Is the Norwegian model of separation of functions within a State the key to successful oil & gas

administration?

In a rapidly changing world, against the backdrop of an increasing demand for abundant, secure and
affordable supply of hydrocarbons, control and management of oil & gas is of paramount importance.
Not only are hydrocarbons an essential part of the energy equation but the sheer dependency of the
developed and developing world on fossil fuels make oil and gas a strategic asset as well as a valuable
tradable commodity. It is therefore a matter of fact that hydrocarbons represent an asset of primary
importance in any jurisdiction and consequently the search for, exploration and sale of such resources
are of considerable importance to any administrator. In turn this has spurred the quest by legislators
and regulators worldwide to find the most effective form of regulation of hydrocarbons at a domestic
level. The question is thus what solution can be implemented by national legislators to optimize the
management of national resources ensuring efficient and profitable exploitment of valuable resources.
Is there a model which can be effectively used by all national legislators to domestically regulate
management of oil and gas, and if so, can such model be invariably exported to all hydrocarbon-rich
provinces?

In an attempt to answer these questions, this article will be to investigate (a) the ability of States to
adopt the Norwegian model1 in relation to the control of its hydrocarbon resources and (b) whether
negative consequences are bound to ensue if such model is not adopted. On the basis of available case
study data on two national oil companies (NOC)2, it will be suggested, consistently with scholars,
that the adoption of a Norwegian model is not always possible nor does failure to adopt it necessarily
translate to poor performance3. Furthermore, relying on NOC performance data4, it will be
hypothesised that, in fact, irrespective of the type of model implemented, successful NOCs appear to
operate under two conditions: (a) the ability to consistently pursue commercially wise, long-term
objectives with little political interference and (b) running of NOC operations with high degree of

Farouk Al-Kasim, Managing Petroleum Resources: the Norwegian Model in a Broad Perspective (Oxford Institute
for Energy Studies 2006a); Farouk Al-Kasim, The Relevance of the Norwegian Model to Developing Countries,
Presentation (2006b) at http://siteresources.worldbank.org/EXTNTFPSI/Resources/606764-1150299531473/Farouk AlKasim.pdf .
2
David G Victor, David R Hults and Mark Thurber, Oil and Governance: state-owned enterprises and the World Energy
Supply (Cambridge University Press 2014) p 14.
3
Ralf Boscheck, The governance of oil supply: an institutional perspective on NOC control and the questions it poses
(2007) 1 (4), 366389 International Journal of Energy Sector Management.
4
Thurber and others (n 2) 110.
1

technical and human capabilities. Hence, the ideal administrative model for any State appear to be
the one which allows both conditions to be met simultaneously.
The expression Norwegian model is used to identify the administrative structure adopted by the
State of Norway to control its hydrocarbons and is characterised by a separation of functions between
three distinct bodies: commercial operations are conducted by a partially privatized NOC (Statoil),
general policy relating to hydrocarbon exploitation is set by the Ministry of Petroleum and Energy
and advisory services and data gathering is performed by a technical body called the Norwegian
Petroleum Directorate5. Statoil performance ranks among the best performing NOCs6 and has been
compared in governance, business strategy and performance to international oil companies,
traditionally strong performers in the petroleum industry7. Norways success spurred interest among
scholars as to the causes of such remarkable performance despite the difficulties associated with
petroleum extraction and State control8. The hope is that if a formula for successful NOC
governance can be found, then it may be applied to other States allowing some degree of success in
managing local petroleum resources9. Therefore, the Norwegian model has been extensively
examined in literature and more specifically, the models inherent fundamental separation of
commercial and policy/regulatory functions of government. Following the proven assumption that an
agent-principal relationship often occurs between commercial entities and policy makers/regulators10,
an argument has been made that the separation of such functions effectively counteracts the
emergence of conflicts of interests which, if left unchecked, could lead to inefficiencies and poor
NOC performance.11

Al Kasim 2006a (n 1) 242; Moe Ola Borten (Norwegian Minister of Petroleum and Energy), The Norwegian Model:
evolution, performance and benefits, Presentation (2012) at https://www.regjeringen.no/.
6
Chidi Basil Ike and Hyunjung Lee, Measurement of the efficiency and productivity of national companies and its
determinants (2014) 17(1) Geosystem Engineering.
7
Christian Wolf, Does Ownership matter? The performance and efficiency of State Oil vs Private Oil (1987-2006)
(2009) 37 Energy Policy.
8
Mark Thurber and Benedicte Tangen Istad, Norways evolving champion; Statoil and the politics of state enterprise,
in Thurber and others (n 2) 599.
9
Mark Thurber, Hults David and Patrick Heller, Exporting the Norwegian Model: The effect of administrative design
on oil sector performance (2011) 39 Energy Policy 5366.
10
Thurber and others (n 2) 66-69; Stephen A. Ross, The Economic Theory of Agency: The Principals Problem (1973)
(63) 2 American Economic Review.
11
Thurber and Istad (n 8) 601.
5

