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On keeping Iceland’s energy resources under Icelandic control

As I mentioned in the last post, Eva Joly has joined ranks with those who oppose the sale of Icelandic energy company HS Orka to Magma Energy of Canada. This afternoon, Mme Joly, along with a group of people who oppose the Magma deal, gave a press conference in which the Magma affair was once again under discussion.

Brief recap for those who have just joined us: A couple of years ago, Reykjavík Energy needed to sell its share in energy company HS Orka, Iceland’s third-largest power company, for reasons to do with competition laws. There were two bidders. One was, for some reason, never named. The other was Magma Energy of Canada.

The problem with Magma of Canada was that, according to Icelandic legislation, non-Icelandic companies cannot own shares in Icelandic power companies. Since Iceland is part of the EEA, however, companies operating within the EEA are exempt from this law. That’s was part of the deal when Iceland joined the EEA and, like it or not, that’s the law today. [And no, I don’t buy the argument that since EEA companies are allowed to own shares in Icelandic companies, any old company from any old corner of the world should be able to follow suit. A deal is a deal, a swap is a swap; Iceland negotiated this agreement with the EEA and, in doing so, opened onto certain benefits for itself. But I digress.]

To get around this pesky little piece of legislation, Magma Energy of Canada established a shelf company in Sweden — a company that has no activity, and whose name cannot even be found on a mailbox at the stated address. According to the strictest interpretation of the law, this is legal [which just goes to show how flawed the law is] — but it certainly does not conform to the spirit of the law. Which was the whole point of the law in the first place.

However, the above is only a small part of the shady dealings surrounding the Magma sale. The whole thing absolutely stinks of corruption. And as if that wasn’t enough, from a business standpoint the Magma sale is a bad, BAD deal for Iceland. From an earlier post I wrote on this same issue:

… The agreement between HS Orka and Magma is tailor-made to pander to the buyer. First of all, Reykjavík Energy IS LENDING Magma a full 70 percent of the purchase price, and the loan is A BULLET LOAN, meaning Magma makes no payments until the end of the loan term – seven years hence [apart from the down payment of 30 percent, of course]. Secondly, Reykjavík Energy has no guarantee for the loan except the shares in HS Orka itself – i.e. Magma Energy puts up no collateral. Thirdly, the loan bears interest of 1.5 percent. ONE POINT FIVE PERCENT! Jeezus – wouldn’t you just love for, say, your mortgage to bear interest of 1.5 percent? Fourth, the loan is in US dollars, so all exchange rate risk is taken by Reykjavík Energy. Since the krona is presently very low against the dollar and can well be expected to rise again within the next seven years, the amount of money that will eventually be paid back will be substantially lower than the amount that was lent.

According to Eva Joly [and as many others have pointed out], Magma Energy is a shady outfit, with a very opaque list of shareholders. In the video below, she discusses Magma and the atrocious business deal that was designed to benefit a select few. Apologies for the poor sound quality in the video — this was shot on my little Flip camera without a tripod and quite a distance away [it’s actually a lot better if you use headphones].

In closing, this: as a sovereign nation, Iceland has the right to reneg on the deal and just say no. It is imperative that the Icelandic public have a say about what they would like to see happen with the Magma sale and how they would like to see their resources allocated [and protected] in the future. One way to press for a national referendum is to collect the signatures of 40,000 Icelanders — or, at least, people with an Icelandic kennitala [social insurance number]. A petition has been up since last summer, when the same group of people [minus Mme Joly] held a similar press conference. So far, around 20,000 people have signed. I blame this relatively low number on the mainstream media’s apparent disinterest in the Magma affair — and also I think people have given up, given in, think the whole thing is futile and not worth fighting for.

However, if everyone who signed that list got at least one friend to sign too, we would be up to 40,000. So — if you have an Icelandic kennitala and the least bit of interest in supporting this thing, please go here and sign.




Comments on this entry are closed.

  • jo6pac October 14, 2010, 1:17 am

    This Very Important for all of you Nice Landers. We in the US give alway the natural resources and it sad what happens to the land when corp. leaves. Only you can protect it.

  • Cactus Zonie October 14, 2010, 3:55 am

    It’s amazing what a little rioting and protesting can do. Keep saying NO to the Globalists , the the international banking cartel , the Bilderberg Group. They want your natural resources. They want it all. No , this is not crazy talk. It’s real.


