that this will shed some light on the most likely future course of
policy.
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J. FAROE
vs'' ISLANDS
r1FN 1
Oilfield
Oil pipeline
40 Natural gas field
- Gas Pipeline
p Pipeline terminus
75 Kilometers
Troll ~,
o \~o
L
20 . motor deNlh
FEDERAL
REPUBLIC
OF
GERMANY
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Western Europe's Major
Oil and Gas Producers:
Rethinking Energy Policy
Most of Western Europe's oil and gas reserves lie
either on the Dutch mainland or in two large sedimen-
tary basins on the North Sea Continental Shelf
(NSCS). Roughly 90 percent of oil and gas reserves
are held by the United Kingdom, Norway, and the
Netherlands. Holland's giant onshore field at Gro-
ningen by itself contains about 30 percent of the
region's proved gas reserves. Offshore, the shallow
southern basin of the North Sea stretches from the
Netherlands to the United Kingdom and contains
mostly deposits of natural gas. The deeper northern
basin, extending from southern Norway to Scotland
and the Shetland Islands and then north into the
Barents Sea, contains large deposits of oil and gas.
Water depths in the southern basin generally do not
exceed 90 meters, while the rich Norwegian trench
lying in the northern basin parallel to the southern
coast of Norway has water depths that often exceed
300 meters.
European oil reserves totaled about 23 billion barrels
in January 1984, equivalent to six years of the
region's oil consumption at current rates. Proved gas
reserves at the same time were about 4,500 billion
cubic meters (bcm), or 27 billion barrels of oil equiva-
lent, equivalent to about 21 years of gas consumption
at current rates. Currently, West European produc-
tion covers about 85 percent of the region's gas
requirements and about three-tenths of its oil needs.
Production and Consumption Trends.
for Oil and Gas'
Western Europe is critically dependent on imported.
energy. The key dependency, and the one most trou-
bling to West European policymakers, is on OPEC oil.
This situation worsened considerably from 1960 to
1973 because West European oil consumption more
than tripled, while domestic production remained
negligible. More recently, Western Europe has begun
to step up its imports of natural gas, particularly from
Most of the offshore oil and gas is shared by Norway
and the United Kingdom. Britain's offshore acreage
includes nearly half of the area available for drilling
in the NSCS and contains 60 percent of known oil
reserves and 32 percent of known gas reserves in the
North Sea. Norway holds 25 percent of the area, with
35 percent of the oil reserves and 53 percent of the gas
reserves. Norway also lays claim to large unexplored
areas of the Norwegian Sea and the Barents Sea,
which are believed to contain rich deposits of oil and
gas. The Netherlands and Denmark each hold 10
percent of the acreage in the NSCS. The Dutch have
9 percent of known gas reserves and 2 percent of the
oil, while Denmark accounts for 6 percent of the gas
and 3 percent of the oil. France, West Germany,
Belgium, and Ireland hold the remainder of the
acreage but have not yet located significant quantities
of oil or gas.
While West European oil and gas reserves are small
relative to total world supplies, they are significant in
terms of West European energy needs. Proved West
the USSR
Western Europe's energy dependence would be even
worse, were it not for the increased energy production
in the United Kingdom, Norway, and the Nether-
lands, coupled with substantial gains in energy conser-
vation in the wake of the OPEC price hikes. From
1973 to 1983 these three countries boosted their
combined oil and gas production from 1.7 million
barrels per day of oil equivalent (b/doe) to 5.4 million
b/doe, while West European oil and gas consumption
dropped from 17.4 million b/doe to 15.1 million
' Data through 1982 are from Energy Balances of OECD Coun-
tries. Production numbers include natural gas liquids, and con-
sumption numbers include bunkers. Originally expressed in million
tons of oil equivalent, figures have been converted into barrels of oil
equivalent or cubic meters of gas using 1 ton = 7.3 barrels and
16,700 b/doe = 1 billion cubic meters per year. 1983 data are
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Table 1
Western Europe: Estimates of Remaining Proved
Oil and Gas Reserves, January 1984
Total Oil and Gas
(million barrels o j)
Oil
(million barrels)
Gas
oil equivalent)
(million barrels
of oil equivalent
(billion cubic)
meters)
Total
50,626
23,390
27,236
4,465
Norway
17,816
7,660
10,156
1,665
United Kingdom
17,487
13,150
4,337
711
Netherlands
8,953
309
8,644
1,417
Italy
1,550
800
750
123
West Germany
1,481
304
1,177
193
Denmark
824
324
500
82
Greece
649
51
598
98
France
561
140
421
69
544
214
b/doe. Net imports of oil and gas covered 59 percent
of the region's total energy requirement in 1973 but
only 35 percent in 1983. Looking at oil alone, imports
covered 97 percent of consumption at the beginning of
the period compared with 70 percent at the end.'
Production
Although the Netherlands, the United Kingdom, and
Norway are now dominant, Western Europe has for
many years obtained modest amounts of oil and
natural gas production from other countries in the
region. In particular, France, Italy, and West Germa-
ny traditionally have covered a significant, though
declining, share of their natural gas needs from
domestic production, while a number of countries
produce small amounts of oil.
The Smaller Producers. Taken as a group, in 1970
these other countries produced about 360,000 barrels
per day (b/d) of oil and 580,000 b/doe (35 bcm) of
natural gas, covering a little over 4 percent of West-
ern Europe's total energy requirement. By 1983 oil
production in these other countries was up slightly to
390,000 b/d, gas production was up to 680,000 b/doe
(41 bcm), and the combined total once again covered
somewhat more than 4 percent of Western Europe's
total energy requirement.
The Netherlands. The Netherlands began to emerge
as a significant energy producer in the 1960s, follow-
ing the discovery of the Groningen gasfield in 1959.
Gas production grew slowly at first-despite The
Hague's policy of rapid development-reaching only
24,000 b/doe (1.4 bcm) by 1965. The pace accelerated
rapidly during the following decade, as production
reached 490,000 b/doe (29 bcm) in 1970 and peaked
at 1.5 million b/doe (90 bcm) in 1976. Output fell
sharply during 1979-82, however-from 1.44 million
b/doe (86 bcm) to 1.11 million b/doe (66 bcm)-as
higher prices and the recession cut into demand.
'The dependency figures for 1983 are, however, somewhat under-
stated because energy consumption in that year was reduced below
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Table 2
Western Europe: Oil and Gas Production
and Consumption a
Million barrels per day of
oil or oil equivalent
Consumption
Production
Production as
Percent of
Total
United Kingdom
Netherlands
Norway
Consumption
1970
12.58
0.40
NEGL
0.04
0
3.2
1971
13.12
0.38
NEGL
0.03
0.01
2.9
1972
14.05
0.39
NEGL
0.03
0.03
2.8
1973
14.96
0.39
NEGL
0.03
0.03
2.6
1978
14.26
1.77
1.11
0.03
0.34
12.4
1979
14.48
2.28
1.57
0.03
0.40
15.8
1980
13.49
2.48
1.62
0.03
0.53
18.4
1970
1.28
1.26
0.19
0.49
0
97.8
1971
1.67
1.62
0.32
0.68
0
97.3
1972
2.14
2.04
0.46
0.90
0
95.7
1973
2.45
2.33
0.50
1.10
0
94.9
1974
2.80
2.64
0.60
1.30
NEGL
94.5
1975
2.97
2.74
0.63
1.40
NEGL
92.1
1976
3.21
2.89
0.66
1.50
0.01
90.0
1977
3.30
2.94
0.69
1.49
0.05
89.2
1978
3.43
3.00
0.67
1.37
0.24
87.5
1979
3.64
3.23
0.67
1.44
0.39
88.6
1980
3.57
3.18
0.64
1.40
0.47
89.1
1982
3.40
2.90
0.65
1.11
0.46
85.2
1983 b
3.59
3.04
0.72
1.18
0.46
84.5
a OECD data, converted from million tons of oil equivalent at 1
ton=7.3 barrels. Consumption figures include bunkers; production
figures include natural gas liquids.
b Estimated.
