Darius Snieckus
OGJ Online
Norway's Labor party has unveiled its long-awaited White Paper on the privatization of state-owned oil and gas company Statoil and the "redistribution" of a slice of the country's direct financial interests (SDFI) in 150 exploration and production licenses on the Norwegian continental shelf.
If Norway�s parliament, the Storting, approves the proposal during its spring session, up to 25% of Statoil and 20% of the SDFI could be sold by midyear.
Under the proposal put before the Storting on Dec. 14 by the Ministry of Petroleum and Energy, between 10% and 25% of Statoil would be floated as early as next summer through an initial public offering (IPO), with the government retaining at least two thirds of the shares in the company. The option to enter into "equity-based strategic alliances" with other companies would be open to Statoil, but only after the IPO.
The state would also keep a controlling stake in the SDFI, selling 20% of its current asset holding on the continental shelf, according to some calculations worth 230 billion kroner. Of the portion put up for sale, 15% would go to Statoil before the floatation through a cash and equity capital transfer arrangement.
Another 5% would be sold to Norway�s second largest oil company, Norsk Hydro AS�44%-owned by the state�and "other [foreign] companies," all of which would pay cash for the assets.
The remainder of the SDFI portfolio would be placed in the hands of a new state-owned limited company based in Stavanger, which would manage the assets "at the account and risk of the state, [with] costs and revenues relating to the assets continuing to be channeled through the state budget."
As part of the SDFI redistribution, the ministry said it proposed a "swap" with Statoil of interests in the Europipe II trunkline and "selected fields" and its stake in the Norpipe and Statpipe pipelines, as well as a change that would give the government a share in the ownership of the oil terminal at Mongstad.
Lastly, the government recommended establishing an independent company to transport gas on the shelf. It would be a limited company but wholly owned by the state "until a lasting ownership structure in the pipeline system on the NCS has been established."
Statoil's future
Along with the proposal, the government released a statement that hinted at it's balancing act.
The ministry stressed that while "expansion of the ownership (of Statoil) will supply new expertise, new partners, and new capital," its proposal aimed to make sure a partly privatized Statoil would continue to be a "Norwegian-based company."
Statoil�s headquarters, its "top management, its decision-making authority, and strategic functions" would remain in Norway.
The Labor proposal falls far short of Statoil�s own vision of its future. Chief Executive Olav Fjell said he was "disappointed" the proposed SDFI redistribution didn�t fully conform to recommendations drawn up by Statoil, but acknowledged the government plans would give his company "greater strength and freedom of action" through an IPO.
On the upside, said Fjell, production from Statoil would be boosted from 700,000 boe/d to 1 million boe/d through the addition of 15% of the government�s SDFI asset portfolio. On the downside, the government�s plans to create an independent company to transport Norwegian gas, which would result in Statoil losing "important responsibilities," would lead to an "unnecessary weakening" of the company.
In a statement, Fjell emphasized that the Labor administration had gone some way toward meeting Statoil�s call to use SDFI holdings industrially to "boost value creation and develop the group�s gas position." He added that the government had "laid the basis for continuing work on a number of the value creation opportunities identified off Norway."
Norsk Hydro Executive Vice-Pres. of Oil and Energy Tore Torvund said while he "favored the government's proposed oil industry reforms, he hoped "additional efforts [would] lead to more equitable treatment of Statoil and Hydro regarding the sale of shares in the SDFI.
"Hydro is positive to the fact the long-term debate about modifying the government's role as an owner in Norway's oil sector has now resulted in a concrete proposal that includes moving closer to reasonable reforms," said Torvund. "Many of the proposals reflect recommendations made by Hydro.
"Hydro will continue to highlight the importance of keeping Statoil and Hydro at about the same size to ensure a balanced competitive milieu that generates optimal results." He added, "It is our opinion that the first stage of commercializing the SDFI ought to offer a larger portion of the assets than that proposed by the administration."
The SDFI, created in 1985, divides Statoil participation in licenses between it and the state. The goal was to channel a larger stream of production revenues directly to the sate, while keeping Statoil from broadening its capital base to the point where it would become too independent of its former owner.
Independence is just what Fjell has been seeking. Speaking at a conference in Stavanger in August, he vocally advocated full privatization in tandem with a complete takeover�as "caretaker"�of the government�s SDFI portfolio.
"Merging SDFI assets with Statoil is the most effective way of organizing the assets," he stated. "It will make it possible to use the SDFI assets actively for restructuring core areas on the NCS, [as well as] for asset swaps, enabling us to build a stronger international portfolio."
He has sent that message since he first proposed a Statoil/SDFI "merger" in August 1999. Fjell then argued that the "value of the state's overall oil and gas assets should be strengthened by merging all or a substantial part of the SDFI with Statoil to create a single commercial entity."