  • kevin oconnor,waterford,ireland October 14, 2010, 5:26 am

    1.5% and thats ok but gov will sign up for 5.5% Icesave, a PO box in Sweden,would this be the very first foreign company in the geotherm biz in Iceland,sounds a bit like the top secret price of a Kw/hr to Alcoa (Top secret=Too embarrassed to reveal how cheap),30% down not like they are injecting zillions in fresh cash to help poverty stricken Icelanders develop their natural resources does it.

    As to the competition laws well I thought you got free hot water and absurdly cheap electricity (14c Kw/Hr here) dont even ask about Germany 20c)

    You always like to find faults Alda, but yes I do agree the whole thing sounds very odd 🙂

  • Snorri P October 14, 2010, 6:03 am

    Looks like EJ cant wait to abandon us Icelanders and is offering a small consolation prize as she exits. And Tossur who oversaw the Magma deal is considering meeting Hamas who invite the President (male) but not his boss (female & gay) as they would have to stone her to death on sight.It really is a circus and can you blame us for loosing all hope by now.

  • Bromley86 October 14, 2010, 8:37 am

    >In closing, this: as a sovereign nation, Iceland has the right to reneg on the deal and just say no.

    Yes, and it could also nationalise all foreign operations on Icelandic soil, but that doesn’t mean it’s a good idea.

    However, let’s assume that the Magma deal was a shady one (it certainly does look like it 🙂 ), complete with kickbacks to the IP local government etc, and that it falls through. What is the financial situation withing HS Okra? IIRC, it’s another massively over-leveraged Icelandic company with loans falling due soon. Is that correct? Can it refinance without government support? Do the taxpayers in the rest of Iceland want to pick up the tab for the mismanagement of a resource company in an IP stronghold?

    “Vinur” may well have been a mouthpiece, but his comments in the earlier post linked to need to be addressed/refuted:

    “Reykjavik Energy (OR) is in a very bad shape financially; banks are refusing to lend money to the company and it is in serious danger of becoming illiquid. The company is not a limited liability company but a coop between Reykjavik City and two other municipalities. If things go wrong Reykjavik City needs to put money into the business; taking it away from the schools and social system that the city is struggling to run in the current recession.

    OR has been trying to sell it’s share in HS Orka FOR 9 MONTHS through a formal sales process. Only Magma submitted a formal proposal. OR is fortunate to have received the offer and being able to divest the shares in HS Orka; reducing related dept 30% instantly and the rest in 7 years time. Are you sure that the krona will be stronger then the today?? I am not.”

    Scott provides some useful context:

    As does Magnus, especially about how the 1.5% loan isn’t as bad as it appears to be and how the shares as collateral isn’t the usual shady-Icelandic-bank-scam transaction:

  • idunn October 14, 2010, 9:44 am

    This is no time to be giving up. If the feeling understandable, nevertheless the decisions made in this moment will set Iceland’s future path.

    Of course there will be pirates out there looking to take control of Iceland’s resources on the cheap. Also the less principled within Iceland willing to forsake their nation for money.

    Magma is a perfect case in point. Tell them and their pals quite pointedly NO now and many of the rest out there may begin looking elsewhere for easier game. If not? Then Magma will be but a foretaste of what Iceland and her citizens can expect, and it will not be pretty.

    WWGD (Gunnar Hámundarson)

  • George October 14, 2010, 10:22 am

    If I understand correctly she implies the whole thing may collapse, leaving the company in the hands of the bond holders. As they paid partially with bonds that may mean Iceland. Which would be an interesting reversal as it would mean Iceland (you and Björk for example) may end up in possession of a developmental (scam) geothermal (our precious energy resources) project (colonial possession) in Soda Lake, Nevada, USA.

    Before vising your new colonial posession may I suggest reading “The Mosquitoes Nevada” available free online as I understand Icelanders are unfamiliar with swarming predatory disease carrying insects. When your colonial Grandees rent a car make sure the wiper fluid reservoir is full.

    What kind of colonial overseers will the Icelanders be? Will they attempt to perfect the people of Soda Lake , or will they allow the indigenous culture to remain unchanged?

  • neil October 14, 2010, 11:18 am

    If the deal is legal – even on a technicality – then it should go ahead. If there is corruption suspected then it should be investigated.

  • kevin oconnor,waterford,ireland October 14, 2010, 11:25 am

    @Bromley86 In financial difficulties excellent it gives the gov. a good excuse to nationalize it without compensation and have it under State control,capitalism does not work ( I for instance am not a billionaire so that proves it does not work for me) so we can nationalize and roll forward the boundaries of socialism, keep the red flag flying there comrade citizens onwards and forwards to a vast European socialist superstate stretching all the way from Reykjavik to Vladivostok all under the mighty euro.