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The discovery of the Groningen gasfield suggested the
probability of substantial offshore reserves, but an
active search did not begin until 1964. Development
was delayed in the first instance by the fact that the
1958 Geneva agreement (the Continental Shelf Con-
vention) had not been ratified. In addition, the harsh
climatic and sea conditions, the lack of adequate
deepwater drilling technology, and the high cost of
offshore projects contributed to the slow start
The United Kingdom. Following offshore discoveries
of gas in 1965 and oil in 1969, Great Britain has
emerged as Western Europe's leading energy produc-
er. Gas production-including some onshore fields-
came first, reaching 190,000 b/doe (11 bcm) by 1970,
600,000 b/doe (36 bcm) in 1974 and 720,000 b/doe
(43 bcm) last year. Oil production was negligible until
1976 when it jumped to 250,000 b/d. Output there-
after expanded very rapidly, with average production
passing 1 million b/d in 1978 and 2 million b/d in
1982. Oil production this year should average 2.6-2.7
million b/d, but this is probably close to the maxi-
mum attainable, and output is likely to begin declin-
ing after 1985
Norway. Due to Oslo's go-slow approach and the
sluggish pace of early discoveries, Norwegian oil and
gas production did not begin until 1971 and 1974,
respectively. As of 1975 gas production was still
negligible while oil output totaled only 190,000 b/d.
Production of both commodities expanded rapidly
from 1975 to 1980. Gas output then leveled off at
about 460,000 b/doe (28 bcm). Oil production also
flattened out for two years but began rising again late
in 1982 and should average better than 700,000 b/d
this year.
Mainly reflecting developments in these three coun-
tries, West European oil production has soared from
390,000 b/d in 1973 to about 3.4 million b/d in 1983.
The United Kingdom provided 69 percent of the 1983
total and Norway, 18 percent. Meanwhile, West
European gas production grew from 2.3 million b/doe
(140 bcm) in 1973 to 3.2 million b/doe (193 bcm) in
1979. Output then fell for three straight years before
recovering slightly to 3.0 million b/doe (182 bcm) last
year. The Netherlands accounted for 39 percent of
the 1983 total; the United Kingdom, 24 percent; and
Consumption
West European oil consumption soared at a 12-
percent annual rate during the 1960s, reflecting both
rapid economic growth and the declining real price of
oil on world markets. Consumption continued to grow
at 6 percent annually during the early 1970s, reaching
a peak of 15.0 million b/d in 1973. Use of natural gas
expanded even more rapidly-due mainly to the
increasing supply of Groningen gas-but from a
much lower base; it reached about 2.4 million b/doe
(147 bcm) in 1973. In the latter year, oil covered over
three-fifths of Western Europe's total energy require-
ment, while natural gas covered one-tenth
West European consumption of oil has declined 23
percent since 1973 to 11.5 million b/d in 1983, with
most of the drop taking place after 1979. The largest
single reason for the decline probably is the switch to
other fuels-coal, gas, and nuclear power-in the
wake of the 1973 and 1979 OPEC price hikes, but
energy conservation, mild weather, and the recent
recession have also had a significant impact. Gas
consumption followed a different pattern, initially
expanding by about one-half to a peak of 3.6 million
b/doe (218 bcm) in 1979. This gain mainly reflected
the advantage that gas had gained vis-a-vis oil, both in
terms of price and security of supply. Consumption
receded to 3.4 million b/doe (204 bcm) in 1982,
because of rising gas prices and the recession, before
recovering to 3.6 million b/doe (215 bcm) last year.
Oil and Gas Import Dependence
These trends in energy production and consumption
have dramatically reduced Western Europe's depend-
%,nce on outside oil and gas suppliers-particularly
OPEC. In 1973 imports of OPEC oil covered 54
percent of Western Europe's total energy consump-
tion; last year this figure was down to 23 percent.
Over the same period, West European dependence on
oil imports from all outside sources fell from 59
percent of total energy consumption to 32 percent.
Although gas imports rose sharply during this period,
they still accounted for less than 3 percent of total
Norway, 15 percent.
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Table 3
Western Europe: Oil and Gas Import Dependence
Net oil imports as a share of total
energy consumption
Total
58.7
57.1
52.0
OPEC
54.4
53.0
45.5
Of which:
Libya
6.7
4.9
3.4
4.4
3.8
3.2
3.7
3.4
2.8
3.7
3.7
Nigeria
3.6
4.4
3.3
2.9
2.5
3.0
3.4
3.3
1.9
2.2
2.6
Kuwait
6.3
4.4
3.3
2.8
2.7
3.2
3.5
2.0
1.1
0.7
1.0
15.3
17.0
13.5
13.9
14.3
11.4
14.2
15.0
15.8
9.4
4.8
8.3
9.6
8.6
9.8
8.0
7.9
3.2
1.7
1.3
3.4
3.5
Iraq
4.5
4.3
5.3
4.9
5.0
5.2
6.6
5.1
1.8
1.7
1.5
USSR
3.3
2.8
3.5
4.4
4.8
5.0
4.6
4.3
4.3
5.6
6.2
Eastern Europe
0.4
0.4
0.6
0.8
0.8
0.6
0.9
1.4
1.1
1.1
1.3
Net gas imports as a share of
total energy consumption
Total
0.6
1.1
1.3
1.8
1.8
1.7
2.1
2.3
2.5
2.8
USSR
0.3
0.7
0.9
1.3
1.4
1.5
1.7
1.9
1.8
1.8
Algeria
0.2
0.2
0.3
0.2
0.2
0.1
0.3
0.4
0.6
0.9
energy consumption in 1983. Oil and gas imports
from the Soviet Union have increased, however, and
the USSR is now the largest outside supplier of both
commodities. Last year imports of Soviet oil and gas
covered 6.2 percent and 1.8 percent, respectively, of
total energy consumption
Norway, the United Kingdom, and the Netherlands
have taken somewhat different approaches to energy
policy, although all have accepted as a basic principle
that government should maintain extensive control of
oil and gas development. The differences in policy
stem largely from the economic conditions that exist-
ed when resources were first developed. The United
Kingdom entered the energy era with a faltering
economy characterized by sluggish economic growth,
recurring balance-of-payments problems, rising bud-
get deficits, and underinvestment in aging industries.
Oil revenues were seen by governments from both
major parties as a means of saving the economy, and
London consequently has followed a policy of rapid 25X1
development. Norway, on the other hand, had a
strong economy, a small, homogeneous population,
and an abundant supply of hydroelectric power. In
this situation, planners were concerned about the
impact of rapid oil and gas development on the social
structure, the environment, and the economy and thus
initially took a go-slow approach-although strategy
recently has shifted toward boosting the pace of
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development. The Netherlands was in a rather differ-
ent situation: although economic conditions were gen-
erally good, the government was embarked on build-
ing an extensive social welfare system; revenue from
gas production seemed to offer a relatively painless
way of financing the costs. As a result, The Hague
began with a policy of rapid development but shifted
to a much more conservationist approach in the wake
of the 1973 oil price hikes.
The United Kingdom
In our view, British policy toward the development of
oil and gas resources over the past two decades can be
summarized as follows:
? Resources should be used to provide maximum
benefits for the country as a whole.
? To ensure this, ultimate control of the resources
should remain in the hands of the government.
? Resources should be developed as quickly as possi-
ble (although recognizing that at some point govern-
ment depletion controls might be desirable).
