Norsk Hydro – government instrument in oil policy?The 10 oil commandments

Possible and impossible oil company models

Many questions were being asked in 1970. How should the Norwegian state be organised in its meeting with the new oil industry? How active should the government be, and how much should be left to private players? Did Norway have anything to learn from other nations in this area?
By Kristin Øye Gjerde, Norwegian Petroleum Museum
- “Recommendation on organisation of governmental continental shelf cases”.

The non-socialists government headed by Centre Party leader Per Borten appointed an “commission of inquiry on state organisation for continental shelf issues” on 18 September 1970 to come up with answers. Chaired by engineer Knud-Endre Knudsen, this body was often known for convenience as the Knudsen commission. Because the matter was pressing, it was instructed to work expeditiously. After only six months, it submitted its report on 24 March 1971 – just one week after the Borten government had resigned because of internal disagreements over Norway’s relations with the European Community.

A number of recommendations were made in the report. But the question was how far these proposals of a commission appointed by a non-socialist administration would be acceptable after the Labour Party had taken over the reigns of government.

Examples from other countries

Iraq’s delegation at the establishment of Opec, 1960. Photo: Opec

The Knudsen commission had devoted considerable work to securing an overview of how other oil-producing countries took care of the state’s interests. Many of these nations had established their own state oil companies around 1970. That development had been encouraged by the formation of the Organisation of the Petroleum-Exporting Countries (Opec) in 1960. Not unexpectedly, the exception was the USA, where several of the large privately owned international oil companies were based.

The commission investigated conditions in several other European countries – France, Italy, the Netherlands and the UK. It furthermore examined the position in the Middle East, covering Iraq, Iran, Kuwait and Saudi Arabia, while Mexico and Venezuela were studied in Latin America. A common denominator for all these countries was relatively strong government influence over the exploitation of petroleum deposits and a regulated relationship with the international oil companies.

Iran, Iraq and Mexico had taken the most drastic action, and nationalised their whole petroleum industry. That was not a relevant model for the Norwegian government.

Other countries had adopted legislation which safeguarded the state’s interests, along with new kinds of agreements with the oil companies. The latter often included provisions giving the state rights to participate if commercial discoveries were made – an interesting opportunity, which had already been secured by the Norwegian government.

BP’s logo from 1958 to 1989.

In the European countries which Norway felt it was natural to compare itself with, a clear distinction existed between administrative and commercial functions. A ministry and/or a government agency held responsibility for the administrative aspects, while the degree of state participation on the commercial side varied from nation to nation. In the Netherlands, the government was only indirectly involved in gas production through the Dutch State Mines. Nor had a state oil company been created in the UK. While British Petroleum (BP) was partly state-owned (just under 50 per cent), it was run as a normal private company. Both Italy and France had oil companies where the government exercised a strong influence. Italy’s ENI was a holding company wholly owned by the state, with certain special rights. The French state was indirectly involved through Enterprise de Recherche et D’Activités Pétroliéres (Erap) and its subsidiaries. This was an independent state-owned company whose object was to conduct exploration for and production, storage, transport, processing and marketing of petroleum and petroleum products. The Knudsen commission’s proposed solutions tended towards the Italian and French models.[REMOVE]Fotnote: Innstillinger og betenkninger fra kongelige og parlamentariske kommisjoner, departementale komitéer m.m. 1971 Nr. 3 Innstilling om organisasjon for statlige kontinentalsokkelsaker, 24 March 1971.

What should the state be responsible for?

The state’s interests in Norway were protected to some extent by the licensing laws. Where commercial considerations were concerned, the government had secured the right to a royalty payment in the form of oil.

Certain production licences already contained provisions on state participation. One form of this was a “net profit” agreement which gave the state the right to a certain proportion of the net profit from a licence, but without the opportunity to participate in the decision process. The other version was a “carried interest” deal, where one of the parties in a licence had its costs met by the others up to a certain point. This type of agreement gave the state the right to become a partner in the joint venture when commercial discoveries were made, and to take part in decisions on the same terms as the other participants.

But far more wide-ranging forms of participation were conceivable, which called for a permanent organisation – in other words, a state oil company. The Knudsen commission took the view that such an enterprise must also be in a position to safeguard the state’s interests in refining and the petrochemical industry.[REMOVE]Fotnote: Ibid..

It is worth noting here that the commission identified education in petroleum-related subjects as a job for the state, with the object of building Norwegian expertise. The government should also play an active role in the location of possible industrial activities related to landing and processing of oil, which would be highly significant for jobs on land. Another government duty identified by the commission was informing the general public about petroleum activities. The build-up of a Norwegian supplier industry also required state support. Last, but not least, the government had to ensure that the necessary investment capital was available.

Tripartite division

The most important move proposed by the Knudsen commission was a division of government functions into three parts, and it considered several ways of achieving this. After detailed discussions, it proposed the following solution.

The Ministry of Industry would deal with oil policy and legislation, and be responsible for offering and awarding production licences.

A “continental shelf” directorate would prepare matters for the ministry and have delegated authority to deal with licence agreements, as well as exercising technical and financial control of the petroleum sector.

A state oil company would pursue the state’s commercial activities.

An organisational model of this kind would provide a natural division of responsibilities, with the ministry handling issues of principle and political decisions while the directorate dealt with administration.[REMOVE]Fotnote: was recommended that the state oil company should be organised pursuant to the Norwegian Companies Act, with full commercial freedom for the board pursuant to clear instructions given by the political authorities. Since the possible scope of the business was not known at the time, the commission advised the creation of a flexible organisation capable to taking on new assignments. That could be achieved by establishing a non-operational holding company, where the various activities it became involved with would be pursued by a set of wholly or partly owned subsidiaries.[REMOVE]Fotnote: Ibid.

The principle of a tripartite division of the state’s involvement with the oil industry gained lasting acceptance, and determined the subsequent shaping of petroleum policy. But views on the organisation of the state oil company differed sharply between the parties in the Storting (parliament).

Change of government – and oil policy

As noted above, new brooms were in place when the Knudsen commission’s report came to be considered by the political authorities.

The industry minister in the minority Labour government headed by Trygve Bratteli was Finn Lied, with Arve Johnsen as his state secretary (junior minister). They took a different view of the report’s findings than the previous minister, Sverre Walther Rostoft from the Conservative Party. Both were supporters of a state oil company, but believed it should be an operational enterprise rather than merely having a holding function. It would learn the petroleum business by pursuing specific activities, just like any other oil company.[REMOVE]Fotnote: Johnsen, Arve, Utfordringen: Statoil-år, (1988): 9.

Political consideration of the state’s organisation in the wake of the commission’s report was strongly influenced by Lied and his allies. As a result, the issue was the subject of a further study and a new report before being debated by the Storting. Nevertheless, the work done by original commission provided a solid foundation and determined much of direction of Norway’s future petroleum policy. That could explain the relatively broad agreement which prevailed in this area from the start.

Norway was moving seriously towards becoming an oil nation in the spring of 1971. Fifty-two wells had been drilled on the Norwegian continental shelf, more than NOK 1 billion had been devoted to prospecting and drilling, and seven discoveries had been made – including one declared commercial. Ekofisk was about to come on stream. Determining how the state’s involvement in this sector was to be organised had become a matter of urgency.


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