Chapter 4

The Government Petroleum Fund

The Government Petroleum Fund was established in 1990 when the Storting adopted the Petroleum Fund Act. The Fund's income is defined under the Act as the central government's net cash flow from petroleum activities, income from the sale of shares in Statoil and the return on the Fund's investments. The Fund's expenditure includes an annual transfer to the Fiscal Budget by virtue of a Storting resolution, equivalent to the non-oil Fiscal budget deficit.

Norges Bank manages the Government Petroleum Fund in accordance with the guidelines provided by the Ministry of Finance. The capital in the Petroleum Fund is invested in equities and fixed-income instruments abroad. The equity share in the Fund is limited to 30-50 per cent. The Fund may today be invested in 28 different countries1).

The value of the Government Petroleum Fund came to NOK 522.6 billion at end-June 2001. The Fund is estimated to increase to NOK 650 billion at the end of 2001 and NOK 861 billion at the end of 2002. Since the beginning of 1998, the Petroleum Fund's total cumulative return has been 23.8 per cent. This corresponds to an average annual real return of 4.7 per cent in the period.

Table 5. Investment of the Fund
Benchmark portfolio
  Equities 1) 40 %
       America 30 %
       Europe 50 %
       Asia/Oceania 20 %
  Bonds 2) 60 %
       America 30 %
       Europe 50 %
       Asia/Oceania 20 %

1) The equity portfolio is distributed between countries according to market capitalisation weights.
2) The bond portfolio has until now been distributed between countries according to GDP weights. From 2002, bonds will be distributed between countries according to market capitalisation weights.

Source: Ministry of Finance.

An Environmental Fund was established on 31 January 2001 with a capital of NOK 1 billion. The Fund should be invested in companies that are considered to have little negative impact on the environment and in companies that satisfy defined criteria with respect to environmental reporting and certification.

The Government will establish an exclusion mechanism for the Petroleum Fund, whereby the Ministry may exclude companies from the Fund's investment universe if investments in such companies are contrary to Norway's commitments under international law. The framework and procedures for such a mechanism are laid down in the Regulation for the Management of the Petroleum Fund. The Regulation was amended on 28 September 2001.

In the Revised National Budget for 2001, the Government decided to include non-government-guaranteed bonds in the benchmark portfolio as from the first quarter of 2002. This change will make the benchmark index more representative of international bond markets. The Lehman Global Aggregate will be used as a benchmark for the bond portfolio. After a period of build-up of non-government-guaranteed bonds, these are estimated to account for about 30-40 per cent of the Petroleum Fund's bond portfolio. The portfolio will primarily include non-government-guaranteed bonds with medium to low credit risk, rated by the credit rating agencies Moody's and Standard and Poors.

Currently, the weights to regional equities and bonds are brought back to the long-term strategic weights at the end of each calendar quarter. In order to reduce transaction costs the Government suggests to rebalance the benchmark only if the weights to certain regions and markets move outside a specified trigger point. In addition the benchmark will be rebalanced as far as possible back towards the strategic weights each month, taking account of the actual monthly cash transfer to the Fund. Norges Bank has estimated that this may reduce transactions costs by NOK 700 million over a five-year period.

Chart 12. Government net cash-flow from the petroleum activities and accumulated capital in the Government Petroleum Fund

Per cent of GDP

Source: OECD, Statistics Norway and Ministry of Finance.

Chart 13. Accumulated returns on the Petroleum Fund

Indicies 31 December 1997=100

Source: Norges Bank.

1) The countries are: Belgium, Denmark, Finland, France, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, the United Kingdom, Switzerland, Sweden, Turkey (equity only), Germany and Austria in Europe, Brazil (equity only), Canada, Mexico (equity only) and USA in America and Australia, Hong Kong, Japan, New Zealand, Singapore, South-Korea (equity only), Taiwan (equity only) and Thailand (equity only) in Asia and Oceania.