? The government should collect as much revenue
from oil and gas as is possible without slowing the
pace of development.
The foundations of British energy policy go back to
the 1934 Petroleum Act, which vests all oil resources
in the Crown. Control of gas operations was given to
the government by the 1945 Ministry of Fuel and
Power Act, which also gave to the Ministry the broad
task of securing effective and coordinated develop-
ment of fuel and power in the United Kingdom. The
1964 Continental Shelf Act established government
control of offshore resources, essentially by extending
the two earlier laws to include offshore areas. In
addition, it ratified the boundaries allocated by the
1958 Geneva convention and established a system of
royalties and taxation for oil and gas development.
Development Policy. During the first decade of explo-
ration and development activity on the United King-
dom's continental shelf (1964-73), governments from
both major parties sought to exploit oil and gas as
quickly as possible. This approach was explicitly
confirmed in the 1967 Fuel Policy White Paper,
which concluded that the advantages of rapid develop-
ment outweighed the disadvantages. In general the
British authorities' view was that oil and gas produc-
tion would add to GNP, improve the balance of
payments, and reduce budget deficits. They also
tended to believe that the value of oil and gas would
be eroded in the future as alternative forms of energy
became available. As a result, several large North Sea
licensing rounds were held, and an important criterion
for awarding licenses was the number of exploratory
wells the applicant promised to drill. In addition, a
relatively easy fiscal regime was introduced to encour-
age exploration and development.
British policy experienced a moderate transformation
during 1973/74 as a new consensus emerged that, at
some future time, the government might need to limit
oil production. The prevailing view was that depletion
controls should not be considered at least until oil self-
sufficiency had been attained, although the Scottish
Nationalist Party advocated setting a production ceil-
ing of 1 million b/d-about half the British level of
consumption. This shift in thinking began in early
1973 under the Conservative government and was
prompted by large offshore oil discoveries, which
aroused fears that oil production might eventually be
large enough to have negative effects. The OPEC
price hikes later in 1973 reinforced this shift in
attitude by vividly demonstrating that oil in the
ground was not necessarily a declining-value asset.
In March 1974 a Labor government was elected on a
platform that included general references to the need
for public control of oil and gas development. Shortly
thereafter the 1974 White Paper on United Kingdom
Offshore Oil and Gas Policy was published. It stated
that the government would eventually control produc-
tion levels, although for the next few years the goal
was still to increase output as quickly as possible. This
was very similar to the view of the Conservative
Party, which in the same year proposed establishing
an independent body to regulate the rate of depletion
starting in the 1980s.
The oil companies were alarmed, however, by the new
Secretary of State for Energy who stated that the
government was taking a more conservationist stance
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and would seek a long-term balanced flow of oil
rather than maximum development. Responding to
protests by the oil companies, he later gave formal
assurances that rapid development would be allowed
to continue until at least 1980. These so-called Varley
assurances were later extended-first to the end of
1982 and more recently to the end of 1984.
The government's new stance was formalized in the
1975 Petroleum and Submarine Pipelines Act. This
gave London extensive power to set depletion rates
(although the power probably was already there im-
plicitly under the laws mentioned earlier). The Act
requires producers to submit a development plan that
includes projected minimum and maximum produc-
tion rates. London can require changes in the plan and
later can order the production rate to be raised or
lowered, within these preset limits. An additional
piece of legislation-the Energy Act of 1976-gave
the government the authority to regulate the price and
output of oil and gas if required to meet a national
emergency or to satisfy EC or IEA requirements.
London's pledge not to impose depletion controls
expires at the end of 1984, but this issue is no longer
very important. Oil production is already very close to
the maximum attainable and is expected to begin
declining in two or three years. Anxious to avoid a
sharp decline in oil output, the Thatcher government
over the last several years has stepped up the pace of
licensing and has significantly eased the tax burden
on North Sea operations, particularly for the smaller
fields where most of the undeveloped oil reserves now
lie.
Taxation. Over the years London basically has sought
to gain as much revenue as possible from oil and gas
operations, while still maintaining a rapid pace of
development. The effort to reconcile these conflicting
objectives has brought numerous changes in the tax
laws during the past decade. As late as 1974 the
United Kingdom had a simple and relatively unbur-
densome oil and gas tax regime consisting of a royalty
fee and the standard corporation income tax. By the
early 1980s the overall tax burden was much higher
and the system was drawing much criticism for its
complexity.
From 1975 to 1982 the trend in taxes was sharply
upward. The substantial oil discoveries of the early
1970s, coupled with the 1973 OPEC price hikes,
made it evident that North Sea operations would
generate enormous profits within a few years. It also
became clear that the government would receive little
revenue in the beginning because the oil companies
had accumulated losses in other parts of the world
that were deductible against North Sea profits in
calculating their corporation income tax. As a result,
Parliament passed the 1975 Oil Taxation Act, which
introduced the Petroleum Revenue Tax (PRT)-a
levy on profits from each individual field, set initially
at 45 percent. To reduce the impact on smaller, high-
cost oilfields, the first 500,000 tons (20,000 b/d)
produced in each six-month period were exempted
from the tax, with a maximum lifetime exemption of
10 million tons per field. The 1975 act also introduced
the unique "ring fence provisions" under which losses
from operations outside Britain's continental shelf
were no longer allowed as deductions for the corpora-
tion income tax. Effective in 1979, the PRT rate was
increased to 60 percent, the tax allowance for capital
expenditures was reduced, and the amount of oil
exempted from PRT was cut in half. These moves
reflected continued high company profits and Lon-
don's need for greater revenues. Following the second
round of OPEC price hikes, the PRT rate was hiked
to 70 percent in 1980 and 75 percent in 1982. In
addition, a further tax-the Special Petroleum Duty
(SPD)-was levied as of 1981.
In response to industry protests, falling oil prices, and
forecasts of declining oil and gas production, London
has significantly eased its tax regime during the past
two years. It first allowed the SPD to lapse at the end
of 1982, and then in mid-1983 implemented several
measures that apply to offshore areas outside the
southern North Sea (where extra development incen-
tives were not considered necessary). Most important-
ly, the 12.5-percent royalty fee was abolished for new
oil and gas fields. Because royalties are paid out of
gross revenue-without regard to profitability-this
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Table 4
United Kingdom: Licensing Rounds
1
(1964)
2
(1965)
3
(1970)
4
(1971-72)
5
(1976-77)
6
(1978-79)
7
(1980-81)
8
(1982-83)
9
(1984-85)
Number of blocks offered
960
1,102
157
436
71
46
95
184
180
Number of blocks applied for
394
127
117
286
51
46
97
84
NA
Number of blocks licensed
348
127
106
282
44
42
90
70
808
Number of companies licensed
53
44
61
213
64
59
157
NA
NA
step was particularly significant for encouraging de-
velopment of the smaller, high-cost fields on which
the United Kingdom will increasingly have to rely. In
addition, the volume of oil exempt from PRT was
restored to its original level of 1 million tons annually
per field.
Partly as a result of these changes, drilling activity in
the British North Sea had reached record levels by
the fall of 1983. Many earlier finds are also being
reappraised and development of as many as 17 small
oilfields could begin by 1985
The volume of oil and gas
reserves currently under development is still far below
the 1976-77 peak, however. Because of the time
required to develop a field, the new tax measures will
have little effect on production-or on government
revenue-before the 1990s.
The Government's Role. The British Government's
energy role begins with the fact that it lays claim to
all oil and gas reserves in the country. It transfers
rights to these resources by means of a licensing
system. A few licenses have been auctioned to the
highest bidder, but the great majority are awarded by
administrative decision. The production license con-
fers the right to drill wells and produce any hydrocar-
bons located and is valid for four years with an option
for a further 20 years on the surrender of at least half
of the original license area.
