Norwegian Oil and Gas Policy

Ladies and gentlemen,

It is a great pleasure for me to speak to you today.

Last year was very exiting for everyone following Norwegian petroleum policy. It culminated just before Christmas when the government submitted the proposition about ownership of Statoil and future management of SDFI to the Storting. 2001 shouldn't be less exiting, as some major political decisions are under way.

I will take this opportunity to elaborate on the Statoil/SDFI issue. Before doing so, however, I will touch upon some other significant matters.

These are:

The situation in the oil market;

Norwegian gas management; and

The North Sea Awards;

Let me start out with the situation in the oil market.

Last year, the average Brent crude price was 28,5 USD, the highest level for more than 15 years.

Strong growth in oil demand, and producer restraint, explain why oil prices stayed so high.

At present, prices are about 25 USD – a level I think should be favourable for producers, but also acceptable for consumer countries.

The immediate outlook for the market is as always somewhat uncertain.

Producers have increased supply significantly over the last year, and oil inventories have started to grow. During the winter we have had a contra seasonal build up in stocks.

The economic prospects both in USA and Japan have deteriorated in recent months. This is creating uncertainty about the oil demand outlook.

On this background, I think OPEC’s recent decision to cut supply by 1,5 mbd was understandable and justified.

The IEA and the USA have expressed concern about the recent OPEC cuts in production.

I don’t share this concern. I think we have reason to believe that OPEC will take into account the possible effects on financial markets and economic growth that oil prices might have.

It is not in the interest of oil producers to have oil prices at levels that can be harmful to the world economy.

Also in the longer term, I believe the prospects for oil is reasonably good.

Two conditions are crucial for the oil market in the long run:

On the demand side: The lack of alternatives to oil in transport, secures long term growth in oil consumption.

On the supply side: Regulation of production, by OPEC alone or together with other producers.

We have reasons to believe that these two fundamental properties of the crude oil market will be in place also in the future.

A key element in Norwegian oil market policy is to contribute to predictability and stability in the oil market.

Stability in the oil market with prices at a reasonable high level should be in the interest of both producing and consuming countries. Market stability is necessary for investments and long term supply of oil.

This was an important motivation, when we introduced production restraints in 1998 and when they were ended last year.

Today, few, if anybody, will disagree that the action taken by OPEC and Non-OPEC producers to curtail supply, was justified with oil prices at 10 USD/bbl.

Upstream investments dried up and the economic and political stability in some countries dependent on oil export was threatened.

Producer and consumer countries have a common interest in avoiding very low oil prices to reoccur.

Short term, low oil prices would be a gain for oil importers. But long term it would lead to less geographical diversity of supply, which is a key element in energy security.

Oil prices at a reasonable level can thus be seen as an insurance premium consumer nations pay to have more diversified supplies and higher energy security.

Norway will continuously evaluate the market and is prepared to consider measures if the market needs it. Our attitude towards this is basically pragmatic.

Norway tries to strike a balance between our interests as oil producer and the obligations and loyalties we have as a member of the International Energy Agency and other organisations, where members have different interests in the oil market.

Our commitments to the OECD and the EEA imply that Norway works in favour of free market principles.

However, we should bear in mind that the oil market is not a free, competitive market. Both consumer and producer nations intervene in the market, by regulating supply or by regulating demand through taxation.

I would now like to turn your attention to natural gas.

The Norwegian gas industry has seen some remarkable changes during the past two decades. From the end of the 1980s and onwards into the 1990s, Norwegian gas sellers represented by the GFU, entered into an impressive number of new large long-term gas sales contracts with buyers on the European Continent. Gas deliveries under these contracts are now in a period of strong growth and will reach a plateau level within the next five years. In order to fulfil the contract obligations, heavy investments in fields, pipelines and treatment plants have been undertaken. For the past few years gas investments have been at an all time high.

As a major gas supplier, the current changes going on in the European gas markets are obviously of great importance to us. We have so far seen that the buyers' interest in entering into new long-term gas sales contracts has almost ceased, probably due to the organisational and regulatory changes in the market.

