12 december 2016 - nordea markets · 2017-04-24 · corporate research 12 december 2016 how oil...

Corporate Research 12 December 2016

Contents

Oil in the Nordics 1

How oil impacts the Nordic economies 2

Interview: Oil in the economy and in Norway 9

Interview: Shaking the oil addiction in Norway 13

Interview: Building green business in Statoil 17

Oil and the corporate sector: A rough guide 21

Interview: Credit health in oil-related sectors 26

Disclaimer and legal disclosures 30

Nordea Markets

Corporate ResearchEquity Research 12 December 2016

Oil in the NordicsThreat to long-term oil outlook: Lack of demand instead of lack of supply?Fossil fuels still dominate, accounting for 90% of global energy consumption. Renewable energy represents only 3% of global energy consumption, but has grown by 16% a year in the past ten years whereas fossil fuels have grown only 2%. Ten years ago, long-term concerns over oil were focused on the potential lack of supply. This has started to shift into a potential long-term concern over the lack of demand for oil, with environmental initiatives by policymakers – such as the Paris Agreement of 2015 – being the key driver. In the Nordic region, this would pose a major challenge only for Norway, whose economy is highly dependent on oil. We explore the way forward in interviews with Norway's Environment Minister Vidar Helgesen, Statoil's Head of New Energy Solutions Irene Rummelhoff, and Nordea's Chief Analyst Thina Margrethe Saltvedt.

Norway post oil: Finding new uses for its core competencesNorwegian oil production peaked in 2001, but high oil prices supported revenue until 2014, and oil still accounts for 40% of Norway's exports. Politicians and captains of industry are seeking a path to a less oil-heavy Norwegian future economy. We believe Norway will seek to build on existing oil and offshore technologies, letting them evolve into areas such as green shipping and energy, while continuing to harvest maritime natural resources.

Oil is not a significant issue in the Nordic region, except in NorwayThe Nordic region is insignificant in a global oil context, accounting for just 2% of world production and less than 1% of proven reserves – almost entirely thanks to Norway. Sweden and Finland are oil importers, and Denmark is roughly oil neutral, while Norway is the major net exporter of oil. The oil price has not had a critical impact on Nordic GDP growth in the past ten years, except in Norway, which has started to lag in the current low oil price environment. That said, the accumulated oil proceeds in its sovereign wealth fund also helped Norway to cope with the global financial crisis in 2008-09.

Investors' perspective: Plays on oil, and winners and losers in the NordicsIt comes as no surprise that Norway's corporate sector has by far the greatest exposure to oil in the Nordic region. Its stock market has nearly twice the correlation (0.75) with the oil price compared with its Nordic neighbours. 72% of revenue of listed Norwegian corporates comes from the oil industry versus 20% for Denmark, 11% for Finland and 4% for Sweden. Norwegian and, to a lesser extent, Danish corporate earnings benefit from a high oil price, while Finland and Sweden are virtually neutral. Nordic pure-play oil stocks in exploration and production, oil services and shipping are well known to investors and mostly found in Norway. Looking at other sectors, there are quite a few Nordic industrials with 8-13% of their top lines derived from oil-related industries, including Metso, Alfa Laval, Hexagon, SKF, Sandvik and ABB. Looking at negative plays on oil, those with the greatest net cost exposure to oil include Autoliv, Finnair, SAS, Huhtamäki and Trelleborg. In our interview with Nordea's Head of Credit Research Anne Schult Ulriksen, we explore the credit health and industry dynamics of the different segments in the oil, offshore and shipping industries.

Oil-related share of revenue and costs for listed Nordic corporates

20%

9%

72%

4%

11% 11%

23%

5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Denmark Finland Norway Sweden

RevenueCost

Source: Company data and Nordea Markets

MarketsIMPORTANT INFORMATION AND DISCLOSURES AT THE END OF THIS REPORT


How oil impacts the Nordic economiesNordea has a house view on the future oil price, and this report is not a reiteration of this. Instead, we look at the global oil market today and examine how the trends impact the Nordic economies. We review exports and imports of oil in the Nordic countries and identify the players sensitive to rising or falling oil prices. We add some thoughts on the long-term oil market and question whether its fate will be decided by supply or demand factors.

Global oil consumption split at one-third each between Asia, the Americas and Europe/Middle East

Global oil consumption in 2015

North America25%

South & Central America

8%

Europe & Eurasia19%

Middle East10%

Africa4%

Asia Pacific34%

Source: BP

Consumption is split roughly at one-third each between Asia, the Americas and Europe/Middle East. Emerging markets are underrepresented in relation to the size of their populations, and the Middle East is clearly overrepresented in consumption, owing to the abundance of oil readily and cheaply available there.

Asia is the world's largest importer of oil; the Middle East, Africa, Russia, Venezuela and Brazil are the major net exporters

Global oil production in 2015

North America22%


8%

Europe & Eurasia19%

Middle East33%

Africa9%

Asia Pacific9%

Source: BP

The picture is different on the production side. Sticking to our split between the major regions, Asia is the big net importer, while Africa and the Middle East are big net exporters. America and Europe are more or less in balance. Of course, this does not tell the full story. Within "Europe & Eurasia", Russia is the big net exporter of oil, while Europe imports

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plenty. Within South America, Venezuela and Brazil are major exporters, while most other countries are importers.

Half of the world's oil reserves are in the Middle East

Global proven oil reserves in 2015

North America14%


19%

Europe & Eurasia

9%

Middle East47%

Africa8%

Asia Pacific3%

Source: BP

And where are the world's proven reserves of oil located? Nearly half are in the Middle East, and another third in the Americas. The residual, roughly 20%, is in Asia, Africa and Europe/Eurasia, the bulk being in Africa and Russia.

To explore how the Nordic region fits into this, we take a slightly more granular look at the global production versus consumption balance for oil, split by country.

By country, the global top three oil consumers are the US, China and India

Global oil consumption in 2015 – top six countries and Norway

USA21%

China13%

India4%

Japan4%

Saudi Arabia4%Russia

3%Norway

0.2%

Rest of the world51%

Source: BP

It is obvious that the US and China dominate this league, together accounting for a third of the world's oil consumption. The Nordic region is an insignificant oil user in a global context, representing roughly 1% of world consumption.

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By country, the global top three oil producers are the US, Saudi Arabia and Russia

Global oil production in 2015 – top six countries and Norway

USA14%

Saudi Arabia13%

Russia12%

Canada5%

Iraq4%Iran

4%Norway

2%


Source: BP

On the production side, the US, Saudi Arabia and Russia are the top countries by a good margin, together accounting for nearly 40% of global oil production. Norway, the only really significant oil producer in the Nordic region, accounts for 2% of world oil production, putting it at 10-15%, the size of each of the world's top three oil producers.

By country, the global top three with the largest proven oil reserves are Venezuela, Saudi Arabia and Canada

Total proven oil reserves in 2015 – top six countries and Norway

Venezuela18%

Saudi Arabia16%

Canada10%

Iran9%

Iraq8%

Russia6%Norway

0.5%


Source: BP

Norway holds only 1% of the world's proven oil reserves

Looking at where the world's oil reserves are located, Venezuela and Saudi Arabia form the top two, followed by Canada, Iran, Iraq and Russia. The Nordic margin is also marginal in this context. Norway holds less than 1% of global oil reserves.

Unsurprisingly, as the Nordic region represents a very small share of the global population and GDP, it is also a small consumer and producer of oil. That said, the region is a net exporter of oil, almost entirely from Norway, which is the only really significant oil producer in the region. Denmark's oil production is marginal, particularly in a global context.

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Oil in the Nordic regionWhat about the Nordic countries and how oil affects them individually? How does it work in their economies?

In the Nordic region, Norway is a big net exporter of oil, Denmark is self-sufficient (around break-even), while Sweden and Finland are net importers

Net export of crude oil 2010-16 – 12-month rolling average

‐4,000

‐2,000

0

2,000

4,000

6,000

8,000

2010 2011 2012 2013 2014 2015

1000 m

etric tonnes

Sweden Denmark Norway Finland

Source: Bloomberg

We start by looking at national exposures to crude oil. As expected, Norway stands out as a major net exporter of oil. Denmark is self-sufficient, hovering around a zero net in imports and exports of oil. Sweden and Finland are both net importers of crude oil, Sweden being more or less proportionally larger than Finland versus the difference in size between the countries in terms of GDP or population. Based on current trends, Denmark could be transitioning from a historical net oil exporter to a net importer, perhaps moving towards a similar structural status as Sweden and Finland.

