Norway’s global winning industry is the offshore sector. This sector developed in the interface between offshore hydrocarbons, maritime technology and insatiable European energy markets.
BI Research: A knowledgebased Norway
Although it started from modest beginnings as a producer of oil and gas in 1971, Norway had
become the worlds’ 13th largest producer of oil and its fourth-largest producer of natural gasin 2009.
The Norwegian oil and gas industry was built upon established Norwegian competences in mining (geophysics), maritime operations and maritime construction (yards), with invaluable inputs from foreign operators and suppliers.
At present, the industry is a complete cluster of 136,000 employees The value creation from operators and suppliers combined represents one-third of total Norwegian GDP (2008). Value creation per employee ranges from NOK 1.2 million for suppliers to NOK 6.5 million for operators. In comparison, value creation per employee in the Tourism industry is NOK 0.4 million.
The supplier industry has successfully managed to internationalize, with exports from oil and gas suppliers representing approximately 15 percent of total Norwegian exports excluding direct sales of oil and gas. In addition to the export value, there is also capital income from repatriated profits from foreign subsidiaries.
The attractiveness of educational programs related to the oil and gas industry have been growing in popularity in absolute and relative terms on both the Bachelor and Master levels.
However, programs dedicated to the petroleum industry have been losing students in recent years. This situation reflects the continuing interest in engineering and related topics with an increasing focus on renewable energy and other technologies that are perceived to be more environmentally friendly.
For doctoral studies, both the absolute number of students and the relative proportion of students are declining. As doctoral studies have the longest time horizon, investment in such studies indicates that there are opportunities for either advanced employment or future academic life within this specific area.
Taking this into consideration, the declining attractiveness of doctoral programs in the relevant areas might constitute an early signal that the opportunities for advanced R&D-based value addition in the oil and gas industry are declining.
Attracting global competence
Practical challenges encountered in the oil and gas activity on the Norwegian continental shelf have given birth to a number of important innovations through a close cooperation between operators and suppliers.
This has made Norway into an attractive location for oil and gas R&D with many international oil and gas companies locating their R&D to Norway.
When oil and gas activities began in Norway, the country already possessed an international maritime industry, and industrial actors within the fields of fabrication and construction. However, Norway lacked oil and gas-specific competencies. The Norwegian government therefore introduced policies to attract global competence/ownership.
Due to the presence of the large partially state-owned operator Statoil, the share of foreign ownership in the total Norwegian oil and gas industry (37%) is much lower than the share of foreign ownership among suppliers (just above 50%).
The reliance on foreign-owned companies distinguishes the elements of ‘infant industry protection’ in the build-up of the Norwegian oil and gas industry from other countries’ experiences. Another factor working towards a high share of foreign ownership, especially in the suppler industry, seems to be that Norwegian-owned start-ups ready to introduce a product to a larger market tend to look for global industrial partners with financial strength.
However, foreign takeovers of Norwegian-owned companies do not harm the development of the national cluster if, like in the case of subsea technology, the R&D is grounded in Norway so that most R&D and headquarter functions remain in Norway.
The oil and gas industry is currently perceived as not very environmentally attractive even though it employs a number of environmentally friendly technologies. There are also ongoing initiatives, such as the utilization of microorganisms, to produce win-win solutions.
Furthermore, the Norwegian oil and gas industry’s environmental standards make it an attractive oil and gas hub in which to do business. This aspect needs to be emphasized further.
However, the development of higher environmental standards is called for, particularly given the plans to extract oil and gas in the northern areas. Norway must be at the forefront of the global industry in terms of developing environmentally friendly solutions.
The cluster dynamics, or the innovation system, in the Norwegian oil industry is based on a high degree of collaboration between suppliers of technology solutions and their customers, the operators.
Intra-industry labor mobility is operator-centric as operators are the preferred employment destination and technology-heavy-cohesive grouping as there are disproportionately large and reciprocal labor movements, especially among Geo & Seismics, Drill & Well and Subsea.
Clusters thrive in the presence of related clusters, and the oil industry has woven a tight network of relations, supported by the transfer of labor to and from the maritime industry, the metal processing industry and advanced knowledge mediators.
Firms in the oil industry invest in competence development as much as firms in the health industry, although the latter is considered to be a much more knowledge-intensive industry. If we combine the intra-industry labor mobility findings with the fact that the main focus of recruitment is on people with industry experience, a reduction in the activity level of the supply industry will also affect operators, as competent labor gains its experience in the supply industry before moving to operators.
Business strategy implications
Based on the study, we have developed the following recommendations for business strategy:
- Prepare for decades of maintenance, modification and decommissioning, and of ‘difficult’ oil and gas production in an increasingly cost-sensitive environment.
- Prepare for increasing low-cost foreign competition, which will initially be evident in the labor-intensive sectors of construction and manufacturing.
- Internationalize through the establishment of foreign subsidiaries by Norwegian headquarters.
- Contribute to promotion of the industry to help increase the critical supply of engineers, both from within the country and from abroad
- Invest in R&D and collaborations with R&D institutions.
- Find ways of channeling learning from foreign oil and gas activity to Norwegian-based R&D communities.
- Establish a proactive environmental involvement to appropriately respond to some of the major risks associated with oil and gas extraction.
- Establish a new petroleum innovation system that is not dependent on the ‘Big Brother’ (NCS Operators), one possible development would be a collaboration between technologically advanced suppliers and systems integrators.
- Explore commercially viable opportunities based on their core competencies for markets outside the oil and gas industry. Given the high cost level in Norway, these applications will have to be highly engineering intensive.
Public policy implications
Based on the study, we offer three practical pieces of advice for policy makers:
- When considering the possibility of opening new areas to oil and gas activity, the government should bear in mind that increased activity will provide the industry with a laboratory for technology development.
- The government should set unprecedented environmental standards that not only secure the environment in northern Norway but also allow the Norwegian oil and gas cluster to remain at the forefront of environmentally friendly solutions. Investments that improve upon the conditions under which innovative environmental solutions can be developed should commence in good time before standards are set.
- To ensure a reliable supply of engineers, the government should promote science-based education at an early age and consider the Australian and Singaporean models for attracting highly educated immigrants.
Amir Sasson and Atle Blomgren (2011): Knowledge Based Oil and Gas Industry. Research Report - 03/2011. BI Norwegian Business School.