  • Michael Schulz October 14, 2010, 11:39 am

    A bad deal is one thing, corruption another. As for the former: in Iceland leadership acts first and thinks later. Hence, I argue, we have a leadership crisis. As for corruption: I’d love to see hard evidence and go after the bastards.
    Does anybody know if there is some (criminal,non-corrupted ?)investigation underway that could produce hard evidence ?

  • mandrill October 14, 2010, 11:40 am

    When I first heard about the Magma deal I though that people were just kicking up a fuss out of an indignant and misguided nationalism. But now I look into it a bit more the deal does look decidedly shady.

    The problem is that a lot of the grounds which are being used to argue against it, rather than being based on the facts of the case are based on exactly the kind of jingoistic nationalism that Iceland can really do without at the moment.

    Iceland needs to encourage legitimate foreign investment, and if this means selling shares of it geothermal power generation company then so be it. The thing about the energy, is that its not going anywhere. They can’t dig it up and ship it to another country. If companies want to make use of Iceland’s energy resources, they have to come here. They have to employ people here, and those people will have to spend money here. All of which is a simple and effective way of injecting a little fluidity into an economy which desperately needs it.

    The Icelandic media needs to stop fostering the suspicion of foreign investment that currently seems to be in vogue. The Icelandic people need to realise realise that they may not want to share the pie at the moment as it is quite a small pie, but by sharing the pie now and bringing in foreign investment the pie will actually get bigger so everyone’s share will get bigger.

    There are literally hundreds of industries (big and heavy and small and light) which need cheap energy. The Aluminium industry is one
    example, but data centers and server farms are another. Adiditionally, the thing about server farms is that they don’t just need manual labour, and cheap electricity, they need skilled and educated people to design, build and maintain them. Data Centers are not just a good way of bringing in foreign investment, they have the added benefit of preventing some of the ‘brain drain’ and fostering innovation and technical ability which in the coming years are going to be assets which are just as valuable as energy is today.

    So sure, look at the Magma deal very carefully and turn it down on solid evidence of shadiness and ethical dubiousness, but don’t simply dismiss it because its a foreign company wanting to invest in your country. Yes, you should be proud of your country and the assets it has, but not to the point of stubbornness and stupidity.

  • sylvia hikins October 14, 2010, 12:40 pm

    @kevin. I do love your totally practical solutions Kevin -keep bringing them on!!!!!!
    I think that Neil’s advice is probably the wisest. Big business works within all kinds of loopholes and devices arranged for it to operate on the edges and be legal. That doesn’t mean you can’t try and get the decision reverse, but Icelanders don’t exactly seem to be rushing out to sign the petition for a referendum. It feels like too little too late but I hope I am wrong.
    sylvia from viking wirral

  • jpeeps October 14, 2010, 4:20 pm

    ” The problem is that a lot of the grounds which are being used to argue against it, rather than being based on the facts of the case are based on exactly the kind of jingoistic nationalism that Iceland can really do without at the moment.”

    mandrill – I couldn’t agree more. If the Magma deal breaks any law, then there are grounds for it to be stopped. But a knee-jerk reaction against outside investors per se ain’t going to do anyone any favours in the long run. Indeed, for the reasons you mention, I don’t necessarily see the merit of “keeping Iceland’s energy resources under Icelandic control”, if the instruments of good governance are in place. The problem is that they haven’t been, it would appear.

  • James Wilde October 14, 2010, 4:44 pm

    I discovered by accident the other day that I still have a kennitala, so I’ve been in and signed, and I’m making sure my son signs, too, if he hasn’t already. So, 19998 to go.

  • rod October 14, 2010, 5:33 pm

    I agree with Eva, her analysis is spot-on.

  • joeinvegas October 14, 2010, 6:12 pm

    At least they are only loaning 70% and not 130% as would probably be done if Eva weren’t watching.

  • Bromley86 October 14, 2010, 8:34 pm

    >At least they are only loaning 70% and not 130% as would probably be done if Eva weren’t watching.

    I very much doubt that her presence even registered with either the Icelandic vendors or Magma at the initial contract stage. This doesn’t appear to be an inside job (as many of the related party transactions between the banks and the vikings were). Rather, an outside investor taking advantage of an entity in financial trouble. And, by all accounts, there weren’t a lot of bidders for it.

