Oil and gas in the capitals

	Vol. 228 No.  4
OYSTEIN NORENG, CONTRIBUTING EDITOR, NORTH SEA

Statoil + Hydro = Norwegian Mega Merger. The oil industry wave of mergers and acquisitions first hit Norway in 1999, when Norsk Hydro, assisted by Statoil (the country’s two major oil companies), swallowed Saga, the third one. Mergers and acquisitions were, at the time, commonplace in the global oil industry. This case was exceptional, however, in two ways. First, the three parties were essentially upstream firms, Saga being exclusively E&P. Second, the two initiating companies were wholly or majority government-owned. This showed that some forces that drive private industry restructuring also apply to state capitalism.

This thesis is confirmed spectacularly by the merger of Statoil and Norsk Hydro’s oil and gas division, which, in some ways, is the former’s acquisition of the latter. Remarkably, the operation has been run by the state’s oil companies without the government—the owner and the regulator—being informed until the last stage. Nevertheless, the outcome is a large company—the world’s largest offshore operator.

The merger with Saga in 1999, based on a shares swap, reduced the state share of Norsk Hydro from 51% to 43.8%, giving the firm a private shareholder majority for the first time since 1970. Since the initial public offering of Statoil in 2001, the state’s share has fallen to 70%. Based on the share swap agreed upon, the merged company would have a state share of 62.5%. However, the Labour prime minister has said that the government intends to raise its portion to 67%, to avoid any private blocking minority able to interfere with, e.g., a statute change.

Thus, Norway is taking a step back into state capitalism, reducing competition and enhancing the state’s position in the industry. Through these moves, Norway, to a more moderate extent, seems to follow the same impulses as countries like Russia and Venezuela. The simple truth is that high oil prices, along with concerns about future supplies, are boosting the bargaining positions of oil producer governments.

The two companies’ combined business in 2006 was estimated at about NOK 400 billion, close to $70 billion, or roughly a quarter of Norway’s gross domestic product. The expected combined output for 2007 is 1.9 million boed. Proved reserves are 6.3 billion boe. Most of the assets are in Norwegian reserves. The argument for a merger is that it will lead to a stronger portfolio in Norway and internationally, and that by combining the acreage, exploration should be more efficient. The merged company undoubtedly will be at the edge of offshore petroleum technology. It will be a major player in the European gas market, as well as in the North Atlantic market for light crude.

The merger of Statoil with Hydro’s oil and gas division will be called “StatoilHydro.”

History. The merger’s background is complex. For several years, Statoil tried to acquire Norsk Hydro, so as to grow and reduce competition in Norway. Hydro has been on the look-out for a partner and reportedly was in discussions with AkerKvaerner. The crunch for Hydro came last autumn when Russian announced that the Shtokman gas field development in the Barents Sea would be delayed and carried out without any foreign equity partners. Hydro had pinned great hopes on this project. For insiders, the setback meant the end of Hydro as an oil and gas company, given its failure to renew its resource base.

In terms of industrial competence, the two companies are complementary. Statoil is less averse to risk than Hydro, which, in turn, has a much better record as a project manager, having on several occasions shown an ability to finish complex offshore projects on time, and within budgets. A combination of Statoil’s risk attitude and Hydro’s project management would be a successful one, but not the other way around.

Undoubtedly, the merger will strengthen Norway’s bargaining position in the European gas market, insofar as the EU competitive authorities do not interfere. Russia is satisfied with the merger, because it means that there will be only one large Norwegian company to deal with. As for the chances of success in the rest of the world, arguments run both ways. The merged offshore giant will be a more resourceful partner and, in most places, it is no disadvantage to be Norwegian. On the other hand, in some instances, the host country might prefer to deal with smaller, specialized companies. Moreover, given the resource nationalism in vogue in large parts of the world, the potential for spectacular earnings is limited.

Effects on activity. There are more reasons for concern about the impact on Norway’s oil industry. In terms of output, the merged company will control 80% of operatorships. There are numerous competing companies in Norway, but none can compare to the merged company in terms of turnover, output or reserves. Indeed, the merged firm has effective control of most productive areas of the Norwegian continental shelf. It also controls a number of smaller prospects that, so far, have been considered too marginal for development. Thus, it will be difficult for any other company to achieve a critical operative mass in Norway, although governmental licensing is likely to favor other companies, to maintain some competition.

In conclusion, what the two companies may gain from synergy and size, the Norwegian oil industry may lose from a lack of diversity and competition. Historically, Norway’s oil industry has advanced into steadily more adverse areas through competition between different technical and managerial concepts. Relying on information from two different sources has empowered the government, enabling it to make discretionary choices. The merged company will be a powerful political actor, and the asymmetry in relation to the government in terms of insight and money will be even more striking. Hence, the merged company will be in an excellent position to control its political and economic environment, short-circuiting the civil service and politicians, and fending off competitors.