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An Oil Fund for Scotland: Taking forward our National Conversation

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4 International Experience of Oil Funds

Chapter Summary

  • Many countries have created investment funds to manage the windfall generated by their natural resources. Three international examples of relevance to Scotland are:
    • the Government Pension Fund - Global in Norway;
    • the Permanent Fund in the U.S. State of Alaska; and
    • the Heritage Savings Fund in the Canadian Province of Alberta.
  • These funds are well established and operate in political and economic systems where any lessons are best transferable to the case of Scotland.

4.1. A number of resource rich countries and regions have established investment funds to manage the wealth generated from their natural resources. For example, Chile has run a stabilisation and pension fund for copper, the US States of New Mexico, Wyoming and Montana all have resource funds of some form, while oil funds exist in most Middle Eastern and African oil producing countries. The UK is relatively unusual among mineral rich countries in that it has yet to establish such a fund.

4.2. Table 9 lists some of the largest natural resource investment funds in the world today.

Table 9: International Examples of Natural Resource Funds (2009)

Country

Fund Name

Assets
($ Billion)

Inception Year

UAE - Abu Dhabi

Various investment funds

$656

1976

Saudi Arabia

SAMA Foreign Holdings

$431

n/a

Norway

Government Pension Fund - Global

$326

1990

Russia

National Welfare Fund

$220

2008

Kuwait

Kuwait Investment Authority

$203

1953

UAE - Dubai

Investment Corporation of Dubai

$82

2006

Libya

Libyan Investment Authority

$65

2006

Qatar

Qatar Investment Authority

$62

2003

Algeria

Revenue Regulation Fund

$47

2000

Kazakhstan

Kazakhstan National Fund

$38

2000

Brunei

Brunei Investment Agency

$30

1983

US - Alaska

Alaska Permanent Fund

$27

1976

Chile

Social and Economic Stabilization Fund

$22

1985

Bahrain

Mumtalakat Holding Company

$14

2006

Iran

Oil Stabilisation Fund

$13

1999

Canada - Alberta

Alberta's Heritage Fund

$12

1976

Source: SWF Institute (2009) - Fund Rankings, April 2009

4.3. The remainder of this chapter discusses three international examples of relevance to Scotland:

  • the Government Pension Fund - Global in Norway:
  • the Permanent Fund in the U.S. State of Alaska; and
  • the Heritage Savings Fund in the Canadian Province of Alberta.

4.4. These funds are well established and operate in political and economic systems where lessons are best transferable to the case of Scotland.

Norway: The Government Pension Fund - Global

4.5. Petroleum was discovered in the Norwegian North Sea sector in 1969, with production beginning in 1971. The effective use of these resources has helped transform the Norwegian economy and made it one of the richest countries in the world, with GDP per capita 50 per cent higher than in the UK42.

4.6. Norway is currently the world's eleventh largest oil producer (and the fifth largest exporter 43) and fifth largest gas producer (and the third largest exporter) 44. It is estimated that approximately 40 per cent of the discovered marketable oil and gas resources on the Norwegian continental shelf have yet to be extracted 45.

Fiscal revenues

4.7. Revenues from the oil and gas sector contribute a significant amount to the Norwegian annual budget. In 2008, 33.5 percent of total government revenues in Norway stemmed directly from the oil and gas sector 46. In addition to receiving tax receipts from the oil and gas industry, the Norwegian Government has a direct financial interest in a number of oil and gas fields, pipelines and onshore facilities. As such the state pays a share of the costs associated with these projects, and in turn receives a proportion of the after-tax profits. The Norwegian Government's direct financial interest in such projects accounted for 37 per cent of its petroleum revenue in 2007. The Norwegian Government also has a 62 per cent stake in StatoilHydro, one of the largest petroleum companies in the world, through which the government receives dividends. These additional sources of revenue mean that the Norwegian Government receives more in revenue per million tonnes of oil and gas output than the UK Government.

4.8. Figure 14 illustrates the total fiscal revenue received by the Norwegian Government from the petroleum industry since 1971. In 2008, the Norwegian Government received NOK 416 billion in revenue from the industry. The value of the remaining revenues has been estimated at NOK 5,455 billion 47.

Figure 14: Norwegian Government Revenue from the Petroleum Industry, NOK Billion 1970 to 2008 (2008 Prices)

Figure 14: Norwegian Government Revenue from the Petroleum Industry, NOK Billion 1970 to 2008 (2008 Prices)

Source: Norwegian Public Accounts and National Budget

Norwegian oil fund

4.9. Norway's oil fund is officially known as 'The Government Pension Fund - Global' 48. The fund was established in 1990, however the first net transfer to the fund was not made until 1996. Although the name of the fund captures its role in meeting future pension obligations, the fund's revenue is not specifically earmarked for pension expenditures.

Figure 15: Value of Norwegian Oil Fund (At Start of Year) NOK Billion 1997 to 2015 (2008 Prices)

Figure 15: Value of Norwegian Oil Fund (At Start of Year) NOK Billion 1997 to 2015 (2008 Prices)

Figures for 2009 onwards are from the National Budget 2009
Source: Norges Bank (2009) - Government Pension Fund - Key Figures
Note: Figures were deflated using OECDGDP Deflators, OECD Economic Outlook and Scottish Government calculations

4.10. The Norwegian oil fund is the third largest wealth fund in the world. As at March 2009 it was valued at NOK 2,076 billion (£214 billion) 49, with a population of close to 5 million, this equates to approximately £43,000 per capita.

