The combination of private and public participation in the Norwegian petroleum industry

-Øystein Noreng

Instituto de Gerencia y Estrategia del Zulia y Cámara Petrolera

MaracaiboMarch 7, 2008

The legal basis• All subsoil mineral resources are the property of

the state• Any mining activity requires a licence from the

government and is subject to special regulations, including taxation

• The continental shelf was added to the national territory in 1962, as state property

• The petroleum law of 1965 had provisions for special regulations and taxes, within a concessionary system

The institutional framework• Concessions giving companies ownership of

share of resources that they extract

• State participation introduced in 1969

• Supervisory body, Norwegian Petroleum Directorate, established 1972

• Statoil, Norway’s national oil company, established 1972

• Statoil split in 1984, introduction of State Direct Financial Involvement, SDFI

The concessionary system

• Concessions make the legal framework for the cooperation between the state and the companies

• Concessions are granted to groups of companies, of which one is operator

• Concessions are normally granted for 28 years, relinquishment of 50 per cent after 6 years

• A work programme is mandatory

• Concessionary rounds normally every two years, but mature areas rounds anually

The state participation• First introduced in 1969 on the basis of ”carried

interest” at 35 per cent

• In 1973 extended to 50 per cent and more

• In 1979 modified to general state majority in all concessions

• Since 1985 Statoil + SDFI majority in all licences

• 2007 merger of Statoil and Norsk Hydro

The Norwegian Requirements

Criteria for licensing:• Requirement to use Norwegian goods and

services whenever competitive• Requirement to transfer operational

knowledge to Norwegian partners and train Norwegians

• Requirement to participate in research cooperation

• Acceptance of minority positions

Public revenues

• Taxation of oil and gas activities

• Charges/fees

• Direct ownership in fields on the Norwegian continental shelf (through the State’s Direct Financial Interest, SDFI)

• Dividends from ownership in Statoil

The fiscal system

The private participation

• Major international oil companies

• Independent international oil companies

• Independent Norwegian companies

• The supply and service industry

The dominator• StatoilHydro dominates the Norwegian

petroleum industry and the economy• Three quarters of business at home• It has about eighty per cent of operator

responsibility, measured by volume• The company is listed on the Oslo and New

York stock exchanges• With the current purchase, the government will

own 67 p.c. of the shares• Other shareholders are mostly institutional

investors

SDFI• The State’s Direct Financial Interest, SDFI, is

a special Norwegian institution, created in 1985, essentially as a fiscal instrument to channel petroleum revenues directly to the state

• Petoro is a state-owned company managing the SDFI on behalf of the state.

Natural gas

• Gassled is a joint stock company investing in and owning the gas pipelines

• Owners are the different natural gas producers and transporters: shareholding in principle depends on volumes

• Gassco is a state-owned company responsible for managing the natural gas pipeline system on and from the Norwegian continental shelf.

• Tariffs are regulated

The industry structure• The Norwegian petroleum industry is

dominated by StatoilHydro

• The merger has significantly reduced competition and diversity

• The foreign majors make no counterweight

• Foreign and Norwegian independents are niche operators

The outlook• The Norwegian resource base is mature,

meaning that new prospects are smaller, more difficult and more costly

• The ownership structure is dispersed, with too many owners with too small shares in the prospects

• The industry growth potential is in both mature and virgin areas

Assets:

• Resource base

• Market proximity

• Experience

• Competence

• Stability

Liabilities:

• Cost pressure• Insufficient diversity and competition• Lack of transparency and cross-subsidies• High taxes• Weak second-hand market• Field ownership structure

The hurdles

• Access to acreage

• Access to rigs

• Insufficient competition

• Petroleum taxation

• Limited second-hand licence trading

Industry restructuring

• StatoilHydro exposed to financial markets

• SDFI – Petoro transparency

• Barriers to newcomers lowered

• Potential for more diversity and competition

Much remains to be done:

• Tax change for marginal prospects• Further Statoil privatisation and

internationalisation • Norsk Hydro restructuring • Role clarification MPE – Petoro – Statoil • Strengthening and focusing of NPD • Gas policy in face of EU adversity • Supply industry restructuring

Conclusion:

• State regulation as opposed to participation and intervention

• Field ownership restructuring• Better coordination of government agencies and

policies essential • Clarification of roles• Optimal solution: draw on private and international

experience, keeping national control

The smaller companies• In the US Gulf of Mexico and the UKCS

smaller oil companies play an increasingly important part, with a growing share of reserves and output

• Their record in health, environment and safety is no worse than that of majors

• They supplement the majors and take on prospects that otherwise hardly would have been developed

• They tend to be cost effective

Norwegian policy challenges

• Secure access to acreage through licensing and higher area fees on idle acreage

• Encourage second-hand licence trading

• Facilitate access to rigs through simpler rules

• Enhance competition, also in the supply industry

• Review petroleum taxation and accelerate depreciation