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Perched on Norway’s northern coast, where the Scandinavian peninsula shatters like an ice floe into the Arctic Ocean, the city of Hammerfest claims to be the northernmost in the world. With its ice-free deep-water harbour, it was once a centre of commerce. A frozen frontier town booming on whale oil, seal skins and seafood, it was the first northern European city to install electric streetlights.

But for most of the past half-century Hammerfest stagnated. Trade favoured warmer climes. Its largest industry, a frozen fish factory, was cutting jobs.

A city in decline dies through the ambition of its young: year after year, they moved away and stayed away. “People weren’t eager to build houses, or even paint them,” says Arvid Jensen, a long-time resident. “You could see it in people’s eyes – there was no optimism.”

Then, in 2002, the pendulum swung back. Statoil, the state petroleum company, announced that it had found a way to exploit a large reserve of natural gas 150km off the coast. From deep-sea wells in the frosty Barents Sea, gas would flow to shore through an underwater pipeline. Cooled and liquefied, it would be loaded on to tankers and shipped as far away as the United States. The project would be called Snøhuit, “Snow White”, and the processing plant located in Hammerfest. When city employees compiled population figures three months later, they found that people had stopped moving away.

“This is just the beginning,” Jensen told me when I visited him in February. The sun had recently risen on Hammerfest for the first time since November, and the city was stretching after the long darkness. Jensen chairs Petroarctic, a group of northern Norwegian companies serving the oil and gas industry. From his office window, we look out across the flashing waters of the port. His finger traces the snowy shorefront, indicating new apartment buildings and the ice-grey slabs of ongoing construction. At the plant across the bay snowploughs, freight lorries, cement trucks and buses buzz from the barracks to the worksite. Gas is to start flowing in April, and Statoil has ramped up exploration in nearby waters. “The Barents Sea is an enormous sea, and we have just started to work,” says Jensen.

But oil can be as much a curse as a blessing. Since the 1960s, when Holland’s sudden gas wealth pushed up its currency and crippled its manufacturing sector, economists have been wary of easy money, even coining a term – the Dutch Disease – for its impact on the rest of the economy. When you ask a Norwegian about his country, you’ll usually get a litany of complaints about the roads, the schools, the hospitals, the cost of living. “Welfare has to do with the difference between what you have and what you expect,” says Arne Jon Isachsen, the editor of a book called What the Oil Money Has Done to Us. “If they expect more, people become unhappy.”

In Hammerfest, the Snow White project will pay €12.4m in yearly property tax, 20 per cent of the municipal budget. The city has already launched a €50m renovation of the schools, and ground has been broken on a €25m Arctic Cultural Centre and a €12m dock. Last year the city strung its hills with a fence to keep out a uniquely Arctic pest. “We have a problem with reindeer here,” says Bjørn Wallsøe, a city worker.

The plant won’t be at full production until the end of the year, but several years of revenue have already been spent. Norwegians like to say they’ve been doubly enriched by globalisation: the country is the third-largest exporter of oil in the world (after Saudi Arabia and Russia), and the price of its exports – petroleum, minerals, ships and fish – has soared, while Asian manufacturers have driven down the prices of clothes, electronics and other consumer goods. Petroleum drives the Norwegian economy, accounting for half of the country’s exports.

Last year this country of 4.5 million people exported €61bn in oil and gas, up 15 per cent from 2005. Statoil (literally “State Oil”) is the country’s biggest oil company and one of its largest employers. When it merges with Norsk Hydro – another state oil and gas firm – later this year, it will become the world’s largest offshore oil and gas company.

The country’s wealth has allowed it one of the most generous welfare states in the world. The sick get free healthcare and up to a year of fully paid leave. When a woman gives birth she can choose between taking 10 months off at full pay or a full year at 80 per cent of her salary. Students are not only exempt from tuition fees, they are eligible for €10,000 in loans each year, nearly a third of which gets written off upon graduation. Prices are high, but so are salaries. A pint of beer might cost €9, but the graveyard shift at a late-night deli in Oslo rakes in €22 an hour. In the city of Stavanger, the industrial oil town on Norway’s western coast where Statoil has its headquarters, unemployment runs at 1.5 per cent. At a job fair in the city’s university, company reps approach students timidly, like overdressed boys at their first dance. The engineering union is making waffles. An oil contractor raffles an iPod. “Every second week there’s another company coming to buy pizza and beer,” says Tonje Bye Lindvik, 30, an engineering student.

