STATOIL NORWAY

Jimmy Lozano, Asim Hussain, Hassan Qureshi, Bonny Nguyen, Duvan Forero, Andy Cheung

MINORITY REPORT

Committed to accommodating the world's energy needs in a responsible manner, applying technology and creating innovative business solutions. Building on more than 35 years of experience from oil and gas production on the Norwegian continental shelf.

Agenda• About Norway• About Statoil• Ownership• Relationship w/ State• Governance• Operating Segments• Products• Marketing• Technology & Operations• Strategy & Behavior• Financial Performance• Keys to Success• Resource Curse• Conclusion

History• 1959: Oil discovered at

Groningen

• 1962: Phillips Petroleum applies to explore – Application rejected

• 1963: Norway’s government creates legal and regulatory framework

• 1965: Government clarifies how to divide NCS with Denmark and Great Britain

• 1972: Statoil created – Timing allowed for government to avoid geological risk

• 1985: State participation in oil reorganized by conservative party

• 1990s: Expand internationally to Ireland, China, Angola

• 2001: Statoil listed on NYSE and Oslo SE

About Norway• Not a member of Organization of the Petroleum Exporting Countries (OPEC) or

the EU

• Member of the International Energy Agency (2007–09), the World Trade Organization, and the Kyoto Protocol.

• Benefits from political stability, a solid currency (kroner), and a good, albeit slow-growing economy. It is ranked fifth in the world in terms of GDP per capita ($58,600)

• Because of the relatively small size of the Norwegian economy, hydrocarbons dominate the budget and macro-indicators, accounting for 35 percent of state revenues and 25 percent of GDP

• Norway has adopted policies to avoid macroeconomic distortions resulting from an oil-based economy, and is often cited as example of success in dealing with the “resource curse”

About Statoil• Founded in 1972 as the national oil company (NOC) of Norway• Operates in 36 countries • Involved in exploration, drilling, transport, refining, and marketing• 13th largest oil and gas company; • largest company in Nordic region by revenue and profit • 80% of Norway’s oil and gas production • Alliance with BP • One of the major suppliers of natural gas to the European market• One of the world's biggest sellers of crude oil. • Became StatoilHydro in 2007 and Recerted to the Statoil in

November 2009• 50% of employees work outside Norway /Workforce consists of

nationals as well as foreigners

Ownership

• 1972: Statoil 100 % government owned.

• 2001: Parliament approved its partial privatization with the sale of 19.2 % of Statoil

• Current: Over the years parliament allowed a further reduction in state ownership down to 67 %

Relationship w/ State• A balance act for politicians to support Statoil while containing its

power in the government.

• In 1981, Statoil’s balance sheet was split into 2, created State’s Direct Financial Interest (SDFI) to decrease its cash flow.

• Lost ability to veto over field decisions in the licensing group.

• Mongstad debacle led to Johnsen’s resignation in 1988 and ultimately ended the strong influence Statoil has in politics.

Relationship w/ State (cont.)

• New CEO Norvik’s strategy is to developing a more arm’s length relationship with the government.

• Need to effectively compete with IOC abroad

• Stronger relationship between employee and Statoil vs government improve performance

• Strong relationship with government limits the company’s freedom.

Relationship w/ State (cont.)

• Today, more corporate like than state-own NOC.• Minimal interference from government in operational

decisions.

Governance• Strong: The roles and responsibilities of the shareholders, the board of

directors, and Statoil’s management are clearly defined• Independent: A nomination committee, whose members are elected by the

shareholders for a term of two years, is independent of both the board and the company’s management

• The board: composed of 11 members, of which 8 are independent• Audit: The NOC’s external auditor is independent in relation to the

company’s management and is elected by the annual general meeting

Norwegian ModelThe “Norwegian model” of petroleum management features the separation of responsibilities among:

•Ministry of Petroleum and Energy (MPE), oversees the state’s ownership interests in petroleum activities

•Norwegian Petroleum Directorate (NPD), the regulator, whose mission is to create the greatest possible values for society from the oil and gas activities

•Petoro AS, a wholly state-owned company established in 2001, which is responsible for the commercial aspects related to the state’s direct involvement in petroleum activities on the NCS, and associated business.

