Global Insight Perspective | |
Significance | Reiten's resignation is designed to eliminate a potential conflict of interest over an investigation into payments made to a Libyan consultancy firm by Norsk Hydro, where he is currently chief executive. |
Implications | Although Reiten has asserted he is not quitting his role on the basis of the investigation findings, the move will do little to remove the suspicion hanging over Norsk Hydro's actions since it took over the Libyan consultancy contracts in 1999. |
Outlook | StatoilHydro will endeavour to retain a focus on integrating its two separate businesses and on executing its business strategies, but it seems likely that further revelations over the Libyan consultancy contracts can be expected in the coming weeks. |
In a rather inauspicious beginning for Norway's newly formed oil and gas company StatoilHydro, Eivind Reiten, chairman of the company's board, yesterday resigned from his post amid a growing controversy over corruption allegations tied to a Libyan consultancy firm. The announcement comes just days after the new company was officially launched, drawing together the oil and gas activities of Norsk Hydro with its Norwegian peer Statoil, a process in which Reiten himself was an integral player. In addition to taking on the role of chairing the merged StatoilHydro, Reiten retained his position of chief executive of Norsk Hydro, which is continuing to operate with its remaining aluminium and electricity assets.
Reiten's surprise resignation follows the preliminary results of an internal probe by StatoilHydro into the actions of Norsk Hydro with respect to its Libyan petroleum activities. On Tuesday this week (2 October), just one day after the official formation of StatoilHydro, Reiten asked a leading lawyer to head an investigation into the company's Libyan portfolio, which Hydro purchased from Saga Petroleum in 1999 and which was subsequently transferred to StatoilHydro as part of the merger. Reiten said yesterday that the preliminary results of the probe indicated Norsk Hydro may have engaged with the Libyan consultancy company "more actively than initially assumed”. In a demonstration of the potential seriousness of the matter, Reiten indicated the findings had now been turned over to the economic crime unit of the Norwegian police, with the internal inquiry also set to continue.
After considering his own role in the matter, Reiten said he had concluded it would be wrong to remain as chairman of a company that is now investigating activities by Norsk Hydro, where he is chief executive, and he would consequently step down from his position as chair. Reiten remained insistent that the move was driven by the need to avoid a conflict of interest in his roles, rather than any incriminating findings in relation to his own actions arising from the initial probe. "Up to now, it has not been established that any violations have been made either ethically or legally…this is what we are now investigating”, he said. Referring to his own resignation, he said: "This is not based on the facts of the case”.
The Libyan Contracts
The scandal goes back to consultancy contracts taken over by Hydro when it bought Norway's then third-largest oil company Saga Petroleum in 1999. Saga had managed to secure large and very lucrative stakes in two major Libyan fields, taking a 25% stake in the Total-operated 30,000-barrels-per-day Mabruk field and an 8% stake in the Repsol YPF-operated Murzuq field earlier that year. After Hydro had taken over Saga, the company realised that it had inherited a consultancy agreement that fell "outside Hydro's ethical guidelines", prompting it to try to divest the Libyan assets shortly afterwards. Libya's international isolation during this period made it hard to sell the stakes, making Hydro decide to keep the Libyan assets and try to incorporate the Libyan contracts "within Hydro's ethical guidelines", a company statement said, as working conditions in the country improved and greater transparency was introduced.
Hydro did, however, find itself forced to honour the contracts inherited through its Saga acquisition, admitting paying US$6.85 million of "potentially unethical payments" as "consultancy fees" during 2000 and 2001. The company said to have received Saga's and Hydro's payments is a South African company called Vexhol, with no obvious links neither to the oil industry or Libya, according to Norwegian financial daily Dagens Naeringsliv. Vexhol, registered as dealing in "wholesale, retail, vehicle repair, motorcycles, household goods, hotels, and restaurants" was registered by a Abdurrazag Khaclea Gammudi in October 1997, whose whereabouts are now not known.
Also allegedly unethical, is a US$300,000 payment by Hydro to the operator of the Murzuq basin fields, to cover expenses. In 2002, Hydro rejected a US$900,000 invoice on the grounds that it could run counter to its ethical guidelines, after which the practices seem to have stopped and become buried in the Hydro memory, not to be shared with Statoil during the nine-months due diligence period. Allegedly, the matter came to StatoilHydro's chief executive Helge Lund's attention only after a Hydro employee blew the whistle on the existence of the affair five days before the merger.
Fresh in Statoil's memory is its expensive settlement with U.S. courts less then one year ago of an embarrassing—and similar—bribery case involving illicit payments to gain access to Iranian projects. Statoil was then fined, and had to pay in settlement, a total of US$18 million, for illicit payments to a London, U.K.,-based consultancy called Horton Investments, which had ties to former Iranian President Ali Akbar Hashemi Rafsanjani's son. Statoil also had to pay fines of US$2.9 million in Norway. The scandal was viewed as very incriminating and resulted in a lot of pressure on Statoil from its largest owner, the Norwegian state.
Outlook and Implications
Reiten has played down the significance of his resignation, but such a response to the initial investigation findings suggests that serious revelations may be emerging from the probe. In addition to removing the conflict of interest, Reiten's resignation may be an early form of "damage control", designed to distance himself and any potentially damaging findings to which he may be linked from StatoilHydro, the new Norwegian energy champion that he was worked so hard in recent months to create.
StatoilHydro itself has sought to minimise any loss of momentum arising from the resignation of its chair, immediately appointing deputy chair Marit Arnstad to the position of acting chairman until the company's assembly can meet to elect a new permanent appointee. The sudden loss of the chairman, who generally is not involved in the company's day-to-day operations, should not prevent StatoilHydro from moving forward with the integration of its two businesses and the execution of its business strategies, but there can be little doubt that the saga—which appears to be far from over—has cast a shadow over the birth of what has been hailed as a new European energy giant.