Norway: production today, benefits for generations

“The generation living at the time of hydrocarbon extraction is by no means the sole ‘owner’ of its value, and is therefore not entitled to spend it,” explains Sigbjørn Johnsen, former Minister of Finance, which effectively encapsulates the ideological basis for the economic and financial model that Norway follows in order to preserve and grow its oil wealth for future generations. To hedge the economy against fluctuating revenues and to maintain competitiveness in other sectors of the economy, petroleum revenues are invested abroad through the Government Pension Fund Global (GPFG), referred to in the country as the ‘oil fund.’ The profits from this fund are then reinvested back into the economy, building infrastructure and public works that will benefit Norwegians for generations to come, all while continuing to grow the size of the oil fund.

However, the current strategy of the oil fund may now change, following the election of a Conservatives-led coalition in Norway in September 2013, which is considering a number of different changes to the structure of the fund. Proposals from the various groups in the coalition include splitting the fund into two or three competing funds, investing in foreign private equity and infrastructure, or even using the fund for direct investment into domestic infrastructure projects. The fund currently contains around USD 755 billion, with the Norwegian Ministry of Finance forecasting that the fund will reach USD 1 trillion by the end of 2019. Despite the recent change of government, Norway knows that its oil and gas will not last forever, and plans to ensure that for as long as possible, its citizens will be able to benefit from this all-too-temporary good fortune.

OIL AS FINANCIAL MUSCLE

The GPFG is open about its investment strategy, its annual results, and the size of the fund. With investments of the GPFG in over 7,500 companies around the world, in both stocks, bonds and real estate, the fund’s risk is quite mixed. And just because the fund has the intention of diversifying investments away from Norway, this does not mean that energy is left out: the fund is currently invested in 147 of the world’s 200 largest companies in terms of reserves of coal, oil and gas.

The fiscal guidelines for the fund state that only the profits from investment can be reinvested into the Norwegian economy. However, with the fund returning 13.4 percent on its investments in 2012, the second best performance in its history, this strategy appears to be no barrier to investment. In the Nordic region, Norway is commonly referred to as the ‘rich cousin’ for a very good reason.

As Christer Tryggestad, director at McKinsey & Company explains, the discovery of oil on the Norwegian Continental Shelf (NCS) has revolutionized life in Norway. “For more than 40 years, petroleum production on the shelf has created considerable wealth for the country. The Norwegian government and regulatory bodies have done an extremely good job in getting the most out of the resources on the shelf. In fact, other hydrocarbon-rich governments now implement the Norwegian model.”

While it may seem that Norway is benefiting from its attempts to diversify its economic base, the problem of over-dependency on oil may be more deeply entrenched than the government likes to admit. As the Pareto Group, a Norwegian holding company, wrote in its 2012 annual report: “The Norwegian economy was solid to the core – but was probably more oil-fueled than most people realize.” Svein Støle, CEO of the holding company, explains that with a continued high oil price, “the oil sector will remain extremely profitable and as a result will attract the best people, thus increasing labor costs. At the same time the public sector will continue to grow, while many ordinary businesses are feeling the pressure between a lucrative and profitable oil industry and the public sector increasing its wages.”

Despite the attempts of the government to preserve oil wealth for future generations, it is clear that Norwegian citizens today do feel the results of the oil boom in their everyday lives. On The Economist’s 2013 ‘Big Mac Index’, which aims to show the purchasing power of citizens in countries around the world, Norway comes in at the top of the list, at USD 7.51 for a Big Mac, against USD 4.66 in the EU area and USD 4.56 in the US: in raw terms, the Big Mac is overvalued in Norway by 64.7% when compared to the exchange rate between the NOK and the USD. There is a danger that Norway’s oil sector will leave other industries out in the cold because of the salaries on offer for skilled workers.

However, this situation is not a new one, and despite the challenge of rising wages and increased living costs, the Norwegians remain generally stoical, as is their wont. Eivind Reiten, former Minister of Petroleum and Energy and former CEO of Norsk Hydro, sums up the situation by saying: “It has been a consistent issue, albeit a small one, ever since we found oil in the country. However, Norwegians have not broken a single window in any shop over the last 40 years despite some challenging decisions. Norwegians citizens are extremely disciplined.”

While economically, the country might be heavily influenced by the oil and gas sector, in power generation at least, Norway has established real independence: today, over 99 percent of Norway’s electricity production comes from hydropower plants. Around 850 small hydroelectric plants situated all over the country generate almost all of the country’s electricity. As a result, all of Norway’s produced gas and most of its oil is exported.

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