As there are major seasonal fluctuations in demand for crude oil, we look at 12-month moving averages for exports and imports. We can deduce from this that import volumes are quite stable over time. This is a natural consequence of by far the largest area of usage for oil being as transport fuel, which is not terribly cyclical on the national level. Oil is hardly used at all for heating in the Nordic region.

Net exports of crude oil and petroleum products during 2010-16 for Norway, 12-month rolling average

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2010 2011 2012 2013 2014 2015

1000 m

etric tonnes

CRUDE Petroleum products

Source: Bloomberg

Net exports of crude oil and petroleum products during 2010-16 for Denmark, 12-month rolling average

‐1,000

‐500

0

500

1,000

2010 2011 2012 2013 2014 2015

1000 m

etric tonnes


Source: Bloomberg

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But it is not all about crude oil. Crude oil is refined into fuels such as petrol, diesel and kerosene, as well as other petroleum products, including bitumen, plastics and chemicals. We note that Norway is a net exporter of both crude oil and petroleum products, while Denmark is roughly at break-even for both.

Sweden and Finland are similar: significant net importers of crude oil, but at the same time meaningful net exporters of refined products. Their refining capacity is greater than their domestic need for petroleum products of various kinds.

Net exports of crude oil and petroleum products during 2010-16 for Sweden, 12-month rolling average

‐2,000

‐1,500

‐1,000

‐500

0

500

1,000

1,500

2,000

2010 2011 2012 2013 2014 2015

1000 m

etric tonnes


Source: Bloomberg

Net exports of crude oil and petroleum products during 2010-16 for Finland, 12-month rolling average

‐1,000

‐800

‐600

‐400

‐200

0

200

400

2010 2011 2012 2013 2014 2015

1000 m

etric tonnes


Source: Bloomberg

The big picture for oil in the Nordic region: Norway is highly dependent on oil demand and the oil price, while Sweden, Finland and Denmark have fairly minor exposure

Taking a simplistic view, this tells us that the Norwegian economy (where oil accounts for some 40% of exports) is highly sensitive to demand for oil and the oil price, while Sweden, Finland and Denmark have only minor exposure to oil.

All but Denmark have some net exposure to petroleum products, which is not identical to oil exposure. Prices for such various oil-derived products and materials are driven by the supply/demand balance for each specific category, linked to refining and cracking capacity in that segment.

How important is oil for the Nordic economies? A general observation is that when the oil price soared from USD 25 to USD 105 per barrel in 2004-08, the quadrupling of the oil price was not sufficient to put a dent in their GDP growth. Upward pressure on transport costs, and on prices for oil-derived input materials, did not have enough of a net effect to trigger real inflationary pressure. Cost increases were generally passed on to consumers. The Nordic economies are clearly less oil-dependent than during the oil shocks of 1973 and 1979.

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The oil price has arguably not had a decisive impact on the Nordic economies in the past 20 years, except in Norway

GDP growth Sweden and Norway versus oil price, 1996-2016

0

20

40

60

80

100

120

‐8%

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

1996 1998 1999 2001 2002 2004 2005 2007 2008 2010 2011 2013 2014 2016

USD

/Barrel

GDP growth

Norway Sweden BRENT Oil Price

Source: Thomson Reuters

Norway was able to use accumulated oil wealth to soften the blow of the global financial crisis in 2008-09, but since 2014 has started to lag in GDP growth from the headwind of a low oil price

Looking at Swedish and Norwegian GDP growth plotted against the oil price, we make two striking observations. Firstly, Norwegian GDP growth suffered much less during the macroeconomic meltdown triggered by the global financial crisis in 2008-09. Norway's economy was less traditionally cyclical, although quite oil-dependent, and the country was able to take advantage of its vast sovereign wealth fund to shield itself from the most severe short-term financial impact from the crisis.

Secondly, GDP growth has started to diverge considerably in 2014-16, with Norway falling behind, in the wake of the sharply lower oil price seen over the period, driving reduced activity and investments in the offshore sector.

The " Peak Oil" theory-related concerns ten years ago have been replaced by possible scenarios of oil demand starting to decline (driven by political initiatives and public perception) well before concerns about available oil reserves would become an issue

Oil demand in the futureNordea has a house view on the oil price, basing forecasts on estimated supply and demand for oil in the medium term. We will not explore the prospects for the oil price or any medium-term forecasts in this report. We do, briefly and lightly, touch upon the long-term outlook for oil demand. Ten years ago, when Chinese and emerging markets demand had pushed up demand and the price of oil sharply, "peak oil" theories were seen by many as the obvious threat to the long-term outlook for the oil markets. The problem would essentially be that the world would run out of oil.

Today, we are seeing a different view starting to take shape. The long-term question marks are shifting from supply to demand. Less incremental growth from emerging markets, greater energy efficiency in developed markets and major political commitments to the environment – such as the Paris Agreement of 2015 – are driving future oil demand lower.

A combination of legislation aimed at cutting pollution and political incentives for climate-friendly energy solutions could have a greater influence on demand for fossil fuels than merely its costs compared with renewable energy sources. Emission regulations for vehicle and marine engines, environmental and energy efficiency classifications for new buildings, and taxes on air travel are examples of political measures to curb pollution. And tax incentives for electric vehicles and subsidies for wind and solar power generation are examples of political incentives to boost adoption of clean energy solutions. Combined with greater climate awareness and perhaps a sense of urgency among younger generations in the world's developed economies, oil producers are starting to see a possible future scenario where demand for fossil fuels could start to stagnate in favour of clean energy alternatives well before there is any genuine concern over a lack of future supply of fossil fuels.

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Renewable energy sources (excluding hydro power) account for only 3% of global energy consumption, but up from 1% ten years ago, and have shown a CAGR of 16% in the period

Global energy consumption of fossil, hydroelectric and other renewables in 2005-15

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mill

ion

tonn

es o

il eq

uiva

lent

Fossil Hydroelectricity consumption Other renewables consumption

Source: BP

Fossil fuels still account for 90% of global energy consumption

We would stress, however, that strong the political, environmental or economic trends may be, the global energy market is not going to change overnight. A glance at global energy consumption over the past ten years is revealing, showing that:

Fossil fuels still dominate, accounting for 90% of global energy consumption.Renewable energy, excluding hydro power, remains a very small part of global energy consumption, accounting for 3%.Growth in renewable energy is very strong, at a ten-year CAGR of 16%, versus 2% for fossil fuels.Hydro power is a quite mature area, with most of the ten-year CAGR of 3% driven by China and certain emerging markets.

This is all food for thought for any oil-dependent country. Oil has been a great source of wealth for decades for those countries blessed with retrievable oil reserves. And oil has remained in demand even during periods when it has become very expensive. But there are significant forces that could divert demand for fossil fuels into clean energy. A high oil price means extra short-term profit for oil exporters, but also greater incentives to save energy and find substitutes for fossil fuel power among users. A determination amongst policymakers across the globe to preserve the climate and curb greenhouse gas emissions could also accelerate the abandonment of fossil fuels for cleaner alternatives.

The Paris Agreement of 2015 stipulates holding the increase in the global average temperature to well below 2°C above pre-industrial levels

The most notable recent such initiative from policymakers was the Paris Agreement of 12 December 2015, signed by 193 of the world's 195 countries, and so far ratified by 115. The key point of the agreement is:

Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change.

Against this backdrop we choose a specific focus on the situation for Norway, by far the Nordic region's most oil-dependent country, in this report. We explore this topic in interviews with Norway's environment minister Vidar Helgesen, with Statoil's Head of New Energy Solutions Irene Rummelhoff, and with Nordea's Thina Saltvedt.

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Interview: Oil in the economy and in NorwayWe interview Thina Margrethe Saltvedt, Chief Analyst for Macro and Oil, Nordea Markets Norway. We explore the world's dependency on oil, how high oil prices in recent history have not put a dent in GDP growth, and how oil dependency could decline in the future. This has major implications for Norway, the only Nordic country highly dependent on oil, which should aim to find new uses for its world-class oil and offshore-related technologies and competencies.