Today, the only negotiations of new large volumes under long term agreements is the negotiations with the Polish Oil and Gas Company. In order to realise the common ambition of the parties in these talks of a direct pipeline connection between Norway and Poland, it would be necessary on the part of the sellers to undertake large investments in new gas infrastructure.

Regarding infrastructure, I would like to mention one other important project under way. That is the construction of the Vesterled pipeline connecting the Norwegian integrated offshore gas transportation system to the British gas market. The Vesterled investments are relatively low, but nevertheless, the project is of great importance for the future gas exports from Norway to the UK. For the time being, most new Norwegian gas sales are made to the UK on short-term contracts, and transported through the British/Belgian Interconnector pipeline. Most of the delivery capacity, available when the long-term commitments to buyers on the Continent have been fulfilled, have been allocated to these short-term sales to the UK in recent time.

If it turns out that the most optimistic predictions regarding the future demand for import gas into the UK are realised, the British market can become the most important market for Norway within this decade.

Norway has always had as its main aim to remain an efficient, stable and long-term supplier of natural gas to the European market. The supply structure of gas to Europe makes Norway an important indigenous source for ensuring security of supply to the EU. Proper management of the gas resources is important for the efficiency of serving the interest of the European Community in securing long-term and stable supply of natural gas. The main resource management aims are the achievement of maximum recovery of economic oil and gas resources in the most cost efficient manner, and within the context of environmental sustainability.

Our present position in this respect is the result of good management of the gas resources by the Government.

We are, however, currently evaluating the system in light of the recent and ongoing structural changes in the gas market with a view to make necessary adaptations. In this respect, we envisage changes to our present system for management of the natural gas resources.

It is also the aim of the Norwegian Government to include the Gas Directive ("Directive") in the EEA Agreement, and to implement it in the national legislation with no undue delay. At present we are in a process of active consultations with the EU on the implementation of the directive in Norway.

I would now like to say a few words about the North Sea Awards that are going to be decided very soon.

In the North Sea, exploration activities have been going on for many years. The activities started in 1965, and about 520 exploration wells have been drilled in the area. The fields presumed to be the largest have been discovered and put in production. About 48 field developments have been approved in the area.

There is still a potential to discover new, profitable resources in the North Sea. The undiscovered resources in unlicensed areas in the North Sea are expected to amount to approximately 1/3 of the total resources in the area.

The North Sea Awards are important for the long-term resource management on the Norwegian Continental Shelf. Licensing of this new acreage will contribute to increased exploration activity and may in the longer term give new field developments. This will even out the activity level and contribute to securing the level of employment in the industry.

15 companies submitted their nominations to the Ministry for blocks that they recommended for inclusion in the North Sea Awards.

In choosing blocks for announcement the Government gave preference to time critical acreage, this means blocks near existing infrastructure with spare, or soon-to-be spare, capacity. In addition the Government gave preference to large areas in the more Eastern and less mature parts in the North Sea for seismic exploration. The deadline for submission of applications was 14 December 2000.

By that time the Ministry received applications from 13 companies for the North Sea Award.

The awards are planned to take place in February or March.

One of the most important policy issues in Norway at the moment is the issue concerning ownership of Statoil and future management of the SDFI.

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.

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.

Accordingly, the government put forward a Storting proposition just before Christmas, with proposals for an improved organisation of the state’s ownership of oil and gas resources.

Even though many of you may be acquainted with the Storting proposition, I will use this opportunity to elaborate on the Statoil/SDFI issue.

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 an instrument of petroleum policy.

The company has long since — and with broad support from its owner — stepped out of the NCS. It has secured a number of good positions in other petroleum provinces, especially in Angola and Azerbaijan.

Statoil pursues operations in several business areas: exploration for and production of oil and gas, refining, petrochemicals, marketing and other activities.

The government proposes to open up for private owners of Statoil by listing the company on the stock market. 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 10-25 per cent of the company’s value will be brought in through the listing.

Statoil will be given the opportunity to conclude equity-based strategic alliances with other companies. This can only be done after the company has been listed.