Yet when I visit Oslo, I find the capital of this small, rich country not so much excited by its wealth as troubled by it. It is a cold day, one of the frostiest of the winter, and a light snow flurries from the sky. Norwegians are understated in manner and in dress, polite and considerate to a fault. Despite having the second highest per capita income in Europe after Luxembourg, they shun opulence for diligence and courtesy – though the odd gold tap does turn up, which doesn’t happen in Sweden or Denmark.

A restaurant manager tells me he does little lunchtime business; Norwegians like to eat in the office. And when I buy a sim card from a news stand, the vendor takes it on himself to spend 10 minutes on his phone running through the procedure of activating it. As I shuttle from office to office, I find the buildings warm but not overly so. Many people I meet wear sweaters. A light coat of dust over Oslo doesn’t suggest I’m in one of the world’s richest nations.

Oil was discovered off Norway’s western coast in 1969, and the country has ridden several busts and booms. In the early 1990s Norway declared that all state petroleum revenues would be put aside in a protected fund and invested outside the country. Recent elections have seen the rise of the Progress Party, whose right-wing, anti-immigrant platform includes promises of spending the country’s oil money on homes in Spain for the country’s pensioners. But thus far government spending has been restrained. Politicians try to keep spending at about 4 per cent of the fund’s $300bn (€227bn) value, the estimated real return on its investments. The capital will be used to tackle an upcoming pension crisis or simply saved. “The wealth should be shared with future generations,” says Martin Skancke, director-general of the Finance Ministry’s Asset Management Department.

In the welfare system’s Oslo headquarters, officials are scratching their heads not over their embarrassment of riches, but on how to cut spending. Unemployment – the number of out-of-luck jobseekers – is very low, but the country has the highest sick-leave figures in the world. One in four working-age Norwegians gets his main income from the state social security system. “No survey of the health situation says that we are getting any sicker,” says Torgeir Hernes, who handles strategic planning for Norway’s welfare system. “But the figures keep rising.”

Norway has all the prerequisites of the Dutch Disease: an economy dominated by a natural resource, a shift in concentration from manufacturing to services that can’t be imported. But by spending just the real return, the idea goes, Norway’s income will be sustainable. If they can control spending, its people can enjoy their oil without ever suffering the disease’s symptoms.

The country’s wealth has also afforded it a place on the world stage, letting it hit far above its weight. Its people have twice voted not to join the European Union and the country insists on continuing whale-hunting in the face of worldwide opprobrium. But Norway is nonetheless one of the world’s most vocal champions of international institutions.

Since launching into the Middle East peace process with the Oslo Accords in the early 1990s, Norway has turned conflict resolution into its foreign-policy centrepiece, wading into conflicts in Sudan, Somalia, Sri Lanka and Colombia. “We saw there was an opportunity for a country like Norway, a northern European country without any vested interest, without colonies,” says Raymond Johansen, Deputy Minister of Foreign Affairs. “It’s easy for us to show we’re impartial.”

Thorvald Stoltenberg, the father of the current Prime Minister and a prominent Norwegian politician who served stints as Defence and Foreign Minister during the 1980s and 1990s, points to the Russian border to show Norway’s changing role since the end of the Cold War. During periods of heightened tension tanks would line up on the Soviet side. “Now the Soviet Union is gone and so are the tanks,” says Stoltenberg. “The new worry from Russia is tuberculosis, and other diseases of poverty. We’ve moved from building up security against each other to trying to build up security together.”

Nevertheless, just offshore, the area near the border is also the one place where Norway shows more muscle than smiles. With climate change and post-Cold War realignment, the area is rapidly thawing, both politically and literally, and the government describes the high north as its strategic priority. The country has a 32-year dispute with Russia over where the two countries should draw their ocean border. The two sides have agreed on an area in the Barents Sea that is off-limits to fishing and oil exploration. But with the United States Geological Survey saying that the Arctic contains about a quarter of the world’s undiscovered gas and oil reserves, the issue has moved to the front burner. “It’s important to maintain the regional stability,” says Liv Monica Stubholt, Deputy Minister of Foreign Affairs specialising in the region.

Since 1925, the country has also claimed the Svalbard archipelago, a sparsely inhabited cluster of islands far north of the Arctic Circle. Norway’s claim to territorial rights extending 200 nautical miles from Svalbard’s coast has never been recognised by its eastern neighbour, but that hasn’t stopped its coastguard from boarding Russian ships which it says have intruded. “Norwegian presence and Norwegian activities and Norwegian sovereignty must come to a natural expression in the high north,” says Stubholt.

Norway’s politicians like to argue that as its wealth rises, so does its responsibility. In per-capita terms, Norway is the world’s leading provider of foreign aid. Last year it spent 0.98 per cent of its national income in foreign aid. That the home of the Nobel Peace Prize hasn’t reached its goal of spending 1 per cent of its income is largely due to rising oil prices. Norway’s politicians can’t keep up with the country’s wealth.

