Terms of reference for an Expert group appointed to review energy stocks in the GPFG

The Government Pension Fund Global (GPFG) and the petroleum revenue spending guidelines are designed to support sustainable high growth and stable development in the mainland economy. As part of this, the State's net cash flow from the petroleum industry is transferred to the fund in its entirety. Fund withdrawals are used to cover the non-oil central government budget deficit and should over time reflect the expected real return of the GPFG (the fiscal rule).

By delinking the earning and use of petroleum revenues, the state budget and the mainland economy are shielded from fluctuations in current oil and gas revenues. It also ensures that wealth from a non-renewable resource can be preserved over time, thus contributing to the welfare of future generations as well.

The transfer of revenues to the GPFG mainly represents a reallocation of the petroleum wealth on the Norwegian continental shelf to financial assets abroad. The fund is broadly diversified, giving the right to a small part of future world production. The reallocation of wealth helps to reduce the overall risk in these wealth components. The value of the GPFG is now more than twice as large as the current estimate of remaining petroleum wealth on the Norwegian continental shelf.

At the same time, the reallocation of wealth means that changes in the fund value becomes more important for the government's revenues. Since 2001, such changes have been handled through the practice of the fiscal rule. A flexible practice of this rule is in line with the fiscal policy guidelines, which emphasizes that the consequences for fiscal policy of major changes in the value of the fund shall be smoothed out over several years.

The investment strategy for the GPFG aims to achieve the highest possible return within the limits of acceptable risk. Broad diversification of investments across countries, sectors and companies is a key premise in the investment strategy. The strategy has been based on weighing expected risk and return of the GPFG.

In a letter dated November 14, 2017, Norges Bank advised the Ministry of Finance that the energy sector should be taken out of the benchmark index for the GPFG. As classified by the index provider FTSE, the energy sector spans energy-related activities in a broad sense, including integrated oil and gas companies, oil service companies and companies within renewable energy. The sector accounts for about 4 per cent of the fund's equity investments, or around NOK 300 billion.

Norges Bank's advice is based on a broader perspective of wealth than the fund in isolation. The Bank writes that this is in line with the strategic plan for the GPFG for 2017-2019, as adopted by the Executive Board. The plan states that the bank will also provide advice based on assessments of Norway's national wealth. Norges Bank writes in its letter November 14, 2017, that the vulnerability of the state's assets for a sustained fall in oil and gas prices will be reduced if the GPFG is not invested in energy stocks. The Bank emphasizes that the advice is based solely on financial arguments and does not reflect any particular view of future movements in the oil prices or the profitability or sustainability of the sector. In its letter, the bank also mentions coming changes in the benchmark, including the announced listing of Saudi Aramco, the world's largest oil company, which has significant exposure to resource rents.

The Ministry of Finance has previously discussed whether a sale of energy stocks is a suitable instrument for making Norway's national wealth less vulnerable for a sustained fall in oil and gas prices, see the white paper on Long-term Perspectives on the Norwegian Economy 2017. The Ministry has also discussed different perspectives for assessing investments in GPFG, see Meld. St. 26 (2016-2017) Report to the Storting (white paper).

The newly appointed Expert group shall assess the foundation for the GPFG's investments in energy stocks in light of the above-mentioned conditions. The group should briefly describe the vulnerability of the Norwegian economy and future revenues to a sustained fall in oil and gas revenues, and how this vulnerability changes over time.

The expert group shall assess:

  1. What is an appropriate wealth perspective for assessing investments in energy stocks in the GPFG. The assessment should take into account both theoretical, practical and/or other considerations, as well as give an account of relevant analyses.
  2. What time perspective should be assumed, given that the fund structure and the fiscal guidelines have been set up to shield the state budget and the mainland economy from fluctuations in oil and gas revenues.
  3. The relationship between the value of energy stocks and the prices of oil and gas, in the short and long run, based on theoretical considerations and empirical analyses. The importance of resource rent risk and extraction costs should also be accounted for.
  4. The relative importance of reduced exposure to the energy sector in the GPFG for the vulnerability of the Norwegian economy to a sustained fall in oil and gas revenues, as compared to other measures.
  5. The effect of a potential reduced exposure to the energy sector for the expected risk and return in the GPFG in the short and long run, including the historical importance of diversification across industry sectors.
  6. Whether a potential reduced exposure to energy stocks in the GPFG should apply to the whole sector, sub-segments of the sector or specific individual companies, and whether there are quantitative criteria that could be useful in this context.

The Expert group shall base its assessments solely on financial risk and return. The group shall not assess the relationship between the benchmark index and the investment universe in the management of the GPFG.

The group shall present its report within August 24, 2018.