The SDFI was established in 1985, by dividing most of Statoil’s production licences on the NCS into 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 licences awarded since its establishment.

SDFI is a field-specific instrument in that the share is adapted to the profitability and resource potential of the individual production licence. The objective for long-term management of these holdings is to achieve the highest possible revenues for the state.

The SDFI represents substantial state assets and revenues. Through this arrangement, the state is a direct participant in more than 150 production licences as well as in pipelines and land-based plants. Statoil manages operational and commercial functions for the SDFI on behalf of the state.

The government proposes that holdings corresponding to 20 per cent of the asset value of the SDFI are included in a restructuring of state participation, providing the state achieves satisfactory terms. The interests which the government envisages selling to Statoil will account for about 15 per cent, while those it envisages selling to Norsk Hydro and other companies will account for roughly five per cent.

As part of the restructuring, the government also proposes a swap between the state and Statoil. This involves a reduction in the state’s ownership interests in Europipe II and selected fields, and increased ownership interests in Norpipe and Statpipe. Furthermore, the government proposes that the reorganisation should comprise the state getting an ownership interest in the crude oil terminal at Mongstad.

The government envisages that the state will continue to be able to take SDFI assets in future licensing rounds. A restructuring along these lines would give companies increased licence 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 licences, and strengthen the decision-making processes. This will enhance exploration, development and operational efficiency as well as extending production. Substantial additional value could be realised through a reorganisation of interests on the NCS. The proposed disposal of SDFI assets has to be seen in the light of Statoil's important position on the NCS, both as an operator and when it comes to it's position in the gas chain, and the desirability of strengthening Statoil prior to the listing.

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

In my view, 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 should be retained.

The government proposes the establishment of a new state-owned limited company to manage the SDFI portfolio of holdings retained by the state in production licences, pipelines and land-based plants. The company will also manage new state participant interests.

This new company will fulfil its purpose without possessing the same expertise as traditional oil companies. The company will not apply for licences 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. SDFI assets will be managed by the company at the state’s risk. Expenditures and revenues relating to the SDFI will continue to be channelled over the state budget.

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

Today Statoil has a key role in the gas transportation system. That will also be the case in the future. However, the privatisation of the company necessitates some adjustments to the system.

The government proposes the establishment of an independent company to transport natural gas on the NCS. It is proposed to organise this undertaking as a limited company. It is envisaged that all technical operations will continue to be pursued by the organisations which discharge them today under contract with the newly-established transport company. The new company will concentrate its activities on system operation, licence administration and overall supervision of the whole transport infrastructure on the NCS. For the present, this company will be owned by the state until a durable form of ownership has been found for the pipeline systems on the NCS.

My clear understanding is that the proposals have been well received by the political environment. I think we have built a good foundation to create a robust and broad political majority in this very important issue.

Considerations are now being made by the Storting's Standing Committee on Energy and the Environment. The Storting is expected to reach it's decisions this spring.

Implementation of possible Storting decisions is a major undertaking. The preparations are well under way.

Conditional upon the Storting's decision, the government intends to determine the timing of the listing of Statoil during the spring. Work is being carried out with the aim of listing the company during 2001. A separate project team has already started its work.

The share sale will be implemented by a syndicate led by UBS Warburg, Morgan Stanley and DnB Markets – which are the global coordinators of the listing. The global coordinators will also be responsible for preparing Statoil for a listing and for advising the Ministry and Statoil.

The project team is also composed of legal advisers, strategic advisors and others.

The process regarding sale of SDFI assets to Statoil has also started.

The sale of SDFI assets to others can take place in parallel - or with some time lag - to the sales process covering Statoil.

Preparatory work for establishing a management company for the SDFI and a transport company for natural gas is also well in progress. According to the plan these two companies will be established prior to the listing.

Norwegian oil and gas policy is facing significant challenges. Consequently, some crucial policy changes are under way. The Statoil/SDFI measures are designed to enhance the value creation on NCS as a whole. This is important both in a short and long term perspective. Although the state will benefit the most, also the other players on NCS will benefit from the proposals recently submitted to the Storting. That is in the interest of all of us.

Thank you for your attention.