Norway signals policy changes

Although the new Labor minority government has postponed partial privatization of Statoil – due to resistance in the party – it has signaled policy changes in a recent report to Parliament on oil and gas activities, presented by the Ministry of Oil and Energy. A Report on the Fiscal Terms of the Petroleum Industry, presented by an expert committee, also recommends changes in the tax system.

The report to Parliament focuses on the need to change fiscal terms for operations in light of advancing resource maturity and sharper competition from other oil provinces. It also states the need to maintain a high, even level of activity, as well as give the oil industry more favorable and more predictable operating conditions.

Operator-friendly procedures. Entry into Norway’s oil business will become easier. From now on, the government intends to announce concession rounds every two years for the Norwegian Sea. For the North Sea, officials once a year will invite the oil companies to propose areas to be opened for exploration, as a yardstick for measuring industry interest and the need to have concession rounds. The government also will accept group applications from oil companies.

The administration also intends to simplify application procedures by publishing standard criteria for allocation of licenses and eventually to modify the present, rather cumbersome rules. It will simplify the documentation required of oil companies when applying for licenses, starting with the next Norwegian Sea round. Before the North Sea license allocation later this year, officials will present guidelines for the contents of applications for mature areas, aiming at a significantly lower documentation load requirement. Finally, the government intends to reduce the price of seismic and other data that it sells to oil companies, while also making more data available to the industry.

What the goals are. For the government, a key, evident objective is to improve the balance of operators by reducing the dominance of the present duopoly, Statoil and Norsk Hydro. Together, they share about 80% of operator responsibility, measured by budgetary spending power for capital or operational expenditures. The stated objective is to stimulate a larger number of competent oil companies to develop operator organizations in Norway. To some extent, this policy already has materialized in the 16th licensing round, which gave a fairly favorable outcome to foreign oil companies. The government has announced an explicitly positive attitude to newcomers – meaning smaller oil companies; downstream companies, such as gas transporters; and service / supply firms that are invited to enter as investors, as well as operators.

To facilitate the change, officials are preparing explicit competence criteria for oil companies, so prospective applicants will know better on what standards their applications are to be judged. Competence requirements will be modified to suit a more mature resource base and the need to attract smaller oil companies. Financial strength and experience will be required, but overall demand for technical competence will be adjusted to allow specialists to enter. Such specialists, for example, might have good competence in well or platform technology, in either geology or production technology, but not necessarily in both. This is an invitation for smaller oil companies with matching competencies to cooperate.

Potential results. If properly implemented, these moves could lead to significant changes in the company structure of the Norwegian oil industry. The historical dominance of large Norwegian and international companies will erode, especially in mature areas. Instead, the stage is set for gradually rising participation by large, foreign oil companies, as well as smaller Norwegian and foreign firms. There is considerable potential for upstream participation by Norwegian newcomers – as exemplified by the activity of Aker Maritime – but Norway should also be more attractive to UK and U.S. independents. A significant step made by the industry (that the government apparently welcomes) is the joint venture between Aker Maritime and Germany’s RWE/DEA.

Governmental intentions for change amount to a mini-revolution in Norwegian oil policy. Norway’s oil industry has been marked by strict, detailed government control; a high rate of state participation; a small share for foreign oil companies; an operating dominance by the national oil company; a high rate of taxation; and a requirement to use Norwegian goods and services. By these yardsticks, Norwegian oil policy in the 1970s and 1980s had more in common with OPEC and developing countries than with the UK and U.S. In most circumstances, competition, private initiative and open markets are more effective means to foster development, spur innovation and cut costs.

Getting the job done. The high oil prices of the 1970s and early 1980s provided the oil industry in Norway, as elsewhere, with huge economic rent that masked many inefficiencies and misallocations that could have emerged from the state-dominated oligopoly, and the restraints on entry and competition.

The call for change came along with the low oil prices of 1998 that exposed the fragility of a number of projects, as well as Norway’s generally high operational costs. Low oil prices also exposed the problems of advancing resource maturity, especially in the North Sea. In the Labor party, there is apparently little opposition to measures that are likely to sustain the oil industry’s activity level. Hence, the measures proposed to lower barriers to entry are likely to pass swiftly. The tax issue risks stalling, unless both sides show a willingness for dialogue and compromise The Statoil issue risks remaining unsettled, at least until after the 2001 parliamentary elections. A majority of the Norwegian people probably favors privatizing Statoil, but perhaps a majority of the Labor party does not. Hence, while the present government is hampered by its own party base, a possible outcome is that after the general elections of 2001, a new government will take Statoil to the stock market and carry out more changes that the present government favors, but is prevented from doing.

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