The Bittersweet Aftertaste of Oil

Jenni Maria Pettersen

How will Equinor’s U.S. scandal change corporate governance in state-owned Norwegian companies?

Since 2007, the Norwegian state oil company Equinor has lost $ 24.6 bn and counting on investments in the U.S.

The Equinor losses have the makings of a perfect business scandal. There was an unacceptable spending culture, massive losses, neglect of advice from the Norwegian Financial Supervisory Authority and most importantly, it looks like a cover-up was attempted.

Equinor reported the loss only indirectly by grouping all international business together. Leaving shareholders and the public unaware of the alleged mismanagement connected to the investments.

In 2014, the Norwegian Financial Supervisory Authority recommended the company change their financial reporting methods. They advised Equinor to separate the U.S from other foreign investments. Such a change would clearly have exposed the losses.

The Equinor board of directors did not change their reporting practices until spring 2020. That was after the scandal became public knowledge. The board claim they did not make the change earlier because they followed the reporting practice of comparable companies operating in the U.S.

What is Parliament’s role in managing state-owned companies?

The Government manages the State’s shares. They must do so in accordance with laws and regulations, the state’s ten principles for good corporate governance and instructions and expectations from Parliament.

Parliament has two roles:

  • A Constitutional right to set instructions for how the Government manages the shares.
  • Monitoring Government’s management of shares.

In 2001, Parliament decided to partly privatize and list Equinor on the stock exchange. According to the parliamentary protocol, a main reason (in addition to adding new shareholders and market surveillance), was to enable Equinor to expand internationally. The company’s investment strategy was even part of the white paper suggesting privatization.

Little did Parliament know that 19 years later, they would learn about Equinor’s U.S. scandal from the Norwegian business daily Dagens Næringsliv. Parliament’s blessing would certainly not have lowered Equinor’s international ambitions. From an outside perspective, it appears strange that the company’s investment strategy was anchored in Parliament.

Only after the situation was exposed did the Minister of Petroleum and Energy Tina Bru inform Parliament about it. Equinor subsequently decided to open an internal investigation led by an external auditor. Their report concluded that Equinor’s onshore business growth strategy in the U.S. “came at the expense of value and control”. It also stated that there was a lack of corporate oversight and Equinor had limited relevant experience.

Parliament’s control organ, the Office of the Auditor General of Norway, also opened an investigation into the Government’s management of the shares in Equinor regarding the investment in the U.S.

The future of the Norwegian Government’s management of shares

Bru says she has asked for more transparent reporting in the future. Equinor has already begun changing its reporting practices.

On November 3, 2020 the Parliamentary Standing Committee on Energy and the Environment held a hearing where they examined the Minister’s report on Equinor's U.S. operations.

The Committee majority stated that Government should be a more active shareholder in the future. In their view there is no contradiction between the State’s principles of corporate governance, sound corporate governance and clearer accountability.

The Committee Majority also noted an increasing focus on ESG and accountability amongst private investors. They asked Government to set high expectations for companies it owns in the future. It is however notable that most committee members are from opposition parties, and there is a tendency for opposition politics to change when they gain power.

On December 15, 2020, the Office of the Auditor General of Norway stated in their report that the Government should have asked Equinor for greater transparency on their foreign investments. They also concluded that the Ministry was preoccupied with petroleum production levels rather than profitability.

The Norwegian model for State-Controlled companies demands a high degree of trust from all stakeholders, including the financial market, shareholders, and the public.

Should the Government fail to set higher standards for transparency in the future, they are likely to face strong critique again. Especially if another serious scandal is allowed to happen. Owning an oil company is not without financial and environmental risk. Does the State as a shareholder have greater legal duties than a private shareholder does?

Published 11. January 2021

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