The Government Petroleum Fund 1998
Management mandate
Act no. 36 of 22 June 1990 relating to the Government Petroleum Fund
§ 1. The Act shall regulate the deployment and investment of a fund
intended to safeguard long-term interests through the use of petroleum
revenues.
§ 2. The Fund's income consists of the cash flow from petroleum
activities, which is transferred from the central government budget, and
the return on the Fund's capital. The cash flow is the sum of
- total tax revenues and royalty deriving from petroleum activities
collected pursuant to Act no. 35 of 13 June 1975 relating to Taxation of
Offshore Petroleum Resources and Act no. 11 of 22 March 1985 relating to
Petroleum Activities
- revenues deriving from tax on CO2 emissions due to petroleum
activities on the continental shelf
- revenues deriving from the State's direct financial interest in
petroleum activities, defined as operating income and other income less
operating expenses and other direct expenses
- central government revenues from net surplus agreements associated
with certain production licences
- dividends from Den norske stats oljeselskap A/S
- transfers from the Petroleum Insurance Fund
- central government revenues deriving from the removal or alternative
use of offshore installations on the continental shelf
- any government sale of stakes representing the State's direct
financial interest in petroleum activities
less
- central government direct investment in petroleum activities
- central government expenses in connection with the Petroleum
Insurance Fund
- central government expenses in connection with the removal or
alternative use of installations on the continental shelf
- any government purchase of stakes as part of the State's direct
financial interest in petroleum activities
§ 3 The Fund's capital may only be used for transfers to the
central government budget pursuant to a resolution by the Storting
(Norwegian parliament). The Fund's capital may not be used in any other
way, nor may it be used to provide credit to the central government or to
private sector entities.
§ 4 The Fund's capital shall be invested in the same manner as the
central government's other assets.
§ 5 The Fund may not raise loans.
The Fund itself has no rights or obligations vis-à-vis private
sector entities or public authorities. The Fund cannot be subjected to
legal proceedings, and may not institute legal proceedings.
§ 6 The Ministry of Finance shall manage the Fund.
§ 7 The King may issue provisions to supplement this Act and
concerning its implementation, including provisions relating to the
establishment of the Fund, its management, etc.
§ 8 The Act enters into force at such time as may be decided by the
King.
Regulation relating to the Management of the Government Petroleum Fund
Issued on 3 October 1997 by the Ministry of Finance pursuant to § 7
of the Act no. 36 of 22 June 1990 relating to the Government Petroleum
Fund.
§ 1 Management of the Government Petroleum Fund
Norges Bank is responsible for the operational management of the
Government Petroleum Fund on behalf of the Ministry of Finance. The Bank
may use other managers. Such managers must have adequate internal, ethical
guidelines for their activities.
Norges Bank shall submit reports on the management of the Government
Petroleum Fund in accordance with the guidelines set out by the Ministry
of Finance.
§ 2 Placement of the Fund
The Government Petroleum Fund shall be placed in a separate account in
the form of NOK deposits in Norges Bank. Norges Bank shall invest this
capital separately in its own name in financial instruments and cash
deposits denominated in foreign currency (the separate portfolio).
Norges Bank shall seek to achieve the highest possible return on the
separate portfolio within the limits set out in the regulation.
§ 3 Accounting return on Government Petroleum Fund
The value of the Government Petroleum Fund's NOK account shall be
equivalent to the value of the separate portfolio. Norges Bank's book
return on the separate portfolio, less remuneration to Norges Bank, shall
be added to the Petroleum Fund's krone account on 31 December every year.
§ 4 Benchmark portfolio and relative risk
The Ministry of Finance, following consultation with Norges Bank, shall
establish a benchmark portfolio for the separate portfolio. The Ministry
shall set a maximum limit for expected variations in the return on
investments in the separate portfolio and the benchmark portfolio, in the
form of a measure of relative volatility.
