Start of something bigSecuring the state’s royalty oil

Contending over capital

Set to become Norway’s most lucrative company, Statoil started with an equity of just NOK 5 million, no earnings and big expenses. Financing its activities became an ever-growing source of friction between the various political parties and between Statoil and the politicians.
By Trude Meland, Norwegian Petroleum Museum
- The sigar box was Statoils first money box. Statoil was dependent on substantial capital injections from the state both as equity and as permission to borrow. Photo: Equinor

Statoil and its first chair, Jens Christian Hauge, wanted to become a fully integrated and operational oil company as quickly as possible. Major commitments involving substantial costs were also imposed on it or taken on at an early stage. A rapid capital build-up was needed to finance ever-more ambitious business plans.[REMOVE]Fotnote: Njølstad, O, 2008, Jens Chr. Hauge: Fullt og helt, Aschehoug, Oslo: 630. These financial resources primarily had to be appropriated by the Storting (parliament).

Customised and constrained

Statoil was a wholly state-owned limited company, and therefore subject to the Norwegian Companies Act with the special provisions which applied to state enterprises. This meant in part that the relevant minister[REMOVE]Fotnote: Between 1972 and 1978, the Minister of Industry was the general assembly, and from 1978 it was the Minister of Petroleum and Energy. served as the general meeting, and was subject in turn to the Storting and the government. These were bodies thereby had formal responsibility for setting requirements for and expectations of Statoil.[REMOVE]Fotnote: Rommetvedt, H, 1991, Butikk eller politikk?: Statoils roller i norsk oljevirksomhet, report, vol 24/91, Rogaland Research, Stavanger: 21.

Statoil’s object was specified in the White Paper on establishing the company, but the wording was vague. It was to be the government’s extended arm and the national body for state management and control, while simultaneously having commercial freedom of action. It was to prove difficult to strike a balance between these two expectations or roles.

While the limited (joint stock) company model aimed to ensure commercial freedom, the Storting’s ability to appropriate funding provided a way of exercising state control over Statoil.

The dilemma this posed eventually found clear expression in the debates on financing the company’s activities. Statoil was dependent on substantial capital injections from the state both as equity and as permission to borrow. The various political parties tried to shape its development through the size of and requirements set for capital appropriations.

As mentioned above, Statoil started life with a share capital of NOK 5 million. Unanimous agreement on that amount prevailed in the Storting. This funding was to cover set-up and operating costs for the first few months.[REMOVE]Fotnote: Johnsen, A, 2008, Norges evige rikdom, Aschehoug, Oslo: 103. As the company’s tasks and commitments expanded, its capital requirements increased and the initial political consensus fractured.

First capital expansion – 1973

The question of increasing Statoil’s equity was raised in the Storting for the first time in the spring of 1973. An additional NOK 125 million was unanimously approved, boosting the share capital to NOK 155 million on top of an increase of NOK 25 million voted by the Storting over the government budget in the previous autumn.[REMOVE]Fotnote: Proposition no 149 (1973–74) to the Storting, Finansiering av Den norske stats oljeselskap a.s. og tilleggsbevilgning på statsbudsjettet for 1975 til dekning av statens kapitalbehov, Ministry of Industry: 1.

Although the vote in the spring of 1973 also ended up as unanimous, the debate revealed dawning disagreements. The Conservatives expressed concern that the various political parties interpreted words and expressions related to Statoil in different ways. When it was said that “the state will be engaged at all appropriate levels”, for example, how should “appropriate” be interpreted?

This failure to agree the basic meaning of the terms used helped to ensure that disagreement over Statoil’s finances escalated year by year.

Borrowing necessary

The state oil company’s tasks kept on expanding, and its funding requirements likewise. In addition to more equity, Statoil needed its own financing sources. Borrowing was the answer.

This raised the question of whether the company should raise loans from the state or with a state guarantee, or take direct responsibility for securing the necessary cash. Statoil itself took the view that its financing was an exclusively commercial matter, and that the company’s “commercial freedom of action” had been a clear presumption when it was founded.[REMOVE]Fotnote: Hanisch, T and Bould, M, 1994, A Tiger by the tail: Embedsverkets forsøk på å styre Statoil. Kristiansand: 234.

