Oil and Gas in the Capitals

The past year, 2020, has hit Norway with several crises. Like the rest of the world, the pandemic has affected the nation’s health and economy. It has fared well: the ensuing economic setback has been comparatively mild.

Government assistance. At an early stage, interest rates were set at zero, followed by an assistance program for businesses affected by the lockdown and weak demand.

The oil price collapse has had a double effect, on current revenues and on investment activity in the industry. The revenue effect has a cushion; oil and gas revenues are channeled to Norway’s Sovereign Wealth Fund, of which only 3% should be spent in the budget, according to convention. In 2020, the ceiling was broken, for the first time in many years. According to the budget, in 2021, it will again be respected. The government expects unemployment to decline from 4.9% in 2020 to 3.1% in 2021.

In the spring, the government, the industry, and the unions agreed on a stimulus package that reduces new project break-even costs. The gain assumed by new tax rules will be equivalent to $10/bbl on larger prospects, and up to $25/bbl on smaller ones. This is already stimulating activity. Several projects are in the pipeline. The government’s ambition is to avoid a wave of bankruptcies followed by unemployment, as it faces parliamentary elections in September 2021. For the industry, government assistance is essential in restructuring for continued activity in a mature oil province.

Keeping oil and gas strong. Facing the crisis, Norway’s response is to strengthen the oil and gas industry, in contrast to neighboring Denmark that has chosen to shut it down. Recent experience has convinced a large majority of the Norwegian public that the industry is good for the country. The Sovereign Wealth Fund represents about $200,000 per citizen. Even at a moderate rate, the transfer represents about one fifth of the budget, so that politicians are able to spend up to 25% more than they collect in taxes, without borrowing, just drawing on a bank account that keeps replenishing, now more from financial investment than from oil and gas.

Equinor’s status. In 2020, a serious, structural problem has surfaced in Norway’s national oil company, Equinor (aka Statoil). The estimated loss of NOK 200 billion (US$ 22 billion) is equivalent to perhaps 40% to 50% of the company’s current market value. A report by auditing firm PwC, Equinor in the USA, fairly treats the company’s mistakes. It confirms that Equinor has put volume ahead of value, underestimated the oil price risk, and organized the U.S. onshore business in an inept manner.

In 2014, the Financial Inspectorate requested the company to publish more information about U.S. operations, but it did not do so. Responsibility for the losses should be shared by senior management, the board of directors and the majority owner, the Norwegian state.

Since the IPO in 2001, the company has been self-governing, giving priority to international growth, funded by earnings on the Norwegian Continental Shelf (NCS). Investment in U.S. onshore oil activities has been particularly unfortunate. There, as pointed out by PwC, the company has bought into bad prospects at the wrong time, at high prices.

Despite limited experience, Equinor chose to bring the U.S. onshore operations into its organisation.

In Equinor (ex-Statoil), consulting firm McKinsey has had a recurring presence, advising senior management as well as the board. Insight into working relations between Equinor and key consultants would be in the public interest. McKinsey has possibly been important in shaping the company strategy for international growth. The PwC report suggests that senior management had a conviction that oil prices could not fall significantly, apparently accepted by the board. The issue is what consultants said.

Value to the Treasury. Since the IPO in 2001, and until 2019, the company has paid NOK 235 billion (current prices) in dividends to the Norwegian government. Petoro, the administrator of the state’s direct financial commitment, the SDFI, has, in the same period, contributed NOK 2,012 billion to the Treasury. In the years from 2001 to 2016, Statoil had a post-tax profit of NOK 411 billion. Of a total operating profit of almost NOK 1,500 billion in these years, 99% was realised at home. Equinor lives off the NCS, taking money out of the country.

Insight into, and control of, the company’s diverse businesses calls for a more transparent structure, separating the different activities into subsidiaries, with distinctive accounts and individual boards. The risk is that in the coming years, Equinor, referring to a green agenda, will use oil and gas revenues to invest heavily in offshore wind power, in a market that shows signs of overinvestment and saturation, making new losses. This may appear politically correct, but it is no recipe for economic success. Norway has two state-owned energy companies, Equinor and Statkraft, that invest in high-risk wind power, with questionable profitability.

A better solution would be for the government to collect more in dividends, feeding the Sovereign Wealth Fund. SDFI/Petoro has proved successful and should be strengthened by larger shares in new licences. The IPO of Statoil/Equinor has not been as successful, and the concept should be reconsidered. The 2005 Petroleum Tax reform has proved successful, measured by newcomers, exploration, discoveries, development, production and revenue. The major success has been the Fund, which has doubled the values deposited. In December, the National Audit Office will publish a report on Equinor.

About the Authors

Dr. Øystein Noreng

Contributing Editor

Dr. Øystein Noreng is a professor emeritus at BI Norwegian Business School. He has been an advisor or consultant to the International Monetary Fund; The World Bank; the governments of Canada, Denmark, Norway, Sweden and the U.S.; and energy companies, including Equinor, PDVSA and Saudi Aramco.