JT: We start with the basics. How does the oil price impact global economic growth? Is a low oil price more beneficial than a high oil price? If we look at the large countries, which are the winners and the losers from a high oil price?

TS: We are completely dependent on oil today, as 55% of the oil that we consume globally is used for transportation. There is currently no competitive universal alternative to oil for transportation. Moreover, virtually all goods, and many services, we consume have been transported in one way or another. This means that when the oil price rises, the transportation cost rises, and so will also the prices of all goods. During 2008-13 we saw a significant increase in the oil price, from USD 30 to USD 150 per barrel. And yet, demand for oil continued to increase, highlighting how dependent we are on it. Some industries are hit harder than others by a high oil price. When the oil price peaked, the Norwegian fishing industry stayed in port during the low season to minimise fuel costs. Moreover, the oil price's spillover effect on prices in the economy has made it challenging for central banks to allow for oil price fluctuations when setting monetary policy. If the oil price rises during a recession, should central banks then raise interest rates to tackle the inflation, or lower rates to stimulate the economy?

Our oil dependency has started to decline thanks to the greater use of other energy sources. This was driven to a great extent by the sharp rise in the oil price until a few years ago. Large investments have been made in alternative energy sources, and consumers have started to use energy more efficiently. Apart from the elevated oil price, this has also been driven by environmental reasons.

JT: How does the oil price affect the Nordic economies? What are the differences between Norway, Denmark, Sweden and Finland?

TS: Norway is the most oil-dependent Nordic country, but Denmark is actually the only net exporter of oil in the EU. The UK is no longer a net exporter. Sweden and Finland are net oil importers. Sweden imports oil mainly from Norway, and Finland mainly from Russia. There are both historical and geographical reasons for the differences. Finland in particular – but also Sweden – has made more progress when it comes to biomass fuel and other substitutes for oil than Norway.

Oil production in Norway peaked in 2001, and since then volumes have halved. Even so, revenue from oil production has continued to increase owing to an increasing oil price, until a couple of years ago. Norway has been lucky in the timing, but I believe the success story has also made us Norwegians too comfortable. Each Norwegian citizen has more than NOK 1m in savings, through the Oil Fund – our sovereign wealth fund. This creates a somewhat false impression of wealth. On the other hand, we have every reason to be proud. Norway is the only country in the world that has managed to generate and preserve a fortune from our nature reserves. The current fund value of more than NOK 7,200bn makes it the largest

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sovereign wealth fund in the world. Other oil-rich nations have typically channelled oil revenue into their economy, boosting it, but also making it highly dependent on the oil market. One key purpose behind the establishment of the Norwegian Oil Fund was to make the economy less reliant on oil.

Still, we have to acknowledge that we have built the Norwegian economy on oil. The bulk of our industrial base and our key skills are associated with the oil industry. We have built world-class skills and technologies in this area, but we have been lagging behind in other industries. The dramatic fall in the oil price in recent years has hit Norway severely. It has been an awakening. Today we face greater challenges than our Nordic neighbours.

JT: Denmark has been successful in building up an industry around wind energy despite being an oil-producing nation. Could Norway follow this example?

TS: Oil is much less important for Denmark than it is for Norway. But Denmark deserves great credit for its efforts in wind power, in which it was an early pioneer. Denmark has a broader industrial base than Norway, which has almost exclusively focused on oil. In that sense, Norway is arguably almost as exposed to the fluctuation in the price of one single commodity as many of the commodity-intensive developing countries. Sweden has been most successful among the Nordic countries in building up a broad industrial base with plenty of multinational companies, making it less exposed to a slump in any given individual industry. Finland is more like Norway in that it has been heavily dependent on a smaller number of critical large companies, with Nokia being the obvious example.

JT: How big a share of global oil production is represented by the Nordic region, ie Norway and Denmark?

TS: Norway’s oil production represents only 2% of global output. Before the Arab Spring uprisings of 2011, Norwegian oil production was slightly above that of Libya. Even if Norway represents a small share of global output, it can matter greatly for the balance in the global oil market, as much of the world's oil reserves and production are found in regions with fragile political stability.

JT: What is the future of oil production in Norway? How much is there left to extract?

TS: In Norway we have not yet produced half of our oil reserves. Views vary greatly on how much of our reserves will be extracted. My view is that if we are to fulfil our commitments under the Paris Climate Accord, we will not be able to use all our reserves, because it would be incompatible with the 2ºC temperature rise target. The next major development on the Norwegian Continental Shelf is Johan Sverdrup, an oil field discovered by Sweden's Lundin Petroleum, which should be in production in 2019. The field has capacity to produce oil for another 40-50 years. I suspect not many new projects will be started on the NCS after 2030 if the world is serious about reaching the 2ºC goal. Demand for oil will start to decline, driven by competitive renewable energy alternatives, new technologies and digitalisation.

The adverse climate impact from the use of fossil fuels is getting ever more attention. Since Norway has contributed greatly to this environmental deterioration, we need to contribute to a more sustainable future development. This means we must consider potential, new industries to invest in, on which to build our future economy. Today,

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Norway's second-biggest industry is fish farming, revenue from which represents a mere 5% of that of the oil industry. There is great resistance to a transformation away from oil and gas. People tend to focus more on their own wealth than on the environment.

JT: How competitive is Norwegian oil? How much does it cost to extract oil from the North Sea compared with Saudi Arabia or any other key benchmark?

TS: It is much more expensive to produce oil in Norway than many other oil-producing countries. In Saudi Arabia, the cost is USD 8-10 per barrel, while the cost in the North Sea is USD 30-40 per barrel. Global production costs are lowest in the Middle East and most expensive for the oil sands in Canada. Onshore extraction is much less expensive than offshore. In the Middle East you don’t have to go far underground to find oil. All Norwegian oil is extracted offshore, at a depth of 100-400 metres. An extreme example is Brazil, where offshore extraction requires drilling through a 2km-thick salt layer, and then even further to a total depth of up to 5km. This inevitably means high production costs. Hence, the oil price could have been much lower over the past decades if political instability and conflict in the Middle East had not reduced supply, or if OPEC had notlimited its production.

JT: How competitive is Norwegian oil compared with Russia?

TS: Russian oil is more or less similar in production cost to Norwegian oil, making it our main competitor. Generally, we say that Russia, Norway, the US, Canada, Mexico and Brazil are competing countries. Among them, production costs are highest in the tar sands in Canada, where in terms of energy required, it takes one barrel of oil to produce two barrels of oil. Canadian oil sand is very dense and viscous (similar to tar), and underground warming is needed to enable its extraction. This is both energy-intense and environmentally sensitive.

JT: What do you think the Norwegian economy could look like in ten to 20 years?

TS: One of Norway's greatest natural resources is the ocean. Two of the world's critical needs are energy and food. We can get both from the ocean. Even if oil consumption will eventually start declining, we can use much of our technology and resources from the oil industry for other energy sources. Offshore wind is one example. We have strong skills in drilling technology, some of which NASA has requested to use on Mars. Norway's shipping industry has proven able to adapt to a changing market in the past. It did so in the 1950s and 1960s, and I believe it will be able to do so again. Back then, the industry adapted by specialising in vessels for the oil industry. This time it will be the reverse.

Regarding food, fish farming is currently the second-biggest industry in Norway, but the ocean can offer more than that. Seaweed is a common feature of Asian diets. We should be able to make use of it in the Nordic region as well. Furthermore, Norway’s electricity production is actually 100% green since practically all power that we consumes derives from hydroelectric power. Green power is something we want to produce more of and particularly export more of to the continent. Norway wants to become “Europe’s green battery”.

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JT: So energy could remain a crucial industry in the Norwegian economy, but with a less fossil fuel-heavy mix? Driven by new uses for technologies and know-how derived from the oil industry?

TS: I think that is a great opportunity. The knowledge we have built should not be wasted. We can also see that the younger generations in Norway, who did not grow up during the oil boom, have different attitudes. They are more environmentally aware and do not see a national or personal livelihood from oil as inevitable. At universities we also see students looking for other types of education, and not only an education that typically leads to a career in the oil industry.

