Norway's way to deal with oil & gas wealth through institutions and funds

Norway's way to deal with oil & gas
International Business& Development Prof. Dr. Johannes Stephan
20TH June 2017
Adu Ohene Emmanuel (60814) Mohammad Narjespourfaragheh (60643)

Norwegian Oil and Gas
I. Overview of Norway
II. Norway‘s Economic Performance
III. History of Oil and Gas in Norway
IV. How did Norway manage the Oil and Gas
I. Institutions
II. Exploration and Exploitation of Resources
III. The Government Pension Fund Global
V. The future prospect of Norway Economy Post oil era
VI. Conclucion
VII. Discossion
Content
TUBAF | International Business & Development | Adu Ohene Emmanuel, Mohammad Narjespourfaragheh | SS2017 | 20.06.17 2

Overview of Norway
 Norway is a parliamentary democracy
and constitutional monarchy in North
Europe since 1905.
 The country rejected EU referenda in
1972 and 1994.
 Norway is a founding member of the UN,
NATO and WTO. Norway is not a
member of OPEC.
 A total of 5.3 million Inhabitants with an
area size of 366,108 Km2 with 88% been
ethnic Norwegians.
 Social equality is high with Gini co-
efficient of 25.8( Highest HDI rank 2013)
 Currency: Norwegian Krone
 1 NOK= 0.118230USD
www.maps.comSource: Statistics Norway 2013,
www.worldmeters.info
TUBAF | International Business & Development | Adu Ohene Emmanuel, Mohammad Narjespourfaragheh | SS2017 | 20.06.17
3

Norways‘s Economic Performance
GDP Per Capita
Source: OECD 2015

Norways‘s Economic Performance
Source: Statistics Norway 2011, www.norskpetroleum.no
Services
59%
Agriculture
3%
Industry
38%
GDP per sector

Norway‘s Economic Performance
Norwegian Production and Export

 In 2010, the labor utilization was 75.3%
in the 15-64 age bracket compared to the
EU average of 64.2%.
 Unemployment rate has been fluctuating
but have been averagely low for years.
 However , the average annual hours
worked is significantly lower than its peers
like Germany, France and Sweden.
Source: OECD 2015
Eurostat 2017
Norway‘s Economic Performance
Labor Utilization
7

• 1950s: Attempts to locate Oil and Gas
• 1962: first application from Philips
Petroleum for exploration activities
• 1963: Proclaiming the sovereignty over
the Norwegian Continental Shelf
(NCS).
• 1965: First licensing rounds with 22
production licenses.
• 1969: Discovery of oil in “Ekofisk” field.
• 1972: Establishment of “Saga
Petroleum” and “Statoil”.
History of Oil and Gas in Norway
Source:www.norskpetroleum.no
8

Source: Norwegian Petroleum Directorate
9

0
50
100
150
200
250
300 1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Gas (40 MJ)
NGL
Condensate
Oil
Source: www.norskpetroleum.no
Historical and Expected Production in Norway,
1970-2021 ( Million Sm³ per day)
10

How did Norway manage their oil and gas
-Institutions
 Before oil discovery, Norway had attained democracy and also had a well functioning state
bureaucracy with little corruption. Ttransparency, reports and supervision are main
aspects.
 One Important factor is how the Norwegian government ensured that bulk of the oil
revenues were reaped by the state( Stable and Transparent Tax system).
 Government also assumes passive ownership shares in all fields through SDFI( State
Direct Financial Interest).
Social and Political Institutions
Sources: Energy Policy 2013, Avoiding the resource curse- the case of Norway

How did Norway manage their oil and gas
-Institutions
 Fiscal rule in 2001: Spending of the oil revenues should be equal to the expected real
return from the pension fund. 3.5~ 4%. The whole net cash flow from the petroleum sector
transfers to pension fund.
 Outcomes:
 Fund will grow with new revenues
 The fund never becomes smaller, in expected terms
 Government runs with a non oil budget deficit, therefore higher public spending
and lower taxes are possible
Social and Political Institutions