The ministry wanted loan funding to be organised on a project-to-project basis, preferably with a state guarantee. From Statoil’s perspective, being tied to the state in this way would make its growth difficult and thereby reduce the financial freedom assumed at the company’s founding.REMOVE]Fotnote: Johnsen, A, op.cit: 103.

In the summer of 1973, Statoil raised two loans of USD 30 million and NOK 25 million through international financial institutions and a Norwegian bank consortium respectively – without a state guarantee. The company notified the Ministry of Industry that it was working on possible funding solutions, but told it no more.

The industry minister thereby learnt about the loans through other channels. Odd Gøthe at the Norwegian currency board told the minister that Statoil had made a currency loan of USD 30 million.

Ola Skjåk Bræk, the outgoing industry minister from the Liberal Party, was not pleased at this news. The Statoil board was instructed that large foreign currency loans must not be raised for the company’s own account. They either had to be made by the state or, if the company arranged them, with a state guarantee.

Statoil’s management found this hard to accept. The company had been established pursuant to Norway’s Companies Act and, in its view, was under no obligation to notify the owner in advance about its financial transactions.[REMOVE]Fotnote: Minutes, board meeting, 3 October 1973, SAST/A-101656/0001/A/Ab/Aba/L0001 – Styremøteprotokoller, 05.10.1972 til 14.12.1978. 

The dispute over the boundary between “national management and control” and “commercial freedom of action” thereby became more heated.

New appropriations – new dispute – 1974

Before the next round of Statoil financing came before the Storting in the spring of 1974, Labour had returned to power and the company thereby had an ally in government. Commercial freedom also weighed most heavily for the ruling party.

The Frigg field. Photo: Øyvind Ellingsen/Equinor

The chair presented a plan for Statoil’s future in January 1974 which indicated a funding requirement of about NOK 8 billion in the period up to 1978 – a quarter as equity and the rest in borrowed risk capital. This sum was needed to meet the commitments imposed on the company by the government – projects such as Frigg, Heimdal, four other oilfields, refining, marketing and distribution, exploration and drilling, and research and development.

Company operations would show substantial losses for many years to come, and it would not show a profit after depreciation until 1981. According to the plan, the whole invested capital would be recovered and a net profit achieved in 1984. (In fact, the company was in profit as early as 1980.[REMOVE]Fotnote: Annual report and accounts, 1980, Den norske stats oljeselskap a.s.)

To realise these plans, the overview of forthcoming investment and capital requirements showed that equity needed to be increased by NOK 150 million in 1974.

When the matter came up in the Storting’s standing committee on finance, the forecast was noted but no conclusions were reached on the capital estimate. Both the full Storting and the ministry also kicked the can down the road. Instead, the government appointed a committee to assess Statoil’s financial development.

What did concern the committee and the full Storting, however, was the annual increase in share capital – and the committee was now split over its dimensions.

The various views expressed correlated with the position of the respective parties along the right-left axis. Labour wanted Statoil to be in position as soon as possible to look after the state’s commercial interests, and believed that a systematic and purposeful build-up and provision of the necessary capital was crucial. It supported Statoil’s request for NOK 150 million.

The centrist Christian Democrat, Centre and Liberal parties were more reserved, and maintained that priorities should be set for Statoil’s activities. For their part, the Conservatives wanted the company to collaborate with the experienced oil companies and avoid big taxpayer injections in the form of billions in equity.[REMOVE]Fotnote: Rommetvedt, H, op.cit: 23.

A joint motion from the Conservative, Christian Democrat and Centre parties proposed a more cautious pace of expansion and a slower increase in equity. They maintained that a rise of NOK 50 million should be sufficient.

The underlying argument was that Statoil had grown too headstrong and needed to be brought under stricter control. But the left won the day by 78 against 66 votes, giving the company its requested NOK 150 million.