JT: What role could the Norwegian sovereign wealth fund play in a transition to lower oil dependency? Could it stimulate transition, or act as a brake against it?

TS: The fund was originally created to reduce the economy’s dependency on oil, and its main purpose is to fund future pensions. But the fund also needs to serve as a buffer to support public spending during recessions. We saw this approach help Norway get through the global financial crisis of 2008-09 quite unscathed, standing out versus other European countries. But the fund has a conservative mandate: it should not misuse its “financial muscle”. 2016 will be the first year when its expenditure will exceed its revenue, which is of course not sustainable in the long run. Another reason for the creation of the fund was a belief that returns from the oil would be higher if we actually pumped it up from the ground and invested the income from extraction and export in financial instruments and assets. Previously, and especially in the 1980s, there were intense debates on this topic. Issues discussed included to whom the oil revenue belongs, and which generations of Norwegians should benefit from the oil revenue? Investing the oil proceeds in financial instruments through the oil fund is a way to allow future generations to benefit from the oil wealth.

It was also made clear when it was formed that the fund would not be used as a political tool. In the beginning it only invested in equities and bonds. Today 5% is invested in property. Management of the fund has recently proposed that it also be allowed to invest in green infrastructure, where it sees potential attractive returns. The fund also has a long investment horizon, well suited for infrastructure projects. The government has yet to approve such investments.

JT: So it would be fair to say that the fund has a very strict focus on generating long-term returns and not being a short-term political instrument?

TS: Definitely. The government has instead set up a separate private equity fund to support innovation and the establishment of new industries. We have a lack of venture capital in Norway, and most of the capital available is used for real estate investments. In contrast to Sweden, there are not many private equity firms in Norway.

The oil fund's management is clearly interested in considering green investments, although it still does not have a mandate for such. Being the world’s largest sovereign welfare fund, its actions have an important signal value. I recently saw that the Fourth Swedish National Pension Fund, AP4, has an explicitly green investment policy for its asset portfolio. In this respect, the oil fund is lagging.

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Interview: Shaking the oil addiction in NorwayInterview with Vidar Helgesen, Norway's Environment Minister, who represents the Høyre (conservative) party. His career includes positions as Chief of Staff to the Prime Minister, Minister of EEA and EU Affairs, and Secretary-General of the International Institute for Democracy and Electoral Assistance (IDEA). We discuss the challenge of transitioning the Norwegian economy from one heavily dependent on oil into new areas, sometimes built on expertise and technologies from the oil industry. We consider the role thegovernment can play, in terms of incentives, taxation and regulations, as potential tools for driving change.

JT: Norway has been a prominent oil nation for decades, with oil today dominating the economy and accounting for roughly 40% of Norway's exports. At the same time, Norway has an ambitious commitment to be CO2 neutral by 2030. Is it a paradox to aim to combine the vital oil industry with being an environmental role model nation? Do you have the toughest job in Norway?

VH: I surely have one of the toughest jobs, but the transition that lies ahead of us will be a great challenge for our entire nation. Consider, for example, that Statoil's CEO Eldar Sætre highlighted at an industry conference on 17 October a scenario where oil demand would peak before 2030. The government's Green Competitiveness study, led by Connie Hedegaard (Denmark's former Environment Minister) and Idar Kreuzer (former CEO of Norwegian insurer Storebrand), will help to provide a roadmap for this transition. Indeed, it comes with no less than 11 roadmapsproduced by business and industry sectors themselves.

We know the oil era is drawing to an end, although it will not happen overnight. Meanwhile, there is no obvious industry to replace oil in our economy. What we do know today is that we intend to be a low-emission country in 2050, but not a low-income country. It could certainly seem to be a paradox that a country such as Norway, living off oil and gas, is doing more than virtually any other country to reduce demand for oil. I am saying this because the transport sector is the biggest current user of oil, and Norway has the most ambitious electric car policy in the world. But we are responding to a global phenomenon. Even the car industry itself is highlighting that electric cars are the future. We will see this change globally, and we have to adapt to it. The challenge for us will be to cut emissions while triggering new economic growth.

JT: Does Norway being a wealthy country give you a favourable starting point for the transition from oil dependency?

VH: It does. The Government Pension Fund, which is the world's largest sovereign wealth fund, has given us a very solid buffer. This has allowed us to cope well so far in a lower oil price environment. But oil no longer being the growth driver in the Norwegian economy will require more spending discipline by us politicians. When I was EU Minister and met European peers on my travels, it caused some astonishment when I explained that Norway had rarely been forced to implement any significant government budget cuts. This made me realise how unique our position is, in a European context. And oil dependency is not the only consideration. Demographical challenges will be another driver for budget discipline in Norway in the coming years.

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JT: In general terms, how do you see the journey for the Norwegian economy towards lower oil dependency in the future? What could be the key drivers? Incentives for new industries? Taxation? Or just a low oil price?

VH: I think both the oil price and climate policy are strong catalysts. It will affect how investors see the future, as has already happened for coal energy. Investors are considering the long-term outlook for oil, but have not quite arrived at a similar conclusion as they seem to have for coal. The government broadly has three tools available to try and drive change: taxation; regulation; and incentives for research and technological innovation. We are using all three. We have CO2 tax, and we have proposed raised petrol and diesel taxes. We have proposed a ban on oil-fired residential heating for all new housing from 2020. Regulations also include requirements for companies to disclose environmental risks. We try to stimulate innovation through government agency Enova, which, for instance, supports investments in infrastructure for the charging of electric cars. The Green Competitiveness study can provide a framework for Norway's emissions vision for 2050. And there should be commitment to this framework from the corporate sector, as 11 different industry sectors have given their input on what should be done, and how to best achieve it.

JT: Has there been any significant change in the Norwegian economy in the past five to ten years? Has a lower oil price been a catalyst for reduced oil dependency?

VH: There have been major changes for companies that have in the past not needed to consider anything other than oil or gas. There is a clear trend that these companies have started exploring alternative application areas for their technologies. One example is a company being able to use its offshore drilling technology for charging stations for electric cars.

There is broad political agreement in Norway that we have made the country too dependent on oil. When this government was formed after the previous election in 2013, one of its main tasks was to address the challenge of a Norwegian economy split into two parts. These two parts of the economy are a historically thriving oil & gas related industry, and "the rest", often lagging behind. Today, the tables have turned, and those other export industries are thriving.

JT: What do you believe the Norwegian economy might look like in ten years?

VH: It is not for us politicians to define winning industries, but I think the cutting-edge competences Norwegian companies have in the oil & gas sector are a very good basis for development within clean energy and low-emission industries. I see opportunities within high-technology sectors. One example is robotics potentially allowing aluminium production –crucial for the car industry – to be competitive in a country such as Norway. This will, however, require different competences than in the past, when production was more labour-intensive. The service sector and digital industries should also have more prominent roles in the future. The government could have a role to encourage digital entrepreneurship, and innovation in general.

Under any future scenario, I would expect the ocean to be a key driver for our economy. Seafood is the second biggest industry in Norway today, after oil & gas. In the future, there could be opportunities in new energy sources, offshore mineral exploration and genetic material in the oceans with uses in pharmaceutical applications. It is striking that we today know more about the surface of the moon, than we know about the sea beds on Earth.

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Shipping has been a hard pressed industry in the last few years, but has meanwhile also seen innovation, for example through a recent introduction of all-electric ferries. Hordaland, the region around the city of Bergen, is highly dependent on ferries, and has decided to adopt low-emission solutions for all of its ferries. This should cut emissions from ferry shipping in that region by 90%. We see both short- and long-term benefits from such initiatives. It can support demand and employment in a Norwegian shipbuilding industry under pressure, while simultaneously helping it evolve within clean technology solutions for global shipping.

JT: When talking about oil and Norway, I find it hard not to bring up the Government Pension Fund, through which every Norwegian citizen is in fact a millionaire. Could the fund have a role to play in Norway becoming less oil-dependent?

VH: The Government Pension Fund is a success story, but we should keep in mind that it invests exclusively outside Norway, and will continue to do so. The fund is not a political tool as such. It is run by investment professionals, and it has from the start had specific ethical guidelines for its investment policy. The Oil Fund ceased investing in coal-fired energy before there was any formal instruction from the government to that effect. As a buffer in our economy, the returns from the fund give Norway certain economic muscle that enables us to pursue strategic initiatives, however, such as state budget support for the promotion of electric cars – which has made the small nation of Norway a world leader in the adoption of electric cars.

