Norway: A Political Risk Lesson For Oil

Oil markets are riddled with geopolitical risk. A sanctions hit Iran, a broken Iraq, a fiesty Venezuela, a corrupt Angola, a restless Russia, a worried Saudi Arabia ? we know the narrative well. But what markets continually overlook is the idea that political risk can be just as acute, if not more deadly in the most developed states of all. The latest workers strike in Norway provides a perfect example.

While all eyes were on the Middle East to see how sanctions deadlines played out, the oil price didn?t budge an inch. Any trader worth their salt would claim they had that one comfortably priced in; but when a bunch of fed-up workers in Oslo demand retirement at 62 with full pensions rights, the oil price shoot straight back to $102/b. We now face the prospect of 2mb/d of high quality, low-sulphur Norwegian production being shut in. Truly explosive stuff for the supply-demand balance. No one saw it coming.

The strike has already clipped Norwegian output by 15% with nine platforms being taken offline. The Norwegian Oil Industry Association hardly helped the situtation by threatening to end all national production if the strike wasn?t called off by midnight tonight (9th July). Someone will have to blink first, and the chances are, it?s going to be the Labour led Norwegian government to come up with a compromise solution. If they don?t, things are deemed so bad, that the International Energy Agency will step in to release the strategic petroleum reserve to offset any shortages.

That?s probably worth repeating just in case it didn?t fully sink in: what the US failed to conjure over Iran ? it could now get over Norway ? the IEA will release emergency reserves thanks to a pension dispute in the highest ranked nation on the UN human development index, with a vast $600bn sovereign (read pension) fund in the kitty. Worst still, even if some kind of arbitration panel manages to reach a settlement this time round, word on the ?Oslo street? is that there will be more disruptions in the coming months. With giant new Norwegian finds in the North Sea and the Arctic, Statoil needs to keep its workers on, riggers and engineers will want a pretty crown for doing so. You litterally couldn?t make this stuff up for Norway, or so you?d think.

Oil traders obviously missed a trick in all this, but the core problem is that political risk has always been mis-priced in developed markets. As the second largest gas exporter to Europe, Oslo?s outages should certainly give Brussels something?to think about, but it?s as the world?s fifth largest oil exporter where the real concern hits. Norway had similar strikes back in 2004 that were quickly dealt with, but it feeds into a far broader developed market resource trend. They all have a predation and penchant for political risk.

The UK treasury has always hiked royalties and taxes on North Sea prodcution to try and balance London?s budgetary books. France has just slapped a tax hike on its beleagured refining sector, while Australia has a long history of introducing overnight take hikes, most recently seen in the 30% Minerals Resource Tax. Canada remains remarkably picky about who it does business with; BHP Billiton couldn?t even get its bid for Potash beyond state legislators in Saskatchewan; political risk doesn?t play out with central governments in developed markets, it can also hit at sub-state and local levels ? especially where valuable resources are concerned.

Then of course we have the US. Forget the Unocal saga back in 2005, that?s old news. But what?s still very current is the ongoing fallout from BP?s Macondo spills. It brought the British major to its knees in 2010, and it?s still in the recovery room now. Compare BP?s Gulf of Mexico mishaps, to?Shell?s operations in the Gulf of Guinea (Nigeria), and?the contrast couldn?t be any sharper as a ?tale of two Gulfs?. Both have been serious environmental bloopers, but the?latter?remains a ?systemic? problem for Shell, the?former was a ?temporal? blow out for BP. Yet it?s on the shores of Florida, rather than the swamps of the Niger Delta that share prices have been hit, and oil prices corrected.

It comes as no surprise that Shell has already received far more international coverage by entertaining the notion that it will drill into Alaska?s Chukchi and Beaufort Seas (believed to hold anything up to 27bn barrels of oil) than it did in the Delta. Highly developed markets = highly developed (and sophisticated) levels of risk. The same dynamic will certainly apply if the US makes serious progress on shale oil, both for environmental demands entailed, and tax takes Washington will try to levy. Some will put all this down to mainstream media being more exacting over ?domestic? standards and what?s deemed a fair slice of the resource pie for advanced nations, but it still comes with the deep irony that markets don?t properly consider upstream risks in developed jurisdictions. Bottom line: when things wrong in ?pleasant places?, market knees always jerk.

As peculiar as that is, it presents an interesting operational rub for IOCs to ponder: The high risk propositions of old might actually become the ?lower risk? bets for the industry, precisely because frontier markets are already considered a ?basket case? of risk. If plays go drastically wrong, so what; it was to be expected. But get lucky and find a ?petrocrat? who knows what?s good for him,?then?oil will flow, policies remain stable; you end up quids in. Both seem a better idea than being caught on the wrong side of the fence in politically capricious developed markets. If that happens, you?re guaranteed one thing: You?ll pay a very heavy price.

Obviously that?s not to say the developed vs. developing energy world division is quite that simple. The iron law of any serious analysis is country risk first, sub-state risk second, project risk third. But the irony of ?nice Norwegians? giving? ?nasty Iranians? a free oil hand will certainly not be lost on the streets of Tehran right now. Risk is everywhere, but the most serious pockets tend to be where nobody has bothered to look.

Source: http://www.forbes.com/sites/matthewhulbert/2012/07/09/norway-a-political-risk-lesson-for-oil/

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