Norway’s Energy Policy Environment Has Become More Challenging
A small left-leaning party leverages its power to change the government’s approach to the offshore sector.
When the Labor Party won the plurality of votes in the 2021 general election and formed a minority coalition with the Center Party, it seemed to be business-as-usual for the oil and gas industry. The center-left government largely endorsed the energy policy of the previous center-right administration and announced the support of continued hydrocarbon development along with ambitious energy-transition plans. However, the Socialist Left Party, the coalition’s parliamentary partner and an advocate of a much faster transition to a low-carbon economy, has created a more complicated landscape for the government.
The Socialist Left Party’s influence stems from its importance for the minority coalition government to secure the parliament’s approval of annual and revised budget proposals. Since 2021, the small left-leaning party has been able to advance its agenda through budget negotiations. The most prominent changes include
Hydrocarbon exploration. At the end of 2021, the Socialist Left compelled the government not to hold the 26th licensing round in 2022. As part of the 2023 budget proposal, the Labor and Center parties agreed to postpone the 26th round until the next regular election in 2025. While it is a setback for the oil industry, the move at least provides some certainty that frontier areas (usually offered under the numbered bi-annual rounds) will not be available over the medium term. Still, the latest frontier round (2020) generated a relatively muted interest – only 7 companies were awarded licenses compared to mature rounds, with 30 and 28 successful bidders in 2020 and 2021, respectively.
Carbon tax. The Labor-led coalition plans to increase the carbon price for the oil and gas industry gradually to Nkr2,000 (the national carbon tax plus the allowances in the EU Emissions Trading System) by 2030. Initially, it would entail a 10% tax increase per year. However, the center-left coalition had to implement a 28% rate hike from Nkr543 to Nkr675 in 2022 to get the Socialist Left Party onboard with the 2022 budget proposal. Subsequent amendments to the carbon tax were not as dramatic, but it is still possible that the target rate of Nkr2,000 will be reached before 2030.
The Socialist Left Party is a strong opponent of continued hydrocarbon exploration and would seek to halt all offerings, including mature acreage under the annual Awards in Pre-defined Areas (APA) rounds. However, given the importance of Norway for European energy security in the current market and geopolitical environment, pursuing such a policy would be highly controversial. Instead, the Socialist Left Party is likely to focus on protecting environmentally sensitive regions in the Norwegian Barents Sea through the introduction of permanent petroleum-free areas and modifying the definition of the ice edge. In early 2023, the party convinced the government to remove several blocks in the Barents Sea from the APA 2023 round. The offering still features 78 blocks in the region, but their attractiveness remains dubious. In the 2022 round, only two out of total 47 licenses were awarded in the Barents Sea compared to 29 in the North Sea and 16 in the Norwegian Sea.
Platform electrification policy is now more certain
The Socialist Left Party managed to accomplish what the Progress Party failed to do over a year ago, and this victory ushers in new challenges for the upstream industry. In early 2022, the parliament rejected a legislative proposal from the Progress Party to ban platform electrification with power from shore. The party was concerned about the impact on mainland electricity prices: it argued that the diversion of electricity to power offshore oil and gas facilities would result in shortages and trigger another price hike. However, the party was unable to garner enough support to move forward with the proposal.
This year, during the revised budget negotiations in May-June, the Labor, Center and Socialist Left parties agreed on the need for the oil and gas industry to electrify oil and gas platforms to cut GHG emissions. According to the announcement, this could only be done via offshore wind, and in 2024 the government would make a proposal to facilitate the deployment of the solution. The parties also agreed that a total of Nkr23 billion would be available in state funding for the successful bidders in the first offshore wind offering in the Sørlige Nordsjø II and Utsira Nord areas over a 15-year period. However, this proposed funding is unlikely to be formalized until after the next general election in 2025, given the time required to complete all regulatory procedures to process applications.
In the meantime, the latest announcements are likely to have major implications for upstream and offshore wind projects. In late 2022, Equinor postponed the final investment decision on its 500MMboe Wisting project in the Barents Sea until the end of 2026 due to rising costs and supply-chain bottlenecks. The project’s development plan includes a power-from-shore solution, which is likely to be reconsidered to comply with an updated government position. Separately, in May 2023, Equinor postponed indefinitely the Trollvind project, a floating wind farm to power the Troll and Oseberg fields. The company cited rising costs, technology availability and a strained timetable as key challenges to delivering the project before 2030. According to the latest survey by the Westwood Global Energy Group, cost inflation could add as much as $280 billion in capex for the global offshore wind industry (excluding Mainland China) over the next decade. Therefore, Norway’s government financial support to advance offshore wind is likely to be critical to promote platform electrification and reduce emissions from oil and gas operations on the Norwegian Continental Shelf.
New battleground
The latest government announcement about seabed mining is likely to trigger a new dispute with the Socialist Left Party, which is expected to leverage its position to block any further developments. In late June, the minority coalition proposed to open 281,000 square kilometers of the Norwegian Continental Shelf for seabed mineral activities. This will include exploration and mapping, but any potential extraction will require additional reviews and approvals. Still, the move is strongly opposed by the Socialist Left, Green and Liberal parties, while the Conservatives have not decided yet, but generally support seabed mining. Moreover, the announcement prompted backlash from environmental organizations, such as the World Wildlife Fund and Bellona. Given the coalition’s reliance on the Socialist Left Party, the initiative may not survive the end-year negotiations, when the parties will discuss the 2024 budget proposal. In addition, given the concerns about the safety of seabed mining and its impact on the marine environment, and even on the human right to health, activist groups are likely to pursue a legal challenge against the Norwegian authorities. The government already faces a case with the European Court of Human Rights (ECHR) related to the 2016 oil and gas licensing round in the Barents Sea, and its outcome is likely to impact the strategy of environmental organizations in the fight against seabed mining on the Norwegian Continental Shelf.