"Norwegian Oil and Gas Policies – changes and challenges"

Ladies and gentlemen,
It is a great pleasure for me to be here in Houston. I am very impressed by the OTC exhibition, which by all standards must be one of the most impressive in the oil and gas business today.

Today, I would like to share with you some thoughts on the challenges confronting the Norwegian oil and gas policy.

The oil and gas industry has always been international, and I believe it will be even more international in the years to come due to changes in Government policies and structural changes in the industry.

Let me mention:

• Liberalised energy markets
• Opening of new petroleum provinces
• The growing influence of international structures, such as the World Trade Organisation (WTO), OECD and the EU
• Increased concern for stability in the oil and energy market
• Consolidation trends with mergers and acquisitions bringing on a different set of players on the global energy arena.
• New Information and Communication technology will intensify international competition

The trends above illustrate that any government has to take on board the consequences of a more integrated world economy. To maintain one's competitive position it will be essential for a nation to adjust their national policy to the global economic environment.

Having said that, this does not mean that Norway has given up her major principles in the petroleum policy. Our petroleum policy has a long-term perspective and will continue to be based on the following:

• The petroleum resources shall give the highest possible value creation and ensure welfare and employment.
• We shall reconcile the role of being a major energy producer with being in the environmental forefront.
• Support the internationalisation of our oil industry.

In a constantly changing environment it is a challenge to make sure these principles are adhered to.

Internationalisation
In an industry that is becoming even more international and competitive, especially through the opening of new petroleum provinces, internationalisation is crucial to the future development of the Norwegian oil and gas industry.

In the past the supply market in Norway was constantly growing. It peaked in 1998 with about 9 billion dollars investments. In the future, the Norwegian supply marked is expected to be smaller, in the order of 5-6 billion dollars, but still quite significant.

The future of our own supply industry will depend on its ability to compete for a fair share of the domestic market as well as obtaining contracts in the international market.

The latter is a market estimated to about 180 billion dollars, of which the Norwegian oil and gas industry only has a share of between 1 and 2 percent. In a longer term, it must be a fair ambition to have 4 to 5 percent of the international market.

We are currently working seriously to improve working relations with international oil companies operating worldwide, national oil companies and leading supply companies.

An important player in the internationalisation of Norwegian oil and gas industry is the foundation INTSOK – the Norwegian Oil and Gas Partners. INTSOK was founded in 1997 by the Norwegian oil and gas industry and the Norwegian government with the purpose of facilitating internationalisation of the Norwegian oil and gas industry. During the last years INTSOK has for instance been hosting a deepwater conference and several workshops here in Houston. I have the impression that these seminars have been highly successful.

Technology
International competitiveness is crucial in succeeding, both for the Norwegian Continental Shelf and our oil and gas industry. The ability to develop and utilise new technology will in my opinion be the key area to achieve international success.

A demanding domestic market has made the oil companies operating in the North Sea used to finding new solutions by stimulating research, not only in the technological mainstream, but also at the very edge of technology. The operators on the Norwegian Continental Shelf have also shown a remarkable ability and willingness to utilise new technology.

Operating in a technology-driven domestic market has also made the Norwegian supply industry worldwide leaders in several areas. The Norwegian subsea suppliers, ABB, FMC Kongsberg Subsea and Kværner, are examples of how the Norwegian industry has been a driving force in technology development globally.

Norway’s oil and gas resources belong to the whole Norwegian society and must be managed to the best advantage of present and future generations. The largest possible value creation to society from oil and gas operations accordingly represents an overriding objective for the government’s oil and gas policy.

The changes in market and competitive conditions in the oil and gas industry necessitate adjustments to achieve this goal and to continue safeguarding employment, high value creation and a strong Norwegian oil and gas industry. It is important that this industry both fulfils its responsibilities on the NCS while at the same time being competitive internationally.

To reach this goal Norwegian authorities have to keep the NCS competitive compared to other petroleum provinces. This means that we must be able to produce the reserves cost efficiently and provide a reasonable return on the investment for the industry, also when the surrounding conditions are changing.

During the last year the Government has proposed several measures intended to strengthen the competitiveness of the NCS. It has recently been a new licensing round in the North Sea and last year we awarded the 16 ^th> licensing round in the Norwegian Sea. In the third quarter of 2001 the 17 ^th> licensing round will be launched. Awards during this round may be given in the second quarter of 2002.

