BUSINESS

Norway's Sovereign Wealth Fund Holds Lessons For Canada

03/23/2015 09:07 EDT | Updated 03/23/2015 10:59 EDT
In Stavanger, a quaint, seaside city on Norway’s coast, a local newspaper publishes a series called "The Oil Kids" that reports on the lifestyles of wealthy second-generation beneficiaries of Norway’s offshore oil riches.

“If you compare to our parents or grandparents which built this country, I think we’re a little bit spoiled," admits Bjorn Knudsen, whose father worked for a large North Sea oil company.

Fifty years ago, Stavanger's biggest industry was canning herring. Now, this city is the country's de facto oil capital.

“We are extremely lucky," says Bjorn’s wife, Kristin Alne, a production engineer for Det Norske Olijeselsksap, an offshore oil company. “There are only five million of us [in Norway], and someone several decades ago was really smart to deal with the income from the oil industry to generate the welfare of this country as a whole."

They are lucky and Norway was smart. So smart that decisions made decades ago to bank the taxes from rich oil fields are now paying for their future at a time when oil-rich Alberta faces a multibillion-dollar deficit.

In the middle of Stavanger, a hulking oil museum charts oil’s legacy and how it turned Norway from poor to prosperous. A real-time ticker counts up the Krone in the oil fund.

Norway today sits on top of a $1-trillion Cdn pension fund established in 1990 to invest the returns of oil and gas. The capital has been invested in over 9,000 companies worldwide, including over 200 in Canada. It is now the largest sovereign wealth fund in the world. 

By contrast, Alberta’s Heritage Savings Fund, established in 1976 by premier Peter Lougheed, sits at only $17 billion Cdn and has been raided by governments and starved of contributions for years.

“For the last 10 years, when nothing went into the Alberta fund, and we put a lot of money aside, the profit went out of Canada," says Rolf Wiborg, a petroleum engineer who recently retired from Norway’s public service.

Norway's ethos

Wiborg, who studied at the University of Alberta and worked for a Norwegian oil company before joining Norway’s Petroleum Directorate, says the key to success has been Norway's ethos of sharing and a commitment to never waver from that goal.

“We don’t change our policies in Norway, with changes in the oil price – you can’t do that," he says. “Lougheed’s government in Alberta knew that, they made policies and then they left them behind."

Oil and gas make up 25 per cent of Norway’s GDP, so the recent plunge in oil prices should have set off alarm bells in Oslo. Thousands of workers have indeed been laid off, but parliament is not painting a dire forecast for 2015.

"We all agree we're not facing a crisis," says Siv Jensen, Norway's finance minister.

Twenty-five years ago, when Norway set up its oil fund, it demanded high taxes from oil companies – 78 per cent after profits and the costs of research and exploration. One hundred per cent of those taxes were banked. The government is allowed to tap into the fund, but only up to four per cent. That leaves the principal untouched. 

“We have low unemployment, we have growth, we have a huge surplus – that’s a very robust start in the face of declining oil prices”, she says confidently.

The Canadian story

Norway did well by those rules. In contrast, Alberta and Saskatchewan – both endowed with oil and other mineral resources – took different routes with vastly different results.

Alberta and Saskatchewan both set up heritage funds (in 1976 and 1978, respectively), but Alberta, for example, only put in 30 per cent of royalties. The funds were consistently raided by governments of the day, and in Alberta, contributions petered out altogether by 1987. The Saskatchewan fund was terminated in 1992.

Those two provinces reveal important failures in the Canadian experience, says Greg Poelzer, a professor at the University of Saskatchewan and author of a recent paper on lessons from Norway.

“First, the failure to contribute annually means the fund will not grow and one-time earnings from non-renewable resources are lost forever," he says.

"Second, governments should only use the interest, otherwise governments will overspend, putting programs at risk when the prices fall, as they always do."

Norway is not immune to oil's fluctuations. Statoil, a Norwegian company that is 67 per cent owned by Norwegians (another fiscally wise decision, according to Rolf Wiborg), has shed eight per cent of its workforce, with more to come.