1. National supervision and control must be ensured for all operations on the NCS.
2. Petroleum discoveries must be exploited in a way which makes Norway as independent
as possible of others for its supplies of crude oil.
3. New industry will be developed on the basis of petroleum.
4. The development of an oil industry must take necessary account of existing industrial
activities and the protection of nature and the environment.
5. Flaring of exploitable gas on the NCS must not be accepted except during brief periods of
testing.
6. Petroleum from the NCS must as a general rule be landed in Norway, except in those
cases where socio-political considerations dictate a different solution.
7. The state must become involved at all appropriate levels and contribute to a coordination
of Norwegian interests in Norway’s petroleum industry as well as the creation of an
integrated oil community which sets its sights both nationally and internationally.
8. A state oil company will be established which can look after the government’s commercial
interests and pursue appropriate collaboration with domestic and foreign oil interests.
9. A pattern of activities must be selected north of the 62nd parallel which reflects the special
socio-political conditions prevailing in that part of the country.
10. Large Norwegian petroleum discoveries could present new tasks for Norway’s foreign
policy.
How did Norway manage the oil and Gas?
- Ten oil commandments of Norway
“The Parliament (Stortinget) unanimously adopted the following 10 basic principles in
June 1972”
13

What is a Sovereign Wealth Fund?(SWF)
• A State-owned investment fund or entity that is commonly
established from balance of payments surplus.
• official foreign currency operations, the proceeds of privatization,
governmental transfer payments, fiscal surplus, and/or receipts
resulting from resource exports.
• It excludes, among other things, foreign currency reserve assets
held by monetary authorities for the traditional balance of
payments or monetary policy purposes, state-owned enterprises
(SOEs) in the traditional sense, government-employee pension
funds (funded by employee/employer contributions), or assets
managed for the benefit of individuals.
Source: Sovereign Wealth Fund Institute
- The Government Pension Fund Global
14

Source: Sovereign Wealth Fund Institute
15

1980’s: the idea
of a government
fund
1990:
establishment of
Petroleum Fund
2006: The name
was changed to
the “Pension Fund”
Integrate
d in the
ordinary
budget
Budget deficit
compensation
EquitiesFixed
Income
Real
Estate
Asset Distribution
Weight
16
Source: Norges Bank,

0
1
2
3
4
5
6
7
NestleSA
RoyalDutch…
AppleInc
AlphabetInc
MicrosoftCorp
RocheHoldingAG
NovartisAG
BlackRockInc
ExxonMobilCorp
Johnson&…
HSBCHoldings…
PrudentialPLC
JPMorgan…
Anheuser-Busch…
WellsFargo&Co
Amazon.comInc
AT&TInc
GeneralElectricCo
BankofAmerica…
Samsung…
Market Value Billion USD
Market Value Billion
USD
Equities: in more than 8,900 companies in 78 countries
17
Source: Norges Bank

0
10
20
30
40
50
60
70
80
UnitedStates
Japan
Germany
UnitedKingdom
Mexico
SouthKorea
France
Italy
Spain
Germany
India
Brazil
Australia
Netherlands
Poland
Indonesia
UnitedStates
Austria
Russia
International…
Canada
China
Canada
Turkey
Market Value Billion USD
Market Value Billion
USD
Fixed Incomes: more than 1250 cases
18
Source: Norges Bank

Future Prospects in post oil era
 Concerns about Norway‘s expenditure on Research and
development much lower than peers.(1.61% vs 1.92% in EU).
 Norway‘s Economy is insufficiently diversed with little local
competition ( Inward FDI).
Source: Eurostat 2008

Conclusion
 Norwegian Model is based on a clear and relatively simple legal &
institutional framework that allows the country to maximize value of
its oil revenues.
 Norway has avoided becoming economically & politically dependent
on oil revenues by excluding oil wealth from political system.

1- Statistics Norway, www.ssb.co/en
2- OECD, The Organization for Economic Co-operation and Development,
www.oecd.org
3- Norwegian Petroleum Website, www.norskpetroleum.no/en
4- Norwegian Petroleum Directorate, www.npd.no
5- Sources: Energy Policy 2013, Avoiding the resource curse- the case of
Norway, Steiner, H., Department of Economics, University of Oslo, Box 1095,
Blindern, 0317 Oslo, Norway
6- Sovereign Fund Institute, www.swfinstitute.org
7- Norges Bank, www.norges-bank.no
TUBAF| International Business & Development|Adu Ohene Emmanuel, Mohammad Narjespourfaragheh|SS2017|20.06.17 21
References

DISCUSSION
Can the Norwegian experience be copied by Other countries considering different economical
and Political development?
Can Norway evolve fully from Natural resource based to a Knowledge based economy and be as
Competitive as its Peers in the future?

Norway's way to deal with oil & gas wealth through institutions and funds

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