Oil and Gas in the Capitals

	Vol. 230 No. 10
ØYSTEIN NORENG, CONTRIBUTING EDITOR, NORTH SEA

Where next for StatoilHydro?

The merger of Statoil and Norsk Hydro created a Norwegian oil and natural gas giant, with a dominant position on the Norwegian Continental Shelf and in deepwater E&P worldwide. In support of the merger, the two company boards had argued that economies of scale would cut costs in Norwegian operations and enhance international competitiveness. In reality, matters are more complex for the resultant company.

The dominant reality of Norway’s petroleum industry is the maturing resource base. Although geological prospects are that there is more oil and gas to find, develop and extract, finds are generally less numerous, smaller, and more difficult and costly to develop. At the same time, development largely targets prospects found at an earlier stage, but then shelved because they were too small or too costly.

This phase of the industry occurred years ago in the US Gulf of Mexico and the UK Continental Shelf, and, in those areas, smaller companies have been taking a rising share of the business, measured by resource ownership and volume extracted. Pluralism and competition contribute to innovation and cost cutting. From this perspective, the merger of Statoil and Norsk Hydro appears unhelpful for Norway’s petroleum industry. Socialist faith in large units does not suit a maturing resource base.

In hindsight, relations with neighboring Russia and the effort to develop the Shtokman gas field in the Barents Sea may have had a lot to do with political acceptance of the merger. It was, and remains, important for Norway to take an active part in such a major Arctic petroleum development as Shtokman. Norway had been negotiating with Russia for several years, but disputes between Statoil and Norsk Hydro prevented a settlement. Rumor is that Russian President Vladimir Putin expressed surprise and concern to Norway’s Prime Minister Jens Stoltenberg that Norway could have two national oil companies that did not cooperate, but rather competed against each other. This may be one reason Stoltenberg expressed elation at the merger. A few years later, the Shtokman development seems more uncertain than ever because of weaker gas markets in Europe and especially North America, technical problems, higher costs and the financial troubles of Russia’s Gazprom, the operator. Norway is ready, with one national champion, StatoilHydro, but the wait may be long.

In the rest of the world, the problem for StatoilHydro is that, in many oil and gas provinces, it encounters conditions inspired by Norway’s experience. Norway never nationalized its oil and gas industry, but has for decades combined high taxation with meager shares for foreign investors, so that their profits remain modest.

The Norwegian government actively promotes Norwegian ways of dealing with foreign investors to other oil- and gas-producing governments. The Oil for Development program, under the auspices of the Norwegian Development Aid Agency, seeks to enhance the ability of poorer petroleum-producing countries to negotiate with, and to tax, international oil companies. This is not just an expression of philanthropy: It is in Norway’s interest that other oil producers also impose high taxes. Consequently, to some extent, StatoilHydro gets treatment in other countries similar to what the IOCs get in Norway. So far, investment outside Norway has not been very successful, measured by volume and earnings. Nevertheless, the company can be useful as a door opener for the Norwegian oil services industry.

As much as StatoilHydro has a dominant position in the Norwegian petroleum industry, it has one dominant owner, the Norwegian government, with 67% of the shares. Because growth potential in Norway is limited, StatoilHydro will have to expand internationally, or be downsized.

From the perspective of changing conditions for IOCs, time may be running out to establish a Norwegian counterpart to majors such as BP, Shell, Chevron and ExxonMobil. Time may be ripe, however, for a Norwegian company that promotes technology and management to other oil provinces and that, as a rule, does not demand extraordinary profits, helped by a majority-shareholding government that does not expect high dividends.

With a distinctive profile as a partner for the host country, expecting moderate profits, StatoilHydro might see its international activities supplement Norway’s efforts to educate other petroleum producers. To some extent, this is already the case: Statoil is welcomed in several countries because of its efforts to transfer knowledge to locals, just like Norway welcomed knowledge from foreign oil investors in the 1970s and 1980s.

The present strategy, to become a major IOC, raises critical questions about the relationship between company ambitions and government ownership. StatoilHydro is perceived as Norway’s national oil company, which is not necessarily a disadvantage, but which may cause conflict. Investment in Canadian oil sands is one case; many politicians find the position of StatoilHydro contrary to Norway’s climate policy and would like the company to pull out. Other cases are corruption scandals in Iran and Libya, where some observers see limited difference between Norway’s oil company and Norway’s government.

An uncritical adherence to local practices around the world would certainly cause a political backlash at home. However, many oil provinces have a business culture less pristine and less transparent than that of Scandinavia, and to impose on an emerging IOC that it must everywhere respect Scandinavian norms might seriously limit growth potential.

Against this backdrop, time seems to be maturing for strategy reassessment, with repercussions for the ownership. There seem to be two options: Either let Statoil develop into a technology and service provider, keeping the two-thirds government share, or reduce that share to 51% and let Statoil increase its activity outside Norway and pursue its aim of becoming a major IOC. WO