“This is the lean approach, fundamentally," says Statoil CEO Eldar Saetre, explaining that the big oil companies have to bring down the costs of production, and automate more of it.

Saetre says the industry is in a phase of permanent reduction and downsizing. “This is not about taking down activity and then thinking it will come back," he says.

Diminishing resources

Norway’s conventional oil reserves – like those in most of the world – are diminishing. Bente Nyland, head of Norway’s Petroleum Directorate, says development will continue on a large, promising new find, Johan Sverdrup, but many of the North Sea fields are maturing.

"The main impact we see is that exploration is put on hold," she says. All the more reason to be vigilant about what comes out of existing fields. "Our goal is to ensure the benefit from the oil activity goes into the Norwegian pension fund."

Like petro-economies around the world, Norway is facing a future where oil is not the golden goose it once was.

“We are facing a turning point where oil and gas will no longer be the engine of growth," warns Finance Minister Jensen. “We need to make sure that we are able to transform our economy towards broader markets.”

But for now, the country's smart planning is a significant hedge against an uncertain future, says Farouk al Kasim, an Iraqi geologist who emigrated to Norway in 1968.

The Norwegians asked the former senior executive with Iraq's Petroleum Company to evaluate some early seismic data. Convinced Norway would soon become a major oil player, Al Kasim helped design the management of the resource.

“They were very determined that the major share of the profit would have to be to the citizens of the country, and that’s how it is today," says al Kasim, who was knighted in 2012 by the Norwegian king for his expertise managing Norway's resource.

But what about today, with the price of oil half of what it was six months ago?

“It is nice to have the fund behind us, because without it, we would have been a very worried nation." 

Also on HuffPost:

  • How To Handle Winter Patio Weather
    Nikki Gill
    In Norway, -5 C is no reason to go running indoors. In fact, it’s still considered prime patio season. For a country in love with dining outdoors, Canada needs to adopt this concept. Don’t let the cold scare you away, just enjoy the heat lamps, animal skin and fleece blankets provided by the restaurant.
  • How To Drive
    Wikimedia
    Maybe it's the attitude, maybe it's the infrastructure but either way, speed limits in Norway are lower on average. On a regular highway, the speed limit is usually 90 km/h.

    Canadians should stop and think — why are we always in such a rush? Though our highway speed limit is 100 km/h, most people tend to drive over that limit.
  • How To Waitress In Sneakers
    Wikimedia
    How often do you see a young woman waiting tables in four-inch heels and a mini skirt? She’s tending to all of her tables, carrying hot plates of food, and manages to never slip and spill a tray of drinks. It’s incredibly impressive but also completely unnecessary. In Norway, all the waitresses you’ll see are dressed comfortably from head to toe, right down to a pair of sensible sneakers.
  • How To Embrace Shorter Workdays
    Wikimedia
    The average workday in Norway is about seven-and-a-half hours long — just under eight-hour average for many Canadian occupations.

    The difference here is that this applies to many retail stores and restaurants as well. Employees are given evenings and weekends to themselves so late-night shopping or late-night dinners out are practically impossible.
  • How To Embrace Sunday As The Day Of Rest
    Flickr: bmills
    We’ve all heard those stories of how Sunday was once the day of rest. No one went to work and nothing was open because everyone was meant to stay home and spend time with their families.

    Well, come to Norway and you'll find the tradition alive — more or less. Some grocery and shopping chains plan to open on Sunday thanks to new government policy but the concept of Sunday being the day of rest is still a respected one.
  • How To Live With Five Weeks Of Paid Vacation
    Flickr: @boetter
    For full-time, salaried employees, the average paid vacation time allowance is five weeks. In Canada, the average sits at two weeks. Imagine how much happier Canadians would all be with three more weeks of vacation time every year. Think of how many more times you could visit Norway!
  • How To Let The Government Do Your Taxes
    Flickr: blmurch
    How much do we all dread tax season? Well in Norway, everything is done for you. The government does all of your paperwork for you and sends you a copy. As long as you agree, you don’t have to do a single thing. If you don’t agree, then you have the option to get involved in the process.