For a long time Ukraine has not paid attention to Scandinavian countries, in particular, such country as Norway. Only this year Prime Minister Mykola Azarov paid visit to this country. Why is it important for Ukraine to cooperate with this country, which has the most advanced technologies of extraction of oil and gas, how is it possible to attract Norwegian investors, and why fish can become gas for us. Olav BERSTAD, Special Advisor for Norwegian Ministry of Foreign Affairs, who has been an ambassador to Ukraine from 2001 to 2006, and now is working on energy issues in the CIS countries, told The Day about this in his house on the Nesodden Peninsula.
Norway is a country bordering on the European Union in the North. How is this neighborhood affecting Norway?
“As a non-member, Norway is amazingly deeply integrated with the EU, in practically all spheres of policy and economy, except for the management of marine resources and agriculture. Norway’s membership in the internal market (through the 1992 European Economic Area agreement, EEA) has been of great benefit. Norway has 5 million inhabitants, but we are the world’s 23rd largest economy and the 4th largest exporter to the EU (after US, China, and Russia). And also for the EU Norway is a large market, the seventh after the US, China, Russia, Turkey, Switzerland, and Japan.
“Our large export of oil and gas explains a lot, but not everything. Norwegian production is fairly diversified, with fish, shipbuilding, machinery, aluminum smelting, ferroalloys, forest products, international shipping services, many other products and services, and tourism as important contributors. We are now the largest exporter of gas to the EU and have replaced Russia in that position. Only 4-5 percent of the oil and gas income is directly spent at home through the state budget, the rest is invested abroad, through a special pension fund (earlier called the oil fund). At the moment the pension fund is almost 800 billion dollars, which has been invested in over 8,000 companies worldwide, in foreign government bonds, and in real estate in such places as London and New York.
“Of Norway’s total export of 160 billion dollars in 2012, 84 percent went to Europe. We imported 87 billion dollars’ worth of goods, 70 percent from Europe. Most of our oil and gas, 111 billion dollars, was sold in Europe.
“All of this makes Norway a unique partner for the EU. In fact, the pension fund is the largest single investor there. Norway has benefited considerably from the earlier enlargements of the European Union, including the expansion of the market for Norwegian goods, services, and investments under one single system of rules.”
How can this factor be helpful for cooperation of our countries, both of which are EU neighbors?
“Ukraine and Norway should in my view be regarded as ideal partners. Between us is the European Union; Norway has big economic, technological, and other kind of possibilities. You have both serious raw materials and scientific resource. And the task is about the possibility of uniting these capabilities. Of course, it would be much easier to accomplish it within a single space. Therefore we support Ukraine’s integration into the European Union, signing of the free trade agreement, which is quite similar to the one we have with the EU. This will create a single space, but not within the EU, but between partners. It will enhance the framework we already have – the free trade agreement between Ukraine and EFTA.”
How can we use it?
“It would be more logical to use the advantages we already have, like exporting fish to Ukraine. You don’t understand what it is like.”
How?
“It’s almost the same as cheap gas. This is a raw material you can process and export in a refined form, for example, to the European Union or other countries. Why is it advantageous? Because the workforce and cost of production in Norway prevent us from doing so. This is our problem. We earn money mostly on the export of raw materials or semi-finished products plus super-high technologies in certain spheres. TV communications have already justified themselves, the same Telenor shows that Norwegian and Ukrainian engineers, experts in the sphere of technologies, can work freely and well.”
Why are Norwegian investors hesitant?
“Because they look at the problems that exist in Ukraine. Ukraine is not so simple for business. Investors understand and remember what happened to Telenor in Ukraine. But the WTO membership and the EU agreement obliges us and forces us to modernization and transparency in business. Norwegian investors, like any other, are ready to take a large risk, but then they expect perhaps super income. It is better with the countries, where the order guarantees predictability and transparency, and confidence in small, but stable income. There is none of this present in Ukraine.”
But there is stability.
“Ukraine’s image is not the best. And you need to attract investors and show them the prospects of sometimes relatively high income.”
But is not there a possibility for mutually advantageous cooperation in the sphere of extraction of oil and gas?