So important is aid work seen in Norway that a humanitarian background can be a good formation for a politician. “We’re one of the richest countries in the world,” says Kjetil Clementsen, 27, a candidate for city council in Stavanger who has volunteered in Rwanda and South Africa. “We should give back to those in need. It’s there in the Norwegian spirit.” Prime Minister Jens Stoltenberg’s official résumé describes his “forceful engagement for development issues”. The foreign minister has served in the World Health Organisation and the Red Cross.

The premium Norway places on ethics is evident in its investment policies. The finance ministry prohibits putting money into companies that make components for nuclear weapons, cluster bombs or mines. Last summer the fund made headlines when Norway said it had disinvested from Wal-Mart over its labour practices. “They were running their operations in a way we felt were inconsistent with the values of the fund,” says Skancke of the Finance Ministry.

Norway has built such a reputation for altruistic policies that the country’s inhabitants risk assuming its behaviour is, by definition, ethical. The high road has always been its easiest path. Small and rich, Norway has found it in its interest to keep a light footprint, to push its claims through international institutions, to raise its profile through a foreign policy of aggressive goodwill.

In a country so concerned with ethics, however, there’s surprisingly little soul-searching about the moral implications of the oil industry. Norway’s petroleum reserves are finite, and production has been declining since 2000, leading Statoil to look abroad for future revenues. The company aims to pump 20 per cent of its oil and gas outside Norway by 2007, with operations in Angola, Azerbaijan, Venezuela and Nigeria.

Even so, there’s little national discussion of the challenges of doing business in countries where little of the oil wealth reaches the general population. “Generally speaking, this is a blind spot,” says Dr Knut Holter, rector at the School of Mission and Theology in Stavanger. In Oslo, I ask Johansen, Deputy Minister of Foreign Affairs, how Norway would maintain its reputation for impartiality as Statoil, which is 71 per cent government-owned, increases its investments abroad. “This potentially can be troublesome,” he admits. Norwegian foreign policy is based on trade and engagement, with the view that isolation only strengthens repressive regimes. But Johansen says he received requests from Statoil and Norsk Hydro to tone down the criticism of capital punishment during a visit to Tehran last year. He refused, risking the companies’ operations, but acknowledged that the pressure will only build with time.

“This can become a delicate balance,” he says. “When we are so rich, with a huge outreach, it can become potentially difficult.”

The foreign ministry sits in central Oslo, in a historic area of 19th-century buildings near the Royal Palace. As I step out through the glass doors I can hear the chants of demonstrators. The warm day has cleared the sidewalks and streets of snow. A small group of about 20 students wearing orange construction caps are protesting against Norway’s participation in the war in Afghanistan, where the country has some 550 troops with plans to send 150 more as they take control of the international airport in Kabul from April. The demonstrators have scheduled the protest for 14.00. Good Norwegians that they are, they stand chanting around the corner, so they wouldn’t arrive early. In the park by the palace, where the snow was still shin-deep, I find another gathering. About two dozen snowmen wearing frowns, grimaces and the rare discordant smile held signs decrying global warming: “we don’t want to melt.” In the era of climate change, so important in Arctic areas, Norway is very careful about its carbon emissions. With a stiff carbon tax and extensive hydropower, the country has so little to cut that it may find it difficult to meet its Kyoto obligations.

Yet if it were to include the oil it sells, Norway would find itself responsible for 3 per cent of the world’s carbon-dioxide emissions, says Gunnell Sadanger of Future in Our Hands, the environmental group that built the snowmen. “We’re dependent on a resource that’s destroying the climate,” she says. “If this keeps going, we won’t be able to build snowmen, go skiing. Yes, these are small things but they’re part of our culture.”

One wouldn’t make these observations of any other country. Oil companies from the US, France, Britain and the Netherlands are as ethically mired as Statoil will ever be. And Russia, Saudi Arabia and Iran have much to answer for beyond their contributions to global warming. But in a country that tries so hard to remain above reproach, these issues stand out like drops of oil against the snow. If Norwegians decide that they want to stick to their two-speed highway that mixes diplomacy with troops in Afghanistan, an admirable environmental track record with whaling, then it’s likely to remain the quirky outsider on top of the world.

Water world

Some experts, including the former UN Secretary General Boutros Boutros-Ghali, believe water may become more important than oil in this century, and it could become a lucrative export for Norway. Africa and Asia are already hard-hit by water shortages, and growing populations will create more pressure in the coming decades.