•Gassco, a wholly state-owned company established in 2001, which is responsible for transporting Norwegian gas to continental Europe and the United Kingdom.

•Statoil, an integrated oil company in which the state is the majority shareholder

Operating Segments• Upstream: Exploration and production dominates the company’s

long term asset base. After initially operating only within the NCS, Statoil moved to international territory in order to expand it’s growth in E&P and focus on natural gas

• Midstream: Natural gas segments transports, processes, and sells natural gas from Statoil’s operations in Norway and internationally

• Downstream: Statoil’s downstream activities include sales and trading, refining, methanol production, and retail and industrial marketing of oil

Upstream – Global Footprint

Products

• Oil• Crude Oil and NGLs from Norwegian Continental Shelf (NCS) ~ 42 Statoil

operated assets.• Development & Production International (DPI) responsible for all

development and production of oil and gas outside the NCS.

• Gas• The Arctic gas is sent ashore through a 143-kilometre-long pipeline to

Melkøya • Gas from Caspian Sea - Statoil has a significant position in the Azerbaijani

gas industry through its 25.5 per cent interest in the Shah Deniz gas field. • Operate shared shale gas and gas liquids assets with Canadian joint

venture partner Talisman on the Eagle Ford formation in 2013. • Active partnership with Chesapeake Energy in the Marcellus formation in

several states in the United States' north-east.

Products (cont.)

• Renewable • One of the largest offshore wind farms in the UK, Sheringham

Shoal, was formally opened in September 2012.• The Norwegian government and Statoil are planning a full-scale

post combustion carbon dioxide capture project in conjunction with the combined heat and power (CHP) station at Mongstad.

Statoil Fuel & Retail (SFR) – Downstream• SFR is a road transportation fuel retailer with a presence in eight

countries across Scandinavia and central and eastern Europe.

• SFR was established in May 2010 as a separate legal entity within the Statoil group. In October 2010, Statoil transferred all activities relating to the fuel and retail business to SFR.

Marketing• Marketing, Processing and Renewable Energy (MPR) is responsible

for the marketing and trading of crude oil, natural gas, liquids and refined products, for transportation and processing, and for developing business opportunities in renewables.

Technology Development• Developing resources on the NCS was technologically challenging

from the start

• Innovations in platform technology were required in order to address the harsh conditions of the North Sea

• A longtime interest of Statoil have been projects that push the envelope of technology in response to increasingly harsh conditions as developments have moved into deeper water and further North

• Allowed for petroleum and political advantages

• Share knowledge and investment risk to accelerate company’s international efforts with experienced partners (BP Alliance)

Operations Development• The Norwegian petroleum policy created a knowledge base

obtained from IOCs from the start of developing the Norwegian Continental Shelf (NCS)

• Public policy facilitated the early development of Statoil by removing exploration and discovery risk

• After the acquisition of Norsk Hydro in 2007, Statoil focused on the internationalization of upstream operations

• The Statoil-BP Alliance allowed the company to be successful in the rapid expansion of the world stage

Financial Performance 2004-2008

• Statoil’s financial performance falls short of the average NOC performance recorded.

• This reflects the maturity of Statoil’s portfolio, as well as possible adjustment costs following the merger with Hydro in 2006.

• Net cash flow to capital expenditure sharply declined after the 2006 merger, mainly due to the large and ambitious internally funded capital expenditure program initiated by the NOC.

Financial Performance 2009-2013

Financial Performance – State Revenue

The Norwegian government derives revenues from 3 major sources: Taxes and fees paid by oil companies, the government’s share through its SDFI holdings and dividends from Statoil

Financial Performance – Statoil

Strategy & Behavior• Control: Norway's policy orientation from the start was focused on

maintaining control over the oil sector, as opposed to simply maximizing revenue. As a result, the country was more concerned with understanding and mitigating the possible negative ramifications of oil wealth than with any special advantage that could be gained from it

• Knowledge: Civil servants gained knowledge of petroleum to regulate the sector through systematic efforts to build up their own independent competence, enabling them to productively steer the political discourse on petroleum management after the first commercial oil discovery was made.