§ 5 Asset distribution
The separate portfolio shall be invested in accordance with the
following distribution of assets:
- Interest-bearing instruments 50 - 70%
- Equity instruments 30 - 50%
When calculating the asset distribution in accordance with the first
paragraph, equity derivatives shall be treated as is if parts of the
separate portfolio had been invested directly in the underlying equity
instrument. The asset distribution pursuant to the first paragraph is
based on the total portfolio, excluding derivatives.
§ 6 Foreign currency and market distribution
The separate portfolio shall be invested in accordance with the
following foreign currency and market distribution:
- Europe 40 - 60%
- The Americas 20 - 40%
- Asia and Oceania 10 - 30%
The separate portfolio can be invested in the following countries:
Europe: Belgium, Denmark, Finland, France, Italy, Ireland, the
Netherlands, Portugal, Spain, the UK, Switzerland, Sweden, Germany and
Austria.
The Americas: The US and Canada
Asia and Oceania: Australia, Hong Kong, Japan, New Zealand and
Singapore.
The separate portfolio can be invested in equity instruments listed on
the stock exchanges in the countries/region listed above and in
interest-bearing instruments issued in the currency of the above-mentioned
countries/region or in the European Currency Unit, the ECU. Issuers of
interest-bearing instruments shall be registered in one of the
above-mentioned countries/region or be an international organisation.
[Entered into force 1 June 1998 (cf. § 11)]
§ 7 Interest rate risk
The modified duration on the total portfolio of interest-bearing
instruments and associated derivatives shall be between 3 and 7.
§ 8 Credit risk
The Ministry of Finance shall establish limits for credit risk in the
separate portfolio.
§ 9 Risk systems and risk management
Norges Bank shall ensure that satisfactory risk systems and control
routines exist for those instruments to be used in the management of the
Fund. Derivatives may be used to the extent that the subsequent financial
exposure does not exceed that which would result from investing directly
in the underlying instruments.
§ 10 Equity ownership
The separate portfolio may not be invested in more than 1 per cent of
the share capital in any one company. Norges Bank shall not exercise its
ownership rights linked to share holdings unless it is necessary in order
to secure the financial interests of the Fund.
§ 11 Entry into force
The regulation enters into force on 1 January 1998, with the exception
of §§ 5 and 6, which shall enter into force on the date decided
by the Ministry of Finance. The regulation on the management of the
Government Petroleum Fund of 10 May 1996 will be revoked on 1 January
The reference in § 6 to the European Accounting and Currency Unit,
the ECU, has been removed with effect from 1 January 1999. The Ministry
took the decision to amend the regulation on 10 December 1998.
The purpose and management of the Petroleum Fund
The Revised National Budget for 1997 contained a discussion of the
principles for guidelines for management of the Government Petroleum Fund.
The Ministry of Finance wrote about the purpose of the Fund in Chapter
3.5.2:
Basically the Petroleum Fund is to be a fiscal policy control
instrument for making the use of petroleum revenues visible. The
general background material to the Act stresses that the allocation of
capital to the Fund must form part of a comprehensive budgeting process.
In establishing the Fund, emphasis has therefore been placed on the
premise that there must be no accumulation of capital that does not
reflect the actual surplus on the government budget.
In formal terms, the Petroleum Fund is a krone account in Norges Bank.
This krone account has a counterpart in that Norges Bank has
simultaneously invested an equivalent amount in the Bank's own name in
foreign securities. The return on these foreign securities determines the
exact return on the Petroleum Fund.
The capital in the Petroleum Fund has two purposes: to serve as a
buffer, providing greater scope of manoeuvre in economic policy if the oil
price or mainland economic activities should fail, and to be a tool for
handling the financial challenges associated with an ageing population
coupled with declining petroleum revenues. These factors combined indicate
that the Fund should be invested with a long-term horizon, but in a way
that makes it possible to drawn on it when required.
The Ministry wrote the following about the management of the Fund in
Chapter 3.5.6:
According to the Petroleum Fund Act, it is as previously mentioned the
Ministry of Finance that is delegated responsibility for managing the
Petroleum Fund. Responsibility for the operational management of the Fund
has since been delegated to Norges Bank. In connection with investment in
equity instruments, it may also be desirable to use managers other than
Norges Bank to procure adequate expertise for the management of the
Petroleum Fund. Today Norges Bank uses external managers to some extent to
manage parts of its ordinary foreign exchange reserves. Among other
things, this permits a fair comparison to be made with its own management.
