* Oil investments falling, high costs deter growth elsewhere
* Decline will be cushioned by $860 bln saved from oilreceipts
* Oil and gas make up a fifth of Norway's GDP
* Many argue for measures to address high costs
By Balazs Koranyi
OSLO, May 8 (Reuters) - Norway's energy boom is tailing offyears ahead of expectations, exposing an economy unprepared forlife after oil and threatening the long-term viability of theworld's most generous welfare model.
High spending within the sector has pushed up wages andother costs to unsustainable levels, not just for the oil andgas industry but for all sectors, and that is now acting as adrag on further energy investment. Norwegian firms outside oilhave struggled to pick up the slack in what has been, for atleast a decade, almost a single-track economy.
How Norway handles this "curse of oil" - huge wealth thatbring unhealthy dependency in its train - may hold lessonsacross the North Sea in Scotland, which votes on independencefrom the United Kingdom later this year, relying at least inpart on what it sees as its oil revenues.
Norway had the foresight to put aside a massive $860 billionrainy-day cash pile, or $170,000 per man, woman and child. Italso has huge budget surpluses, a top-notch AAA credit ratingand low unemployment, so tangible decline is not imminent.
But costs have soared, non-oil exporters are struggling, thegovernment is spending $20 billion more oil money this year thanin 2007 and the generous welfare model, which depends on asteady flow of oil tax revenue may not be preparing Norwegiansfor 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 PetterHavdal, CEO of car-parts maker Kongsberg Automotive.
Kongsberg Automotive has only 5 percent of its workers leftin Norway, having moved jobs to places like Mexico, China andthe United States, and keeping only high-tech, automatedfunctions at home. It says it is struggling with high labourcosts and even problems such as excessive sick leave.
"It's a bit discouraging that the sick leave in Norway istwice the level of other plants," Havdal said. "That is to me anindication that something is not as it should be."
With per capita GDP around $100,000, the Norwegian lifestylehas 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 ofthe labour force are outside the labour force, because ofwelfare, pension issues," says Siv Jensen, the finance minister.
Company executives and some government officials say Norwayneeds to limit wage increases to productivity, limit oil costgrowth, cut taxes like neighbours have done and spend less ofthe oil money. Some say it should even depreciate its currency.
The Scottish National Party's argument in favour ofindependence has centred on the promise that Scotland canreplicate the success of Norway's oil economy, creating asovereign wealth fund for future generations, while publiccoffers would be only half as dependent on oil and gas.
Unfortunately for Scotland, the glory days of Britishhydrocarbon production are already in the past, with North Seaoutput 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 thisyear, mostly from Norway, rising to two-thirds by 2026, thegovernment has said.
TURN FOR BIG OIL
The fortunes of the oil industry, which accounts for a fifthof Norway's economy, have shifted abruptly as the global oilsector slammed on the brakes.
Costs are spiking and capital spending has been so high thatenergy firms are selling assets to pay dividends. With oilprices seen falling this year and next, appetite for capitalexpenditure is low.
Investments, which tripled over the past decade, are nowseen declining in the years ahead, confounding earlierexpectations for a steady increase, while oil production remainsflat, despite years of heavy spending.
Energy companies are cutting some of their most innovativeprojects, a big worry as the sector has relied on cutting edgeinnovation to offset its high costs.
The government puts the best face on this, but admits timesare changing.
"The boom is probably over. But we're not looking at a steepdecline in investment or production," says oil minister TordLien. "The costs are rising too high and too fast. The Norwegiancosts have risen a little bit more than elsewhere."
Shell has called off a multi-billion dollar gasproject that was seen as a step towards platform-free offshoreproduction after costs on the pilot project hit seven times theinitial estimate. It would have placed all equipment on theseabed, including compression, and would have powered it fromthe shore, a huge technological step.
Statoil, the state-owned national champion, hasslashed spending, eliminating advanced projects like an Arcticrig that would have been able to operate in two-metre thick ice.
"Cutting back on capital spending is hurting innovation,"says government oil regulator chief Bente Nyland. "When you'recutting back, you're focusing on your production (and) yourincome ... This will have a long-term impact because you have tomake decisions on projects now."
Norway is the world's seventh biggest oil exporter, and itsupplies a fifth of the European Union's gas, a criticalposition as tensions with Moscow over Ukraine raise concernsabout Russian supplies.
It also boasts the world's highest GDP per hour worked,according to the OECD, but labour productivity has declinedsince 2007, and since 2000 its unit labour cost has risen aroundsix times faster than in Germany.
NO GOING BACK
Handelsbanken economist Knut Anton Mork said Norway must actif it is to avoid decline.
"The oil boom has ended," Mork said. "Norway needs torebalance to a more sustainable level, which can be done eitherthrough a nominal depreciation or through an internaldevaluation of wages.
"Absent necessary adjustments, Norway after oil may face astructural crisis similar to that in Finland after Nokia."
Industry-leading mobile handset maker used toaccount for nearly a fifth of Finland's exports and a quarter ofits corporation tax before its rapid decline as rivals corneredthe market in smartphones.
Neighbour Sweden, meanwhile, cut sickness and unemploymentbenefits and lowered income, wealth and corporate taxes. Its taxburden has fallen by four percentage points of gross domesticproduct, now making it lower than France.
But such wage adjustment in Norway is unlikely in the nearterm, and unions dispute that the country has a competitivenessproblem. Industrial workers nearly went on strike in April untillast-minute concessions.
"We haven't been in a situation since the second world warthat we had any cutbacks on rights we have negotiated," saidStein-Ragnar Noreng, CEO for consultancy KPMG's Norwegian unit.
"There is no sign of willingness from unions or thegovernment to go into any kind of discussion. This could be verydangerous because investments will go down."
Knut Sunde, director of employer interest group Area Tradeand Industrial Policy, also sees little chance of much change: "It's a high-cost country and will always be, so there's nodreaming about ever coming back to the good old days when Swedenwas expensive and Norway was cheap. We'll never go back." (Additional reporting by Henrik Stolen in Oslo, Sakari Suoninenin Helsinki and Karolin Schaps in London; Editing by WillWaterman)
