Norway: Revenue from oil fund now exceeds revenue from oil

Besides fjords and vikings, Norway’s claim to fame is its oil wealth. It was not always like this. Even though Norway has had 50 years of oil activity, it took 30 years until the government ran a budget surplus. Today, 20 years later, the surplus from petroleum activity has resulted in the largest investment fund in the world. The fund, commonly known by Norwegians as the “oil fund”, holds 1.3% of the value of the world’s listed companies. Norway is slowly moving from relying on natural resources to financial investments.

Transparency and long-term strategy

Transparency, predictability and a principled long-term strategy have been core tenants to the Norwegian experience. This is also why the government started implementing the EITI process in 2009. It has since published six EITI Reports, which disclose and verify financial flows from the country’s oil and gas sector.

At the launch of the latest Norwegian EITI Report Minister of Petroleum Tord Lien said: “Transparency of financial flows from the extraction of oil and gas is important. Openness contributes to better understanding of the industry and a better factual basis. We need both to make good decisions.”

He added: “Norway wants to be a driving force internationally in this work. This, the sixth EITI report for Norway confirms that we have a good management system and control of the financial flows.”

The report is Norway’s first to be produced under the EITI Standard. Compared with previous reports, this report contains extensive information about Norway’s petroleum sector, including production volume figures and the prognosis for the coming years.

Post-peak production

Although modestly down from peak production ten years ago, 214 million Sm³ o.e. marketable petroleum was produced in 2013 from 78 fields on the Norwegian Continental Shelf. About half of the production was gas, which is predicted to increase in the coming years (see chart below).

Yet not peak revenue

Although recently rebounding, oil prices are today still more than one-third lower than in 2013, when the average price was USD 109. Governments in most resource-rich countries face weakened government finances as consequence.

Norway is less affected since its government has decoupled its budget from the volatile oil price. The government’s revenue from oil and gas go in its entirety into the aforementioned investment fund. The government can spend up to 4% of the value of this fund each year. As consequence, government finances are more cushioned from oil price fluctuations than other resource-rich countries. However, as the oil fund continues to grow, Norway is turning its reliance on oil markets into reliance on financial markets.

A clear indication of the transition from oil to finance comes from comparing the income the government receives from the oil sector with the financial returns of the oil fund. For the second year in a row financial returns were larger and increasing. This trend can be expected to be intensified for 2014 when oil proceeds were reduced as consequence of low oil prices.

Source: EITI Reports, NBIM

A second indication came last month when the manager of the fund Norges Bank Investment Management announced record-high quarterly returns, which were larger than what the Norwegian government spent in the same period.

Following the revenue from the sale of the government’s oil

Over 55% of Norway’s petroleum revenue comes from the special 79% tax rate on the income of extractive companies. Most of the remainder comes from the State’s Direct Financial Investment (SDFI) in the sector, which is a special economic instrument where the Norwegian state has direct holdings in a number of oil and gas fields, pipelines and onshore facilities.

As one of several owners, the government covers its share of investments and costs and receives a corresponding share of the income from production licenses. The share of SDFI’s oil is marketed by Statoil, a petroleum company where the state holds a majority of the shares, and the payments of the oil sale are transferred to the Central Bank. These transactions are reconciled in the EITI Report. See the illustration of the flows from the EITI Report below.

A further explanation and comparison with other countries can be found in the recent EITI brief “The EITI, NOCs and the first trade”.

“Everything about Norwegian petroleum”

Petroleum activities will continue to play a big role for Norway’s economy for many years to come. Indeed, 55% of discovered resources are still in the ground. The Norwegian Petroleum Directorate recently announced that they know of more recoverable oil now than ten years ago.

In April Norway launched a website, available at http://www.norskpetroleum.no/en/, where people can find detailed and accessible information about Norwegian the petroleum sector. The website boldly claims that it contains “everything you need to know about Norwegian petroleum activities”.  This includes information, maps and raw data about:

• government revenue, including the by-company breakdowns from the EITI report;
• the legal framework and tax system;
• available resources, exploration and production

All data are continuously updated from the Norwegian Petroleum Directorate’s databases.

Chart from the new portal Norwegian Petroleum. It was only in the last 15 years that the oil activity started yielding significant revenue to government.

Other EITI countries, such as the United States, are also shifting focus from disclosure in print and pdf reports towards disclosure by open data and digital tools.

Looking ahead

The Norwegian EITI multi-stakeholder group is set to meet and plan the next steps for Norway’s EITI process in June. The civil society group Publish What You Pay Norway recently presented what they think Norway should do with its EITI. They call for transparency of the beneficial owners and on mining licenses in Norway.

Next year, Norway will be required to complete an EITI Validation, to assess its compliance with the 2013 EITI Standard.

For more information on the EITI in Norway, visit the country page on the EITI website and their national EITI website.