  • The Fred from the forums October 14, 2010, 9:36 pm

    I grew up in a resource-producing state in the US. Many billions of dollars were produced there: only poverty and pollution were left behind. That’s what can happen when foreign capital is extracting rather than building.

    If foreigners build a data center, they’re investing. There’s more wealth in the world, the investors get a profit, everyone wins.

    If foreigners built a geothermal reservoir, they’d be investing. But the reservoir was already there. They’re buying, not investing.

    A purchase on equitable terms might still be a good transaction for both sides, but selling something you can’t replace, on concessionary terms, is different.

  • Joerg October 14, 2010, 9:54 pm

    Unfortunately, I don’t have a kennitala otherwise I wouldn’t hesitate to sign.

    It’s rather all the shady details than the fact that Magma is a foreign company, which make this deal so unfavourable for Iceland. If nothing helps, I hope that they will at least get taxed to the max.

  • Bromley86 October 14, 2010, 11:49 pm

    @Fred. The situation changes though when locals have borrowed money from foreigners. If other foreigners come in an take over that debt, then they’re investing as otherwise the government (read: taxpayer) has to pony up.

    I was trying to find out how much debt there is and when it falls due. No joy yet, but I unearthed an excellent article on EDA:

    It’s long, but it describes the entire privatisation process (down to who was getting, ahem, donations). Summed up by:

    “None of the sellers: Reykjanesbaer, Reykjavik and those who held the control on behalf of Islandsbanki in GGE seemed to have any interest in the interests of those they were working on behalf.”

  • Guest October 15, 2010, 12:01 am

    — if I posted it twice sorry — I corrected a point that was formulated in a missleading way

    One virtue in difficult times is to maintain a fact based analysis although emotions are high. If facts are as good analyzed as in the summary given here and here https://grapevine.is/Home/ReadArticle/Eva-Joly-Says-Magma-Energy-Deal-Is-Unbelievably-Bad-Business you should not wonder if your argument is not heard.
    It took five minutes to figure out that Ross Beaty is quite a successful business man, with a long career, being involved in a couple of public listed companies with substantial market capitalization (https://people.forbes.com/profile/ross-j-beaty/61693 & https://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=PAAS). Forbes does not seem to be a lousy “we make you rich” newsletter. 35% in Magma is personal wealth invested via his foundation. If you take a short look at the company’s news they seem to raise more and more cash for the deal on Iceland. I do not have the time to make a proper due diligence of all details, since I am not a journalist, but just the beginning turns me skeptical against arguments presented.
    So what is the problem? The sale of Icelandic resources per se? This is fine, but please address it in this way. It must have been a shock to discover that -aside propaganda- Iceland is among the least open countries. But we need foreign investors now. There is already the EEA agreement. We try to join EU – so I can well imagine that the next thing is that foreign ownership restriction in fishery are to fall. But this is one discussion, a political one not about Magma.

    If you do not like the sale structure, ok. But then the arguments should also be according. Set the sale in context – is a structure 30% cash + 70% zero bond really that unusual in corporate world (PE normally goes for 20% cash + 80% credit being paid by the bought company only – not that I cheer for it, but this is life). They have all shares of HS Orka as collateral (with a 30% safety net as we see from the description of a price the buyer though it is worth to pay –> lesser asymmetries of information). Do you know all bylaws as investment guarantees in Iceland etc.? In short – it is difficult to value a deal structure with so few details. How was the financial condition of HS Orka? If she or the mother company is really nearly bankrupt as some commenters claim I think you we were lucky.
    One point I want to hear more about is the 1.5% interest rate. Is it on top on an index? If not, you might check the responsibility of the former owners why they agreed on such an interest rate. They, but not Magma, could be sueable for not taking proper account of owners interests.
    I know that it is hard to fall from “best í heimi” & “we know it better” to figuring out that our own people are not better than anybody else in this world. But I suggest making the best out of it. Instead of a petition against him we should invite Ross Beaty and tell him he is a welcomed guest as long as he behaves like a guest. There are needs of Icelandic people so he should know them and address them. Make him accountable – ownership means responsibility. Iceland needs international power players that can support us against the British claim. Or how do you think Icesave will end if we do not/cannot pay? UK might welcome that since then it as good negotiation power for access to fishing and to energy resources.
    This will show clear signals to good investors that there is an educated following of deals, reasonable maintaining of national self-interest, but not an emotional stupid overreactions where courts have to clear up everything in the end.
    Sorry for the long post, but I had to say it.

  • David October 17, 2010, 3:29 am

    I just signed the petition. Thanks for this Alda.