Since oil production started in earnest in Norway in 1971, Norwegians were called by some as the “blue eyed Arabs” and even recently, The Economist said on February 2, 2013 that fellow Nordic countries refer to Norway as the “most northerly Arab country.”
Norway’s oil and gas revenue is the reason for this envy. More importantly, the success of Norway in managing its oil riches has helped it remain relatively free from the ups and down of the world economy or that of the oil market.
Norway realised early in the game that oil and gas resources are subject to depletion and that revenue from these sources may not be stable and subject to the vicissitudes of the oil and gas markets. It came to the conclusion that there is a necessity to establish a sovereign wealth fund to manage the large surpluses generated from exporting natural resources.
Norway established the Petroleum Fund in 1990 when its oil and gas production was rising sharply. But the fund was designed for long-term foreign investment as Norway wanted to counter the effects of any decline in production or income and to “smooth out the disruptive effects of highly fluctuating oil prices” especially after the oil crash of 1986.
The Petroleum Fund changed its name in 2006 to the ‘Government Pension Fund — Global’. It has nothing to do with ordinary pension contributions and is to be distinguished from the much smaller ‘Government Pension Fund — Norway’, which was formerly The National Insurance Scheme Fund, and pension fund allowed to invest only domestically.
The global fund is where the surplus of Norway’s oil sector is deposited. The surplus is generated from income tax on oil companies (28 per cent), oil and gas tax especially levied on agreements (50 per cent), proceeds from the government share (67 per cent) in Statoil, the national oil company, and proceeds from a 20 per cent share Norway has with all international oil companies operating in the country.
The fund’s current value is reported to be close to $720 billion (Dh2.6 trillion). It holds one per cent of global equity markets, with 1.78 per cent of European stocks. The Norwegian Ministry of Finance forecasts that the fund will reach $1 trillion by the end of 2019. Previously, the fund invested 40 per cent of its value in the stock markets, but in 2009, the ratio was changed to 60 per cent. Five per cent is now invested in real estate and the rest in bonds. To reduce risks, investments are made in about 8,000 companies around the world and the fund is not allowed to own more than 10 per cent in any company.
The fund operates in a transparent manner. Its performance is disclosed at a press conference every quarter and its company shares are listed in the annual report. The fund is run by a unit in the Norwegian Central Bank for the Norwegian Ministry of Finance. Its contribution to the Ministry’s annual budget is currently limited to 4 per cent, which is probably less than the annual profits of the fund and thereby the fund’s capital keeps rising. The 4 per cent rule can be discarded in times of major economic disruption.
All political shades agree to the importance of the fund but the conservatives may want to split it into two and desire investment in domestic infrastructure. Yet, there are some calling for further contribution from the fund to the budget but it is feared that would increase inflation. Others see the risk of the stock market as high and want to reduce exposure. Experience has, however, shown that investing small in many companies reduces this risk and that the fund lost considerably when it was following a more conservative policy.
The ethical aspect of the fund’s investment is also a concern. The Advisory Council on Ethics issues ethical guidelines where companies involved in arms production, in tobacco or in violation of human rights are involved. The fund also supports environmental issues of local or global impact and judges companies on this basis. The fund sold its shares in the Israeli group Elbit as it provided a surveillance system for the separation wall in the West Bank. However, the OECD (Organisation for Economic Co-operation and Development) recently rebuked the fund for its investment in South Korean steel maker Posco, which is constructing a steel plant in India that may displace 20,000 local people.
Oil and gas production in Norway still has a long way to go and the fund is likely to grow ever more, especially if oil prices remain at their current level and gas prices improve. But more on this next week.
— The writer is former head of the Energy Studies Department in Opec Secretariat in Vienna.