What Norway will likely do with Statoil

Norwegian oil policy is heading for a fundamental change. The model from the 1970s – based on tight government control, a high degree of state participation and high taxes – is being dismantled. The reason is simply that the world has changed. In the 1970s and early 1980s, political stability, rising oil prices and promising geology gave Norway a strong bargaining position in relation to the international oil industry, especially as many OPEC countries nationalized their oil industries. Hence, Norway could impose tough licensing procedures and high net taxes for the limited amount of oil and gas that foreign oil companies could access. Overall, the policy has been a success, giving Norway huge revenues as the world’s second largest net oil exporter.

Conditions changed. Today, however, the basis for this policy is history. The resource base in the North Sea is mature, with finds getting smaller and more difficult and with a rising share of natural gas. The promising parts of the more northerly Norwegian and Barents Seas are considered high risk. Oil provinces with more promising geology and less severe conditions are opening up in OPEC countries and in the Former Soviet Union. Political stability is less important for countries whose rulers, in any case, will be desperate for oil and gas revenues. Hence, Norway’s bargaining position with international oil no longer is what it used to be.

The 1998 oil price decline demonstrated Norway’s risk and vulnerability. Thus, even though oil prices have recovered, there is little exploration and development activity, so that a crunch has hit oil companies and the offshore supply industry, alike. The two major Norwegian oil companies – Statoil and Norsk Hydro – both struggle with restructuring and the financial squeeze resulting from low 1998 earnings. Norwegian licensing policy since the 1970s has essentially given preference to the large international oil companies, on the assumption of superior technical competence, but they now see more interesting opportunities elsewhere. By contrast, independent and small oil companies that are active in other mature oil provinces, such as the U.S. Gulf of Mexico, are hardly present in Norway.

Against this backdrop, all stones are being turned. There is a broad consensus that wholly state-owned Statoil should be partly privatized. Probably one third of shares will be on the stock exchange by 2001. There is less of a consensus about what to do with the State Direct Financial Involvement (SDFI), which is a unique Norwegian construction. Fearing that Statoil would become too big, the government in 1985 split off its own share of most oil and gas fields. Through SDFI, the government acts as an industry investor, getting the cash flow, but Statoil manages the share. Statoil has proposed a merger with SDFI before privatization, arguing that in oil, size is money. Hence, the merger would by itself give an incremental stock market value, says Statoil.

Statoil’s total reserves of oil and gas are close to five billion bbl, which are more than those of Texaco, but less than those of Chevron or TotalFina. Since Statoil’s results are below industry average, these assets could make it a vulnerable target for an unfriendly takeover. SDFI’s oil and gas assets are about 12.5 billion bbl, meaning that combined Statoil and SDFI reserves would be 17.5 billion bbl, which would put the company in the same league with Exxon-Mobil, BP-Amoco and Shell. Hence, Statoil’s desire to grow is understandable, but so is reticence to hand over SDFI.

Statoil is the subject of criticism because its return on capital is below industry average and because its foreign ventures, as a whole, have not been very successful. The board and management were replaced recently because of persistent cost overruns. Getting a hand on the SDFI cash flow would blunt incentives to cut costs and provide resources for large-scale foreign investment. It is not certain that a giant company expanding abroad is in Norway’s best interest.

Norway’s other major oil company, Norsk Hydro, would also like to get a share of SDFI. The company, since its acquisition of Saga, is 44% government-owned, with oil and gas reserves of about 1.5 billion bbl. It is also a conglomerate, diversified in oil and gas, chemicals, fertilizer and aluminum, but the strategy is to become more of an oil and gas company. Return on capital is above that of Statoil, but still below industry average.

Potential actions.The dilemma for Norway is whether to consider the oil and gas resources as a base for wealth and portfolio management or as a base for industrial policy. Total Norwegian government assets related to oil and gas are in the neighborhood of $200 billion, or about one and half times Norway’s gross domestic product, including discounted oil and tax revenues, SDFI, Statoil and the Norsk Hydro share, as well as the Petroleum Fund, which is about $25–30 billion.

A private investor would probably diversify risk and sell off the Statoil and Norsk Hydro shares, as well as SDFI, to the highest bidder. However, this could risk the end of a Norwegian-owned oil industry. Statoil and Norsk Hydro would not have resources to bid against foreign majors for SDFI’s assets, and both companies would risk being taken over. This is politically impossible and hardly sensible in economic terms.

Against this backdrop, change is likely to be more cautious. Privatization of Statoil will proceed, but in the longer run, the government is likely to keep a golden share of at least 33.4% to prevent a take-over. The same applies to Norsk Hydro. Some SDFI assets are likely to be transferred to these two companies, possibly through an exchange of shares. Other SDFI assets are likely to be sold in the market to consolidate companies with smaller shares, especially field operators. Some major SDFI assets, such as the huge Troll gas share, most probably will be retained and managed through bids. Moreover, a separate gas pipeline company is likely to be established, paving the way for Norway’s acceptance of the EU gas directive on open access. Finally, licensing policy is likely to change, giving easier access to independent and small oil companies. Whether tax rates will go down is more uncertain, but should not be excluded.

Øystein Noreng is Professor, Norwegian School of Management, and holds the FINA Chair in petroleum economics and management. He will be a regular contributor to this column, which now features oil-and-gas-related political news and analysis from various world regions, in addition to quarterly reports on U.S. governmental activities.

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