Norway's Sovereign Wealth Fund

Brian Hicks

Written By Brian Hicks

Posted September 28, 2009

Norway has a problem any country wishes for. . .

What to do with its extra money.

Two weeks ago, Norwegians voted in a general election that put the future of the country’s enormous sovereign wealth fund on the line.

But what most investors don’t realize is that the oil money now starting to trickle out of Norway’s national account will soon become a torrent of liquidity in renewable energy markets.

That’s right — Norway just announced a $4 billion foray into renewable energy shares. . . and that’s just the beginning.

Voting for $400 Billion Fund Managers

Norway is the second-richest nation per capita; and with only about 4.8 million residents, it is also the world’s sixth largest net oil exporter (eighth largest producer), and third largest net gas exporter.

The Norwegians aren’t in OPEC and they aren’t in the EU. The government isn’t really beholden to anyone but its citizens.

And since 1996, Norway has been socking away revenue from its North Sea oil and gas production, which is led by the U.S.-listed StatoilHydro (NYSE:STO). To put it into better perspective, StatoilHydro controls approximately 80% of the country’s oil and gas production. The company was created by the merger of Statoil and Norsk Hydro about two years ago.

Norway’s sovereign wealth fund is now worth nearly $400 billion.

Not a bad setup, right?

Well, such a relationship between government and electorate means voting is more like choosing mutual fund managers than it is a process to elect officials to pave roads and fend off Swedish attacks.

Norway has managed to avoid the economic traps that caught neighboring Iceland and Latvia and severely damaged others in the region.

Nevertheless, Ole, a 53-year-old engineer, said before the election that Norway has weathered the recession well "because we have oil, not thanks to the government’s policies."

Ole wants a change from the current left-wing coalition ruling parliament; a shift to the center-right could mean that more of the gigantic Norwegian Government Pension Fund goes to plugging gaps in the country’s welfare state.

Whichever party Ole opts for, the reality is this: North Sea oil reserves are coming down. Crude output hit a plateau in the 90s, and peak production is now a full decade behind StatoilHydro and its peers, Scotland and Holland.

Opening Offshore Production

So what are the consequences of the election on September 14?

The win for the center-left coalition was just one obstacle in unlocking new offshore reserves. Specifically, it means opening up key areas like Lofoten and Vesteraalen. The Lofoten area is estimated to hold approximately two billion barrels of oil equivalent.

As the chief of Norway’s oil industry association, Per Terje Vold, put it: " Oil and gas activity off Lofoten and Vesteraalen will be important for the further development of the welfare state and to create new line into the region."

But let’s be fair. . . opening up those controversial waters is one of the only ways by which Norway can continue to enjoy their oil wealth. If nothing else, the election is a clear indication that sentiment is changing. After all, ever since the country began saving its oil revenue 13 years ago, this is the first government to win a re-election.

Also consider how increasingly difficult it is becoming to find oil; StatoilHydro’s reserve replacement ratio fell to 34% in 2008. This year, production is expected to decline more than 9%.

It’s only a matter of time.

Natural gas output is increasing, but that doesn’t solve the problem that Norway’s energy intensity (total energy consumption per unit of GDP) is the second-highest in the developed world.

Norway needs not just returns on its sovereign wealth fund investments, but also new ideas on how Norwegians can stay warm through the winter without putting a dent in economic productivity. . . not to mention a need for new sources of revenue, as the black gold dries up.

All countries rich in natural resources should aim to keep domestic consumption low in order to maximize exports. Norway’s energy intensity is therefore a concern to those who want to keep the welfare system robust and the pension fund padded.

Like nomadic hunters that traverse the tundra looking for sustenance, Norway’s leaders are tasked with bringing home returns to hungry stakeholders.

Not Only Norway. . . Billions Spread around the World

Norway’s strategy for preserving and adding to the country’s sense of fiscal well-being means looking at places like India, where Oslo is pumping $1.2 billion into 232 Indian companies involved in cleantech, emissions control, and energy generation.

Chinese shares are sure to be on the smorgasbord of emerging market green shares targeted by Norway’s retirement fund. Even U.S. clean energy stocks have shown their advantage, compared to sticking with oil. Take a look at this comparison of the United States Oil Fund ETF (NYSE:USO) against the Power Shares Wilder Hill Clean Energy ETF (NYSE:PBW), since the beginning of 2009:


USO ETF Oil Chart

Even though oil has padded Norway’s coffers for a good run, oil is actually being surpassed in potential returns by the very companies that are providing energy alternatives to global consumers.

Again, consider that just $4 billion of Norway’s national wealth is being committed to green shares so far. That’s just 1%. With each uptick in petroleum-generated resource wealth that pours into renewable energy shares, we see more validation and interest in our stock recommendation service Green Chip International.

And on our radar are not only Norway’s billions, but also Beijing’s $232 billion clean energy stimulus, Germany’s world-leading solar power market, and the U.S. cleantech boom. They are all creating stellar returns — like over 446% in one Chinese cleantech company since last December.

Politics and profits are intertwined these days, no matter where you are. Don’t miss the next vote that determines how billions will drive your investments. Check out Green Chip International right here to join us in following politics to profit.


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