Sharp Rise in Revenues From Oil and Gas Activities, Lower Risk of Stranded Assets

The EU Energy Council agreed a price cap on gas at its December 19 meeting, but finding the right trigger and precise mechanism for the price cap proved controversial, and the measure would have a negative impact on the market. It raised concerns about financial stability as it could lead to increased volatility. This was the only outstanding issue that stalled the broader energy assistance package, which included legislation on joint purchases of gas by Member States.

Agreed price caps are only triggered in response to unusual price volatility, but combined with the EU collective purchasing power, prices can be lowered when negotiating with suppliers. This could lead to longer term supply contracts to improve planning certainty for homes and businesses.

However, the positive impact of the energy crisis on energy suppliers such as Norway is unlikely to abate significantly. Continued high tax revenues from the oil and gas sector are expected to strengthen the country’s finances, even if gas prices moderate in the coming years.

Under the Norwegian fiscal framework, revenues from the oil sector are initially deposited in a national sovereign wealth fund. Net cash flow from oil and gas operations will grow from NOK 288 billion (8.6% of mainland GDP) in 2021 to NOK 1,169 billion (33.7% of mainland GDP) in 2022 and NOK 1,384 billion by 2023. billion (38.3%) and is expected to increase fourfold. of mainland GDP)(Figure 1).

Figure 1. Norwegian oil revenues, 2020-2023

Billions of NOK (left axis), as a percentage of mainland trend GDP (right axis)

Source: Norwegian Government, Scope Ratings.

Clarify the limits to which EU agreed measures can bring down gas prices

There are clear limits to the extent to which the EU’s agreed measures can bring down gas prices, and they alone cannot solve the continent’s energy crisis. Large differences in the degree of budgetary flexibility, country industrial mix, and dependence on gas are factors that influence the large differences in the size of government support packages.

In total, European governments have already allocated around €705 billion to help homes and businesses out of the energy crisis. The largest support package was announced by Germany at €264 billion (7.4% of GDP), with smaller allocations from Italy (5.1%), the UK (3.5%), Spain (3.2%) and France (2.8%). (Figure 2).

Figure 2: Governments allocated and allocated budgets to protect homes and businesses from the energy crisis (September 2021-November 2022)

Source: Bruegel, Public and Private Sector National Sources, Scope Rating.

Norway’s dependence on gas increases as European nations move away from Russia

As European countries gradually move away from Russian energy sources, they have become more dependent on liquefied natural gas (LNG), which is imported primarily from the United States, Qatar and Nigeria, and which now accounts for over 42% of Europe’s gas supply. I’m here. Since Russia’s war against Ukraine escalated, Norway has established itself as her EU’s single most important gas supplier, supplying around 30% of EU gas since the summer (Figure 3).

Figure 3: Gas supply to Europe

Percentage of total gas supply, monthly moving average

Source: European Network of Transmission System Operators of Gas, Scope Rating.

Norway’s growing importance to European gas supplies also reduces the risk of Norwegian stranded assets. Increased reliance on the EU and the use of gas as a transitional fuel towards net zero will likely put the Norwegian economy on the line for the oil and gas sector as demand is likely to remain high in the medium term. Provide ample time to diversify from addiction.

Although Norway postponed its 26th New oil and gas field licensing rounds through 2025 and beyond, this applies only to new unexplored territory. Existing areas of the Norwegian continental shelf will therefore continue to be developed. According to recent forecasts by the Norwegian Petroleum Directorate, oil and gas production is expected to remain at high levels in the medium term, with gas production in particular expected to remain near all-time highs each year until 2026.

See the economic calendar for all today’s economic events.

Eiko Sievert is Director of Sovereign and Public Sector Ratings. Scope Ratings GmbHAlessandra Poli, Associate Analyst at Scope, contributed to the writing of this commentary.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *