The Norwegian Government Pension Fund Global l Tore Eriksen Paris 1 June 2012 1
Part I The Role of oil & gas in the Norwegian economy 2
Discovery of oil on December 23. 1969; the Ekofisk oil field Foto: Kjetil Alsvik/Conoco Phillips 3
The petroleum sector s share of the Norwegian economy. 2011 23% 30% 26% 49% The petroleum sector s share of GDP The petroleum sector s share of state revenues The petroleum sector s share of total investment The petroleum sector s share of total exports Source: Statistics 4
Total government take in is dominated by petroleum taxes and SDFI Revenue (billion 2012-NOK) 500 400 300 Taxes Duties SDFI Dividends Oil price (right axis) Oil price (2012-USD per barrel) 120 100 80 200 60 100 40 0 20-100 0 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Source: Ministry of Finance 5
Total government take in is dominated by petroleum taxes and SDFI Revenue (billion 2012-NOK) 500 400 Taxes Duties SDFI Dividends 300 200 100 0 2011 Source: Ministry of Finance 6
Human capital is our most important resource National wealth per capita in. 2009 4.4% 84.4% 8.4% 2.8% Pension and tax reform must strengthen work incentives Welfare scheme reforms: More people at work - fewer on benefits Discounted petroleum rent Financial assets Real capital Discounted value of labour Good policy fundamentals - sustainable macroeconomic policy Source: Ministry of Finance, NB12. 7
A population of five million, and growing 8
Strong growth, also in Mainland 190 180 170 160 150 140 130 120 110 100 GDP GDP Mainland OECD 200 190 180 170 160 150 140 130 120 110 100 9
Crude oil production in has already peaked 300 (Total petroleum production in, mill. Sm 3 o.e.) Crude oil 250 Gas NGL (included condensate) 200 150 100 50 0 1970 1980 1990 2000 2010 2020 2030 Source: Norwegian Petroleum Directorate (Apr 2012) and Revised National Budget 2012 (May 2012) 10
Ranking of oil & gas exporters Oil export in 2011 (mill b/d) Gas export in 2010 (mill. Sm3) 8,0 7,0 7 7 200 180 187 6,0 5,0 4,0 160 140 120 100 101 95 3,0 80 70 2,0 2 2 56 2 2 60 2 39 36 40 1,0 20 00 0,0 0 11
40 35 30 25 20 15 10 Export of Norwegian gas to France (billion NOK) 5 0 2001 2004 2007 2010 12
Petroleum revenues are temporary and volatile Separate spending from current revenues: Pensions Extraction Path Transform windfall gain to permanent increase in consumption Necessitate saving a large part of petroleum revenues Consumption path after discovery Consumption path before petroleum discovery t 0 Time 13
The GPFG is fully integrated with fiscal policy Return on investments Petroleum revenues Bill NoK Bill NoK 175 175 Structural deficit All revenues 150 4 percent real return 150 Fund State Budget 125 125 100 100 Transfer to finance nonoil deficit Expenditures 75 75 50 50 Fiscal policy guideline Over time spend Fund real return (estimated at 4%) 0 25 2001 2003 2005 2007 2009 2012 25 0 Source: Ministry of Finance, RNB 2012 14
Petroleum revenues have been high 25 20 15 (Percent of trend GDP for Mainland.) State s net cash flow Expected real return 25 20 15 10 10 5 5 0 0-5 1970 2000 2030 2060-5 Source: Ministry of Finance, RNB12 15
Part II Management of the Government Pension Fund Global 16
GPFG is one of the largest Sovereign Wealth Funds in the world 500 Market value 1996 2011. Billion EUR, year-end. 430bn 500 400 400 300 300 200 200 100 100 0 1996 1998 2000 2002 2004 2006 2008 2010 0 17
GPFG governance structure Stortinget - Norwegian Parliament Ultimate owners Government Pension Fund Act National Budget Annual Report on the management of the Fund Material changes to investment strategy presented before Parliament prior to implementation Norwegian Ministry of Finance Formal owner Mandate on the management of the GPFG Regulation on risk management and internal control Quarterly and annual report Investment strategy advice Norges Bank Norges Bank Investment Management Operational manager 18
GPFG Investment Strategy GPFG Benchmark Index Global Equities (60%) Global Fixed Income (35-40%) Global Real Estate ( 5%) Emerging 7 % Asia/ Oceania 15 % Emerging 12 % North- America 35 % Asia/ Oceania 11 % North- America 42 % Europe 38 % Europe 40 % 19
Financial return varies over time 40 Annualized return measured in currency basket. Percentages. 10 000 Real return on investments t in equities and bonds since 1900 30 Equities Bonds Financial crisis 2008 1 000 20 Stock market crash 1987 10 100 "IT bubble" & 9.11 0 Oil price shock -10 10 World war II World war I -20 Stock market crash 1929 1-30 -40 1998 2000 2002 2004 2006 2008 2010 0 1899 1919 1939 1959 1979 1999 20
Number of years Ministry of Finance Large variations in equity returns since 1998 Annual real return in an equity portfolio similar to the Fund since 1900 21 Source: Ministry of Finance/Dimson, Marsh and Staunton Real return in per cent
GPFG investments in France (as of year-end 2011) Investments amounted to 37bn EUR about 9 percent of total fund assets Equity investments in 162 individual companies Investments in bonds from 72 individual issuers Largest Fund holdings in France: Bonds 50 % Real estate 2 % Equities 48 % Issuer Market value (million NOK) Asset class Government of France 79 789 Bonds Total SA 14 369 Equities 22
Real estate investments in UK and France First real estate investments in France July 2011 Partnership with AXA Group 50 percent stake in ten properties located in and around Paris (year-end 2011) 23
Responsible investment practices We shall safeguard value in a broad sense Ensure good financial return over the long run, to the benefit of future generations Safeguard values held by the owners of the Fund, the population of Exercise of ownership rights Ministry of Finance General framework Decides on exclusion/ observation Recommendations on exclusion/observation Norges Bank Council on Ethics A good long-term return depends on sustainable development in economic, environmental and social terms, and well-functioning financial markets 24
Exclusion and observation of companies Product-based d exclusion Produce weapons that violate fundamental humanitarian principles in their normal use Produce tobacco Sell weapons or military material to Burma Conduct-based exclusion Serious or systematic violations of fundamental ethical norms human rights including child labour individuals rights in situations of war or conflict gross corruption severe environmental damage other particularly serious violations of fundamental ethical norms The Ministry of Finance has excluded 55 companies and placed 2 under observation as of May 2012 25
Exercise of ownership rights Exercise of ownership rights is based on international recognised principles Overall purpose of active ownership is to safeguard the Fund s financial values Focus areas 1. Equal treatment of shareholders 2. Shareholder influence and board accountability 3. Well-functioning, legitimate and efficient markets 4. Children s rights 5. Climate change 6. Water management Good corporate governance Environmental and social issues Norges Bank has made it a priority that the focus areas should be relevant to investors in general and the Fund s portfolio in particular 26