JT: Could the Oil Fund contribute to lower oil dependency by selectively investing in green infrastructure or innovation?

VH: There has been some discussion in parliament about potential investments in unlisted green infrastructure assets, but so far there has been a reluctance to part with the conservative, historically very successful, investment policy of the fund. Following a request from parliament, the government is currently evaluating potential options to reduce the risk of investing in private companies, and will present a view on this issue in 2017.

JT: If we look at it from the opposite angle, is there any risk of the Oil Fund becoming a brake, slowing Norway's transition to lower oil dependence?

VH: I don't see that risk. The fund has its own, very clear, investment mandate, and it is steadily getting greener. Politically, we are using profit from the fund in periods of expansive fiscal policy to invest in future technologies within renewable energy.

JT: Do you see the Norwegian oil and gas industry embracing change, or trying to resist it?

VH: I think there is a widespread awareness of where things are heading. Ten years ago, the "peak oil" theory was all about a dwindling global supply of oil. Today, it has moved on to be about demand for oil. As an example, Statoil has started communicating about demand risks, and it is not alone in that.

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JT: Politically, is oil and gas dependency a generational issue in Norway? Might young Norwegians not see it as a fact of life that Norway lives predominantly off oil and gas?

VH: Absolutely, and the pace of change has been dramatic in recent years. Many of today's youth may never buy a fossil fuel-powered car. Three years ago, numerous university students saw it as an obvious end goal to work in the oil industry on graduation. Many have now been forced to reconsider. This can be a tough adjustment, but it could also create opportunities for other industries, which have earlier found it difficult to recruit graduate engineers. The oil & gas industry will remain a significant employer, but will not create as many jobs as in the past.

JT: Within the Nordic region, different countries have very different oil exposures: Norway is a major exporter; Sweden and Finland are net importers; and Denmark is roughly break-even. Denmark has become a pioneering nation within wind energy, both in domestic power generation and in exporting wind turbine technology. Could Norway follow the Danish example?

VH: Remember that Norway was a hydropower nation before we became an oil and gas nation, and we will remain a hydro power nation after the oil and gas era. Our domestic energy mix is almost fully renewable. Norway comes from a different starting point than our neighbours, with greater oil and gas reserves and accordingly a bigger offshore industry built on them, than Denmark. We are now investing significantly in renewable energy, including wind. One example is Fosen in Central Norway, the biggest onshore wind farm project in Europe, with EUR 1.1bn being invested in 1,000 MW of capacity, to be completed in 2020. This represents 3.4 TWh of power annually, which is 2-3% of Norway's entire annual electricity production. The current pace of investment in renewable energy in Norway is twice that of the average for the past 25 years.

Denmark is certainly a great example of how long-term strategic initiatives can pay off, and unlike Norway, Denmark has actually reduced its overall CO2 emissions. That said, Norway's emissions would have been 25% higher today if we had taken no measures at all to reduce them. This is an important starting point for the journey towards a CO2-neutral Norway in 2030.

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Interview: Building green business in StatoilInterview with Irene Rummelhoff, Statoil's Executive Vice President New Energy Solutions, and a member of group management, reporting to CEO Eldar Sætre. Irene is also Vice Chair of the Board of Directors of Norsk Hydro, and her long career at Statoil includes positions as Head of Exploration in Norway, and seven years of international experience, heading up the strengthening of Statoil's asset base in North America. Statoil has put its renewable energy activities in a separate business area, directly under the CEO. Irene explains how this highlights the focus and priority for these projects within the group, and how it is driven by Statoil seeing potential exciting and commercially viable business opportunities within renewable energy.

JT: The New Energy Solutions business area in Statoil was established about 18 months ago, and you commented then that its purpose was to build a profitable business within renewable energy. Was this the key reason for its formation, or were there "defensive" drivers as well, such as needing to find new growth areas beyond fossil fuels?

IR: NES was formed in response to Statoil seeing a significant growth opportunity within renewable energy, not least driven by technological development pushing down production costs for wind and solar energy, making them more competitive alternatives to fossil fuels. The second part of our mandate is also to develop new lower-carbon business opportunities for Statoil’s core products of oil and gas. There will be demand for oil and gas for many years yet, but future growth will not match historical rates. We know we are facing a shift in demand from fossil to renewables, although we don't know its magnitude or pace. We see great value in preparing for this transition by building a competence base we can adapt to the growth that materialises. This should help us avoid ending up in a situation where we have been in denial about coming change, and where we would be forced to suddenly reconsider our strategy and position, like some European utility groups that have made 180º strategy turns. But I would highlight that NES is mainly about exploring exciting potential business opportunities!

JT: Your boss, Statoil CEO Eldar Sætre, highlighted potential for fossil fuel demand starting to decline within ten years at an energy conference in London on 17 October. One could argue that it is radical for a CEO of an oil major to make such a comment. Would you say it gives extra weight to the mandate for NES within Statoil?

IR: Statoil releases an annual Energy Perspectives report, in which we describe three potential and different scenarios for the future. One of the three is The Renewal Scenario, which is based on achievement of the 2° C temperature rise global climate goal. This is the scenario Eldar was referring to, in which global oil demand would level out around 2030 and then start to decline. We need to plan for different scenarios, and we see demand for renewable energy continuing to increase in all three in the Energy Perspectives report.

JT: You have a long career in Statoil, with prominent roles as Head of Exploration in Norway and in building Statoil's North American business. Should we see your appointment to run NES and be part of the group management team as a signal for how important renewables are considered to be for Statoil's future?

IR: Establishing NES as a separate business area reporting directly to the CEO was a very important signal. It made NES much more visible, and it reflects the aspirations to gradually complement the oil & gas portfolio with profitable renewable energy and other low-carbon energy solutions.

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As for the choice of me to run NES, I think a key reason was that Eldar wanted a leader with deep knowledge of our oil and gas business. Making NES an integrated part of Statoil will require intimate knowledge of the competences and capabilities we have within our various activities. Another desired trait was an entrepreneurial record, and I have some experience from building up new business areas within the group. But the elevation of NES to a separate unit, directly under the CEO, was key. It creates commitment, attention and visibility.

JT: The NES portfolio, among other things, currently consists of CCS (carbon capture and storage) and wind power, plus a new venture capital fund launched in February 2016. Have you chosen CCS and wind power because Statoil has unique competences that can be exploited in these areas? Are there other reasons for Statoil's choice to pursue these specific areas within renewable energy?

IR: Starting with offshore wind was a very natural choice for us. Wind and solar power are the most mature and currently commercially viable technologies within renewable energy. In addition, being a major offshore oil & gas producer, Statoil has deep knowledge of marine technologies thatcan be applied in offshore wind power. Large-scale offshore projects are complex and capital-intensive, and they require established networks of partners and suppliers, which take time to build. Barriers to entry are accordingly high, and limited competition has given opportunities for attractive potential returns from projects. This has started to change in recent years, though, with a growing number of financial investors becoming involved in tendering for new projects.

Regarding CCS, it is the same reasoning as for offshore wind. We have deep knowledge of the activity, having captured and stored CO2 under the seabed for more than 20 years. We see CCS as an important measure to produce oil and gas with as low emissions as possible.

We are not limited to areas where we are already established. We have a very open mandate within renewable energy, but our ambition to achieve good profitability from the start, made it natural for us to begin with exploiting areas where we have a natural edge. For less mature technologies and applications, we have instead set up a venture capital fund, which aims to invest up to USD 200m in the next four to seven years. This will allow us to invest in projects in which a key purpose is for us to build our own knowledge. There is a huge difference between reading about a project in a report, and actually being involved in it in the field. An onshore wind power project in the US has taught us plenty about viable business models, technology and distribution. But we naturally aim also for the venture capital fund's projects to give good returns on our investments.

We have an ongoing discussion regarding our potential involvement in solar energy projects. I expect solar to be a key energy source in the future, given how much costs for the technology have come down. It is hard for me to imagine that we could ignore this technology if Statoil is to remain a major energy supplier in the future.

