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Canada Doesn't Obey Oil-Rich Norway's 'Ten Commandments'

Forty years ago petro giants called Norwegians' demands crazy. They paid off handsomely. Third in a series.

By Mitchell Anderson, 8 Aug 2012, TheTyee.ca

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NORWAY'S 10 OIL COMMANDMENTS

Crafted in 1971 by the national government's Standing Committee of Industry:

1. Ensure national governance and control of the entire activity on the Norwegian Continental Shelf.

2. Exploit the petroleum deposits in such a manner that Norway minimizes its dependency of crude oil imports.

3. Develop new business activities based on the petroleum sector.

4. The development of the oil and gas industry must take necessary consideration to existing business and to the environment.

5. Flaring of valuable natural gas is not accepted on the Norwegian Continental Shelf, except for shorter test periods.

6. Petroleum from the Norwegian Continental Shelf shall as a main rule be shipped to Norway unless societal impact considerations require other alternatives.

7. The government shall be involved at all appropriate levels, contribute to the coordination of Norwegian interests within the Norwegian oil industry, and develop an integrated Norwegian petroleum environment with both national and international goals.

8. A state-owned oil company shall be established to secure the Government's economic interests, and to have a positive cooperation with national and foreign interests.

9. The activity north of 62 degrees shall satisfy the special societal impact conditions tied to this part of the country.

10.Future Norwegian petroleum discoveries may expose the Norwegian foreign policy to new challenges.

-- The Standing Committee of Industry 1971

So far in this series we have looked at Norway's oil industry in the present day, and their Viking cultural roots that allowed this tiny nation to stand up to the world's most powerful industrial sector.

But to understand how uniquely different the oil industry is managed in Norway compared to Canada we have to look back to the 1960s and a key moment in Norwegian history.

Phillips Petroleum approached the Norwegian government in October 1962 to begin an offshore exploration program. Norway at the time had no expectation that there was oil, no regulatory system to grant oil concessions and no established maritime borders with its neighbors. They told Phillips they would have to wait.

Even after clear border boundaries were negotiated in 1965, it would have easiest to follow the lead of their Danish neighbors and grant exploration rights to a single foreign company, with a royalty system if any oil was found. When the discovery of the massive Ekofisk field in 1969, Norway decided they would chart a far more challenging course.

Norway was in no rush to develop their oil resources, and determined that it would only be on their own terms with a clear benefit to Norwegians. So strong was this sentiment that an all-party parliamentary white paper itemized "10 commandments" (see sidebar) for oil development, later enshrined into the Norwegian Petroleum Act.

One of the first steps in 1972 was setting up a state-controlled oil company called Statoil, created by a unanimous act of parliament in 1972. As new offshore concessions became available, Statoil was preferentially granted the largest ownership shares in the most promising areas. The company was also exempt from contributing exploration costs, which were covered by their foreign business partners.

Foreign companies were required to set up Norwegian-based subsidiaries, conform to Norwegian labour and safety regulations, and train Norwegians to ensure that the country was not technically dependent on outsiders to develop their resource. They were also required to use Norwegian subcontractors and local shipyards even if their bids were more expensive.

Windfalls and brinksmanship

When global oil prices shot up in 1974 after the Middle East oil embargo, the Norwegian government decided that a major tax increase was needed to ensure that oil companies would not realize windfall profits at the expense of the Norwegian taxpayer.

Professor Einar Lie at the University of Oslo researched the history of this period and describes how the government used the newly formed Statoil to gather intelligence on how far they could push foreign companies.

"The Norwegian civil servants wanted to squeeze this lemon to the maximum but they did not want to foreign oil companies to leave. So they talked extensively with Statoil, which had a lot of informed contacts with the other oil companies to find out just how much they would be able to take without the foreign companies leaving Norway. They were extremely pragmatic on how to get the maximum taxation."

At the time, oil companies in Norway were being taxed at about 50 per cent. In 1974, Norwegian officials summoned Exxon, Shell and others to a meeting and informed them the new petroleum law would raise taxes to close to 90 per cent. Representatives of the world's most powerful industrial sector were not pleased.

When the yelling died down, the hard-nosed minister of finance at the time noted that none of the companies present had surrendered their oil concessions. He then reportedly turned to his bureaucrats and said in full view of enraged oil executives, "We should have taken more."

