Trillion Dollar Baby: How Norway Beat the Oil Giants and Won a Lasting Fortune

By Paul Cleary

For most of its history, Norway eked out a marginal existence from fishing, forestry and shipping. But things changed in 1969, when the country found one of the world's biggest offshore oilfields. As the revenue started to flow, Norway began to create the world's best system for developing mineral resources - and for extracting the maximum possible share of the profits.

From the outset, Norway decided that it was the master and not the servant of Big Oil. Twenty years after it began stashing its cash, this country of just five million people has amassed the world's largest sovereign wealth fund, with assets of more than US$850 billion - and it's on track to exceed $1 trillion in 2020.

Unlike many other countries, Norway has taken a non-renewable resource and turned it into a financial asset that can last for generations to come. This is the story of how the Norwegians did it.

'An economic morality tale for our times.' —The Age

Highly commended, 2016 Ashurst Business Literature Prize. 'A 'must-read' in the context of Australian public debate on government policy relating to mineral wealth and resources.'

• Language: English
• Publisher: Black Inc. Books
• Release date: Sep 1, 2016
• ISBN: 9781925435214

Paul Cleary

Paul Cleary is a prominent Australian journalist who has documented the politics and economics of resource extraction for more than a decade. He served as an adviser to the government of East Timor on resource-sector governance and negotiations, and has a doctorate from the Australian National University. He is the author of Too Much Luck, Mine-Field and Trillion Dollar Baby.

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Published by Black Inc., an imprint of Schwartz Publishing Pty Ltd

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Carlton VIC 3053, Australia

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Copyright © Paul Cleary 2016

Paul Cleary asserts his right to be known as the author of this work.

ALL RIGHTS RESERVED.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means electronic, mechanical, photocopying, recording or otherwise without the prior consent of the publishers.

National Library of Australia Cataloguing-in-Publication entry:

Cleary, Paul, 1964– author.

Trillion dollar baby: how Norway beat the oil giants and won a lasting fortune / Paul Cleary.

9781863958691 (paperback)

9781925435214 (ebook)

Sovereign wealth funds—Norway.

Petroleum—Norway—History.

Norway—Economic policy.

Norway—Economic conditions.

332.6725209481

Cover design by Peter Long

Text design and typesetting by Tristan Main

Front cover photo: Bloomberg/Getty Images

Back cover photo: Statoil/Norwegian Petroleum Museum

Map page x: A map showing the location of the Norwegian Sea in the North Atlantic Ocean. Created by Norman Einstein, August 25, 2005.

BY THE SAME AUTHOR

Shakedown – Australia’s Grab for Timor Oil

The Men Who Came Out of the Ground

Too Much Luck

Mine-Field

CONTENTS

Chronology

Map of Norway and its Maritime Territory

Prologue

1.Out of the Darkness

2.Into the Deep

3.Command and Control

4.The Price of Prosperity

5.Seabed Soldiers

6.Planning and Failing

7.Trolling the Soviets

8.Cash Cow

9.The New North

10.Nordic Rules for Riches

Afterword

Appendices

Acknowledgments

Bibliography

Notes

Index

CHRONOLOGY

MAP OF NORWAY AND ITS MARITIME TERRITORY

PROLOGUE

ON A WINTRY DAY IN LATE NOVEMBER 1974, EXECUTIVES FROM the world’s most powerful oil companies filed into a grand quadrangular building in Oslo. Adorned with a white wedding cake façade, Victoria Terrasse had served as the headquarters for the Nazi security police during the Second World War. Now it was the head office for the Ministry of Foreign Affairs, and the government had chosen this venue because it was about to assert its sovereignty like never before. Most of the executives assembled in the large auditorium came from the big American companies. They operated in the four corners of the world, where they were accustomed to deciding how they’d do business. But Norway, which at the time had a population of just 3.85 million people, knew it needed to take control of its destiny and reap a much larger share of the benefits from the once-only extraction of its petroleum wealth.

A year earlier, Arab oil producers had formed the cartel known as the Organization of Petroleum Exporting Countries (OPEC), which slashed production and triggered a quadrupling of oil prices, thus ending a halcyon era of abundant fossil fuel. The following year, oil companies reported spectacular increases in profit. Norway’s economic advisers quickly realised the tax regime that had been put in place a few years back wasn’t designed for this new era of rising prices, and would deny the country tens of billions of dollars of revenue. Foreign companies exploring in Norway’s part of the North Sea had discovered two mammoth oilfields over the past five years, and several smaller ones as well. Firm and wise stewardship of this endowment was called for.

In the five years since oil was discovered in 1969, Norway had learned a great deal about the powerful oil industry and it was now ready to extract the maximum possible share of revenue. It had set up a national oil company and given it a mission to generate direct ownership and profits for the state, and to drive the involvement of locals in the development of the industry. It had created a policy that allowed the state to take a direct equity stake in oilfields should they prove to be very profitable, without having to invest in the exploration costs. It was what might be known as a cake-and-eat-it policy. But on the revenue front, the existing tax regime still meant that any super profits would be collected by the companies, not the government of Norway.