JT: Would you consider acquiring companies within renewable energy, or are you only investing in projects?

IR: We are currently only investing in projects. We have no plans to make an acquisition, but they are a natural part of any growth strategy. Even if we are currently exclusively pursuing organic growth and partnerships, I would not rule out that we could consider acquisitions in the future. Any potential acquisition for Statoil would be evaluated as an alternative to organic investments within oil & gas, or in NES. And I would pitch any

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investment proposal on similar terms and hurdles as for any other business area within Statoil. It comes down to maturity for technologies and business models, and we would be reluctant to acquire our way into a new area without having built a knowledge of it.

JT: NES currently represents a small part of Statoil's revenue. Will your business area account for a greater share of Statoil's investments in the future? How big a share of Statoil's revenue or capex do you think NES could represent in ten years? 2%? 5%? 50%?

IR: That is a good and relevant question, and this is an ongoing discussion within the company. The activities in NES are complex, and we want to evaluate which potential opportunities exist before we consider any such targets. We have committed time and resources to exploring potential opportunities. I have a mandate to establish a profitable business area, and when I find any opportunities to expand or improve it, I will present them. Today we see fewer available projects than there is appetite for investments. There are typically many aggressive bidders in tenders for wind and solar projects. This has made it hard to set concrete numerical targets for NES, but our ambition is definitely to grow and be significantly bigger in ten years.

JT: How do the risks in renewable energy projects compare with other, typical, project risks in the Statoil group?

IR: Any projects I propose will be evaluated in the same way as any other project in Statoil. But my projects typically have lower risk than oil or gas exploration projects, and hence lower expected returns. There is growing comfort in the group with the types of project risks found in NES. We are currently building the Dudgeon offshore wind farm in the UK, and it has so far gone very well. For every successfully completed project, it should be less difficult to have new ones approved.

JT: What is driving the increased competition for renewable energy projects? Is it coming from established industrial players, from new industrial competitors or from financial institutions?

IR: There has been a notable increase in activity by financial institutions, driven by the ultra-low interest rate environment. This has made them even more keen on finding alternative investment opportunities, which –unlike "safe" fixed income instruments – actually might give them a meaningful positive yield with an acceptable level of risk.

Renewable energy projects can offer long-term, stable revenue with limited operational risks. In two of our projects, the Sheringham Shoal and Dudgeon wind farms in the UK, we have reduced our own exposure by partnering with external financing partners. They are unable to execute such a project alone and need an experienced industrial partner such as Statoil.

JT: Having established NES indicates a serious commitment to renewable energy by Statoil. How would you say this commitment compares to those of other oil majors?

IR: I would argue that Statoil has been quite early in its commitment. We see others following. Globally, I consider the US oil majors more passive within renewables, with Europeans generally being more active. Among them, Total, BP and ENI, for example, have, like Statoil, set up renewables business areas, but with varying strategies. Shell has a strong focus on the transition from coal to gas. Total has used an acquisition to make a

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significant bet on solar energy. The common denominator is that most European oil majors are aiming to take an active role in renewable energy.

JT: There are several strong drivers for renewable energy. Which are most important? Political climate targets? Technological innovation making new energy sources more competitive? Potential future lower demand for fossil fuels? A lower oil price?

IR: In the past, it was widely believed that political initiatives would be critical to driving change in the energy sector, but this has not quite been the case. Instead, improved technology has been key, today making wind and solar power much more competitive alternatives to fossil fuels. In several markets, wind power is today the lowest-cost alternative. Texas is an example of this dynamic, where onshore wind is growing on purely commercial merits, rather than from political environmental initiatives.

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Oil and the corporate sector: A rough guideWe examine how oil affects the Nordic stock markets and the financial health of listed companies in each country. We explore the differences between the individual Nordic countries, both for aggregated listed corporate universes and for specific companies which stand out in terms of revenue or cost exposure to oil.

Oil and the Nordic equity marketsIn the section on oil and the Nordic economies, we determined that oil has not been a decisive factor at the GDP level for any of the Nordic countries bar Norway.

But what about the corporate sector? How do oil and the price of oil affect the health of industry, of small and large companies in the Nordic countries?

We use the listed companies as a proxy for each country's corporate sector. When we dig a little deeper into our analysis, we look specifically at the universe of stocks that Nordea Equity Research covers in each country.

Norwegian equity market is highly correlated with Brent crude oil price

Starting with the bigger picture, we look at the correlation between the oil price and the local benchmark equity index in the Nordic countries. Not surprisingly, Norway stands out as having by far the highest correlation between the equity index and the oil price. The correlation is clearly visible from just observing a simple graph with the two variables.

Oslo Stock Exchange OBX price index and crude oil Brent USD per barrel

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OSLO Stock Exchange Crude Oil‐Brent Spot

Source: Thomson Reuters

The 20-year correlation coefficient between the Norwegian equity price index and the oil price is 0.75, nearly twice as high as in the other Nordic countries

Norway's status of having by far the most oil-exposed corporate sector in the region is even more pronounced when we summarise the correlation coefficients between each local benchmark equity price index and the Brent crude oil price. For Norway, the 20-year correlation is nearly twice as high, at 0.75.

Correlation, Nordic local benchmark equity price indices and Brent crude oil

OSLO Stock Exchange 0.75OMX HELSINKI 25 Index 0.45OMX COPENHAGEN 20 Index 0.43OMX STOCKHOLM 30 Index 0.45

Source: Nordea Markets

So, in the eyes of equity investors, the general health of corporate earnings and cash flows in Norway is virtually twice as dependent on the oil price

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as in the neighbouring countries. This ties in well with the oil export and import exposures we analysed in our earlier section on oil and the Nordic economies.

Oil impact on the Nordic corporate sectorsNorway's listed corporate sector has 63% of revenue exposed to oil, by far the most in the Nordic region

Share prices and stock market valuations are one thing, and corporate earnings and cash flows are another. From time to time, these two are not necessarily in total synchronisation. How does oil affect the various Nordic national corporate sectors?

To form at least an indicative view of this, we solicit the help of Nordea's equity analysts across the Nordic region. We ask all analysts to give a rough estimate of the share of revenue for each of the companies they follow that is derived from the oil industry, and the share of each company's cost base that is directly linked to oil.

Oil-related share of revenue and costs for listed Nordic corporates

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Denmark Finland Norway Sweden

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When we aggregate all this corporate data by country, we recognise the pattern. Norway stands out, dramatically, with a listed corporate sector which derives 72% of its revenue from the oil industry or related industries. Although Norwegian companies also have significant oil-related costs, there is substantial net exposure from selling to oil-dependent customers and customer industries. The top lines of listed corporates in Norway are highly dependent on the oil price and on oil-related activity and projects. No surprise there.

Sweden has a small and net neutral oil exposure in its corporate sector

What about the other Nordic countries? Sweden's revenue and costs also stand out as having the lowest gross exposures to oil among the Nordics. On top of this, the revenue and cost exposures balance each other out, making the Swedish listed corporate earnings exposure to the oil price quite insignificant on the aggregated level.

Denmark's listed corporates are a 'mini-Norway', benefiting from a high oil price, but much less so than Norway

Denmark is a more moderate, mini-version of Norway on the aggregated national level. About 20% of corporate revenue is derived from oil-related industries, and roughly half that is oil-related in the cost base. Finland is similar to Sweden, almost neutral on a net basis, but with higher gross exposure to oil for both revenue and costs compared with Sweden.

Oil impact on individual listed companies46 of our Nordic covered companies have 100% revenue exposure to oil, nearly all of which are Norwegian

Reviewing revenue and cost exposure to oil on the individual company level brings some interesting revelations. Let us start with the obvious: those listed companies that are totally dependent on oil and related industries for their business. In our Nordic coverage universe, 46 companies have 100% of their top line derived from oil activity.