Consequently, the separation of functions has appeared essential to reduce such risk while controlling
NOCs in emerging petroleum provinces12, even inspiring precepts of international good practice13.
Scholars have, however, highlighted that Norways success lies in much more than a formula for
bureaucratic organization14 and several other factors contribute to the success of the Norwegian
model15. In fact, the Norwegian model appears to be the product of a mature, politically dynamic and
highly competitive democracy, historically set on pursuing long-term petroleum policies for the
benefit of the whole country16. Relying on proven institutional capacity and extensively drawing on
its experience in other successful industrial sectors, Norway adopted the separation of functions to
pursue Statoils commercial competitiveness without political entanglement, a high degree of
independent monitoring by a panel of prepared technicians and the development of long-term political
strategies free from commercial concerns17. This balanced and ever-evolving relationship between
powers/bodies coupled with Norways proven institutional and human capabilities were essential in
allowing Statoil to pursue long-term technological development within a highly monitored, lean,
commercially oriented organization18 and enjoy a constant growth of annual net income19, resembling
a well performing IOC20.

Empirical data, however, shows that strong NOC performance is not necessarily dependent on the
implementation of a strict separation between policy/regulatory and commercial functions as
successful NOCs are found both in countries which implement separation of functions and countries
which do not. Saudi Arabias Saudi Aramco is an excellent example21. Saudi Aramco developed from
the nationalization of a private company in 197622 and has pursued the objective of being a successful
enterprise while at the same time supporting the Saudi national mission ever since23. Saudi Arabia
does not feature a competitive political environment as it was created in 1932 under the rule of

Timothy Kyepa, Integrating the Proposed National Oil Company of Uganda into the Corporate Governance Discourse:
Lessons from Norway, (2012) 75(30) J. Energy & Nat Resources L; Thurber and Istad (n 2) 599; Pietro As Mendes and
others, Reforming Brazils offshore oil and gas safety regulatory framework: Lessons from Norway, the United Kingdom
and the United States (2014) 74 Energy Policy.
13
Natural Resource Charter, Precept 6, 23 http://naturalresourcecharter.org/.
14
Thurber and Istad (n 8) 600.
15
Hathway Synne Ellen, Should the Norwegian Model of Direct State Participation in Petroleum Activities be used in
Resource Rich Developing Countries as part of the Solution to the Resource Curse? (2012) University of Oslo, 36- 38.
16
Section 1-2 Norwegian Petroleum Act 1972 http://www.npd.no/en/Regulations/Acts/Petroleum-activities-act/#1-1;
Thurber and Istad (n 8) 628; See the ten principles developed by the standing committee on industry in 1971, available at
http://www.npd.no/en/Publications/Norwegian-Continental-Shelf/No2-2010/10-commanding-achievements/.
17
Moe Ola Borten (n 5); Thurber and Istad (n 8) 612.
18
Thurber and Istad (n 8) 601, 637.
19
ibid 630.
20
ibid 632.
21
Stevens P, Saudi Aramco: the jewel in the crown in Oil and Governance (n 2);
22
ibid 181.
23
ibid 184.
12

Abdulaziz Al Saud and has been governed by members of the same family ever since. The
relationship between Saudi Aramco and political power is extremely close24 to the point that scholars
have observed that the ruling family has, in fact, relied upon Saudi Aramco to pursue its own survival
and political stability. Even though day-to-day operations are delegated to a well-developed system
of public administrators25, the Saudi ruling family firmly maintains ultimate control26. The
convergence of interests between the Saudi family and the NOCs corporate mission, characterized
by the pursuit of clear, long-term objectives within a closed, centralized system of administration has
thus created a protective wall27 which prevents Saudi Aramco from falling victim to transient
political whims and loss of commercial focus28. In fact, Saudi Aramco has been defined as a patient
investor29 pursuing human and technical capital growth30 as part of a long-term value-creating
strategy. As Statoil, Saudi Aramco is a well performing NOC31, and as Statoil it has proved to be in
the game for the long run32 yet no formal separation of functions exists and Saudi Aramco itself
defies the Norwegian dictum of separating functions as it is virtually self-regulating with very limited
external supervision.33 Saudi Aramco therefore contradicts the prima facie contention that a formal
separation of functions is paramount to good performance and disproves, to some extent, the scholarly
contention that NOCs thrive in monitoring-heavy systems34.
Although Saudi Aramcos example supports the argument that the Norwegian Model is not the only
path to good NOC performance, further proof can be obtained analysing countries that have tried to
implement the Norwegian model and proved unsuccessful. Nigeria and its NOC, the NNPC, are a
good example. Nigeria implemented the separation of functions in 1971 and then again in 1999. Most
recently35, a new draft of the petroleum industry bill was declared ready to be put forward to the
National Assembly, featuring a formal separation between policy makers/regulators and commercial
entities to cure the systems historical inefficiencies. Despite these efforts and the formal separation

