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Version: 04.05.05

STATOIL IRAN

Less than one year after being awarded a contract to develop one of the world’s largest offshore petroleum fields, Statoil’s future in Iran appeared to be in jeopardy. Statoil was at the center of a corruption investigation that had resulted in the resignations of three of the company’s top executives, including its CEO.Harald Finnvik, a 20-year Statoil veteran and country manager for Iran, was incredulous. “For three years we’ve tried to win confidence down here, and now it's in danger of being torn away,” he complained.[1]

Finnvik’s concern centered on alleged bribes paid by Horton Investments, on Statoil’s behest, to secure lucrative petroleum development contracts. According to the Iranian government, the secret $15 million contract between Horton and Statoil was used to channel bribes to unnamed government officials. Finnvik wondered if his relationship with the Iranian government could be salvaged. “This will certainly test our relations with Iranian officials,” he explained. “The next big test will come when we bid for new projects.”[2]

Company Background

Statoil was founded in 1972 with a mandate to explore and develop Norway’s offshore oil and gas reserves. Operating in Norway’s harsh waters demanded a high level of innovation, which helped Statoil to become one of the world’s foremost authorities in offshore production. By the end of century, however, Statoil faced declining reserves in its home market, and sought to ameliorate the situation through international investment. In 2003, the company had investments in Venezuela, Brazil, Azerbaijan, Iran, and Algeria, which together accounted for approximately eight per cent of the company’s production. Statoil planned to quadruple international production to 300,000 barrels/day by 2007.

Statoil Iran

Iran became one of the world’s first major oil producing nations after British geologists discovered substantial deposits in 1908. Based on this discovery, the Anglo-Persian Oil Company (APOC), which later became known as British Petroleum, was created to commercialize Iranian oil fields. Royalties from the development of these fields were only a small fraction of the company’s operating profits.

By the 1950s, oil had become a much more important resource than it had been when the Anglo-Persian Oil Company was established at the turn of the century. Yet, the company’s royalty structure remained essential unchanged. When APOC refused to revisit the terms of the original agreement, the Iranian government decided to nationalize the oil industry. Two years later, a CIA-backed military coup placed control of Iran’s oil industry in the hands US, British, and Dutch oil companies. The highly repressive government inspired popular resentment, thus sowing the seeds for the Islamic Revolution of 1978.

Following the death of the Ayatollah Khomeini in 1989, a more moderate Iranian government decided to reopen the country to international investment. Oil companies were required to partner with the National Iranian Oil Company (NIOC) to provide development expertise and improve the recovery rate of known oil and gas reserves.

In 2001, the NIOC sought tenders to develop South Pars, an offshore field that held approximately eight per cent of known world gas reserves, and 40 per cent of Iran’s known reserves. However, following the attack on the Pentagon and World Trade Center on September 11, 2001, US president George Bush branded Iran as a member of the “Axis of Evil.” The US subsequently established an isolationist policy toward Iran that included sanctions against companies doing business there. As a consequence, oil companies that also had business interests in the United States were reluctant to bid on Iranian projects.

In October 2002, the NIOC awarded Statoil a 40 per cent stake in the South Pars project. Under the terms of the agreement, Statoil agreed to invest $300 million over four years as part of its $2.6 billion investment in the Persian Gulf.[3]

To manage the project, Statoil recruited Harald Finnvik who, since 1995, had been country manager in neighbouring Azerbaijan. Like Iran, Azerbaijan was predominantly Shia Muslim, making Finnvik one of the few Statoil executives with an understanding of the regional culture. In Azerbaijan, Finnvik also served as Norway's consul general, affording him unprecedented access to government officials, including the president of Azerbaijan. He noted,

The Consulate takes less than 5% of my time, but it gives me the possibility to expand our business network, a chance I personally would never have had if I were acting only as a Statoil representative.[4]

The Horton Investments Contract

In early 2003, Statoil’s internal auditors uncovered secret payments of $5 million to Horton Investments,[5] a Turks and Caicos Islands registered consultancy thought to be run by the son of a former Iranian president. According to Statoil, Horton Investments was hired to provide “insight into financial, industrial, legal, and social issues associated with business development in Iran,”[6] but the company’s auditors held a different view. “We shouldn’t be involved in these types of payments,” they complained to Statoil CEO Olav Fjell. Fjell raised the issue with the company chairman, but decided against discussing it with the rest of the board.[7]

The Horton deal was the brainchild of Dr. Richard Hubbard. The Stanford-trained geologist and former head of BP Brazil had been recruited by Statoil three years earlier with a mandate to grow the company’s international operations. Although Hubbard was credited with developing new business in Venezuela and Algeria, he was not well liked by some Statoil employees who viewed his management style as overly aggressive.[8]

A few months after Statoil’s internal audit, an unnamed BP executive complained to NIOC officials that Horton Investments was paying bribes on Statoil’s behalf in order to win oil and gas development contracts. Although Statoil denied any wrongdoing, the Iranian government filed an official complaint with the government of Norway. In September 2003, both the Norwegian anti-corruption police and the US Securities and Exchange Commission began investigating Statoil’s arrangement with Horton Investments.

The Investigation

The investigation prompted Hubbard’s dismissal, soon to be followed by the resignations of Statoil’s CEO and Chairman, both of whom received a vote of no confidence from the company’s board of directors. Upon his resignation, Fjell claimed that the Horton contract had been the sole responsibility of Hubbard and himself. Finnvik, who had been unaware of the payments, was left to deal with the fallout of the scandal and to mend the increasingly precarious relationship with the Iranian government.

Many of the company’s employees complained that the Horton scandal was only a symptom of aggressive international expansion. They recommended that Statoil rethink its expansion plans and focus more on its core Norwegian business. CFO Inge Hansen, who was slated to replace Fjell as CEO, tried to reassure the rank and file that Statoil would not compromise its integrity in order to win international contracts. The Horton Investments contract was an aberration, he explained. “I am going to work hard to get the employees with me.”[9]

By early 2004, the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime had obtained sufficient evidence to enter a preliminary charge against the company for illegal influencing of foreign government officials under the Norwegian General Civil Penal Code.[10]

Finally, the Iranian parliament created a commission to investigate the alleged payments. Several fact finding delegations visited Norway in an effort to obtain information from Norwegian authorities, but they remained unsatisfied with the level of intergovernmental cooperation.[11] Meanwhile, Statoil completed the first section of its offshore drilling rig, and other operations continued according to the company’s four year contract.

[1] Statoil faces uncertain future in Iran, Aftenposten, September 23, 2003

[2] Statoil Still Afloat Despite Losing Man Overboard, International Petroleum Finance, October 8, 2003

[3] Statoil signs Iran gas deal, BBC News, 28 October, 2002

[4] Harald Finnvik Diplomatic Interview, Azerbaijan International, Autumn 1996

[5] This represented the first of three payments to Horton Investments. The contract was later annulled and no further payments were made.

[6] Statoil Still Afloat Despite Losing Man Overboard, International Petroleum Finance, October 8, 2003

[7] Statoil Chief Executive Quits As Board Split On Probe, Energy Intelligence Briefing, September 23, 2003

[8] Statoil Still Afloat Despite Losing Man Overboard, International Petroleum Finance, October 8, 2003

[9] Statoil Chief Executive Quits As Board Split On Probe, Energy Intelligence Briefing, September 23, 2003

[10] Commitments And Contingent Liabilities, Statoil 2003 Annual Report

[11] Iranian Press Reports On 4 Apr 04 Majlis Session, BBC Monitoring International Reports, April 13, 2004