According to Lie, "They were furious when they heard about the new taxation law. And then they started a media campaign saying that they would leave Norway and that it was impossible to work in a socialist country like this that does not understand the rules of international capitalism."

The stakes were high in this gambit. Internal documents uncovered by Professor Lie showed the Norwegian government was concerned about legal challenges, trade sanctions from the U.S., or foreign oil companies leaving Norway.

None did. In fact even with the higher rate of taxation, company profits were higher than originally projected due to increased global prices, and the Norwegian government knew this going into their meeting with industry.

The new petroleum law in 1974 did not merely raise taxes, it specified that taxes would be calculated based on numbers provided by the Norwegian government, not the company. According to Lie, "The core of the regulation was that the Norwegian state would define the value of the oil produced and tax the companies of that basis. They would not accept what the companies presented as taxable income since these figures are so much easier to manipulate."

What is remarkable about this brinkmanship with the global oil industry is that all Norwegian political parties were united in the effort. According to Lie, who poured through the records of the era:

"I don't remember any political debate between the parties on this issue. No one supported the oil business interests politically. There was general agreement that Norway needed the technical competence and size of the foreign oil companies to develop the most difficult fields. Everyone wanted the oil companies to stay in Norway. But business interests have really never been integrated into Norwegian political life. It's really unthinkable that the oil sector interests would intervene in the political debate by trying to have spokesmen among the political parties. Everyone was in favor of the Norwegian society prospering and that we should get maximum benefit from the oil resource."

'How do you tax a blowout?'

The government was so determined to maximize revenues they even taxed the oil that spilled during a drilling accident in 1977. According to Lie, "The day after the big blowout of a Phillips well, the minister of finance called a meeting to determine how to tax the oil that had spilled. This was really not part of the taxation regime and he wanted to know 'How do you tax a blowout?'. I tell this story as an explanation of their mindset."

There is an additional lesson for Canada in this history. While Canada seems still to be debating whether we should be an oil-producing nation, Lie recounts how Norway never suffered from this national neurosis. "I think the most fascinating part of the Norwegian story is that you don't have this public debate about the pros and cons of oil companies -- its much more a debate about how should we move forward to get the maximum government take."

This strategy has paid off handsomely. Norway is debt-free, has $600 billion in the bank and is very much in control of how their national resources are developed. By comparison, Canada remains riven by regional disputes that undermine our collective negotiating position, has no national petroleum policy and is $566 billion in the red, even though we produce 40 per cent more oil than Norway.

Alberta is the sole recipient of royalties on their oil production, which is comparable to the entire nation of Norway. Yet the province has been unable to balance the budget in the last three fiscal years and is rapidly spending past oil wealth while laying off teachers and closing hospital beds. Norway collects between 70-80 per cent tax on oil profits. Royalties charged on Alberta bitumen in 2010 were 10 per cent.

Norway's inspiration was Alberta

It didn't have to be this way. Many of the strategies employed by Norway to maintain control over their oil industry were first pioneered in Canada. Twenty years before Norway started their oil fund, Peter Lougheed set up the iconic Alberta Heritage Fund as an autonomous repository of the province's oil wealth. It was apparently too autonomous for subsequent premiers and no revenues have been contributed to the moribund fund since the 1980s.

When Norway was scouring the globe for progressive regulatory systems in the early 1970s, they adopted many aspects from Alberta's Energy Resources Conservation Board, though with much stronger enforcement mechanisms.

And like Norway, Canada also incorporated a state-owned oil company in the early 1970s. Petro-Canada was created by an act of parliament in 1975 but the move was greeted with such hostility in Alberta that Ottawa eventually sold Canada's remaining small stake in the company in 2004.

It is telling that almost 40 years since Petro-Canada was created, Albertans seem more open to state-owned oil companies from China than from Ottawa. Calgary-based Nexen is being purchased by the China National Offshore Oil Company for $15.1 billion and the sale has generated relatively mild public debate in the province.

In the U.S., the takeover of Nexen's U.S. assets is being opposed by both Democratic and Republican members of Congress on the basis of national security concerns.

Here in Canada the deal must be approved by federal cabinet based on a vague "net benefit test" regarding Canada's national interest.

Many years ago Norway decided very clearly what was in their national interest. They now reap the benefits of their determination to control their own destiny. Ottawa by contrast seems content to let the market decide such weighty issues.

Next Wednesday: How Norway acts as both an oil industry regulator and business partner.  [Tyee]

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