Parts of the NCS have moved into a mature phase with fewer and smaller discoveries, which are commercially more demanding. In these areas there are need for players with expertise in marginal field development and tail end production. In a recent White Paper the Government states that smaller oil companies, downstream companies and service companies are welcome as licensees on the NCS.

Statoil/SDFI
The single most important adjustment in Norwegian oil and gas policy is the ongoing process of improving the State's ownership interests to the oil and gas activities. This is the issue concerning ownership of Statoil and future management of the SDFI.

The Government put forward a Storting proposition just before Christmas, concerning the above. Last Thursday this proposition was discussed in the Storting, which approved the proposed restructuring.

Statoil was established in 1972 as the State’s commercial instrument in petroleum activities. It was long a privileged national State-owned oil company.

Statoil’s role in Norwegian oil and gas policy has changed fundamentally over the past 10-15 years. The company operates today under the same commercial terms as the other participants on the NCS, and is no longer a petroleum policy instrument. Statoil pursues operations in several business areas: exploration for and production of oil and gas, refining, petrochemicals, marketing and other activities. In addition to being the largest operator on the NCS, the company has secured a number of good positions in other petroleum provinces.

One proposal to the Storting was to open up for private owners in Statoil and to list the company. The Storting approved this proposal.

Expanding ownership will supply new expertise, partners and capital. The State will retain at least two-thirds of the shares in the company. Initially new owners corresponding to 15-25 per cent of the company’s value will be brought in through the listing.

The SDFI was established in 1985, by dividing most of Statoil’s production licenses on the NCS in a direct financial interest for the state (the SDFI) and a commercial share for Statoil.

An SDFI share has been included in nearly all production licenses awarded since its establishment. The size of the share is related to the profitability and resource potential of the individual production license.

The SDFI represents substantial State assets and revenues. Through this arrangement, the State is a direct participant in more than 150 production licenses as well as in pipelines and land-based plants. At present, Statoil manages operational and commercial functions for the SDFI on behalf of the State. After privatisation, however, a new company will take over the responsibility for managing the SDFI.

The Storting has decided that holdings, corresponding to 21,5 per cent of the asset value of the SDFI, are to be sold to Statoil and other companies as part of the restructuring of the State's assets, providing the State achieves satisfactory terms in the transactions. 15 per cent of the assets will be sold to Statoil and 6,5 per cent to other companies.

The Government envisages that the State will continue to take SDFI assets in future licensing rounds.

A restructuring along these lines would give companies increased license interests on the NCS. Larger holdings will provide companies with stronger incentives, allow them to take better advantage of economies of scale and coordination benefits in and between production licenses, and strengthen the decision-making processes. This will enhance exploration, development and operational efficiency as well as extending production.

As a consequence of a privatisation of Statoil, the present management arrangements of the SDFI cannot continue unchanged. An important question has therefore been how to manage the SDFI assets the State decides to retain.

Today’s management model for the SDFI has functioned satisfactorily since it was established in 1985. The present management model contains a number of positive features, which we have decided to retain.

The Government proposes to establish a new State-owned incorporated company to manage the SDFI portfolio. This new company will fulfil its purpose without possessing all the expertise of a traditional oil company. The company will not apply for licenses on its own account. It will not be given operatorships. Activities in which the company is involved will be functionally related to petroleum activities on the NCS. The company will manage SDFI assets at the State’s cost and risk.

Neutral and efficient utilisation and development of natural gas transport and processing facilities are important for realising the value of Norway’s natural gas, and must be viewed in a long-term perspective.

Statoil has a key role in the gas transportation system, but the privatisation of the company necessitates some adjustments to the system.

Thus, the Government has proposed to establish an independent company to transport natural gas on the NCS. This proposal was approved by the Storting last Thursday. The new company will concentrate its activities on system operation, license administration and overall supervision of the transport infrastructure on the NCS. For the time being, this company will be owned by the State until a durable form of ownership has been found for the Norwegian pipeline system.

Preparatory work for establishing a management company for the SDFI and a transport company for natural gas is also well in progress.

Norwegian oil and gas policies are facing significant challenges. We have already made some policy changes, in addition to the one I have described above. These changes and the Statoil and SDFI measures are designed to enhance the value creation on the NCS as a whole, both in a short and long time perspective.

Thank you for your attention!

Foil in PDF format
Foil: Changes affecting the oil industry.
Foil: Principal Objectives of the Petroleum Policy
Foil: Ownership of Statoil
Foil: Restructuring of the SDFI