The Norwegian model: An indicative of the NOCs’ successful performance?
- Written by Lavinia-Petronela Tănase, LLM Oil and Gas Law with Professional Skills - University of Aberdeen
Norway represents one of the most performant nations worldwide regarding its petroleum resource management. This major petroleum producer has decided, in the early ‘70s, that the most successful scheme for highly efficient oil and gas related activities shall be the clearly defined division of oil sector functions. Norway displayed strong sympathy for the instauration of a Ministry of Petroleum and Energy, a Norwegian Petroleum Directorate (NPD) and a National Oil Company, called Statoil. As a rule, the Ministry shall govern the petroleum legislation and policy making (e.g. award exploration and production licenses), while all technical and regulatory matters (e.g. gathering data on all hydrocarbon activities, collecting fees from oil operators, advising the Ministry on technical matters) (Thurber, 2013) shall be coordinated by NPD. Furthermore, all extensive commercial operations both in Norway and abroad would be pursued by the National Oil Company (NOC)(Al-Kasim, 2006).
This article aims at unfolding the modality in which the Norwegian Model can apply to several other countries and the cause-effect result between the non-implementation of such a separation-of-functions model and the inherent problems the NOCs are faced with.
This model’s resounding success relies upon the highly stable political scene and performant bureaucracy of the state. Fundamentally, for implementing the separation of functions within the governance of the oil sector, the state needs to prove it has developed a strong institutional capacity and a competitive political system (Thurber, 2010). Norway has confirmed that the model has functioned on the basis of an appreciably – efficient previous industrial experience and investments in human capital, to accommodate the actual and future employees with the petroleum industry (Thurber, 2013). More specifically, Norway has followed some very prominent steps in its becoming as one of the world’s leading oil and gas producers. Its gigantic, qualitative oil and gas discoveries in the early ‘70s and its favourable position in the northern part of Europe have substantially contributed to this statute. Moreover, Thurber and Istad (2013) argue that there has been a sine qua non-link between the separation of functions model and the conversion of Statoil in a truly efficient and well structured NOC. In this way, Al-Kasim states that this Nordic country has focused on preserving control over its oil resources, in order to counterbalance the ‘power and ambition of Statoil’. However, the State’s institutions and Statoil have worked together towards a developing economy based on oil activities. Hence, the Government Pension Fund – Global emerged by collecting oil revenues and secure them for the belonging of the entire population of Norway, and not just to a small richer group (Leroen, 2012). Furthermore, the Government allowed Statoil to take long-term approach to technological development, its organisational culture valuing innovation instead of commercial gain.
As a matter of fact, even the Natural Resource Charter (2014) endows the Norwegian Model in its first precept, by clearly laying out that the natural resources should be managed in such a way as to primarily benefit the citizen, ‘through an inclusive and comprehensive national strategy, legal framework and competent institutions’. Also, the sixth precept brings to light the idea that NOCs should develop their commercial activity upon well established mandates.
Even though Norway has had a positive experience with separation of functions regarding the governance of its oil and gas sector, it does not mean this shall constitute a precedent for all countries that endeavour to pursue this model. Practically, each country must be analyzed according to its political, legal, institutional specificities and human capital development. To put it more simply, commercial activities are likely to go wrong due to a lack of legislative and institutional stability (Rodrik, 2008).
This model has been successfully implemented throughout the world only in a handful of oil producing countries, such as Norway and Brazil. Brazil, a country which once had high institutional capacity and vibrant political competition, took a first step in applying the separation of functions model by creating the Agencia National do Petroleo, Gas Natural e Biocombustiveis (ANP) in 1997, long after the creation of its NOC, Petrobras in 1953. Brazil initiated the transition after carefully building up its human and institutional capacity (Thurber, 2010). The time factor seems crucial, as by ANP’s establishment, Petrobras had already gained the statute of a powerful world competitor. Also, by that moment, the country’s bureaucracy had developed into a stable one, able to oversight the NOC’s activities and to create the perfect environment for its focusing mainly on commercial endeavours (Thurber, 2011). The objective of the separation of functions was to create a level playing field and determine Petrobras to become more commercial in its approach, following the long period of military ruling (1965 – 1985) when NOC exercised all three functions.
In the present day, however, Petrobras is no longer a successful example, as corruption, poor financial decisions and huge amount of debts refrain it from maintaining its leading position among the world’s NOC. Specifically, after the discovery of the so-called ‘pre-salt oilfields’ (the oil lies under a 2km thick layer of salt, under the ocean), Petrobras embarked on what was the biggest corporate capital expenditure programme in the world (Lahey, 2016).