This should also apply to the Petroleum Fund.
Norges Bank takes up the matter of external managers in its submission
of 10 April:
"Responsibility for overall control should be centralised
in one institution in order to ensure that the different limits for low
risk in the total portfolio (distribution of asset classes, currency and
market distribution etc.) set out in the Ministry of Finance's guidelines
are observed at all times. This institution should, however, be authorised
to use other managers for parts of the portfolio. On the whole, it must be
appropriate to assign the operational responsibility for any equity
investments to those managers that can execute this in the most
cost-effective manner."
The Ministry assumes that the use of other managers should be organised
in such a way that Norges Bank retains the overall responsibility for the
operational management of the Fund's capital, and that the bank delegates
parts of the portfolio to other managers. Reference is made to Norges
Bank's submission of 10 April, which states:
"In assessing internal versus external management, the
main emphasis will be on commercial criteria. If there is reason to expect
that institutions other than Norges Bank are in a position to undertake
the management at a lower cost and/or a higher return, responsibility for
the management itself should be outsourced. This will, however, be based
on overall risk management in Norges Bank, in accordance with the
guidelines set by the Ministry of Finance."
It is assumed that Norges Bank will make commercial criteria the basis
for selecting external managers. Both Norwegian and foreign managers are
potential candidates. Investing in equity instruments will mean that
greater demands are made of Norges Bank's risk management and risk
control.
In establishing new guidelines for the management of the Petroleum Fund,
which open the way for the investment of some of the Fund's capital in
equity instruments, provisions placing limits on the risk associated with
both the equity portfolio and the Fund's overall portfolio will be
included.
Evaluating Norges Bank's management of the Fund's capital is an
important responsibility for the Ministry, which will use external
expertise for the purpose. It is intended that the reports received by the
Ministry will be public. Evaluation will take place by means of a
benchmark portfolio, which will be established in accordance with the
guidelines for the Petroleum Fund's investment, and which can be said to
represent a neutral investment strategy according to the investment
guidelines. The difference between the return of the Fund's portfolio and
the benchmark portfolio will then be broken down into different elements
and analysed.
It is intended that the Storting will be informed about the Petroleum
Fund's accounts through the Central Government Accounts. It may also be
natural to discuss the Fund's half-yearly results in the National Budget.
There will additionally be preliminary figures for the value of the Fund
every month, since Norges Bank publishes an overview of its assets and
liabilities every month.
The Ministry has been informed that an agreement has been made between
Norges Bank's Auditing Department and the Auditor General on the auditing
of the Government Petroleum Fund. The ultimate auditing of the Petroleum
Fund is assigned to the Office of the Auditor General, which bases its
audit on the work performed by Norges Bank's Auditing Department. The
Ministry of Finance receives all essential reports from Norges Bank's
audit of the Petroleum Fund.
Management agreement between the Ministry of Finance and Norges Bank
1. The contents of the agreement, etc.
The State, represented by the Ministry of Finance, has delegated to
Norges Bank the responsibility for the operational management of the
Government Petroleum Fund. The management of the Fund is subject to Act
no. 36 of 22 June 1990 on the Government Petroleum Fund with the
appurtenant regulations, as well as other decisions and guidelines that
have been or may be adopted by the Ministry of Finance. This agreement,
together with the regulations and decisions mentioned, governs the
relationship between the Ministry of Finance and Norges Bank in connection
with the management of the Fund.
All notifications that affect this agreement shall be in writing and
signed. Such notifications shall be communicated to Norges Bank Investment
Management and to the Economic Policy Department of the Ministry of
Finance.
2. Norges Bank's obligations
2.1 Norges Bank’s responsibilities
Norges Bank shall manage the Fund in accordance with the law, the
financial management regulation for the central government, regulations
and other decisions and guidelines that apply to the Fund (cf Clauses 1
and 3.1). Matters of special importance shall be submitted to the Ministry
of Finance.
