Øystein Noreng - Jul 09, 2021

Facing the energy transition, the largest international oil companies are moving at varying speeds and with varying levels of enthusiasm into new businesses dedicated to a decarbonized future. At the other end of the spectrum, leading national oil companies, while giving a nod to reducing carbon intensity, are increasingly focused on monetizing their existing oil and gas reserves as fully as possible. Norway's Equinor, despite its preponderant state ownership, is marching headlong down the path into alternative energy along with Total and other European majors. How did this happen? Will its strategy produce the best returns for Norway? Equinor has a poor track record in expanding its oil and gas business outside of Norway. Is it taking undue risks with wind energy? The more profitable approach for Norway would be for Equinor to maximize the returns from its existing assets, leaving alternative energy to others.

Norway's biggest industrial scandal came to light in 2020, with Equinor's loss of 200 billion kroner ($10 billion) from onshore projects in the United States. Reports from Norway’s Office of the Auditor General and consultancy PricewaterhouseCoopers (PwC), indicate that the losses were due to poor management practices, which misunderstood the market and ineptly organized onshore operations in the US. The company's management was shown to be incompetent and the board irresponsible. The Auditor General points out that the company's reporting was not in accordance with the principles of transparency in ownership reports. In addition, the Auditor General refers to OECD guidelines on management of state-owned companies, noting that "a serious problem arises when companies with a state ownership interest implement ambitious strategies without having clearly identified, assessed or duly reported on the risks posed by the strategies.” The PwC report addresses essential questions such as: how strategy is developed and implemented; the design of systems for managing a business and managing risk; and how management and culture enable an organization's performance. The report concludes that Equinor's strategy for growth was implemented at the expense of value and control. Following this harsh assessment, one would have expected that the primary owner, the Norwegian government, with two-thirds under its direct control, would clean up Equinor.

Instead, the Norwegian government has renewed the state appointed board members' mandate, accepting the losses, the failed strategy and the poor planning. Equinor's annual shareholder meeting in 2021 remarkably renewed the mandates of the government appointed board members, despite its heavy losses. Through its ownership interest in Equinor, the government has proved conspicuously passive, uncritically following recommendations from the company board. If the government's 67% share had belonged to international funds and private investors, the board and senior management of Equinor would probably have been replaced. Sadly, Norway in this case proves that governments often are weak, incompetent owners. Equinor now appears "untouchable" in Norwegian politics. It is essentially self-governing, and not susceptible to external signals and controls. In fact, to a large extent Equinor appears to control its primary owner, the Norwegian government.

New Strategy

Shortly thereafter, Equinor announced its new strategy, moving the center of gravity for investment from oil and gas to offshore wind. Its target is for more than a twentyfold increase in offshore wind capacity by 2030, from 0.6 gigawatts to 12-16 GW. Capital markets responded negatively. They did not welcome the transition to a business with more questionable returns and reduced the company's share value by 9% over three days, a loss of 45 billion kroner for the owners.

The government's response has been to strengthen Equinor's independence by transferring ownership and supervision of the company from the Ministry of Petroleum and Energy to the Ministry of Trade, Industry and Fisheries. The argument is that this move has been prepared for years to coordinate the various business interests of the Norwegian government. Instead of being a dominant subject in the Ministry of Petroleum, Equinor will become one of many topics within the Ministry of Trade and Industry. The likelihood is that the change of ministerial supervision will make it more difficult to control how Equinor's disposes of its cashflow, allowing senior management to embark on more questionable businesses, not least offshore wind energy, which is politically fashionable and subsidized.

To add insult to injury, the audit of the state's direct financial involvement in the petroleum industry, the SDFI, was likewise moved to the Ministry of Trade and Industry. Remarkably, the Ministry of Finance was kept out of the discussion of these key issues for the Norwegian economy. The opposition Labor Party supports the move, underscoring the extent of Equinor’s political influence. Equinor appears to be more untouchable than ever. The Ministry of Petroleum and Energy, on the other hand, is politically vulnerable and may be destined for liquidation.

The counter argument to this loosening of controls is that, in the Norwegian context, the economic weight and technical complexity of the oil industry, together with Equinor’s dominant position, justifies a special government post for overseeing operations. However, under the current setup, external control of Equinor looks likely to deteriorate further, and the company will prioritize volume over value, particularly in offshore wind. It will use revenues from the oil and gas of the Norwegian Continental Shelf to finance more doubtful investments. Volume ambitions carry high risks, and the strategy does not appear sustainable. Norway’s maritime areas have large wind resources, but the development and exploitation of intermittent wind is a different business than finding and extracting oil and natural gas. By allowing Equinor to invest in wind power, the government invites wasting oil and gas revenues, following the example of costly onshore operations in the Us. A more sensible solution, establishing a separate wind power company for sake of cost transparency, would hardly be in Equinor's interest. The company wants to grow without petty considerations for profitability.

Professor Petter Osmundsen at the University of Stavanger has in a preliminary unpublished memorandum carried out a critical analysis of Equinor's new strategy entitled, "The Star Was Not a Star and the Cow Was Not a Cow." He points out that once again, the company seems to misunderstand the market. The risk is that Equinor will overinvest in wind power and underinvest in oil and gas -- at a loss for itself and for the country.

Why won't the government owner intervene, even with strong negative signals from the capital market regarding Equinor's new wind strategy? Prime Minister Erna Solberg is not following the Conservative Party's past sober oil policy tradition. Oil Minister Tina Bru has not been able to defend her ministry's field of expertise. Both have now assumed responsibility for what is to come by reappointing a board responsible for major mistakes and losses. Conspicuously, the Labor Party does not voice much criticism of the mismanagement of the most important part of the state's business operations. The argument about the need for coordination of the state's business operations is theoretical. Recent experience shows that spending in the government's oil industry needs tighter controls, not slacker. Presumably, the Labor Party should have an interest in tighter state control that can bring more revenues to the treasury, which could draw the Ministry of Finance more strongly into the management of Equinor. But apparently Labor has no such interest.

In retrospect, the 2001 privatization of Statoil (as Equinor was known at that time) appears to have been carried out unwisely. The company has systematically taken money out of Norway. For Norway, it is better instead to bring more petroleum revenues to the country's sovereign wealth fund, SPU, by the government taking a larger dividend from Equinor. Norway is still behind neighboring countries in issues of research and development. The primary challenge for Norway's economy is to use oil and gas revenues to develop a knowledge-based, competitive business sector rather than offshore wind turbines.

Statoil/Equinor appears as a classic example of how privatization should not be done. Responsibility for the errors is evenly distributed politically. In 2001, the Labor Party sold a share of the SDFI to Statoil. Since 2013, the various governments led by Solberg have given the company almost free rein. The bill has arrived in the form of the Auditor General's report on Equinor, but both the Conservatives and the Labor Party want to continue with a system that produces high risk and at times heavy losses for Norway. Equinor has learned its politics well: The outcome is a nationalized company that is politically more effective than it is economically efficient.

Øystein Noreng is professor emeritus in Petroleum Economics and Management at BI Norwegian Business School in Oslo, Norway.


Further disruption lies ahead. The 2021 Outlook provides important context and pointers to help you navigate these changes, and understand how sometimes confusing events fit the broader picture.
China is promising little but quietly adopting domestic policies that may beat its official CO2 emission cutting goals.