NEWS ANALYSIS: Norway’s huge state pension fund known as the “Oil Fund” was back in the news this week, most recently for earning another dizzying amount of money in the third quarter. It’s been battered by the recent global stock market unrest since, though, and debate continues over whether it should stop investing in the oil business that fueled its very foundation in 1998.
A lot has happened since then, when the the Norwegian government decided to stash away its huge and growing revenues from the country’s offshore oil industry for the benefit of future generations. The fund, officially called Statens pensjonsfond utland (SPU), was meant to help finance pensions and prevent all of Norway’s oil wealth from overheating its economy.
The fund has grown over the past 20 years to become the largest sovereign wealth fund in the world, a major player on international stock- and, more recently, real estate markets. It represents so much money that the numbers are all but mind-boggling. On Friday, fund managers could report returns of another NOK 174 billion (USD 21 billion) in the third quarter alone. While shareholdings yielded a return of 3.1 percent, real estate values rose 1.9 percent and fixed-income investments lost 0.3 percent.
That resulted in an overall return for the quarter of 2.1 percent, compared to returns since the fund was established 20 years ago of 6 percent. After costs and inflation, the total return so far has been adjusted to 4 percent.
Tapping the fund
The Norwegian goverment was allowed to pull exactly that amount, 4 percent, out of the fund every year to augment the state budget, until some new prudency measures introduced in the new low-interest-rate environment lowered that to 3 percent two years ago. Now there’s more concern that the government should be even stricter about its use of Oil Fund money. Since the Oil Fund still keeps growing, the actual kroner amount of money withdrawn (to help fund Norway’s welfare state in addition to its tax and fee revenues) has kept growing as well. As Finance Minister Siv Jensen of the Progress Party once famously said, “the country’s piggy bank keeps gaining weight,” even when actual returns decline.
According to the Oil Fund’s quarterly report released Friday, the fund had a market value of NOK 8,478 billion (roughly a trillion US dollars) at the end of the third quarter on September 30, with 67.6 percent of it invested in stocklisted shares, 2.7 percent in unlisted real estate and 29.7 percent in fixed income investments.
On Friday morning, the fund’s market value (which changes by the second) was logged at NOK 8,111 billion, indicating at least paper losses of more than NOK 300 billion in the past three weeks. That’s tied largely to dives in stock markets around the world, where the fund is invested. The stock market turbulence is in turn blamed mostly on the trade wars set off by US President Donald J Trump’s protectionist policies that also have affected Oslo’s own stock exchange.
While some Norwegian analysts think the market turbulence in Norway will settle down given the country’s renewed economic growth, it may continue abroad where the Oil Fund invests. Meanwhile, debate continued this week over whether the fund should continue to invest in the oil business itself.
An Oil Fund out of oil?
It caught international attention last year when both the head of Norway’s central bank, which controls the Oil Fund, and the fund’s own top manager recommended pulling the fund out of oil and gas investments because of the new risk involved. Even though the fund’s very existence is based on Norway’s own highly successful venture into the oil and gas business 50 years ago, when it started developing its offshore oil fields in the North Sea, both Norges Bank Governor Øystein Olsen and the chief executive of Norges Bank Investment Management (NBIM) that runs the fund, Yngve Slyngstad, now view investments in fossil fuels as too risky in the long run. Norway’s own state oil company, now called Equinor, reported more huge profits this week, but climate change and ongoing efforts to move from oil, gas and especially coal to alternative forms of energy areviewed as likely to eventually reduce the value of oil and gas stocks.
Several Norwegian political leaders also keep calling for the Oil Fund to get out of oil stocks, much like it has withdrawn from investment in the coal industry, for even more direct climate reasons. While the Norges Bank and Oil Fund leaders cite financial risk, Kari Elisabeth Kaski of the Socialist Left party (SV) told newspaper Dagsavisen this week that SV’s objections are “first and foremost” based on the “threat” oil and gas activity poses to the climate.
Norway’s finance ministry, however, has continued to hesitate over whether the fund should pull out of oil and gas investments, which now amount to around 6 percent of the fund’s market assets. The ministry, led by Jensen, set up a so-called “expert panel” to study the issue and it has ended up not supporting either Olsen’s, Slyngstad’s or Kaski’s views. Its conclusion that the fund should continue to invest in oil and gas shares has now been sent out to hearing.
Kaski, a Member of Parliament herself, is frustrated over the finance ministry’s unwillingness to accept either the fund’s leaders or political opposition to oil and gas in Parliament. The arguments that led to withdrawal from coal were directly tied to concerns over how coal contributes to climate change. Norway’s own oil and gas industry not only continues to large win protection, the government also is actively expanding oil and gas exploration activities into the sensitive Arctic. Industry proponents claim, for example, that Europe needs Norway’s gas to replace its coal-powered energy plants, and that gas is cleaner than coal.
‘Sell off state’s own oil shares’
While Olsen and Slyngstad worry about the pure financial risk of hanging on to oil and gas industry shares, the ministry’s panel has suggested that such risk could rather be cut by selling off some of the state’s sake in Equinor, the Norwegian company that was called Statoil until last spring. The Norwegian state still holds 67 percent of Equinor’s shares, which represents a sizeable risk as well. Equinor bosses deny they were trying to change the company’s identity as a state-owned oil company and instead wanted to reflect other areas into which the company is venturing, including wind power projects. The new Equinor name, meanwhile, may appeal to the equity markets, and a state sell-off may lurk in the background.
At least some aspects of the Oil Fund’s future have been decided: Jensen announced earlier this month that it will remain a part of Norway’s central bank but it will get what amounts to its own board of directors. Bank Governor Olsen will lead Norges Bank’s main board that will be responsible for the Oil Fund and the bank’s administrative operations. Olsen will also lead a new monetary policy committee (to replaced the current executive board) that will be responsible for setting interest rates and other issues relating to monetary policy.
Norway’s Labour Party, which leads the opposition in Parliament and is currently hoping to seize government power away from the Conservative and Progress parties, is also leaning in favour of the Oil Fund bosses’ desire to sell out of oil and gas. Labour MP Svein Roald Hansen, who sits with Kaski on the Parliament’s finance committee, told Dagsavisen that he supports Olsen’s and Slyngstad’s views but won’t commit to a position until after the hearing period ends.
Hansen’s support, however, isn’t tied to climate concerns either. His ultimate decision “will be based on financial considerations,” he told Dagsavisen. A majority in Parliament can, in the end, instruct the finance ministry on what to do with the Oil Fund’s oil and gas shares, with a decision expected next spring. The Oil Fund’s market value, meanwhile, had risen to NOK 8,120 billion by midday on Friday, gaining NOK 9 billion in value during the time this story was written.