4.11. As with many investment funds, the value of Norway's oil fund has been affected by the turbulence in global equity markets during 2008 with the fund's value falling by almost 9 per cent in the first quarter of 2009. However preliminary estimates suggest that these losses were reversed in subsequent months with initial estimates valuing the fund at NOK 2,384 billion at the end of June 2009 50. Over the longer term, the Norwegian Central Bank forecast that the fund will be worth nearly NOK 4,000 billion by 2015 (in 2008 prices) or £379 billion using current exchange rates.

Alaska: The Permanent Fund

4.12. Oil was discovered along the north coast of Alaska in the late 1960s and has made a significant contribution to the state's economy. In 2008, Alaskan GDP per capita was approximately $44,000, 15 per cent higher than the US average 51.

4.13. Alaska's oil fields are estimated to be large, with the Prudhoe Bay field the largest conventional field ever discovered in North America with estimated original reserves in place of approximately 25 billion barrels of oil 52.

4.14. Oil production in Alaska peaked in 1988-89 at 736 million barrels 53. Since then production has declined by two thirds with output of 249 million barrels in 2008 as illustrated in Figure 16.

Figure 16: Alaska Crude Oil Production (Thousand Barrels): 1973 to 2008

Figure 16: Alaska Crude Oil Production (Thousand Barrels): 1973 to 2008

Source: US Energy Information Administration

Fiscal revenues

4.15. The Alaskan Government receives revenues from oil production from two main sources - licences and royalties from oil fields located in state owned land, and a severance tax on oil returns. As Figure 17 illustrates, petroleum revenue peaked in real terms in 1982 at $6.9 billion before declining. Revenue has increased again in recent years following the rise in oil prices.

Figure 17: Alaska Petroleum Revenue (1970 to 2008) (2008 Prices)

Figure 17: Alaska Petroleum Revenue (1970 to 2008) (2008 Prices)

Source: Alaska Department of Revenue Tax Division. Annual figures cover the period 1 July to 30 June.
Note: Petroleum Revenue is net of transfers into the permanent fund.
Figures were deflated using OECDGDP Deflators, OECD Economic Outlook

Alaskan oil fund

4.16. Alaska's oil fund, established in 1976, is officially known as 'The Alaska Permanent Fund' 54. It is a dedicated investment fund owned by the State and is enshrined in the Alaskan constitution 55, 56. The fund attracts widespread public support and the relevant constitutional amendment to establish the fund was passed by an almost two to one majority 57. From an initial deposit of $734,000 in 1977, the fund was worth $31 billion (£19 billion) at the end of May 2009 58.

Figure 18: Alaska Permanent Fund Value (1978 to 2009) (2008 Prices)

Figure 18: Alaska Permanent Fund Value (1978 to 2009) (2008 Prices)

Source: Alaska Permanent Fund Corporation.
Note: Figures were deflated using OECDGDP Deflators, OECD Economic Outlook

Alberta: The Heritage Savings Fund

4.17. Alberta is the largest oil and gas producer in Canada. In fact, it is estimated that Alberta contains the second largest proven concentration of oil in the world, approximately 180 billion barrels 59. This has helped make Alberta one of the richest provinces in Canada with GDP per capita of $81,000 CAD in 2008, 69 per cent higher than the Canadian average 60.

4.18. While Alberta has some traditional deposits of oil, they are relatively modest in size. The main source is tar-sand deposits. Tar-sands are deposits of relatively low quality hydrocarbons located in a mixture of sand, water and clay that require extensive treatment before use. It is estimated that 173 billion barrels of oil in Alberta's tar-sand deposits are recoverable with current technology 61.

Fiscal revenues

4.19. The vast majority of oil production in Alberta takes place on land owned by the state. Therefore, in addition to tax revenues collected from the production of oil and the profits earned, the Albertan government also collects royalties from the granting of licences to operate on state land. The revenue received from the petroleum industry since 1970-71 is summarised in Figure 19.

Figure 19: Alberta Non Renewable Resource Revenue (1970-71 to 2008-09) (2008 Prices)

Figure 19: Alberta Non Renewable Resource Revenue (1970-71 to 2008-09) (2008 Prices)

Source: Alberta Finance.
Note: Figures were deflated using OECDGDP Deflators, OECD Economic Outlook

Alberta oil fund

4.20. Alberta's oil fund is officially known as the 'Alberta Heritage Savings Trust Fund'. The fund was established in 1976 and at the end of May 2009 was valued at $14 billion CAD (£8 billion) 62. It is the only Province in Canada to have established an oil fund.

4.21. The Government of Alberta has full access to the revenues in the fund and can decide how much to put into the fund each year.

4.22. The Fund was started with a special contribution of $1.5 billion CAD in 1976 63. Payments were made on an annual basis until 1986-87. From 1987 to 2006, no new payments were made into the fund. As a result of the lack of additional investment and continued withdrawals, the fund's real value declined over time as illustrated in Figure 20. Since 2006, investments have recommenced with approximately $3 billion CAD invested 64.

Figure 20: Alberta Heritage Savings Fund Value (1976-77 to 2008-09) (2008 Prices)

Figure 20: Alberta Heritage Savings Fund Value (1976-77 to 2008-09) (2008 Prices)

Source: Alberta Heritage Savings Trust Fund (2009) - 2008-09 Annual Report
Note: Figures were deflated using OECDGDP Deflators, OECD Economic Outlook