In an effort to get North Sea development under way
rapidly, two large licensing rounds were held in 1964
and 1965, with more than 2,000 blocks offered and
475 licensed. During the third and fourth rounds
(1970-72) an additional 593 blocks were offered, of
which 388 were licensed. With the most promising
areas already taken, and with discoveries occurring
rapidly, licensing slowed sharply thereafter. During
1973-79 only two rounds were held in which just 117
blocks were offered and 86 licensed.
Licensing activity has picked up again since 1979 as
part of London's effort to boost exploration and
development. Under the seventh licensing round, 90
offshore blocks were licensed in 1981 and 70 more
licenses were issued in early 1983, at the conclusion of
the eighth round. A ninth round is currently under
way, and London is expected to award about 80
licenses early next year. In August 1983 London also
opened 30 onshore areas for production and seven
areas for exploration and promised to review onshore
licensing regulations.
London also plays an energy role through several state
companies. Although the Thatcher government has
"privatized" the production activities of British Na-
tional Oil Company (BNOC), the firm still performs
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an important marketing function. It is entitled to
purchase up to 51 percent of the oil produced in the
North Sea, at current official prices, under participa-
tion agreements signed by the companies as a licens-
ing condition. BNOC also holds and distributes oil
taken by the government as "payment in kind" for
royalties. Government revenues from BNOC sales are
placed in a special National Oil Account and are used
to finance future acquisitions and operations of the
company. Nearly all the gas produced domestically is
marketed by British Gas Corporation, which controls
the purchase price under long-term contracts with
producers. In early 1983 the Thatcher government
offered to sell most of its partial stake in British
Petroleum-the country's largest oil company-to
help cut its budget deficit
The government has also taken measures to ensure
that British industry benefits from the oil bonanza.
London requires that 60 percent of the oil produced be
refined domestically. The Offshore Supplies Office,
founded in 1972, is charged with identifying and
promoting domestic suppliers for the goods and serv-
ices used in both domestic and foreign oil and gas
projects. This effort has been successful, as British
firms' share of domestic contracts has risen to about
70 percent, compared with less than 10 percent in
1974, when most of the materials and services came
from the United States
Norway
Of the three major West European energy producers,
Norway has maintained the strictest control of its oil
and gas resources. Oslo's energy policy is based on the
May 1963 Royal Decree, which extended sovereignty
to offshore areas, and the June 1963 Exploration for
and Exploitation of Submarine National Resources
Act, which vested power over resources in the state
and gave the government control over licensing and
regulation. Once formal guidelines had been an-
nounced and a tax regime decided, the first offshore
licenses were awarded in 1965, and production began
in 1971
The Go-Slow Policy. From the start, Oslo adopted a
more conservative approach to offshore development
than did London. This reflected, in part, the smaller
size of the Norwegian economy (one-eighth the size of
the United Kingdom's) and its lower level of energy
consumption (less than one-tenth of that in the United
Kingdom), of which 40 percent was hydroelectric
power. It also resulted from the more favorable
economic conditions-relatively stable economic
growth and absence of balance-of-payments crises-
that Norway enjoyed. Rapid exploitation of North
Sea energy reserves was seen as potentially injurious
to the domestic economy and the established social
order. In particular, Norwegian planners feared that
faster development would lead to higher inflation,
damage to the fishing industry and the environment
generally, and industrial restructuring problems.
Norway's "go-slow" policy became more explicit in
the early 1970s when parliament passed a resolution
limiting combined oil and gas production to 1.8
million b/doe-a level that was expected to be
reached in the early 1980s. This policy tightening
resulted mainly from the fact that large oil and gas
reserves had already been discovered when OPEC
quadrupled the price of oil in 1973; both factors
magnified the potential impact of energy development
and intensified fears of a disruptive effect on Norwe-
gian society. In fact, a Finance Ministry study indi-
cated that as many as one-fifth of the workers in
traditional industries might be displaced (mainly be-
cause of the impact on the exchange rate) if North
Sea development continued along its projected path.
In addition, environmental concerns-already impor-
tant in a country where the population is concentrated
along the coast-were magnified by several major oil
spills in other parts of the world.
The go-slow policy was implemented primarily by
means of a restrictive approach to licensing. Norway
did not hold its first licensing round until 1965, by
which time the United Kingdom was already carrying
out its second round. By the end of 1965 Oslo had
granted production licenses for only 78 North Sea
blocks while London had licensed 475. Allowing for
the fact that the Norwegian blocks are about twice as
large, there was still approximately a 3-to-1 disparity
in the total area licensed.
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Table 5
Norway: Licensing Rounds a
(1980-82)
(1981)
(1982)
(1983)
(1984)
Number of blocks offered
NA
68
32
15
26
13
12
40
24
Number of blocks applied for
NA
14
26
10
22
13
10
20
NA
Number of blocks licensed
78
14
8
8
12
9
5
15
NA
Number of companies licensed
10
9
6
6
4
7
5
NA
NA
a Some licenses have been awarded outside of the regular licensing
rounds:
1971-1
1973-2 (Statfjord)
1976-3 (approximately)
1978-1 (Gullfaks)
1982-1 (block 30/9)
Also in 1973 nine blocks were reserved for Statoil.
The disparity in licensing between Norway and the
United Kingdom became even more pronounced in
subsequent years. During 1966-79-despite growing
oil company interest in the Norwegian sector of the
North Sea-Oslo licensed only 45 more blocks. This
figure includes a number of blocks that were allocated
outside the three licensing rounds or that were re-
served for the Norwegian state oil company. During
the same period, the United Kingdom held four more
licensing rounds and awarded 474 licenses.
Government Participation and Taxes. Over the years
Oslo has substantially boosted its take from Norway's
oil and gas sector by means of both direct participa-
tion and higher taxes. Beginning with the second
licensing round in 1969, government participation-
varying from 5 to 40 percent-in all licenses was
required, using the "carried-interest" system. Under
this system-a Norwegian innovation-the govern-
ment does not participate in the development work
but retains the right, once the field is declared
commercial, to claim a share of the output by paying
a corresponding share of the development costs. Since
1973 the level of government participation has varied
from 50 to 80 percent, all in the hands of the state oil
company-Statoil-which began operations in the
same year.
The Norwegian tax system has been less subject to
modification than that of the United Kingdom, al-
though there have been several increases over the
years. In 1972 the earlier flat 10-percent royalty was
replaced by a sliding levy on oil production of between
8 and 16 percent (depending on the level of output)
and a 12.5-percent charge on gas production. In 1975
a special petroleum tax was added; it currently is set
at 35 percent of residual profits (after all other taxes
are paid) less 6.67 percent of the capital expenditures
made during the previous 15 years. Other taxes
include the standard municipal tax of 23 percent of
net income, federal taxes of 27.8 percent on net
income less distributed dividends, and withholding
taxes of 10 to 15 percent on dividends distributed
abroad.
Changing Attitudes. Over the last five years Norwe-
gian thinking has moved away from the go-slow
approach to a significant degree-primarily, in our
judgment, because actual oil and gas production has
fallen far short of projections and has not had some of
the negative consequences that the Norwegians
feared. Instead of reaching the ceiling of 1.8 million
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b/doe, output in the early 1980s was only slightly
more than half that figure. An additional important
factor has been the emergence of a significant domes-
tic industry engaged in offshore services and sup-
plies-a sector with an obvious vested interest in
maintaining a high level of oil and gas development.
Along with this has come a growing demand from
regions that have not particularly benefited from
energy development thus far-primarily the northern
half of the country-for a share of the jobs and
industries that are being created. Finally, opposition
from environmentalists has weakened because of the
relative absence of problems thus far, while labor
union objections to rapid energy development have
been muted by a sharp rise in unemployment-even
though the level is still low compared with most other
West European countries.
