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Hydro Under Investigation for Former Libya Oil Operations

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The investigation report into Hydro's former oil operations in Libya and consultancy agreements relating to the Company's international oil and gas operations was submitted today to the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime (Okokrim). The investigation provides grounds for criticism of certain issues. The investigators' report to the board was published today.

It is up to Okokrim to consider the legal implications of the contents of the report.

"The investigation has revealed that mistakes were made in Libya in 2000-2001 that represent a breach of Hydro's regulations. This is regrettable, and we need to learn from it. Any mistake in this area is unacceptable, and we take this issue very seriously," said Terje Vareberg, Chairman of Hydro's Board of Directors.

"The board is satisfied that Hydro has generally maintained a sound ethical framework and a healthy business culture. The company's regulations were satisfactory in 2000 and have subsequently been further improved. The board will however make sure that regulations and routines are reviewed again to see whether additional improvements may be made to ensure compliance," he said.

"The Company will take all necessary measures to prevent such mistakes from arising again in the future," adds Vareberg.

The investigation was carried out by the law firms Wiersholm and Shearman & Sterling. The investigation was performed on behalf of Hydro's board after questions concerning Hydro's former Libyan activities were raised in connection with the merger of Hydro's oil and gas activities with Statoil to form StatoilHydro on October 1 last year. The investigation was executed independently of, but in parallel with, StatoilHydro's corresponding investigation.

The outcome of the investigation will also be submitted and presented to US authorities. "Hydro will now await the respective authorities' further consideration of this matter and will continue to cooperate fully with them," said Vareberg.

Consultancy agreements in all countries where Hydro was previously engaged in petroleum activities -- in Africa, South America, Europe and the Middle East -- have been reviewed. A total of 35.5 million documents have been collected, of which more than 1.4 million have been subject to detailed scrutiny. In addition, analyses of financial statements and more than 70 interviews have been carried out. In total, the investigation has cost Hydro more than NOK 100 million.

Grounds for Criticism in Libya

The report gives reason to conclude that a breach of Hydro's ethical regulations took place in February 2000, when the Company entered into an agreement with a consultant to assist in a planned sale of the Libya portfolio. Ahead of the sales process, Hydro had considered a previous agreement with the same consultant as problematic. The sales process was later cancelled.

"Although Hydro acted correctly and rejected two attractive licenses, we should not have entered into a new agreement with the same consultant to assist the sale," said Vareberg.

Payments under this agreement formed part of the payments which Hydro referred to on October 1 last year, which the company then estimated at US $6.85 million during the period 2000-2001. The investigation shows that payments under the different agreements amounted to US $7.4 million.

Another misjudgment was made in connection with a payment corresponding to US $1.9 million made to the operator of one of the fields in Libya in October 2000. According to the report, Hydro should have realized that the payment might be problematic.

"We have to admit that misjudgments were made in the handling of Hydro's former Libyan portfolio," said Eivind Reiten, President and CEO of Hydro.

"We need to accept this criticism and use it as a basis for further improvement. Even though the report shows that most of the difficult matters were handled well, and that we have sound systems and routines to handle such issues, we must always strive to be better. We will continue to do just that," said Reiten.

The report also highlights payments made to representatives of the state-owned National Oil Company (NOC), who were members of operator and steering committees in fields where Hydro had ownership shares. Although this was a well-established system in Libya known to the NOC, Hydro was not comfortable with these payments. Due to initiatives from Hydro and other involved companies, the NOC in 2006 published guidelines for payments to representatives in such committees.

Other Countries

In addition to Libya, the investigation looked at the use of consultants in a number of other countries where Hydro had been engaged in or was considering petroleum activities, such as Angola, Iraq, Iran, Russia, Nigeria, Venezuela, Brazil and the Ivory Coast, as well as Kurdistan. The report shows that Hydro on several occasions refrained from pursuing business opportunities due to transparency and integrity considerations.
 

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