Norway's economic outlook is shaping up to be one of both optimism and caution as oil investments are set to hit record highs, but challenges with the krone continue to pose significant questions for the future.
According to the Offshore Norge industry association, oil and gas companies operating within Norway expect to invest approximately 275 billion Norwegian crowns ($24.68 billion) by 2025. This figure marks a notable increase from the 263.7 billion crowns projected for this year. The optimism stems from various factors including increased costs, accelerated development plans, and the drilling of additional wells at existing oil and gas fields. Last year, the industry group had predicted investments for 2024 and 2025 to total only 240 billion and 225.9 billion crowns, respectively, demonstrating how rapidly the industry is adapting.
The anticipated investments indicate not just buoyancy within the oil sector, but also the broader impact they may have on the Norwegian economy as the country remains Western Europe's largest oil and gas producer, achieving output levels of just over 4 million barrels of oil equivalent per day. Despite these promising numbers, the outlook beyond 2025 appears to show some decline, with investment estimates reducing to 251 billion crowns for 2026 and 203 billion crowns by 2029. This reduction is expected as existing development projects reach completion.
Offshore Norge's predictions are supported by responses from fourteen companies—including major players like Equinor, Aker BP, Vaar Energi, ConocoPhillips, and Shell—which combined represent nearly 100% of the country's total oil and gas output. Key oil fields such as Equinor's Arctic Johan Castberg and Vaar's Balder X are projected to go live during the first and second quarters of 2025, respectively, as Aker BP's Yggdrasil field is scheduled to commence operation by 2027.
Meanwhile, the status of the Norwegian krone has remained troubled throughout 2024, marked by persistent weakness against dominant currencies such as the US dollar and the euro. Though there was brief appreciation against the euro and Swedish krona last November, the overall forecast suggests uncertainty. Analysts have noted the volatility surrounding the krone, culminating discussions on its future within the next year.
Jan Ludvig Andreassen, chief economist at the Eika Group, mentioned, "Forecasting the exchange rate between the krone and the euro is a mug's game because no factors can be used to reliably predict its movements. Or so say the researchers." Despite the unpredictable nature of exchange rates, Andreassen offered his prediction of a possible 10% rise for the kroner against the euro, dependent upon continuous structural problems within Europe.
Rory Fennessy, senior economist at Oxford Economics, provides the contrasting perspective highlighting the krone’s 'incredibly weak' performance, especially considering the backdrop of geopolitical tensions such as the invasion of Ukraine. He remarked, "While the depreciation has steadied somewhat this year, the krone remains incredibly weak by historical standards."
Fennessy emphasized the vulnerability of the krone due to its lower trading volume compared to major G10 currencies, which leaves it susceptible to sell-offs during turbulent geopolitical times. Despite strong wage growth within Norway, he argues, this has not been correlated with rising economic growth, exacerbated by the issues of weak productivity.
Predicting the krone's performance for 2025, Fennessy voices skepticism about any significant improvements. He anticipates the US dollar to maintain strength, attributing this to geopolitical instability and the continued outperformance of the US economy. There is, nonetheless, the possibility of the krone performing comparatively well against the euro should Norway's economy fare significantly stronger than the euro area.
For the krone to see substantial recovery, various factors need to align favorably. Fennessy highlights the necessity for reduction of the global risk climate and harmonious monetary policymaking by Norge's central bank, Norges Bank. Should the bank delay easing or act prematurely, this could impact the krone unfavorably.
Fennessy also pointed out Norway’s persistent productivity challenges as being central to the krone's plight. “Norway's productivity performance over the past few years has been disappointing... Stagnation coupled with strong wage growth has raised business costs and diminished international competitiveness,” he noted.
On the brighter side, Norway's future within the offshore petroleum sector remains pivotal, as Fennessy explained. The thoughtful management of the oil fund is expected to hinder the adverse effects of currency inflows onto Norway's economy and support potential diversification efforts. He opined, "Overall we think Norway is well placed to do so... to be one of the greater beneficiaries of AI in the long term across all countries due to these factors."
These dynamics create a complex picture for Norway's economy heading forward, where oil investments present optimism but are tempered by the challenges faced by the krone. Effective policymakers will need to navigate both internal challenges and external pressures affecting its currency, ensuring stability and growth amid changing global landscapes.
