Statoil No Longer Looks Sacred

Stoltenberg is moving to privatize at least part of the giant

It's easy to envy Norway these days. With petroleum prices hitting $34 a barrel, registers in the energy-rich country are ringing. Oslo has already salted away $30 billion in a Petroleum Fund for leaner years--in addition to central bank reserves of $21 billion. And the Labor government of Jens Stoltenberg has far more money than it can wisely spend. Anyone who wants a job in Norway can have one, and the economy is expected to pick up by 3.9% this year. As usual, the state-controlled oil and gas industry will account for 10% to 15% of gross domestic product.

Not exactly the moment to tinker with the equation, is it? But it's the moment Stoltenberg, a modernizer in the mold of British Prime Minister Tony Blair, has chosen to push for the privatization of Statoil, the $20 billion state-controlled oil producer, and the opening of Norway's vast offshore reserves to outside investors. Stoltenberg will bid for crucial political backing for these plans at a party congress this November. Some politicians fear the effort could cost the young PM his job, given that Norway's state sector enjoys broad support among voters and within the governing party. More likely, Stoltenberg's allies say, is a compromise that at least begins the process of taking Norway's oil industry private.

Execs at Statoil are all ears. Indeed, they initiated the idea of privatizing the company as a way of re-invigorating it. In terms of both clout and profitability, the company has fallen behind the supermajors in recent years. Statoil's top managers have also watched uneasily as publicly traded rivals such as BP Amoco PLC and Exxon Mobil Corp. have used their shares to grow by swallowing competitors. They are lobbying in Oslo for a partial privatization that gives Statoil better access to capital markets--and toughens it up in the bargain. To prepare for a sale, Statoil last March named Inge K. Hansen, a former investment banker, chief financial officer. Hansen asserts that even a minority share listing--Statoil anticipates a 20% to 30% tranche, worth $4 billion to $6 billion in the market--would add discipline and reduce political interference at Statoil. The government "will have to be very careful not to act differently from other shareholders," he says.

Foreign competitors that lease drilling rights in Norway from the government are behind Stoltenberg, too. They have been quietly warning that the emergence of new development areas--the west coast of Africa and the Caspian Sea in particular--could drain investment dollars away from Norway. The nation's offshore industry, focused on Norway's southwestern coast, has the world's highest production costs, according to a recent Deutsche Bank study. And in Britain and the U.S., the marginal tax rate on oil production is considerably lower than Norway's 78%. "If a company is well-positioned in Britain or the U.S., Norway doesn't look that competitive," says Gregory W. Coleman, managing director of BP Norge in Stavanger.

The government is listening. Olav Akselsen, Norway's 35-year-old Petroleum & Energy Minister, says the government wants "to make [Norway's] oil companies more prepared for competition from abroad." That means selling a slice of Statoil and--more important to the oil companies--allowing outsiders to bid for some of Norway's oil and gas reserves, known as the State's Direct Financial Interest, or SDFI, which Statoil manages but does not own. Norsk Hydro, an $11 billion energy conglomerate that is 43.8% state-owned, is also likely to get a slice of the SDFI.

Statoil sees the restructuring as an opportunity to climb higher in the oil-league tables. Right now, it has about 3.1 billion barrels in reserves, putting it tenth, just behind Argentina's Repsol YPF and ahead of U.S.-based Conoco Inc. But buying a healthy chunk of the SDFI, which is estimated at as much as 16 billion barrels, could put it close to the leader, Exxon Mobil, which has 21 billion. With those added assets, CFO Hansen insists, Statoil could be a world-beater. "We should promote Statoil to be the Nokia of Norway," he says.

Another advantage: If Statoil and other oil majors are permitted to purchase part of the SDFI, they can swap acreage among themselves and consolidate production. At present, these holdings are badly fragmented and expensive to operate. To many in the industry, this is a crucial dividend of the government's plan. "The status quo will make people start to lose interest," says one international oil executive.

The prospect of a restructuring of the Norwegian industry has put Oslo and Stavanger, Norway's oil capital, on the itinerary of investment bankers. But before anything changes, Stoltenberg must survive what is shaping up as a bitter debate. Many Norwegians are suspicious of free-market capitalism and intensely nationalistic about the nation's oil assets. Politicians are lining up on both sides of the issue. In mid-August, the small but influential Center Party reversed itself, opposing privatization of Statoil. "A well-run state company is as good as a private company," says party leader Odd Roger Enoksen. "We don't need the money, so why sell?"

Stoltenberg's biggest worry is a split within his own party. A youthful coterie of Labor modernizers favors changes in the oil industry as part of an effort to reform much of Norway's welfare state. But Labor's Old Guard and younger leftists, allied with the country's powerful trade unions, are strongly against expanding the private sector's role in such a vital industry. "Many people are skeptical about too much privatization in Norway," says Inger Lise Husoy, a Labor MP from Oslo. "Many of my friends went into politics to preserve the public sector."

A MOVE NEXT YEAR? Labor insiders are confident that Stoltenberg will come out of the November congress with a workable deal. As to timing, Akselsen predicts that early next year the government will agree to sell a minority stake in Statoil to investors and open some portion of the SDFI. In the long run, according to Oystein Noreng, a professor of oil economics at the Norwegian School of Management in Oslo, investors will be offered as much as 70% of Statoil, with the government retaining a blocking stake in order to prevent any moves that would shock Norwegians, such as a shift of headquarters out of Norway.

Just the prospect of a listing seems to be doing wonders for Statoil. The company actually lost money in 1998, thanks to low oil prices, cost overruns, and ill-advised foreign ventures. But it has since been focusing operations and slashing costs. For the first half of this year, Statoil reported record pretax profits of $1.89 billion on revenues of $10.9 billion. Still, Statoil's 7.5% return on capital employed remains well below that of such industry leaders as BP and Shell, which are in the 12% range.

However the privatization debate plays out, Norway is certain to remain one of Europe's key energy suppliers. But it may be just the moment for Norwegians to consider some long-term changes in the industry that makes them rich.