Quarterly and annual reports on the management of the Fund, to be drawn
up by Norges Bank in accordance with guidelines laid down by the Ministry
(cf Section1 of the regulation), shall be approved by Norges Bank’s
Auditing Department. Norges Bank shall without undue delay notify the
Ministry of significant changes or expected significant changes in the
Fund’s assets. Norges Bank shall provide the Ministry of Finance with
information as requested by the Ministry, including information in
machine-readable form to companies that assist the Ministry in evaluating
Norges Bank’s management of the Government Petroleum Fund.
Norges Bank is liable for paying damages to the State for losses arising
as a result of negligence or intent on the part of the Bank, external
managers or external service providers operating under an agreement with
the Bank (cf Clause 2.2, first paragraph of the agreement).
2.2 Management of the Fund
Norges Bank may use external managers and external service providers in
the management of the Fund. Norges Bank is party to agreements with such
service providers, and shall supervise their activity on behalf of the
Fund.
The Ministry of Finance shall be informed, prior to the conclusion of a
final agreement, of the choice of external service providers of major
importance to management and the basis for the selection. Such information
shall always be provided when concluding a new management agreement with
external managers. The Ministry of Finance may require Norges Bank to
submit to the Ministry the contracts it enters into in connection with the
management of the Fund.
2.3 Information
Norges Bank shall provide information concerning the Fund's management
to the public, in accordance with the Public Information Act and the
Public Administration Act, and the relevant guidelines issued by the
Ministry of Finance.
3. The obligations of the Ministry of Finance
3.1 Regulations, guidelines, etc.
Norges Bank shall have the opportunity to express its view before any
changes are made to regulations, decisions or guidelines on management,
and shall be notified in due time for changes to be made in the portfolio.
3.2 Remuneration
Remuneration is subject to Annex 1 to this agreement. Remuneration is
determined on the basis of the principle of full coverage of expenses
incurred by Norges Bank. Changes in the method for calculating
remuneration for the following calendar year may be requested by both
parties before 1 December of each year.
Remuneration is drawn from the Fund’s gross return before the net
return is transferred to the Fund’s krone account on 31 December of
each year. Norges Bank shall submit its remuneration calculations to the
Ministry of Finance as early as possible and no later than one week before
finalising the accounts.
The Ministry of Finance shall approve in advance those clauses of the
agreements between Norges Bank and Norges Bank’s managers that have a
direct influence on the remuneration paid by the Ministry of Finance to
Norges Bank.
3.3. Amounts credited
The Ministry of Finance effects any transfer of funds from the Treasury
to the Fund’s krone account at Norges Bank at the end of each
quarter. The approximate amount to be transferred shall be communicated to
Norges Bank in due time for the Bank to make any portfolio adjustments.
3.4 Amounts debited
The Ministry of Finance shall inform Norges Bank of any drawings on the
Fund in due time for the Bank to make any portfolio adjustments. The
Ministry of Finance will inform Norges Bank of the account to which the
transfer is to be credited.
3.5 Taxation
The Ministry of Finance shall contribute to providing the documentation
necessary to clarify the tax position of capital from the Fund that has
been invested abroad.
4. Amendments and entry into force, etc.
4.1 Amendments
The agreement shall be revised when changes to laws or regulations,
decision or guidelines so require. This agreement and the annex thereto
may not otherwise be amended without the written approval of both parties.
4.2 Entry into force and termination, etc.
This agreement enters into force on 15 May 1998, albeit such that Annex
1 to this agreement applies in full from 1 January 1998. If the parties
have not given written notification by 31 December in a given year that
the agreement shall be terminated as from 31 December of the following
year, the agreement will continue to apply one year at a time until such
notification is given.
The Ministry of Finance issues further specified rules and instructions
in connection with the termination of the management assignment, including
severance pay and other remuneration to Norges Bank in connection with the
termination. Clause 3.1 applies accordingly.