International Politics

Apr. 2002 Vol. 223 No. 4  International Politics

Øystein Noreng,  Contributing Editor

Will Norway get one major oil company? Discussion is starting in Norway on the oil and natural gas industry’s future structure. Conservative Industry Minister Ansgar Gabrielsen surprised almost everyone by saying publicly that there is now less need for diversity on the Norwegian shelf, and that a merger of Statoil and Hydro’s petroleum divisions "would not be a bad solution." Most surprised was Christian Democrat Oil and Energy Minister Einar Steensnæs, who several times had stated a different opinion. Industry Minister Gabrielsen also seems to be at odds with his own Conservative Party, whose policies clearly favor diversity and competition.

Until the carve-up of Saga in 1999 and the merger with Norsk Hydro, Norway had three major upstream oil companies. After Norsk Hydro bought German aluminum producer, VAW, restructuring the conglomerate into independently listed subsidiaries for light metals, fertilizer and energy has been on the agenda, but no decision has as yet been made. Eventually, Norsk Hydro could remain a holding company, with a minority government ownership, keeping, at least initially, a majority of shares in the subsidiaries. The main argument in favor of separate listings is that conglomerates usually get a negative premium in financial markets, so that shareholder value would increase. The managerial argument is that independent companies would be freer to pursue strategies for a higher value added than are the conglomerate’s present divisions, which are bound by mutual considerations.

A separately listed Norsk Hydro Energy would be an important company in Europe. In 2001, the company produced about 340,000 bpd of crude oil, NGLs and condensate, and about 6 Bcm of natural gas, as well as 9.7 TWh of hydroelectric power. It would be an attractive partner for downstream companies that have interests in gas trading.

The company would also be interesting prey for the other major Norwegian firm, Statoil, which has equity production of about 650,000 bpd of oil, including NGLs and condensate, and 350,000 boed of gas from Norway’s continental shelf. In addition, Statoil trades about 1.1 million bpd of Norwegian government equity crude and in excess of 400,000 bpd of crude bought from third parties. Thus, total daily trade is about 2 million bbl of crude and condensate, making it the world’s third-largest oil trader, surpassed only by National Iranian Oil Co. and Saudi Aramco. In natural gas, Statoil has an anticipated equity production of 17 Bcm in 2002. In addition, the firm trades 20 Bcm of Norwegian equity gas, making total gas sales 37 Bcm this year. Eventually, the new energy giant could also comprise Statkraft, Norway’s state electricity producer, with an annual output of about 40 Bcm, so that total annual power output would be 50 TWh.

The argument is that such a combination would create a Norwegian giant in Europe’s energy market, with an equity crude output of about 1 million bpd, trading close to 2.5 million barrels daily. In natural gas, equity output would be 23 Bcm this year, with turnover of 43 Bcm.

The merger would enhance market power and upstream value added, in addition to cutting costs by eliminating duplicated operations. The argument is substantiated by Statoil’s recent improvement in cost performance. Statoil argues that to succeed in energy these days, companies need size and financial muscle.

This argument may be valid in many circumstances, but not necessarily in Norway. The idea of merging Norsk Hydro Energy with Statoil is essentially proposed by the latter, as well as by bankers and consultants in its network. As a still largely government-owned company, Statoil has an inherent appetite for expansion. However, with stock exchange listing since last year, the company needs to consolidate, cut costs and improve earnings.

By absorbing Norsk Hydro Energy, Statoil would rid itself of a competitor and a sometimes-embarrassing comparison on the Norwegian continental shelf. Although Statoil is cutting costs, its previously state-owned company culture needs to change profoundly before the firm can compare with the best of the private sector. Norsk Hydro, on the other hand, holds the traditions of a private company and thus, has a different culture that does things differently, often at less cost. It also has had a more focused strategy.

The synergy effect of an eventual merger between Statoil and Norsk Hydro Energy seems doubtful. Merging two very different company cultures will be lengthy and costly, with the risk of many good people leaving. An eventual Norwegian oil giant would have almost all its upstream assets on Norway’s continental shelf, and there would not be much diversification downstream. Hence, the low degree of diversification would tempt financial markets to not value the new, combined stock highly. Most probably, financial markets would also view with some skepticism a new, large oil company that has a high degree of government ownership. In spite of high oil prices, lower costs and good earnings, the newly issued Statoil stock has not performed excellently since the summer of 2001.

Several other arguments are also negative. The Norwegian continental shelf is maturing, especially in the North Sea. Finding rates are lower, and fields to be developed are generally smaller and more difficult. Infrastructure has been developed and is now open to all. Judging from experience elsewhere, especially in the U.S. Gulf of Mexico and the UK sector of the North Sea, this is not the time to merge the two leading operators. Norway’s oil industry already suffers from too little competition, as Statoil and Norsk Hydro have 80% of operatorships and budget power between them. Merging the two would create a virtual monopoly, likely to stifle competition and innovation. Two brains think better than one – this is also true in Norway!

Øystein Noreng is Professor, Norwegian School of Management, and he holds the TotalFinaElf chair in petroleum economics and management. He is a regular contributor to this column.