Energy policy disagreements between the Conserva-
tives and the opposition Labor Party focus on areas
other than the desirable level of oil and gas produc-
tion. In particular, the Conservatives want to reduce
the role of Statoil because of projections that the
company might control 20 percent of Norwegian
GNP by the turn of the century. The Labor Party
favors a more powerful Statoil-able to compete
effectively with the international oil companies-but
has agreed to a compromise that will significantly
reduce Statoil's revenues in the 1990s. Compared with
the Conservatives, the Labor Party is somewhat more
inclined to limit the amount of foreign participation in
offshore operations. Under either party, however,
Norwegian companies will play a major role in the
future development of Norway's North Sea energy
resources.
Norway's changing attitude toward North Sea devel-
opment was crystallized to a great extent in the
Skanland Report, issued in early 1983. The report
concluded that, rather than setting a specific produc-
tion target, Norway should aim for a steady flow of
net new investment in oil and gas production. This
would result in a gradual rise in the level of gross
investment because the requirement for replacement
investment will increase over time. Under this ap-
proach, it is estimated that oil and gas production
would gradually double to about 2.4 million b/doe in
the late 1990s. The Skanland Report also advocated
setting up a special fund to smooth out the economic
impact of energy production; in good years the gov-
ernment would transfer some oil and gas revenue to
the fund and would draw from the fund when energy
income declined. A member of the Labor Party's right
wing and a director of the Bank of Norway, Hermod
Skanland is widely respected in Norway. His basic
conclusions have met with fairly broad approval and
seem likely to be accepted by parliament as the basis
for Norway's production policy
The Netherlands
The discovery of a major gas deposit at Groningen in
the Netherlands in the late 1950s triggered the search
for energy in the North Sea. Ironically, however, the
Netherlands has fared relatively poorly in this search,
as almost all major finds have been in the British or
Norwegian sectors. Nevertheless, the limited success
offshore has been more than offset by the emergence
of Groningen as one of the largest gasfields in the
world.
Dutch energy policy is based on the Napoleonic 1810
Mining Law, the 1958 Continental Shelf Mining Act,
and a 1965 amendment to the 1958 law. Gas and oil
production-both offshore and onshore-is primarily
in the hands of Netherlands Aardolie Mautschippig
(NAM). Founded in 1947, NAM is a consortium of
Shell Nederland (25 percent); Esso Holding Company,
Holland (25 percent); and the Dutch Government (50
percent). Gas distribution and marketing within the
country and-since 1975-gas export sales are in the
hands of Gasunie, which is also a consortium, orga-
nized in the same way as NAM. The management of
both companies is handled by Shell, which in turn is
principally owned by the Dutch Government.
Dutch energy policy in the 1960s evolved in the
absence of some of the pressures that influenced
government decisions in the other two energy produc-
ers. Unlike the case in the United Kingdom, the
economy was generally perceived to be in good shape
so The Hague did not feel pressured to speed gas
production as a means of solving other economic
problems. On the other hand, some of the objections
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to energy development that were important in Nor-
way did not play a major role in the Netherlands.
Onshore gas production posed relatively few environ-
mental dangers and-with an economy that was
larger and more diversified than Norway's-the
Dutch were less afraid of potential disruptive effects
of rapid energy development.
In this situation the government's rapidly growing
revenue needs became the dominant factor in energy
decision making. The Hague had already begun to put
in place a massive social welfare system, and gas
production seemed to offer a relatively painless way of
obtaining the funds required to finance it. Reinforcing
this inclination was the widespread belief that gas left
in the ground would be a declining-value asset. Rapid
development of other energy sources-particularly
nuclear power-was expected to undercut the market
for gas in the future and hold down its price.F__1
Under these circumstances the Dutch Government set
out-in the Aardgas Nota (Natural Gas Note) of
1965-an explicit policy of rapid gas exploitation.
The Groningen gasfield, as well as any offshore oil
and gas fields that might be found, were to be
developed quickly. To provide a market for the gas,
Dutch consumers would be encouraged to switch to
the new fuel, and long-term export contracts would be
signed with foreign buyers. To speed the search for
energy in the North Sea, a liberal licensing regime
was introduced. In the first licensing round (1967),
over half the available concessions were licensed for a
15-year period with no requirements for government
participation. Twenty-four additional licenses were
granted during a second round (1970), and all but 20
percent of the remaining areas were allocated during'
a third licensing round (1972). Most of the concessions
went to NAM.
Although the offshore search effort proved disap-
pointing, the Dutch goal of rapid gas development was
basically met. Gas production-almost all from Gro-
ningen-rose from 24,000 b/doe (1.4 bcm) in 1965 to
1.1 million b/doe (66 bcm) in 1973. Almost half of the
1973 output was exported, while the gas consumed at
home covered 47 percent of the country's total prima-
ry energy requirement. The increasing availability of
relatively cheap Groningen gas particularly stimulat-
ed the.growth of energy-intensive industry. From
1960 to 1973 industrial energy use in the Netherlands
rose 270 percent while energy consumption in the rest
of the economy increased only 160 percent.
The 1973 oil embargo and oil price hikes sharply
altered Dutch thinking on energy issues. The embargo
highlighted the dangers of depending on imported
energy and thus called into question The Hague's
policy of rapidly depleting Dutch gas reserves. At the
same time, the price hikes provided dramatic proof
that energy prices could rise as well as fall.
The rethinking of Dutch energy policy began with the
1974 White Paper, which called for energy conserva-
tion in general and reserving gas for "premium" uses.
During 1974-77 The Hague took several steps to
implement these principles, the most important of
which was the decision not to renew gas export
contracts when they expired (mostly in the late 1980s
and early 1990s). The government also decided to
phase out gas use in power stations and large industri-
al installations, moved to step up imports of oil and
gas, began studying possible increases in the use of
coal and nuclear power, and implemented several
measures to promote energy conservation.
The Hague's shift to a more conservative gas deple-
tion policy was confirmed in a three-part Energy
Memorandum published in 1979/80. The first part of
the memorandum established conservation and diver-
sification of energy sources as the basic objectives of
Dutch energy policy, while the second and third parts
called, respectively, for a sharp increase in the use of
coal and for the construction of three large nuclear
power plants. Also, in 1980 the government began
renegotiating Dutch gas export contracts; the result
was a significant increase in the base price and the
introduction of a more complete indexation system-
although Dutch gas prices have yet to catch up with
oil prices.
Since 1980, however, the pendulum has swung back
toward a somewhat more liberal depletion policy. The
main reason for the latest shift, in our judgment, is
the fact that Dutch gas production fell more quickly
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than expected after 1979. Export sales were off
particularly sharply because Dutch export contracts
offer buyers an unusual degree of freedom to adjust
the volume of deliveries, and the Netherlands thus
bore the brunt of the recession-induced drop in West
European gas purchases. In addition to increasing the
life expectancy of Dutch reserves, the unexpectedly
sharp drop in gas demand cut government revenue-
just as the recession was forcing an increase in
expenditures. Repeated attempts at budget tightening
by several van Agt coalition governments, including
the current center-right government, have failed to
reverse the trend: the budget deficit has soared from
4.6 percent of GNP in 1980 to 8.0 percent last year.
As a result, domestic pressure to increase gas sales,
and thereby government revenues, has grown, al-
though there are still political disagreements on the
issue. On the left, the Socialists, and to a lesser extent
the Democrats '66, tend to favor expanded exports to
finance higher social spending and offset rising unem-
ployment. On the right, the Christian Democrats and
the Liberals are more inclined to slow depletion, curb
spending, and hold the gas as a strategic reserve for
Western Europe. Some also fear that increased gas
sales will mean a larger government presence in the
economy and will postpone needed industrial restruc-
turing measures proposed by the van Agt government.