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Nordic listed companies with 100% revenue exposure to oil

Company Sector Reuters Country Oil Rev %Torm Oil, Gas & Consumable Fuels Denmark 100%Aker Solutions Energy Equipment & Services Norway 100%Archer Energy Equipment & Services Norway 100%Atwood Oceanics Energy Equipment & Services Norway 100%Avance Gas Oil, Gas & Consumable Fuels Norway 100%Awilco Drilling Energy Equipment & Services Norway 100%Awilco LNG Oil, Gas & Consumable Fuels Norway 100%BW LPG Oil, Gas & Consumable Fuels Norway 100%BW Offshore Ltd Energy Equipment & Services Norway 100%CGG Metals & Mining Norway 100%Deep Sea Supply Energy Equipment & Services Norway 100%Det norske oljeselskap Oil, Gas & Consumable Fuels Norway 100%Diamond Offshore Drilling Energy Equipment & Services Norway 100%DNO Oil, Gas & Consumable Fuels Norway 100%DOF Energy Equipment & Services Norway 100%ElectroMagnetic GeoServices Energy Equipment & Services Norway 100%Ensco Energy Equipment & Services Norway 100%Farstad Shipping Energy Equipment & Services Norway 100%Flex LNG Oil, Gas & Consumable Fuels Norway 100%Fred Olsen Energy Energy Equipment & Services Norway 100%Frontline Ltd Oil, Gas & Consumable Fuels Norway 100%Golar LNG Oil, Gas & Consumable Fuels Norway 100%Havila Shipping Energy Equipment & Services Norway 100%Kvaerner Energy Equipment & Services Norway 100%Noble Trading Companies & Distributors Norway 100%North Atlantic Drilling Energy Equipment & Services Norway 100%Ocean Rig UDW Energy Equipment & Services Norway 100%Odfjell Drilling Energy Equipment & Services Norway 100%Odfjell SE Marine Norway 100%Pacific Drilling Energy Equipment & Services Norway 100%Petroleum Geo Services (PGS) Energy Equipment & Services Norway 100%Polarcus Energy Equipment & Services Norway 100%Prosafe SE Energy Equipment & Services Norway 100%Rowan Companies Energy Equipment & Services Norway 100%Seadrill Energy Equipment & Services Norway 100%Solstad Offshore Energy Equipment & Services Norway 100%Songa Offshore Energy Equipment & Services Norway 100%Spectrum ASA Energy Equipment & Services Norway 100%Statoil Oil, Gas & Consumable Fuels Norway 100%Stolt-Nielsen Ltd Marine Norway 100%Subsea 7 Energy Equipment & Services Norway 100%TGS Nopec Energy Equipment & Services Norway 100%Transocean Inc Air Freight & Logistics Norway 100%Africa Oil Corp. Oil, Gas & Consumable Fuels Sweden 100%EnQuest Oil, Gas & Consumable Fuels Sweden 100%Lundin Petroleum Oil, Gas & Consumable Fuels Sweden 100%


This is a long list of "usual suspects". Of these 46 companies, 42 are Norwegian. Torm from Denmark and Africa Oil, EnQuest and Lundin Petroleum from Sweden are also there. These companies are all typically on the radar screen for investors seeking oil exposure, in a positive or a negative context.

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The next 23 have 7-80% of their top line exposed to oil

These include partial oil plays such as Neste, Akastor and Aker...

...as well as industrials such as Metso, Alfa Laval and SKF, and two Norwegian banks: DnB and Sparebank 1 SR-Bank

Moving on to what is a little less obvious, we look next at the following 23 Nordic companies on our list of top revenue exposures to oil. These are the companies with between 7% and 80% of their top line dependent on oil.

The "next" 23 listed Nordic companies ranked by revenue exposure to oil

Company Sector Reuters Country Oil Rev %

Neste Oil, Gas & Consumable Fuels Finland 80%

Akastor Energy Equipment & Services Norway 80%

Aker ASA Oil, Gas & Consumable Fuels Norway 60%A.P. Møller - Mærsk Marine Denmark 50%

Höegh LNG Oil, Gas & Consumable Fuels Norway 50%

D/S Norden Marine Denmark 30%

DONG Energy Electric Utilities Denmark 25%

Wilh. Wilhelmsen Holding Marine Norway 20%

Coor Service Management Commercial Services & Supplies Sweden 20%

DFDS Marine Denmark 15%

DSV Road & Rail Denmark 15%

Novozymes Chemicals Denmark 15%

Metso Machinery Finland 13%

Alfa Laval Machinery Sweden 12%

Hexagon Electronic Eq., Instrum. & Components Sweden 10%

Hexpol Chemicals Sweden 10%

Ratos Capital Markets Sweden 10%

SKF Machinery Sweden 10%

Trelleborg Machinery Sweden 10%

Sandvik Machinery Sweden 9%ABB Electrical Equipment Sweden 8%

DNB Banks Norway 7%

Sparebank 1 SR-Bank Banks Norway 7%


This is a more mixed list, with all four countries represented, and actually with most different industries and sectors having candidates in this sample. At the top of the list are energy and oil-related groups which we recognise but which are not total pure plays on oil: Neste, Akastor, Aker, A.P. Møller-Mærsk and Høegh LNG.

When we move further down the list, to companies with 7-15% of their top line exposed to oil, we have a much broader sample. This includes industrials such as Metso, Alfa Laval and SKF, electrical and electronics companies such as Hexagon and ABB, and even two Norwegian banks: DnB and Sparebank 1 SR-Bank. We must point out, though, that for the banks the exposure is defined as the share of lending rather than the share of revenue.

We note with interest that there are a number of companies not necessarily perceived as significant oil plays, which do have quite a meaningful revenue exposure to oil.

We must not forget the other side of the coin – the companies which have a major cost exposure to oil and hence benefit from a low oil price. To get a hopefully somewhat more accurate sense of where we find such exposure among listed Nordic companies, we put together a list of the top 20 from our equity research coverage universe, ranked by net cost exposure to oil. In other words, ranked by the net of cost share minus revenue share dependent on oil.

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The biggest cost exposures to oil are found with Hexpol, Autoliv, Finnair and SAS – all significant beneficiaries of a low oil price

The top 20 listed Nordic companies ranked by net cost exposure to oilCompany Sector Reuters Country Oil Rev % Oil Cost %t oil cost %Hexpol Chemicals Sweden 10% 50% 40%Autoliv Auto Components Sweden 0% 30% 30%Finnair Airlines Finland 0% 25% 25%SAS Airlines Sweden 0% 25% 25%Huhtamäki Containers & Packaging Finland 0% 20% 20%Trelleborg Machinery Sweden 10% 30% 20%Uponor Building Products Finland 0% 15% 15%Rockwool Building Products Denmark 0% 13% 13%Nokian Tyres Auto Components Finland 0% 10% 10%Tikkurila Chemicals Finland 0% 10% 10%Electrolux Household Durables Sweden 0% 10% 10%Husqvarna Household Durables Sweden 0% 10% 10%Aspo Comm. Services & Supplies Finland 5% 15% 10%Kemira Chemicals Finland 5% 15% 10%Carlsberg Beverages Denmark 0% 8% 8%Chr. Hansen Chemicals Denmark 0% 8% 8%Royal Unibrew Beverages Denmark 0% 8% 8%Santa Fe Group Comm. Services & Supplies Denmark 0% 8% 8%Lundin Mining Metals & Mining Sweden 0% 8% 8%


This is another mixed list. Although we do not find a single Norwegian company on it, Sweden, Denmark and Finland are all represented. And many sectors are there, too.

Polymer components group Hexpol tops the list, followed by automotive supplier Autoliv. We would emphasise that Hexpol is not quite as exposed as it may seem from being at the top of this list, as its oil-related costs are largely passed through to its product sales prices.

Next come the two listed incumbent airlines Finnair and SAS, big users of jet fuel. After them, we find packaging group Huhtamäki and capital goods group Trelleborg. All of these have a net oil-related exposure corresponding to 20-40% of their cost base. They should all be major beneficiaries of a low oil price.

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Interview: Credit health in oil-related sectors Interview with Anne Schult Ulriksen, Head of Credit Research, Nordea Markets. Anne clarifies the differences in future prospects between different segments of the oil, offshore and shipping industries, and gives perspectives on the past and present credit health of these segments. The variations between segments are significant, and bond markets are still open to solid players in healthier segments, despite a trebled Norwegian high-yield corporate bond default rate in the past 12 months.

JT: The oil, offshore and shipping sectors have all been affected by a lower oil price – how do you see the general credit health in these sectors? Are there major differences between them?