“As for the main field of Norway, oil and gas, there are two aspects. Firstly, it is production and export of oil and gas. This causes large direct income. Oil companies (Norwegian and foreign) are taxed at a rate of 78 percent. In addition comes the return on the investment when the Norwegian state invests in field development as a partner with the oil companies. This makes the share of the Norwegian state and society as 90 percent. Why have the foreign investors agreed to such a huge share to be taken by Norway? Because 10 percent are guaranteed. They are sure that in 20-30 and more years this agreement will be preserved. It does not depend on any possible changes in the government. Sometimes these 10 percent are enough for investors. Of course, we have sold our recourses, but we keep 90 percent. Surely, this is a good business.
“Azerbaijan is an interesting example. In 1994 they signed a vast agreement with foreign companies. They fully honored the agreement. Therefore the foreign companies are ready to invest more in this country. At the moment the conditions for investors in Azerbaijan are absolutely different from the ones that existed in 1994.”
This must be worse for them?
“It is better for Azerbaijan and worse for the investors, but better for the Azerbaijani population. It took Azerbaijan over 10 years, and 20 years later they have shown in practice that they have stably honored these agreements.”
And what about the second moment?
“This is development and production of oil production technologies. Norway is a leading country in deep water operations. Oil and gas machine-building today employs many thousands of people. So, not only do we export oil and gas, but also the supertechnological production.”
Did the Ukrainian prime minister on his visit to Norway manage to make Norway investors and Norwegian state interested in making investments in Ukraine and realize the projects of oil and gas extraction?
“I think Azarov’s visit was important both for Ukraine, and Norway. That was the first visit of this level over 22 years of independence. One can say it was a historical visit, even though the practical results so far are limited. Azarov basically wanted Norwegian energy companies to invest in Ukraine, perhaps especially with regard to the Black Sea shelf and unconventional gas.”
Shale gas?
“Absolutely right. But my feeling is that Ukraine at present is not so interesting for Norwegian oil companies.”
Why?
“Because they have a full specter of works, new large discoveries in the Norwegian sector, operations in Canada, in the US – including the shale gas, in East Africa, in East Asia, in Azerbaijan, there are new opportunities everywhere. However, as a result of the visit the Norwegian-Ukrainian Chamber of Commerce in Oslo has been active in promoting of energy opportunities, particularly oil and gas and machine-building, but also renewable energy and energy efficiency where Norway has a lot to offer.”
What is needed for Norwegian business to come to Ukraine?
“Well, I think, three main things. One is, of course, the general legal, political, and economic ‘framework conditions.’ Ukraine has taken a big step in the right direction by becoming a member of the WTO. Membership in itself doesn’t bring immediate happiness. Signing the Deep and Comprehensive Free Trade Agreement with the EU and the Association Agreement will add considerably to an improved framework for economic cooperation, plus enhance Ukraine’s image. The second aspect is real steps in fulfilling the obligations, including reduction of corruption, separation of functions, independency of the judiciary, and transparency of regulatory organs. The third thing is good examples of successful investments. Companies learn and listen to each other. If some companies have been successful, have received appropriate help by the authorities, by feeling welcomed, that laws and regulations have been executed in an impartial way, then this is a positive factor also for others.”
Isn’t Ukraine on a right track?
“It has taken too long. In 1991 there was considerable euphoria in the West, and a too optimistic view that the new independent states would be integrated into the world economy and quickly recover. But the heritage of the Soviet system and other things have been much more difficult to overcome than we thought. And, unfortunately, its good sides have not been well preserved, such as health services and education. In 1992 Norway was the only country that proposed a massive new Marshall plan for the former Soviet states, similar to the one that had helped Europe after the war. The vast majority of Western countries held the opinion that good technical assistance for reform and private investments would be enough for a new start and that the countries could borrow money and fundamentally pay for their own reconstruction and development. With regard to Russia, I remember, especially the Americans worked to assist in the rebuilding of the oil and gas sector (so that Russia could earn more money from export), in the rebuilding of agriculture (so that the population could be fed without import, meaning that hard currency would be saved for necessary public investments), and in keeping Russian nuclear, chemical and biological scientists and engineers employed in rebuilding at home, and so that proliferation of this knowledge to undesirable countries and regions could be avoided. Broadly speaking, the same policy applied to Ukraine. Your country is already a large food exporter, with excellent natural basis for further development. But Ukraine has not succeeded very well in developing its energy sector and reducing its domestic and foreign energy bill.”