At the other end of the exposition, stand Nigeria and Algeria, who have deeply failed in trying to reform their current systems and implement this model. Hence, Nigeria, a country of low institutional capacity and high political competition, initiated the formal separation of functions one year before Norway, in 1971. Theoretically the Department of Petroleum Resources (DPR) exercised regulatory responsibilities, while the National Nigerian Oil Company (NNOC) undertook all commercial activities in the oil sector. However, due to the large political control by the country’s patrons, the DPR was hindered from pursuing its powers correspondingly. The main purpose was that NNOC encapsulates all three functions, in order for the political domineers not to lose the future personal gains secured through the contracting process (Heller, 2010). Unfortunately, Nigeria did not have the fertile soil for the implementation of such a strict model, as it did not bear a strong civil service at the beginning of oil development. Also it did not invest in training the professionals throughout time (Nwokeji, 2007). Moreover, the personnel migration from the NNOC to the DPR enhanced the know-how transmission and the unrelinquishable dependence between them. Even though it has struggled for more than 50 years with reforming the governance of the hydrocarbon resources, Nigeria still has a long way until achieving performance through separation of functions.
According to Thurber (2011), a similar situation existed in Algeria also, which seemed willing to transition to the Norwegian Model, but it was mainly impeded by the political actors who benefit from the actual system. In 2005, even after the creation of two governmental agencies, namely Agence Nationale pour la Valorisation des Resources en Hydrocarbures (ALNAFT) and Autorite de Regulation des Hydrocarbures (ARH), their roles remained formal, without having any beneficial action on the NOC – Sonatrach’s commercial activity (Entelis, 1999).
On the other hand, there are countries that do not need to adopt the Norwegian Model as their oil development process has been only marked by triumphs over the years. Angola and Kingdom of Saudi Arabia (KSA) are the two exponents of this category, two countries with low political competition and low institutional capacity, but very prolific governance of hydrocarbons.
Angola, even steadily affected by oblivious corruption, has triggered economical growth and reliable return-revenue to the government through its multitasking agent – Sonangol, which executes impeccably all three functions. Heller (2012) agrees that due to the Civil War that took over the country from 1975-2002, Angola was led by a small tight-knit group of people who invited foreign investments to the country, in order to secure safe revenue return to the government. Consequently, one of the main perks of the NOC was the developing of a new class of technocrats and skilled managers that led the company towards successful commercial operations.
Similarly, KSA represents one of the most important examples which prove that the lack in Norwegian Model’s application does not automatically imply poor oil governance. Saudi Arabia’s history differs completely from all of the other states, being largely known as the world’s most important oil producer (Valerie, 2005). Saudi Aramco, the NOC, practically compresses all three functions, with very little government control. Because the managers of the NOC are closely related to the Al Saud Royal Family, and the relentless human resources exchanges between the Ministry of Petroleum and Saudi Aramco make impossible a clear distinction of functions between them (Stevens, 2008). Basically, Saudi Aramco has captured all the prerogatives of other governmental institutions in governing the country’s hydrocarbon resources. The success lies within the rallying between the management of NOC and the leadership of the country, while continuous investment in human capital and technology development is being pursued.
This analysis on the NOCs seems invariably important as, nowadays, they have monopolized almost 73% of the world’s oil reserves, be they situated in the Middle East, Africa, Europe, Latin America and other parts of Asia. Specifically, in Venezuela’s case, we shall state that the NOC has encountered many difficulties due to the lack of powers’ separation within the State. Thus, Petroleos de Venezuela (PDVSA) has failed to conduct thriving commercial operations, as it is a state-controlled company that exerts the petroleum policy on behalf of the president. The former ruler, Hugo Chavez, has taken control over the company, transforming it from a commercially managed company into its agent (Hults, 2007). Chavez’s reform to modify the Constitution has put a lot of pressure onto the company, and lowered its performance as a production agent, by 30%. Moreover, the fact that the Venezuelan government has focused primarily on using the NOC as a means for funding and implementing the presidential initiatives, has determined a low level of performance, overall. By contrast, Saudi Aramco has not encountered any obstacles in its becoming one of the largest oil and gas companies worldwide while not implementing the Norwegian Model. However, unlike PDVSA, Saudi Aramco has been granted with the liberty and autonomy to conduct its commercial activities, following a ‘western professional practices and a strong professional ethos’ (Boscheck, 2008).
For a proper implementation of the Model, there has to be taken accountability of the state’s institutional capacity and political unrest. As we have seen, many countries have tried and failed to adopt it, mainly due to their intrastate unwelcoming prerequisites. This Model is highly recommended as underpinning the successful governance of a state’s hydrocarbon resources, but not irreplaceable. Angola and Saudi Arabia, which have managed to maintain their leading positions in the world’s oil market without a separation of functions, stand as proof in this respect. Nevertheless, in countries like Venezuela, not only the lack of Norwegian Model has determined the disastrous performance of the NOC, but also the almost totalitarian system of governance of state. Whereas in Brasil, the corruption and huge amount of debts transposed Petrobras from a world’s leading NOC, into a sinking one.