He said, "This increase in value would find expression in the stock market after the enlarged group has been listed."
Since becoming chief executive in 1999, Fjell has tried to mold Statoil into a financial shape worthy of an international privatized company. Following spiraling cost overruns on its giant �gard offshore development, "major" write-downs on some of its UK investments, and political challenges to its involvement in Nigeria, Statoil turned in a loss of 1.3 billion kroner for 1998, compared to a profit of more than 5 billion kroner between 1995-97.
Through a restructuring program begun by his predecessor, Harald Norvik, Fjell reduced operations costs 0.6% last year and cut 1.1 billion from exploration spending in an attempt to get the company back in the black. He has set a 4 billion kroner cost savings target for year-end 2001.
This year, the company also shed holdings worth 2.1 billion kroner as part of its strategy to concentrate on core areas off Norway.
Analysts react
Ironically, the leaner and foreseeably more profitable Statoil may still have a hard time attracting interest in its partial privatization, according to some industry observers.
By offering a conservative 10-25% of Statoil through an IPO, the government may be doing worse than simply backsliding slightly on the consensus reached at its party conference in November to sell up to a third of the oil and gas giant.
The promise of a decision from Norway's government on the knotty issue of privatization of Statoil and the SDFI has been pending for more than a year. This delay�partly because publication of a White Paper in June was delayed by Labor politicians who wanted a "full consultation" at their recent party convention�prompted Moody�s Investors Service to place Statoil under review for a possible downgrade in December.
The Labor government�s vote in favor of partial privatization, said Moody�s, would lead to change in Statoil�s "character." No longer a state-owned, "domestic-oriented" oil company, a "partially-floated, enlarged Statoil," in Moody�s view, might be "weaker that [other major international oil companies] in terms of reserve scale and diversification, production profile, operational efficiency, financial returns, and debt protection."
Commerzbank AG oil analyst Clay Smith said there is a danger that by floating an "insufficient" percentage of the company next year, the IPO risks being "totally ignored by the market."
Smith believes the government�s plans for Statoil and the SDFI are ill defined and it should reconsider "just what outcome they are trying to derive by this process."
He asked, "Is the government trying to make a state company more efficient? Is it trying to diversify the assets base? Is it trying to give [Statoil] a platform to become more internationalized? Which outcomes or combination of outcomes is the idea of privatization of Statoil and the SDFI trying to derive?
"Until [the government] decides what it is they are trying to do, how can they craft the business model by which to generate that outcome? If [the government] is trying to create an internationally competitive oil company or �Norwegian champion�, they are going about it the wrong way," he added.
Another fear, suggests Smith, is that the longer it takes the government to decide on the future of Statoil and the SDFI the greater the likelihood that Statoil will be tagged "below investment grade,"not because its asset portfolio is unattractive to investors, but because the company's "understanding and transparency" are below investment grade.
Political issue
The sale of some of Statoil and the SDFI assets is a particularly touchy issue for Norway's government because�on top of the fact that the oil company and the state's oil assets are entrenched in the Norwegian psyche�they introduce a very real financial issue for the country.
Norway is one of the most oil dependent economies in the world: Oil represented 13% of country's GDP in 1999.
Prime Minister Jens Stoltenberg noted that the SDFI had been instrumental in "value creation" for Norwegian society. But, he said, now is "an appropriate time to ask whether the current organization of the state involved in the Norwegian continental shelf is the right one."
Minister of Petroleum and Energy Olav Akselsen's White Paper opened with the statement, "Norway�s oil and gas resources belong to the Norwegian society as a whole and shall be managed to the benefit of present and future generations. Accordingly, securing the largest possible share of the value creation from the oil and gas activities to society represents a main objective of the government�s oil and gas policy."
Changes in the "market conditions and the conditions related to competition in the oil and gas industry," it read, now called for "adjustments" to safeguard employment and strengthen Norway�s oil and gas industry.
The issues of privatization of the last major state-owned oil company in western Europe, and the sale of part of the package of oil and gas reserves directly owned by the state loom large, but then so does the potential prize.
By some calculations Statoil could be worth as much as 140 billion kroner when it is floated, making its IPO the largest in Western Europe in 5 years. As for the SDFI, in 1999 it provided the Norwegian government with pre-tax profits of 44 billion kroner and operating cashflow of 62 billion kroner.
On top of these figures, it is worth noting that the SDFI has close to 10 billion boe of booked reserves�65% gas�and production of 1.6 million b/d.
Given that Norway produces around 7% of the world's 3.1 million b/d non-Organization of Petroleum Exporting Countries oil output, the decisions regarding Statoil and SDFI are not of just local interest.