ASU: Not just lower oil prices, but also a high cost level combined with dividend commitments to shareholders, have forced oil companies to curb spending. We saw this coming as early as 2012, but did not think we would see the deepest oil services recession in 40 years.

There are indeed material differences between the various segments. All offshore companies have been severely hit by sharp reductions in oil company spending. In particular, asset-heavy segments such as offshore drilling and offshore supply have been hit hard. These have significant operational and financial leverage, and both segments have invested excessively in assets. The result is weak and further weakening credits across these segments.

Over the past 12 months, we have seen the Norwegian high yield corporate default rate move from 5% up to 16% – it was under 2% in 2014. In absolute terms, NOK 37.8bn of debt was defaulted in 2015, of which 69% was within Oil Services, 18% in Offshore Supply Vessels and 13% in Exploration & Production (E&P). The NOK 25.9bn that has defaulted over the past 12 months may be less than the peak in 2009, when NOK 32.9bn defaulted, but, to put the growth of the High Yield market in perspective, this is more than the NOK 21.2bn that was outstanding in the Norwegian High Yield market at the onset of the prior upturn in 2004. These numbers exclude the numerous restructurings approved by bondholders, such as the amendment of tenor and other terms. The term "runway" must be one of the most used of 2016 in the oil- and offshore-related credit markets.

In contrast, larger oil companies remain pretty solid credits despite lower oil prices. The international oil majors have all prioritised low-cost operations, scaled down investment levels and preserved cash flow. There has been some credit pressure among smaller and medium-sized US-based oil and gas companies with weak balance sheets and limited production bases. The US shale industry has been cash flow negative since H2 2009, but was close to cash flow neutral in Q3 2016. Consensus estimates suggest that the industry will be cash flow neutral in 2017.

Finally, many shipping segments have been less impacted by the lower oil price, and specific supply and demand (including low economic growth) trends have been far more important.

JT: Does the oil price impact these three sectors in different ways and what are the differences?

ASU: Perhaps surprisingly, the oil price impacts oil companies in different ways. Most importantly, operating cash flow is highly correlated with the oil price, so credit metrics will normally weaken on lower oil prices. Oil

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companies can significantly reduce capex levels, however, thereby offsetting the negative effects from lower cash flow. Moreover, Aker BP, for example, has only recently transitioned from exploration to production, so the direct oil price impact only became a truly relevant credit driver due to production changes after Detnor and BP Norge merged.

While declining oil prices do not directly impact earnings for the offshore companies, they do force E&P companies to reduce investments, which in turn hits demand for rigs, supply vessels, oil field services equipment etc. Combined with an appetite to invest in new rigs and vessels, this has led to a significant oversupply of vessels in most segments. We do not think credit health will be restored to these segments until the underlying demand balances with supply. As a result, we expect a significant time lag between recovering oil prices and improving markets for the offshore companies. There are few exceptions to this – the seismic industry has been slightly better at managing excess supply and subsea equipment manufacturers have enjoyed high backlogs that they are still working off, offering them relatively better visibility and the ability to manage capacity during the downturn.

Many shipping segments, such as chemical and car shipping, have seen a positive short-term effect as the lower oil price has reduced bunker costs. In the longer term, lower oil prices and reduced investments could curb demand growth, especially within the liquefied natural gas segment, as oil companies are reluctant to invest in new LNG production capacity. The only real impact from lower oil prices has been on the bunker side, where we see several companies taking hits on expensive hedges on the way down, making them reluctant to return to historical bunker hedging levels, even though the oil price is trending up.

JT: What have companies in the sectors done in the past few years in response to the lower oil price?

ASU: The oil companies have had strong focus on cutting costs and preserving cash flow, while maintaining focus on low-cost production assets. Bids have been tendered, retendered, re-engineered to find cheaper solutions rather than gold-plating field developments. Frame agreements have been renegotiated at lower prices and a major oil company such as Statoil has been willing to move its maintenance business from the market leader on the Norwegian Continental Shelf (NCS) to less established players.

Companies in the offshore segments have cut operating costs sharply and restructured their balance sheets in order to survive. This has not been enough for most segments; there is also material scrapping of assets (rigs, vessels) in an effort to improve the market balance and reduce costs related to idle vessels.

The engineering and construction companies (oilfield services companies) have laid off effectively all temporary staff, which has been a large portion of the employees, as well as laying off 20%-plus of their permanent employees.

JT: What outlook do you see for these sectors in the next few years?

ASU: We have a positive view on the oil price into 2017 and expect a modest increase in activity level from oil companies. It is important to bear in mind that many producing oil fields are more than profitable at current oil price levels, in particular because oil companies have now been able to cut operating costs substantially. As an example, we have producing oil fields on the NCS with single-digit production costs,

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measured in USD per barrel. Their credit stories remain relatively robust and, should an even lower oil price materialise, they can still cut dividends as a means to protect the credit metrics.

By contrast, we expect the next few years to be very challenging for the offshore segments given the severe oversupply of vessels. Global utilisation for drilling rigs and offshore support vessels is currently around 50%. It will take several years of increasing demand to restore market balance. In subsea equipment, there is also significant overcapacity and we struggle to see capacity utilisation reaching ~700 tree (one tree used per oil well) capacity in the near term, particularly given the late-cyclical nature of this segment. However, this segment is also much less fragmented, so between the four suppliers – Aker Solutions, FMC/Technip, Cameron/Schlumberger and GE/Baker Hughes – there is at least the potential for more disciplined bidding.

For the shipping sector, the outlook is mixed between the segments – the LNG and car carrier segments are likely to improve first, while we expect liquefied propane gas (LPG) and chemical shipping to head into a down-cycle in the coming years. Bulk continues to struggle, but we expect it to recover gradually in 2017 thanks to increased scrapping and very limited new supply.

JT: Do the various companies need to do more to adapt to current market conditions, or to expected future conditions?

ASU: For the shipping segments with a negative outlook, the current balance sheets could be unsustainable and we would not rule out that selective issuers will have to amend maturity schedules and/or issue new equity. Most offshore companies have already completed restructurings or will have to undergo restructurings in the next few years. Several of the companies that have already restructured their balance sheets will likely have to do so again in 2019 if the market does not recover sharply – we expect these segments to remain very weak from a credit perspective. We expect to see significant M&A activity as market players seek to consolidate the market to reduce costs and improve market dynamics.

Oil companies are a completely different story. There very few oil companies active in the Nordic credit market, as Statoil and Petoro (which manages the Norwegian state's direct financial interest) control most of the production on the NCS. Consequently, the sector focus is limited in the credit market and more attention is given to company-specific investment cases.

JT: How do credit investors perceive these sectors? Are they top-down plays on oil, are they simply issuers somewhere on the credit quality scale, or are there significant company-specific investment cases?

ASU: A gross simplification would be to say that the further investors sit away from the deeply cyclical businesses, the more the bonds are seen as top-down plays on oil. The closer credit investors are to the NOK High Yield market, the more they trade the bonds on company specifics. It is also fair to say that many NOK High Yield investors have spent a great deal of time on the numerous restructurings that have taken place or are ongoing in the offshore industry.

Given the high leverage and time lag between oil price changes and earnings, most offshore bonds are traded on the company specifics with the credit quality more as a "box" within which specific investors make their mandates. There are major differences between the credit qualities and it is essential to pick the winners in each segment in order to avoid

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huge losses. Aker Solutions, for instance, is a company that is managing the toughest downturn in decades from a position of relative strength, with a solid balance sheet, NOK 2.3bn in cash and an undrawn NOK 5bn revolving credit facility (RCF).

Credit investors are fairly positive towards some shipping segments and the bond market is open for new issuances. We believe the decision to invest in shipping credits is not driven by a top-down view on oil, but rather on segment- and company-specific considerations.

JT: Has sustainability become an important factor for these issuers? If so, what are the drivers?

ASU: After a prolonged period of very high oil prices, the focus on fuel efficiency has increased meaningfully, and this focus has continued even though oil prices have come down.

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Disclaimer and legal disclosures Disclaimer

Nordea Markets is the name of the Markets departments of Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank Finland Plc and Nordea Bank Danmark A/S. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This document is not investment research. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgment of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.

Completion date: 8 December 2016, 11:01 CET

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12 december 2016 - nordea markets · 2017-04-24 · corporate research 12 december 2016 how oil...

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