The net result of these pressures is that the Nether-
lands seems to be headed for a middle-of-the-road
approach, between the earlier extremes of rapid deple-
tion and strict conservation. About two years ago The
Hague announced that gas not taken under existing
export contracts could be delivered after the nominal
termination dates of the contracts. Since there is
likely to be a substantial quantity of such gas, due to
the unexpected decline in demand after 1979, this
decision amounted to a de facto extension of the
contracts. Last year The Hague went a step further,
announcing that additional quantities of gas would be
made available for export-although the Netherlands
and the gas-buying companies still must reach agree-
ment on prices. The most likely result of these two
moves is that Dutch gas exports will continue into the
latter part of the next decade instead of terminating in
the early 1990s.
On balance we judge that the development of oil and
gas production has had a positive impact on the
economies of the three countries-although probably
not to the extent they originally had expected. On the
plus side, energy production has boosted economic
growth, strengthened the balance of payments, and
provided a relatively painless source of government
revenue. It has also added to economic security by
reducing vulnerability to a cutoff of energy imports.
On the other hand,'the growth of energy production
has hurt the traditional manufacturing sector in all
three countries. The impact on employment is uncer-
tain because gains in some areas have been offset by
losses in others
The impact of oil and gas on payments balances has
been especially significant. Britain's energy trade
deficit, which peaked in 1974 at $9.0 billion, had
disappeared by the end of 1980 and had turned into a
$10.7 billion surplus by 1983. Mainly on the strength
of this turnaround, the current account balance
moved from an average annual deficit of $2.8 billion
during 1973-76 to an average annual surplus of $9.0
billion during 1977-83. Meanwhile, Norway's balance
of trade shifted from a deficit of $4 billion in 1977 to
a $4.3 billion surplus in 1983, with almost the entire
improvement coming from greater oil and gas exports;
the current account has been in surplus since 1979.
Increased earnings from oil and gas have helped to
finance imports of manufactures and have been used
to spur capital investment in oil-related manufactur-
ing industries. Buoyed by its gas sales, the Nether-
lands' current account has been in surplus for nine of
the last 12 years, the cumulative surplus for the period
totaling almost $19 billion. Although an import surge
and the second OPEC price hike pushed the current
account into deficit during 1978-80, it has come back
stronger than ever, with a surplus averaging $4.1
billion annually since 1980.
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Table 6
West European Energy Producers: Oil and Gas in the Economy
Gross production value of oil and gas (million US $)
392
1,125
5,381
22,332
26,971
26,957
Share of GDP (percent)
0.2
0.5
1.7
3.9
4.5
4.8
Gross exports of oil and gas (million US $)
1,649
2,135
4,384
14,510
18,746
19,016
Share of total exports (percent)
4.3
4.7
6.4
13.2
18.1
19.6
Government oil and gas revenue (million US $)
42
137
1,079
9,031
13,084
13,671
Share of total government revenue (percent)
NEGL
1.6
2.5
13.6
17.0
17.3
Employment in oil and gas (thousands)
28
32
36
36
36
35
Share of total employment (percent)
0.1
0.1
0.1
0.2
0.2
0.2
Norway
Gross production value of oil and gas (million US $)
101
1,345
2,922
9,313
9,582
9,226
Share of GDP (percent)
0.5
3.8
6.0
14.4
15.3
15.0
Gross exports of oil and gas (million US $)
88
1,220
2,593
8,381
8,378
8,285
Share of total exports (percent)
0.8
10.0
16.9
30.7
30.7
32.5
Government oil and gas revenue (million US $)
NEGL
0.4
0.7
4.7
4.5
4.6
Share of total government revenue (percent)
0.2
3.1
4.7
18.4
18.1
19.5
Employment in oil and gas (thousands)
2
4
6
8
11
12
Share of total employment (percent)
0.1
0.3
0.4
0.5
0.6
0.7
Netherlands
Gross production value of oil and gas (million US $)
2,909
4,357
6,549
8,086
9,509
9,228
Share of GDP (percent)
4.5
4.9
5.3
6.5
7.5
7.5
Gross exports of oil and gas (million US $)
1,459
1,899
2,701
5,095
5,340
4,987
Share of total exports (percent)
2.7
4.9
5.4
6.9
7.8
8.0
Government oil and gas revenue (million US $)
1,117
2,597
4,742
7,018
7,734
7,998
Share of total government revenue (percent)
5.5
10.2
10.7
14.0
19.0
20.0
Employment in oil and gas (thousands)
5
5
6
7
8
8
Share of total employment (percent)
0.1
0.1
0.2
0.2
0.2
0.2
In the cases of Norway and the United Kingdom, the
gain in the energy trade balance has been partially
offset by a deterioration in the nonenergy trade
balance, particularly for manufactured products.
Over the last five years Norway's deficit in manufac-
tures trade has averaged about $2 billion per year
greater than in the preceding five-year period. In the
United Kingdom the shift was more dramatic as the
balance on manufactures moved into the red for the
first time ever in 1983. The $7.2 billion deficit last
year contrasts with a surplus on manufactures that
averaged over $8 billion annually during 1975-80. In
both countries the deterioration of the manufacturing
trade balance probably reflects the fact that oil and
gas production has generated new income-some of
which will be spent on imports-and also probably
caused the exchange rate to be higher than it other-
wise would have been. In the Netherlands, where oil
and gas account for a much smaller share of exports
than in the other two countries, there has been no
obvious negative impact on the manufacturing trade
balance.
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producers.
Over the years, the three governments have taken a
large and increasing share of total oil and gas income
in the form of taxes, royalties, licensing fees, partici-
pation and marketing agreements, and profits of
wholly and partly state-owned companies. Revenue
from oil and gas production now accounts for close to
one-fifth of total government receipts in each of the
countries. In the United Kingdom, 1982 energy reve-
nues totaled $13.7 billion, or 17.3 percent of total
government receipts. Norwegian taxes, royalties, and
licensing fees amounted to $4.6 billion in 1982 and
accounted for 19.5 percent of total government in-
come. In the Netherlands, gas revenues reached $8
billion in 1982 and provided 20 percent of total
government revenue. Unlike the United Kingdom and
Norway, the Netherlands has no special energy taxes;
The Hague's energy revenue arises largely from its
government's share of Gasunie and NAM, participa-
tion agreements with private firms, and netbacks from
gas production on the manufacturing sector.
Energy production also appears to have boosted eco-
nomic growth in the three countries, although the
impact is impossible to quantify with precision. Last
year oil and gas production accounted for 5.5 percent
of GNP in the United Kingdom, 7.5 percent in the
Netherlands, and 17 percent in Norway. The net
additions to GNP are probably smaller, however,
because some of the productive resources used in the
oil and gas sector could have been utilized in other
areas and because of the negative impact of oil and
We believe that a rough indication of the impact of oil
and gas is the improvement in relative economic
growth that all three countries registered after energy
production got under way. The effect is most pro-
nounced for Norway where we estimate that energy
production added roughly 2 percentage points to the
average annual GNP growth rate over a seven-year
period. In the decade before significant oil and gas
production began, the Norwegian economy grew at a
4.3-percent annual rate-exactly the same as the
other West European OECD countries. During the
years of expanding oil and gas production (1975-81),
however, Norway grew twice as fast as the other
group-4.1 percent annually versus 2 percent. Using
the same methodology, we estimate that growing
energy production added about half a percentage
Table 7
West European Energy Producers:
Economic Growth Before and After
Oil and Gas Production Began
Norway United Netherlands
Kingdom
Period before oil and gas
production began
1965-74
1966-75
1958-67
Average annual real
GNP growth during
this period (percent)
4.3
2.3
4.5
Average annual real
GNP growth for West
European OECD
(percent)
4.3
4.1
4.5
Growth differential
(percentage points)
0.0
-1.8
0.0
Period of expanding oil and
gas production
1975-81
1976-82
1968-77
Average annual real
GNP growth during
this period (percent)
4.1
1.2
4.3
Average annual real
GNP growth for West
European OECD
(percent)
2.0
2.3
3.8
Growth differential
(percentage points)
2.1
-1.1
0.5
Change in the growth
differential (estimated
impact of energy)
(percentage points)
2.1
0.7
0.5
point annually to Dutch economic growth from 1967
to 1977 and almost three-fourths of a percentage
point to the British growth rate from 1975 to 1982.
