A fine state of affairs

The fundamental structural change currently being experienced by the oil and gas industry at large is finding a deep resonance in Norway with the hotly debated issue of Statoil's privatization and the future of the state's direct financial interest (SDFI) in the Norwegian Continent Shelf.

The fundamental structural change currently being experienced by the oil and gas industry at large is finding a deep resonance in Norway with the hotly debated issue of Statoil's privatization and the future of the state's direct financial interest (SDFI) in the Norwegian Continent Shelf.

Further delays to the government's White Paper on the subject-an indication of just how far-reaching any decision taken by the ruling Labor government will be-gave the country's Prime Minister, Jens Stoltenberg, and Statoil CEO Olav Fjell the chance to again make their pitches as to the "best" outcome of these deliberations.

Speaking at the ONS conference in Stavanger, Fjell, an advocate of privatization who took up his post in the wake of a government house-cleaning at Statoil prompted by several years of poor financials, is single-minded in his stance on the SDFI question.

"Merging SDFI assets with Statoil is the most effective way of organizing the assets: 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," were his words.

Golden mean

Stoltenberg, trying to balance his belief that the SDFI had been historically instrumental in "value creation" for Norwegian society with a recognition that it is "an appropriate time to ask whether the current organization of the state involvement [in the NCS] is the right one," was more politic. "Open-mindedness" was his keynote.

The golden mean Stoltenberg is angling at looks nearly impossible to achieve. Even his party's discussions of the SDFI question are deadlocked. Yet the alternative, taking the standard pro-privatization line that any loss in state-owned revenues post-privatization would be made up for by a larger tax take from a streamlined private company, might be disastrous. For though Fjell delivered 600 million kroner in cuts to operating costs last year and lifted the company's return on capital employed to 7.5% from 5.3%, Statoil fiscal stability, as analyst group Wood Mackenzie reminds us, is built on a portfolio of choice NCS licences won on a preferential basis since the early 1970s.

Five ways forward

As WoodMac sees it there are five options for Statoil and the SDFI: a "three-way split" in which all or part of these state assets are auctioned or allocated to Statoil, Norsk Hydro AS, and foreign oil companies; an "all-Norway option" where Statoil and Hydro buy or are given all or some of the SDFI; a new SDFI company directly controlled by government but managed by an existing, perhaps foreign, oil major; a Statoil-strategic partner option, with a limited initial public offering; and a "major restructuring" scenario involving a merger between Statoil and Hydro bolstered by some 30-50% of the SDFI.

However the restructuring of Statoil and the SDFI plays out, two facts are plain. For Norway, a country in which oil revenues made up 15% of its 1999 gross domestic product, the SDFI is no mere philosophical talking point. With the NCS accounting for 7% of the world's non-OPEC oil supply last year-and with Statoil, Hydro, and the SDFI producing close to 70% of the country's yearly oil output-the impact of the government's decision will have global reverberations.

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