About one third of the world’s population already lives in countries considered to be “water-stressed” – that is, where consumption exceeds 10 per cent of total supply. If present trends continue, two out of every three people on Earth will live in that condition by 2025. There is currently little interest in the large-scale commercial export of Norwegian water, and Norway only possesses a small part of total available water resources, but it is in a favourable position due to its small population, climate, location and geography: water volumes are stored in lakes and rivers, particularly in the extensive mountain ranges, functioning as natural water towers.

Global warming may increase precipitation in Norway, which is ironic, since petroleum from Norway’s continental shelf undoubtedly contributes to global warming.

Fishy business

Norway controls an area of ocean six times larger than its landmass and its waters are some of the world’s most productive. Norwegian fishermen catch about 2.5 million tonnes of fish per year in national waters, in addition to which 622,000 tonnes are produced by the country’s aquaculture industry.

Norway is the world’s third-largest exporter of seafood, and the fishing and fish-farming industries supply consumers in more than 150 countries; the export industry is worth about NOK31bn (€3.85bn) annually. Norway’s fishing industry employs 35,000 people and most of the small communities along the country’s sparsely populated coast are dependent on it.

The industry is highly regulated to ensure sustainability. Vessels longer than 24m are required to carry satellite transmitters so that their activities can be monitored.

Ninety per cent of Norway’s fish stocks are co-owned with other nations. This means that international co-operation is essential: Norwegian fisheries agree stock quotas with countries including Russia, Iceland, the Faroe Islands, Greenland and EU member states.

It’s a gas, gas, gas

Norway is the world’s third largest exporter of oil and gas. Most of the Norwegian gas is sold through long-term deals to Britain and other European countries.

In spite of more than 30 years of production, only about a third of the expected total resources on the Norwegian continental shelf have been exploited, which is good news for customers in the West, since energy demand is increasing, and a politically stable supply network is of the utmost importance.

The petroleum industry is vital to Norway’s 4,640,200 citizens, since it is responsible for more than a quarter of the state’s revenues. In 2006 the export value of the petroleum industry amounted to NOK545 billion. Out of an active workforce of 2,354,000, only 80,000 people are employed in petroleum-related activities, but the spillover effects to other industries are significant.

From the start, the challenge for Norway was to establish a system of managing the resources that maximised value for the Norwegian people, while also establishing a commercial framework which enabled business partners to make rational, long-term investment decisions. There might be more good news in store, since the Norwegian continental shelf – and petroleum reserves – may be much larger than previously thought.

Norway recently submitted research on the extent of its continental shelf to the UN’s Commission on the Limits of the Continental Shelf in order to determine the boundary between its continental shelf and the international seabed.

Cold front

On 8 January 2007 the Norwegian Defence Minister Anne-Grete Strom-Erichsen spoke bluntly: “Norway’s relations with Russia are good, but we shall not remain uncritical of all patterns of development in today’s Russia.” Long the model of Scandinavian political correctness, this small, oil-rich country is not one for provoking its prickly neighbour. However, three issues are polluting Norwegian-Russian relations: energy, fisheries and the environment.

Energy: Norway has been keen to play its part in the exploitation of the Shtokman natural gas field. However, Moscow’s aggressive attitude in the unresolved dispute about just where the border lies on the continental shelf has soured relations. It is a dispute compounded by the rude awakening of Norwegians to Russian business practices and their companies’ shady relationship with the Kremlin.

Fisheries: while co-operation from their Russian counterpart is increasing, the Norwegian coastguard has had to cope with repeated incursions by the Russian fishing fleet into Norwegian waters. This has led to many clashes and the odd attempt by escaping Russian trawlers to abduct Norwegian inspectors.

Environment: Norway is used to dealing with the dangers posed by ageing Russian nuclear-power stations and by decommissioned nuclear submarines rotting not far from Norway’s far north. However, the country is now worried about the possibility of pollution from Russian oilfields and the transportation of crude oil along Norway’s coast.

For Norway, the peaceful resolution of disputes is paramount. Therefore, any dispute with Russia must be resolved through diplomacy – although, as a member of Nato, Norway has the military backing of the Atlantic Alliance. However, Oslo is taking some steps to deal with Russian incursions. All the major Norwegian air, ground and sea forces are now stationed in the north, and the coastguard is being reinforced with a fleet of new vessels so it can maintain a continuous presence. The Norwegian navy will soon take delivery of five new frigates, and over the next few years all of Norway’s ageing F-16s will be replaced by the state-of-the-art Joint Strike Fighter.

Indeed, as Chief of Defence General Sverre Disen points out, posture without capability is worthless. Could Norway be facing a new, very cold Cold War in the frozen north? Time will tell.

Julian Lindley French is senior scholar at the Centre for Applied Policy, University of Munich. This article is a personal viewpoint.

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