Commitment at home and abroad

30/04/2007 Merging Statoil and Hydro’s petroleum business will benefit the international involvement of the new company, since size is significant in this business. But any reduction in activity on the NCS would be a very poor socio-economic outcome for Norway.

Text: Petter Osmundsen Photo: Minna Suojoki

Many factors make size important in the petroleum industry, including a direct relationship with capital market pricing for oil companies. Large companies have a bigger growth potential in their portfolios, for instance. Size can also have a positive effect on governments in the award of licences. Major and prospective operatorships which are demanding in terms of both knowledge and resources are often awarded to the biggest companies. A wider area of geological opportunity can give large players the opportunity to “skim the cream”, and the biggest international oil companies also have the best opportunities for global tax management. On the other hand, large companies face substantial coordination costs and can miss out on the advantages of focused strategies and specialisation.

Taken together, therefore, it seems likely that StatoilHydro’s foreign commitment will be strengthened as a result of the merger. This unification could also represent advantages for the NCS, includ­ing rationalisation and improved utilisation of scarce human resources. In addition, broader and more heavyweight licence holdings may make it easier to take a coordinated view of large areas of the NCS. With suitable action to preserve offshore competition, this unification could be profitable not only for the companies but also for society.  But failing to make adjustments to the player picture and to the regulatory regime could raise the prospect that the socio-economic outcome of the merger for Norway will be negative.

Crucial
Foreign operations are crucial for developing Norway’s own oil companies, which would fade away and lose their expertise if they were confined to an NCS which has pass­ed its peak. Lessons learnt and expertise gained from activities elsewhere will also have a positive effect on the Norwegian business. In revenue terms, dividend from a foreign commitment would make a fine contribution. But taxes and direct holdings on the NCS will remain the government’s main source of petroleum income for the foreseeable future. The right to tax natural resources rests with the nation state, which lays claim to the bulk of the re­source rent in the petroleum sector. This picture has been reinforced by the resource nationalism of recent years. So the contribution which foreign operations could make to Norway will take the form of dividend rather than petroleum taxes. Such dividends represent less than three per cent of the Norwegian government’s total income from the petroleum business. In other words, the government’s role as an owner in the oil and gas sector is far less important than revenues from taxes and the state’s direct financial interest (SDFI). This means that the key aspect is the government’s administrative and regulatory role.

If we break down Statoil’s 2005 dividend payment of NOK 8.1 billion by its various business areas, NOK 1.4 billion was attributable to international exploration and production (E&P). That corresponds in turn to 0.5 per cent of the government’s total take from the petroleum sector. Compared with the NOK 56 billion paid by Statoil in tax, or the NOK 283 billion derived overall by the government, the foreign contribution is negligible. However, this picture is set to change. The NCS has probably peaked, with government revenues likely to decline slowly over time, while foreign activities in StatoilHydro will make a steadily growing contribution. Annual profits from international E&P in Statoil have been rising sharply, from NOK 1.1 billion in 2003 to NOK 2.8 billion in 2004 and NOK 5.3 billion in 2005. As time passes, therefore, the international contribution to government petroleum revenues will rise. Since the bulk of the rent falls to the host country through its right to levy tax, however, oper­ations on the NCS will remain the biggest source of income for the foreseeable future. This must accordingly continue to be the main focus for socio-economic assessments in the petroleum sector.

Positive
Profits from Statoil’s international commitment show a positive trend. Although the company has received very good help from a dramatic rise in oil and gas prices during recent years, it remains clear that a strong and profitable international activity has been built up in a relatively short space of time. This increased activity is important for ensuring that the Norwegian oil community will not decay as activity declines on the NCS. An international commitment will provide a return on the knowledge which has been built up in the Norwegian oil and supplies industry over 40 years. So the foreign focus is both correct and important. But an effort needs to be made at home as well. International operations must not be pursued at the expense of activity on the NCS. Permitting a market concentration as great as the StatoilHydro union without simultaneously encouraging competition and strengthening the petroleum admini­stration could hurt the domestic industry by reducing its necessary dynamism. There is also a danger that the foreign focus of the newly-merged company would mean too little concentration on and management attention to the NCS. The commercial solutions chosen will not necessarily be socio-economically beneficial. This is where the petroleum administration has an important role to play, by promoting competition and constantly challenging the new company to seek good solutions.

Petter Osmundsen, a professor and petroleum economist at the University of Stavanger, has written widely on the planned Statoil-Hydro merger. This is an abridged and popularised version of a major article he has authored for the NPD.

 

Updated: 04/09/2009