Disagreement widens – 1975

The committee assessing Statoil’s financial development submitted its report to the industry ministry in March 1975. At that time, the authorities had yet to reach a final conclusion on a number of issues of principle raised by the company’s future capital requirements and equity build-up.

These included the relationship between equity and loan financing, funding methods and the currency policy aspects of the company’s financial management.[REMOVE]Fotnote: Proposition no 1489 (1973-74), Om utvidelse av aksjekapitalen i Den norske stats oljeselskap a.s, Ministry of Industry.

The committee concluded that Statoil’s operations had to be coordinated with national economic policy. Both the size and nature of its business made this essential. The distinctive article 10 in the company’s articles of association adopted the year before laid the basis for a harmonisation of its investment, and the financing of this, with national goals.

As expressed by the committee, these principles for funding Statoil came up for debate in the Storting during the spring of 1975, along with the “article 10 plan” submitted by the company.

The latter called for a share capital increase of NOK 450 million plus NOK 650 million in loans. That was supported by the industry ministry through a White Paper.[REMOVE]Fotnote: Report no 81 (1974-75) to the Storting, A. Virksomheten på den norske kontinentalsokkel B. Virksomheten til Den norske stats oljeselskap a.s. i 1974, og selskapets planer for virksomheten i 1975 C. Virksomheten til Statens oljedirektorat i 1973 og 1974, Ministry of Industry.

This document presented Statoil’s plans for 1975-79 as well as its financing and financial results for 1975 and the annual report and accounts for the previous year.

The debate which followed was couched in harsh words. Conservative Olaf Knudson was on the warpath:

A state capitalist society leads to a concentration of power, monopolisation, [and] an intermingling of commercial and administrative tasks in the state which threaten abuses of power. I must also highlight the dangers of the nationalistic oil policy which the government has adopted, and which will serve our country poorly in the rather longer term.[REMOVE]Fotnote: Aftenposten, “Favorisering av Statoil en trussel mot demokratiet”, 9 June 1975.

The Conservative members of the Storting were not interested in helping to build up what Knudson described as a state capitalist society, which he regarded as a threat to a free democracy. He and his party called for Statoil to meet its capital requirements through the sale or leasing of participatory rights.

Together with the Centre, Christian Democrat and Liberal parties, the Conservatives sought once again to restrict the company’s power base and maintained that NOK 250 million in additional equity was more than enough.

Knudson was not the only representative to speak out. Per Kristian Foss, leader of the Young Conservatives, told leading Oslo daily Aftenposten that a Statoil monopoly would result in a demonstration of power of unknown dimensions and without effective parliamentary control.[REMOVE]Fotnote: Ellefsen, Harald, “Enormt Statoil-monopol uten folkevalgt kontroll”, Aftenposten, 9 June 1975.

The debate nevertheless concluded with Statoil getting the funds it sought. At the same time, however, new principles for financing the company were established.[REMOVE]Fotnote: Proposition no 143 (1974-75) to the Storting, Finansiering av Den norske stats oljeselskap a.s. og tilleggsbevilgning på statsbudsjettet for 1975 til dekning av selskapets kapitalbehov, Ministry of Industry.

It was established, for example, that loans Statoil might raise would be so largely that they could have a significant impact on Norwegian economic policy. So the general rule was to be that such borrowing would be done by the state.[REMOVE]Fotnote: Recommendation no 401 (1974—75) to the Storting, Innstilling fra industrikomitéen om finansieringen av Den norske stats oljeselskap A/S (Statoil) og tilleggsbevilgning på statsbudsjettet for 1975 til dekning av selskapets kapitalbehov (Proposition no 143).

Through article 10, moreover, any and all capital increases would be based on information submitted to the Storting and/or the general meeting.

These principles helped to strengthen control by the government and the Storting over the company, and thereby reduce its independence.[REMOVE]Fotnote: Hanisch, T and Bould, M, op.cit: 235.

A leading article in Oslo daily Dagbladet interpreted the political changes in relation to Statoil as a sign that the non-socialists wanted to “clip the company’s claws” by refusing to provide it with capital. Matters did not go quite so far this time, but the issue was soon a matter of clipping not only claws but also wings.


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