End of oil boom threatens Norway's welfare model

By Balazs Koranyi

OSLO (Reuters) - Norway's energy boom is tailing off years ahead of expectations, exposing an economy unprepared for life after oil and threatening the long-term viability of the world's most generous welfare model.

High spending within the sector has pushed up wages and other costs to unsustainable levels, not just for the oil and gas industry but for all sectors, and that is now acting as a drag on further energy investment. Norwegian firms outside oil have struggled to pick up the slack in what has been, for at least a decade, almost a single-track economy.

How Norway handles this "curse of oil" - huge wealth that bring unhealthy dependency in its train - may hold lessons across the North Sea in Scotland, which votes on independence from the United Kingdom later this year, relying at least in part on what it sees as its oil revenues.

Norway had the foresight to put aside a massive $860 billion rainy-day cash pile, or $170,000 per man, woman and child. It also has huge budget surpluses, a top-notch AAA credit rating and low unemployment, so tangible decline is not imminent.

But costs have soared, non-oil exporters are struggling, the government is spending $20 billion more oil money this year than in 2007 and the generous welfare model, which depends on a steady flow of oil tax revenue may not be preparing Norwegians for tougher times.

"In Norway, job security seems to be taken for granted, almost like it's a human right to have a job," says Hans Petter Havdal, CEO of car-parts maker Kongsberg Automotive.

Kongsberg Automotive has only 5 percent of its workers left in Norway, having moved jobs to places like Mexico, China and the United States, and keeping only high-tech, automated functions at home. It says it is struggling with high labor costs and even problems such as excessive sick leave.

"It's a bit discouraging that the sick leave in Norway is twice the level of other plants," Havdal said. "That is to me an indication that something is not as it should be."

With per capita GDP around $100,000, the Norwegian lifestyle has become such that the work week averages less than 33 hours, one of the lowest in the world, and while unemployment is low, there is large underemployment, made possible by benefits.

In 2012, a new word entered the Norwegian lexicon - to "nave", or live off benefits from welfare agency NAV.

"Approximately 600,000 Norwegians ... who should be part of the labor force are outside the labor force, because of welfare, pension issues," says Siv Jensen, the finance minister.

Company executives and some government officials say Norway needs to limit wage increases to productivity, limit oil cost growth, cut taxes like neighbors have done and spend less of the oil money. Some say it should even depreciate its currency.

The Scottish National Party's argument in favor of independence has centered on the promise that Scotland can replicate the success of Norway's oil economy, creating a sovereign wealth fund for future generations, while public coffers would be only half as dependent on oil and gas.

Unfortunately for Scotland, the glory days of British hydrocarbon production are already in the past, with North Sea output down around two thirds since its peak.

A net oil and gas exporter until the turn of the century, Britain will import almost half of its hydrocarbon needs this year, mostly from Norway, rising to two-thirds by 2026, the government has said.

TURN FOR BIG OIL

The fortunes of the oil industry, which accounts for a fifth of Norway's economy, have shifted abruptly as the global oil sector slammed on the brakes.

Costs are spiking and capital spending has been so high that energy firms are selling assets to pay dividends. With oil prices seen falling this year and next, appetite for capital expenditure is low.

Investments, which tripled over the past decade, are now seen declining in the years ahead, confounding earlier expectations for a steady increase, while oil production remains flat, despite years of heavy spending.

Energy companies are cutting some of their most innovative projects, a big worry as the sector has relied on cutting edge innovation to offset its high costs.

The government puts the best face on this, but admits times are changing.

"The boom is probably over. But we're not looking at a steep decline in investment or production," says oil minister Tord Lien. "The costs are rising too high and too fast. The Norwegian costs have risen a little bit more than elsewhere."