Unfortunately, the benefits of oil and gas production
have been at least partially offset by some negative
effects. While these effects cannot be isolated from
other negative influences-such as worldwide reces-
sion or restrictive government policy-they appear to
be greatest in the Netherlands and smallest in Nor-
way. The most important of the negative offsets is a
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decline in output and employment in the manufactur-
ing sector. Even total employment may also be ad-
versely affected in some cases, but this is much harder
to establish.
The negative impact on the manufacturing sector
arises mainly because rising oil and gas earnings and
resulting improvements in the current account cause
the exchange rate to appreciate. The resulting decline
in competitiveness leads to higher imports and re-
duced exports and eventually to declines in production
and employment in export- and import-competing
industries. A secondary impact is that the relatively
high wages paid in the oil and gas industry have led
workers in other sectors, backed by strong unions, to
push for higher wages. This leads to further declines
in price competitiveness, corresponding cuts in compa-
ny profits, investment, and production and thus to a
reduced manufacturing base. Finally, increased oil
and gas production may have hurt other industries by
diverting some of the investment funds that might
otherwise have gone to them. These negative effects
have been only partially offset by government efforts
to promote domestic suppliers of equipment for the oil
and gas sector.
The manufacturing sector in all three countries per-
formed relatively poorly during their periods of ex-
panding energy production, although we cannot say
how much of this is attributable to energy production.
Dutch manufacturing GDP grew at a 2.3-percent
annual rate during 1968-77, less than two-thirds the
rate recorded in the other West European OECD
countries, whereas previously it had grown at about
the same rate. Over the same period the manufactur-
ing share of total Dutch GDP fell 5.6 percentage
points-the sharpest decline of any OECD member.
In the United Kingdom, manufacturing GDP fell 2.1
percent annually on average during 1976-82, while it
grew at a 0.9-percent annual rate elsewhere in the
West European OECD. While this 3-percentage-point
growth differential was about the same as in the preoil
period, we believe Britain's performance would have
been better in the absence of oil. In Norway, manu-
facturing output declined at an average annual rate of
1.6 percent during 1975-81, while it was growing at a
0.5-percent pace in the other group-a significant
worsening of the previous growth differential. Over
this period the combination of falling manufacturing
within the OECD.
output and rising energy production caused the manu-
facturing share of GDP to fall from 21.9 percent to
14.8 percent. As was the case with the Netherlands a
decade earlier, this was the biggest drop recorded
The impact of expanding energy production on em-
ployment is less certain because there are offsetting
influences. Employment in the manufacturing sector
alone, however, probably has been adversely affected
in all three countries. This was clearly the case in the
Netherlands and the United Kingdom, where manu-
facturing employment fell by 16 percent and 25
percent, respectively, during the period of expanding
energy production, although part of the British de-
cline probably is due to the Thatcher government's
efforts to restructure the industrial sector. Manufac-
turing employment also fell in Norway, but the
decline was modest-less than that recorded by the
other West European OECD countries during the
same period. The loss of manufacturing jobs was not
offset by the relatively small number of jobs created
in the capital-intensive energy sector. On the other
hand, the boost that energy production gives to overall
economic growth may lead to substantial job creation
in the services sector, and thus to a net increase in
total employment. This probably accounts for at least
part of the 17-percent gain in Norwegian employment
during 1975-81, versus a 2-percent rise for the other
West European OECD countries. Many of these jobs
were created in Norway's public sector and were
financed out of the sharp rise in government oil and
gas revenue (or, initially, by borrowing against the
anticipated rise in revenue). In the Netherlands total
employment growth just matched that of the other
West European OECD countries while energy pro-
duction was expanding. As for the United Kingdom,
total employment dropped 5.7 percent during 1976-
82, but again it is impossible to say how much of this
decline was due to Thatcher policies and the world
economic recession. On balance, we judge the.net
employment effect to have been positive in Norway,
approximately neutral in the Netherlands, and nega-
tive in the United Kingdom.
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A final problem is that of pollution: Only a few major
spills have occurred in the North Sea, but recent
reports by the Norwegian and British Governments
show concern that aging equipment and faster devel-
opment could portend a severe accident in the next
decade. Such an accident could cause major damage
to the domestic fishing industry and high cleanup
costs. Thus far, the governments' response to the
potential crisis has been to tighten environmental
regulations and safety requirements on new and exist-
ing fields. The Norwegians have the most elaborate
controls for North Sea operations and have an active
agency with the power of law behind it. The Nether-
lands, only recently expanding its North Sea opera-
tions, has yet to develop an effective pollution and
environmental control program.
Although long-term energy forecasts are inherently
shaky, we believe it is fairly certain that Western
Europe will continue to rely on imports for 40 to 50
percent of total energy supplies through the end of the
century and beyond. As a result, the region will
remain vulnerable to supply disruptions, especially if
energy markets tighten in the early 1990s as most
forecasters expect. Among the three main West Euro-
pean energy producers, Norway's relative importance
will increase as its oil and gas production continues to
expand, while output in the United Kingdom and the
Netherlands probably will decline.
There is no doubt that imports will continue to supply
the great majority of Western Europe's oil needs well
into the next century. While there is a wide range of
forecasts, the consensus probably is that the region's
oil-import dependence in the year 2000 will be higher
than the 1983 figure of 70 percent. Consumption
could begin growing again, reflecting the resumption
of economic growth and the sharp fall in real oil prices
over the last few years. Indigenous oil production,
meanwhile, probably will be somewhat lower in the
year 2000 than it is now, as increases in Norway fail
to fully offset declines in the United Kingdom. While
London's recent moves to stimulate North Sea devel-
opment will boost oil production in the 1990s above
what it would have been otherwise, we doubt that the
The outlook for gas is even more uncertain than that
for oil, the key question being how Western Europe
will cover its gas needs in the 1990s and beyond. The
rise in gas consumption that began in 1983 is continu-
ing this year, and most forecasters project a further
substantial increase by the end of the century. At the
same time, production from most existing fields will
decline as the fields approach exhaustion. Production
from the giant Groningen gasfield is also expected to
decline by the year 2000, because Dutch policymakers
still intend to phase out exports long before the field is
exhausted, holding the remaining gas for Dutch use
and as an emergency reserve for Western Europe.
While Dutch willingness to continue gas exports past
the early 1990s has provided a little more breathing
space, Western Europe is still almost certainly going
to need a major new source of gas by the end of the
century. The region's principal hope for covering its
projected gas deficit from indigenous sources lies in
the development of Norway's offshore Troll field.
Projected production increases from other smaller
fields currently under development will offset only
part of the projected decline in West European gas
production. Troll, on the other hand, is a giant field-
comparable to Groningen-whose production poten-
tial has been estimated as high as 40-50 billion cubic
meters per year (670,000 to 830,000 b/doe).
