From oil and gas to financial assets – Norway’s Government Pension Fund – Global

Introduction

Good morning and thank you for the invitation to this highly topical conference. I have been asked to talk about the “objectives and experience of the Norwegian oil fund”. In doing so, I will try to explain the set-up and purpose of the Fund and draw some preliminary conclusions about the outcome so far.

Since Norway became an oil nation some 40 years ago, the petroleum sector has grown to become an important part of our economy. Today, petroleum accounts for approximately 25 per cent of Norway’s gross domestic product (GDP).

And even though the production of oil is declining after peaking around the turn of the millennium, total petroleum production will remain high for many years to come.

The economic challenges posed by petroleum extraction were widely recognised early on. As early as in 1974, the Norwegian parliament discussed these challenges in depth, and in the early 1980s, the idea of a fund that would stabilise petroleum revenue spending was launched. Due to domestic economic turmoil and financial crisis in the late 1980s and early 1990s, it took time before the idea of a fund was turned into actual savings.

Why a Pension Fund?

The Government Petroleum Fund was formally established in 1990. In 2006, the name was changed to the Government Pension Fund – Global. In spite of the name change, the Fund is more similar to an endowment than to a pension fund.

Since the first transfer of some USD 400 million was made in 1996, the Fund has grown rapidly in size. Its assets are currently valued at around USD 400 billion. One third of the portfolio, about USD 130 billion is invested here in North America. The Fund is expected to grow rapidly in coming years, and may double in 5-10 years.

The Fund was established as a tool to support prudent management of Norway’s petroleum wealth. One purpose is to shield the non-oil economy from price fluctuations (see Chart 3). The Fund is also a long-term savings instrument. It will help to cope with future financial commitments linked to an ageing population.

Accumulation of capital in the Fund reflects the depletion of a non-renewable resource, which is exchanged for financial assets through the Fund’s investments. By setting up the Fund, it became possible to establish a path for production of oil and gas that is independent of the profile for petroleum revenue spending.

Furthermore, to effectively shield the non-oil economy, and to make sure that private sector investment decisions could be made independently of the public sector’s saving of petroleum wealth, the Fund is only invested abroad. This also enhances the expected return on government wealth and reduces the risk.

The alternative to a fund would have been to directly regulate production by putting a conservative upper limit on annual extraction. This was attempted in the 1970s and -80s. At that time, we had a production ceiling of 90 million standard cubic metres per year. This approach was abandoned in the 1980s. Today, the government steers exploration activities and awards production licenses, but has no explicit production target. Since the mid-1990s, total petroleum production has been around 250 million standard cubic metres per year.

The Fund mechanism

The Fund is by law fully integrated with the government budget, and the same priorities are imposed on spending from the Fund as on any other government spending. This means that the entire petroleum revenues are transferred to the Fund. An amount equal to the non-oil budget deficit is then transferred to the fiscal budget. The mechanism ensures that the accumulation of capital in the Fund is equal to government net financial savings. There is no corresponding increase in liabilities.

Furthermore, legislation prohibits use of Fund money for purposes not prioritised in the regular budget processes. There is no hidden use of oil money, or any use for special purposes. The Fund is strictly and effectively “out of bounds” to special interests.