Amy Myers Jaffe and Jareer Elass, Saudi Aramco: National Flagship with Global Responsibilities, (2007)
https://bakerinstitute.org/media/files/page/9f100176/noc_saudiaramco_jaffe_elass_revised.pdf.
25
Stevens (n 21) 187.
26
ibid 186.
27
ibid 173-74, 187.
28
Nawaf Obaid, The Oil Kingdom at 100: Petroleum Policymaking in Saudi Arabia, (2000) Policy Paper 55 Washington
DC: The Washington Institute for Near East Policy.
29
Valrie Marcel, Oil Titans: National Oil Companies in the Middle East, (2006 Chatham House, London) 73.
30
Stevens (n 21) 197.
31
Thurber and others (n 2) 94.
32
Marcel (n 30) 162
33
Stevens (n 21) 188.
34
Thurber and others (n 2) 92.
35
New draft petroleum industry Bill ready for National Assembly, Premium Times, 16/11/2015
http://www.premiumtimesng.com/business/6017new_draft_petroleum_industry_bill_ready_for_national_assembly.html
24

of functions, the NNPCs performance remains chronically poor36. Scholars have attributed such
failure with short-sighted policy makers, ineffective overseers and lack of human and technical capital
regardless of the formal separation of functions37. This supports the contention that any attempt to
implement the Norwegian model in a country with limited institutional and technical capacity would
prove fruitless38 unless the recipient State developed its human and institutional capabilities before
attempting the graft. This is consistent with the view that the Norwegian model is the product of a
convergence of pre-existing social, economic and political conditions that must occur before the
model is implemented and, where such model is deliberately chosen, such conditions cannot follow
implementation but must precede it. Even so, Saudi Aramco proves that NOCs may yield positive
results irrespective of the adoption of the Norwegian model.
Interestingly, however, Statoil and Saudi Aramco do share similarities. Both appear to operate in
accordance with good commercial practice in the petroleum industry i.e. committing to long-term
investments, human capital growth and technological advancement and both appear to be insulated
from political power, albeit through different mechanisms, and able to pursue commercial objectives
without detrimental interference from political forces39. Then again, Norway and Saudi Arabia are
politically different, the first being a proven democracy open to political change and the former being
a consolidated kingdom. This feature offers useful insight to explain of the different approach to State
control of NOCs. Pluralistic democracies imply a multitude of voices within each governing body or
office and, consequently, a multitude of potentially contrasting interests, often as short-termed as
single political/administrative mandates, making the state-NOC relationship especially vulnerable to
agency-principal conflicts.

By contrast, the petroleum industry is characterised by extremely long-term, capital-intensive

investments40 and high level of technical expertise, incompatible with short-sighted, commercial
choices and uneducated political interference. Norway addressed its political environment and
principal-agent risk developing a system of check-and-balances, drawing on its experience as a
democratic country. It succeeded as it already had the necessary institutional capabilities and
experience. Saudi Arabia, however, faces no such environment and, in fact, the Saudi mission has
been firm in its objectives with a consistent, long-term approach to petroleum extraction throughout

36

Thurber and others (n 2) 92

Mark Thurber, Ifeyinwa Emelife and Patrick Heller, NNPC and Nigerias oil patronage ecosystem, in Thurber and
others (n 2) 715-717.
38
Thurber and others (n 9) 12.
39
Thurber and Istad (n 8) 601.
40
Christian Wolf and Michael Pollitt, Privatising national oil companies: assessing the impact on firm performance,
(2008) Cambridge Papers https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/workingpapers/wp0802.pdf.
37

Saudi Aramcos years of service. The reigning familys vested interest for good the NOCs
performance and high revenues has effectively offset the agent-principal risk allowing, in turn, Saudi
Aramco to fully commit to the implementation of successful commercial practices. The case study of
two of the worlds most successful NOCs and their administrative models provide strong support to
the contention that the Norwegian model is not indispensable for good NOC performance. Both
models, however, have come to display similar, winning traits, namely the capacity to shield the NOC
from principal-agent risk thus allowing it to pursue long-term objectives consistently with rational
petroleum industry practice, to accrue strong technical capabilities and highly skilled workforce while
operating with a beneficial clarity of goals41.

The model itself, therefore, appears per se to be less relevant to good performance than the
aforementioned traits, which can manifest regardless of the model used. The Norwegian model, albeit
successful, should not therefore be considered essential to NOC performance but a mere instrument
at the disposal of institutionally capable countries. In contrast, unwavering pursuit of long-term
objectives and a strong human and technical capital appear of greater importance for NOC success.

41

Glada Lahn and others, Good governance of the National Petroleum Sector: the Chatham House Document, (2007)
http://www.chathamhouse.org.uk/files/9761_ggdoc0407.pdf.