To develop Troll, a number of technical problems
must be resolved-in particular how to work a field
that is in an inhospitable area with water depths of
300 meters or more, roughly twice the depth of any
offshore fields now in operation. Although the oil
companies are confident that the problems can be
overcome, the cost and the time required are uncer-
tain. The consensus seems to be that eight to 10 years
of work will be required before production can begin,
and at least several more years before full output is
achieved. Thus, even if development began now, it
would be near the turn of the century before Troll
could make a major contribution to West European
gas supplies.
current level of output can be maintained.
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The major obstacles to Troll development are its cost
and the competing objectives of the parties involved.
The operator of the Troll field-Royal Dutch Shell-
will not proceed with full-scale development until
there is a firm sales contract for the gas at a price that
will cover projected costs. The gas buyers, on the
other hand, will want flexible prices and delivery
schedules. They are afraid of being stuck with unmar-
ketable gas if oil prices and gas demand do not rise as
expected-and they are well aware of how inaccurate
long-term energy forecasts can be. Finally, the Nor-
wegian Government has grown accustomed to taking
a major share of the revenue from oil and gas projects
and obviously wants to do the same with Troll.
Western Europe's major alternative to Troll gas is the
USSR. With their enormous reserves and their need
for foreign exchange, the Soviets undoubtedly will be
willing and able to provide large additional amounts
of gas. There is still some export pipeline capacity that
has not been contracted for, and, more important, the
Soviets could relatively easily construct one-or
more-additional export pipelines in a fraction of the
time that it would take to develop Troll. In addition,
Moscow almost certainly will be able to undercut the
prices offered by Norway or any other potential
suppliers.
While the West Europeans would not be totally
sanguine about increasing their dependence on Soviet
gas, neither will they rule out this alternative. We
believe that they could reconcile-to their satisfac-
tion, at least-increased imports of Soviet gas with
their IEA commitment to avoid "undue dependency"
on any single energy supplier. In the view of most
West Europeans, their critical import dependency is
on OPEC, not the USSR. They would point out that
West European imports of Soviet oil probably will
decline sharply by the mid-1990s, due to the USSR's
expected slippage in oil output and its rising domestic
demand. In this situation Western Europe could sign
another major deal for Soviet gas and still hold its
energy dependence on the USSR in the next decade
below the current level.' The new Soviet pipeline will
be able to deliver 29 billion cubic meters of gas
annually, slightly more than the 27 bcm that the
USSR sold to Western Europe last year. With the
new pipeline in full operation by 1990, Soviet gas
could then account for about 22 percent of Western
Europe's gas consumption and 3.5 percent of its total
energy consumption. If another pipeline of the same
size were constructed by the mid-1990s, these figures
would rise above 30 percent and 5 percent, respective-
The West Europeans also clearly believe that the
Soviets have been reliable trade partners in the past
and that Moscow would have too much at stake-in
the form of foreign exchange earnings and its good
reputation as a trade partner-to use gas as a foreign
policy lever. They would also be likely to argue that
buying Soviet gas would help hold down oil prices,
and that, even if an embargo were imposed, they
could cope with it reasonably well by a combination of
fuel switching, conservation, and increased imports of
Dutch gas. In this connection, we believe the gas-
buying companies probably would be willing to help
the Dutch with the costs of maintaining a capability
to boost gas production substantially on short notice.
The West Europeans would feel even more secure
with Norwegian gas, of course, and probably would
pay a premium to obtain it-but not a very large
premium, we suspect. Other potential gas suppliers
(such as Iran or Nigeria) probably could not compete
with the Soviets in terms of price and would be
regarded by the West Europeans as involving a
greater security risk than the USSR.
Negotiations on Troll gas are expected to begin next
year. If the West Europeans are to turn to this source,
rather than the USSR, Oslo, Shell, and the gas-
buying companies will have to work out a mutually
satisfactory agreement reasonably soon-the longer
they delay the greater the chance that the Soviets will
get the market by default. While all three parties
want Troll to proceed, they all have other alternatives.
Royal Dutch Shell's future as a profitable energy
company would not be jeopardized by failure to
develop Troll, and the gas-buying companies know
that they can turn to the USSR if Troll negotiations
break down. Oslo's alternative probably would be to
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concentrate on oilfield development for the time be-
ing, with the hope that a better deal for Troll gas
could be negotiated a few years down the road after
energy markets begin to tighten. Meanwhile, for the
last two years Norwegian officials have sought to
strengthen Oslo's hand in the upcoming Troll negotia-
tions by publicly stressing the security advantages to
Western Europe of buying Norwegian gas.
An agreement to develop Troll will probably also
require Dutch willingness to cover any gas shortfalls
before the field comes on line. The Hague's recent
easing of export policy represents a big step in this
direction, and we believe it eventually will go further,
for several reasons:
? The decline in demand for Dutch gas since 1979
means that existing export contracts could be con-
tinued until the turn of the century and still leave
the Dutch in the year 2000 with approximately the
level of reserves that they originally had planned.
? Eliminating gas exports would force some difficult
adjustments on the Dutch economy because of the
large negative impact on the trade balance and on
government revenue. We believe the government
will come under increasing pressure to delay this
adjustment phase, particularly in view of its recent
lack of success in reducing its huge budget deficit.
? The Hague is likely to feel increasing pressure from
the gas-buying countries to extend the contracts for
the sake of West European and EC solidarity.
In our view, Oslo will have to show the most flexibility
if a deal for Troll gas is to be worked out. It will have
to offer the gas at a price that will always remain
below the energy-equivalent oil price, and to do this it
will have to accept a less burdensome tax regime for
Troll, perhaps based less on royalties and more on
profits. In part this judgment simply reflects Oslo's
bargaining disadvantage vis-a-vis the gas companies,
who have an alternative supplier while Oslo has no
serious alternative buyer. It also reflects the different
economic circumstances associated with Troll. North
Sea oil and gas fields developed to date have been a
financial bonanza for the Norwegian Government-
development and production costs have been so low
that Oslo has been able to claim approximately half of
the gross sales revenue and still leave the producing
companies enough to cover costs and make a comfort-
able profit. Because of its higher production costs,
Troll gas appears uncompetitive in the current energy
market-but mainly because government royalties
and taxes more than double the projected cost of
bringing the gas to market. Energy industry analysts
now seem fairly confident that an easing of the tax 25X1
system would make Troll gas competitive while still
providing large revenues for Oslo.
There are several factors that we believe could push
Oslo to make some price concessions on Troll gas. The
first is that Troll would still be a boon to the
government and to the Norwegian economy even if it
does not generate tax revenue at the same rate as
earlier fields. Another factor is Norwegian fear that
Troll gas could be shut out of the West European
market if development does not begin soon. If gas
demand in the region grows faster than expected, the
gas-buying companies could be forced to turn to the
USSR as the only supplier capable of delivering the
gas quickly enough to meet their needs. The third
positive factor is the widespread expectation that
world energy prices will be substantially higher by the
end of the century. Such a rise in energy prices would
greatly boost Troll's attractiveness for all concerned:
the buyers could get their gas at a price well below the
energy-equivalent cost of oil but high enough to pay
good profits to the companies and still leave a large
chunk of revenue to be claimed by the Norwegian
Government. 25X1 25X1
Oslo has in fact already shown some signs of becom-
ing more flexible in its negotiating strategy. Over the
past year, for example, it has eased its tax regime on
the Ekofisk field to spur production and it also
moderated its price demands for the sale of gas from
the Sleipner field to the United Kingdom. More
recently, a Norwegian official told a US Government
representative that Oslo was determined to see Troll
developed. He stated that Oslo's strategy was to force
the oil companies to minimize the development costs
for the field. Once that was accomplished, the govern-
ment would show sufficient flexibility on the tax issue
to ensure development took place.
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