Norway declares Statoil ready for privatization

After much suspense and party infighting, the Labor party convention finally agreed with the government’s proposal to partially privatize Norway’s national oil company, Statoil. Since taking power last winter, the Labor leadership has pushed for Statoil to be privatized. The proposal met strong resistance from within the party for reasons of principle and because Statoil has been seen as the bulwark of a huge public sector. That sector has been criticized increasingly for inefficiency and has been the target of competition and privatization proposals. Opponents of Statoil privatization finally had to concede defeat and accept that the government should no longer be the oil company’s only owner.

Serious uncertainties remain, however. For instance, the resolution states that Statoil ownership can be extended to others, not by the government selling shares, but by getting fresh capital through strategic alliances. This is on condition that the government keeps at least two-thirds of it. Moreover, some shares in oil and gas fields owned directly by the government through the State Direct Financial Investment (SDFI) can be transferred or sold to Statoil and Norsk Hydro.

The minority government’s goal is to present a Statoil proposition to Parliament before Christmas and to have a new ownership structure in place sometime during 2001. Strategic alliances may be popular in the Labor party, which has a visceral distrust of financial markets and nostalgia for economic planning. The most recent case was the attempted merger of Norway’s Telenor and Sweden’s Telia before privatization – it was no success. Strategic alliances in oil prior to stock exchange quotation will not necessarily work out any better.

Statoil’s major assets are oil and natural gas in the ground, close to major markets, as well as advanced offshore technology. Potential partners will have less-valuable assets, such as refineries and (eventually) natural gas pipelines that are due to open to third-party access. The risk is evidently that in a bout of planning megalomania, Statoil – backed by Labor politicians – might exchange high-value upstream assets for lower-value downstream positions. This is where Parliament can exercise control. The non-socialist majority, although divided, is less fearful of financial markets and more skeptical of strategic alliances. Thus, it is likely to scrutinize the details of Statoil privatization and to be restrictive in transferring the state’s directly owned oil and gas assets.

Successful Statoil privatization also requires that the petroleum tax issue be settled, and that a solution be found to natural gas transportation and (possibly) gas marketing. Any tax uncertainty will depress Statoil’s market value. Perhaps the most imprudent step would be to privatize first and then lower taxes. The natural gas issue involves pipeline operatorships and possibly ownership, as well as compliance with the European Union directive on open access and competitive sales. In any case, the next year should be interesting, as the September 2001 elections begin to appear on the horizon.

Petroleum taxation reform overdue, but stalling. Being one of the world’s leading oil and gas producers, Norway is (not surprisingly) in political trouble with herself. With giant budget and current-account surpluses, the government and many opposition politicians have permitted themselves to take a somewhat complacent view on mundane issues, such as generating income and how to run the petroleum industry. Reality is likely to strike back, however.

Norway’s problem is that exploration and development are slowing down and, unless investment picks up again and soon, oil production risks declining considerably over the next five to 10 years. The reason is not resource scarcity, but an unfortunate coincidence of taxation, licensing, company structure and political disagreement. The petroleum tax system strongly favors established oil companies with current oil and gas income and deters newcomers. Licensing until this year favored big oil companies, especially Norwegian firms.

The North Sea is now a mature oil province, with plenty of smaller prospects left that essentially will be of interest to smaller, specialized oil companies. However, these firms are deterred by the tax system. Meanwhile, the major oil companies still have interest in deep offshore parcels, while the two Norwegian operators, Norsk Hydro and Statoil, want to expand abroad. Hence, activity suffers.

Before the summer, the Norwegian government announced – in a report to Parliament – the need for newcomers and changes in the institutional framework, if the Norwegian continental shelf is to remain competitive. The most important aspect – changes in petroleum taxation – risks being stalled by a dispute between the government and the industry.

The background is a report from an expert committee appointed by the Finance Ministry, advocating important changes in the present petroleum tax system. The salient features would be 1) Discontinue deductions for financial costs and onshore losses against offshore petroleum taxation; 2) Change the Special Petroleum Tax into a cash-flow tax on economic rent above a standardized rate of return on investment; and 3) Prolong the depreciation schedule to match the real lifetime of capital equipment. As compensation, the expert committee proposes to reduce the Special Tax, from 50% to 44%, to permit deficits to be carried forward with interest. This would help newcomers and facilitate trading in license shares by lifting tax neutrality requirements.

The proposal has met with total rejection by the Norwegian Oil Industry Association (OLF), which prefers to keep the present system, but with a lower Special Tax. This seems to represent the interests of the major oil companies and (especially) the Norwegian ones, which all want a larger share of the income from large producing fields and to continue deducting onshore losses. The government realizes that Parliament hardly would agree to reduce the Special Tax, as long as the oil price is $30/bbl or higher and that it is concerned about incentives that could encourage newcomers and develop smaller fields. That is where the issue stalls, but with backing in Parliament, the government is likely to implement some of the changes proposed.