• Competition: Robust contestation between socialist and conservative political parties also helped contribute to a system of oil administration that supported competition and was able to evolve new checks and balances as needed

Strategy & Behavior (Cont.)• Development: Statoil did play an important role in contributing to the

development of Norwegian industry and technological capability, in large part because it had the freedom to take a long-term approach to technology development.

• Innovation: With a strong engineering orientation and few consequences for failure as a fully state-backed company, Statoil developed a culture valuing innovation over development of a lean, commercially-oriented organization. The focus on innovation contributed to significant technological breakthroughs and helped spur the development of a high-value-added domestic industry in oil

Strategy & Behavior (Cont.)• Maturity: The formal relationship between Statoil and the government has

become more arm's-length as Norway's resources and oil expertise have matured. Under its first CEO, Statoil aggressively flexed its political muscles to gain special advantages in licensing and access to acreage. As domestic resources began to mature, Statoil's leadership focused more on forging an independent corporate identity and governance structure that would allow the company to compete effectively abroad.

• Connected: The effect of residual ties effect is magnified by Norway's small size and Statoil's importance within it as the largest petroleum developer. Areas of impact are:• The effect on policy decisions of direct personal connections between Statoil

leaders and politicians. • Persistent "Norway-centric" influences on Statoil's strategy even in the larger

context of efforts to internationalize• Public pressure from politicians who continue to see themselves as Statoil's

masters.

• Government restrictions on entry: Major development projects or issues of principle must be considered and approved by the Storting. The oil and gas market is highly regulated. Statoil has competitive advantage as a state owned company.

• Economies of scale:Benefit from producing on a large scale, which means that the average cost of one barrel is lower. Statoil is actively involved in the direct trade sector, delivering large quantities.

Strategy & Behavior (Cont.)

Keys to Success• Change: successfully adapted to changes in the market outlook, trends in the

regulation of the petroleum sector, and the relative importance and shifting of relationships between the NOC and private oil companies.

• Success: Statoil is an example of a successful NOC, it has benefited from the backing of the state and the privileges afforded to it. With the state’s support, the NOC has been able to focus on its core business, to develop knowledge and expertise, and to realize strategic investments in technologies

• Strategy: The government decisions to open the petroleum sector to private investors, and eventually to revoke the NOC’s state privileges, were far-sighted policy measures. By partnering with experienced international operators the NOC was able to: • (i) Accelerate its learning curve, • (ii) Develop a portfolio of assets without having to take the exploration risk• (iii) Benchmark its performance with private companies.

When its privileges were revoked, the NOC had to find its place in the market, but by then it had the size, strength, and knowledge to do so.

Summary• For at least a decade after its establishment, Statoil could count on

the extensive privileges granted to it by the state, which allowed it to build its expertise and asset base without taking the exploration and development risk. Indeed the government’s aim was to create a strong NOC

• The NOC strategy evolved over time adapting to changing geological, economic, and political conditions

• Statoil played an important role in contributing to the development of Norwegian industry and technological capability.

Summary (Cont.)• Strong engineering orientation and few consequences for failure as

a fully state-backed company, Statoil developed a culture valuing innovation over development of a lean commercially oriented organization

• Innovation contributed to significant technological breakthroughs and helped spur the development of a high-value-added domestic industry in oil services

Conclusion

• Statoil is heavily affected by domestic politics and in turn has a heavy impact on Norwegian domestic politics and foreign policy

• The goals, strategies, and behaviors of Statoil, as an NOC, will change over time in order to further its growth in a maturing resource base

• The future organization and operation of Statoil will advance in an efficient manner as the country’s oil and gas sector matures

• Statoil has a commitment to advance abroad, develop existing fields, satellite fields, and application of enhanced recovery technologies

Questions?

Avoiding the Resource Curse

• Policy focus on long-term wealth management • Awareness of resource curse • Successful transition from infant industry

• Limited non-commercial policy interference in Statoil’s operations• Manage to keep Statoil free from political entanglements • Statoil is relatively professional

• Allows for some competition to add efficiency