Norway had the benefit of a very capable public service that had a long tradition of dealing with powerful foreign interests, most notably the companies that developed Norway’s hydro resources in the early 1900s. The officials convinced the Labour government to move quickly and decisively to grab what they knew was rightfully theirs. Finance ministry officials were able to draw on a network of Norwegian executives who had been seconded to work inside foreign oil companies. Ostensibly, this was part of a plan to train Norway’s inexperienced engineers, but the network proved to be a veritable fifth column that could supply the government with valuable information about these multinationals. The informants told the officials just how far they could push Big Oil. According to the economic historian Einar Lie, their aim was simple: to squeeze every last drop of excess profit while ensuring that the foreign oil rigs remained in operation.¹

*

Not long after the executives had settled into their seats, finance officials explained that companies would now pay a special tax of 40 per cent on top of Norway’s already high corporate tax rate of 50 per cent. The executives added the two figures together and thought they could be paying up to 90 per cent – at least, that was what the oil executives said when they breathlessly briefed the media after the meeting.² Norway’s audacious move was described by the executives as being ‘far more onerous’ than what was being proposed by the UK government.³ In fact, this surprise revenue grab encouraged the UK’s treasury to be equally brave; at the time it was toying with the idea of an additional profits tax but had been reluctant to give details.⁴

Even more audacious than the rate of the special tax was its design. The proposed regime, which would see the government determining selling prices and the cost base for projects, was designed to drive a stake through the heart of tax minimisation by these global corporations.

Despite Norway’s boldness, Big Oil kept its rigs in Norway’s part of the North Sea, known as the Norwegian Continental Shelf (NCS), because the region remained an attractive place to invest and because it could gain no support from Norway’s conservative party. Even though conservatives are traditionally great advocates of lower taxes, Norway’s conservatives agreed with the higher rate and refrained from political opportunism. This is remarkably different to what has transpired in many other countries, where oil companies have been able to win support by dividing and conquering the political class. Even to this day, both sides of Norwegian politics remain firmly in favour of the tax regime.⁵ Unlike other resource-rich countries, Norway was showing how to become the master rather than the servant of resource multinationals. That November 1974 meeting was a decisive step along the way towards reaping the maximum national benefit from the country’s resource wealth.

*

Walk around the main streets of Oslo today, and what you’ll see is surprisingly modest. Norway is distinctly lacking in grand edifices or other trophies that attest to its triumph as a petroleum producer. One of the very few such monuments is the sleek, iceberg-inspired Opera House overlooking Oslo Fjord, but that was finished ahead of schedule in 2008 and came in under its reasonable budget of $500 million. The main shopping centres are still old-style high streets, rather than modern-day mega-malls. Most government offices blend into the low-rise streetscapes and there is an absence of expensive vehicles on the road (other than a growing fleet of electric vehicles that run on the country’s abundant hydro-electric power). Even Apple, which has planted its grandiose glass-fronted showrooms around the world, operates out of small shopfronts in the Norwegian capital.

As a society, Norwegians have remained true to the sentiment put to visiting oil executives in the late 1960s of wanting to eschew the euphoria of oil riches. This record is all the more remarkable because many other countries, and not just poor ones, have blown their boom-time windfalls on largesse, whether in the form of grand edifices, military hardware, white elephant projects or cash splashes for swinging voters.

Norway’s experience is particularly instructive because of a misperception found in much academic literature and media commentary about the effect on countries of plentiful natural resources. This misperception is exemplified by Michael Ross in The Oil Curse: ‘Petroleum wealth is overwhelmingly a problem for low- and middle-income countries, not rich, industrialised ones.’⁶ Yet the view that resource-rich developed countries – such as Australia, Canada, the United States and the United Kingdom – have all astutely managed their resources is a flawed one. It’s true that they may not be run by authoritarian regimes, but these countries can’t be said to have exercised good governance and long-term strategy over the development of their non-renewable resources. At the end of the UK’s first decade as an oil-rich nation, for example, the country had to ask the International Monetary Fund for a $4 billion bail-out, which is still the biggest facility ever extended by the emergency lender.⁷

Norway is alone in the developed world in having successfully kept most of the windfall from its oil and gas wealth – 90 per cent of cash flow now accrues to the Norwegian state.⁸ And only Norway has set up sound institutions to manage this boom-time bonus for generations to come. At the start of its oil era, Norway was a middle-income country with a per capita GDP just ahead of Greece, and by the end of the 1970s it was heavily indebted to the rest of the world. Its net foreign liabilities as a share of GDP peaked at 40 per cent. But its effective taxation and disciplined savings strategy have since turned it from a net debtor into one of the world’s biggest creditors. Its net foreign assets are worth 185 per cent of GDP, or around $760 billion, and they’ve risen even more sharply when converted back into local currency as a result of Norway’s flexible exchange rate (one advantage of not being part of the euro). During a twenty-year period of relatively high oil prices, Norway salted away $870 billion in a long-term sovereign wealth fund. Despite lower oil prices, the fund is still growing and is on track to hit $1 trillion in 2020.

When compared with Canada and Australia, two industrialised nations with Westminster political institutions and substantial resource sectors, Norway’s achievement is absolutely monumental. Canada, with a comparable energy and mineral sector that generates 14 per cent of GDP, has established just one small sovereign wealth fund.⁹ The oil-rich state of Alberta showed some foresight when it set up a future fund in 1976 to save windfall revenue, but it was repeatedly plundered by politicians, and the lack of good governance is evident today in its balance of C$18 billion ($13 billion).¹⁰ Australia, with a rapidly growing mineral and energy sector, has performed no better. Even after its biggest resources boom, Australia has failed to build up rainy-day assets and its net foreign debt has hit the trillion-dollar mark in local currency. When the boom began in the early 2000s, Australia’s foreign liabilities stood at around $A400 billion ($305 billion). By March 2016, they had more than doubled to A$1012 billion ($750 billion), or around 60 per cent of GDP.¹¹ Australia does have a sovereign wealth fund, the Future Fund, but its assets of around A$120 billion ($87 billion) are expressly linked to future pensions for public servants.

Norway offers the best example in the world today of how to govern extraction of non-renewable resources, but it is by no means perfect. The country made mistakes in the early years by allowing development to run ahead of safety, leading to the loss of many young lives in the 1970s and 1980s. The focus on onshore development involved high risks that pushed the technological frontier and led to massive cost blow-outs. The country is now licensing new development in the Arctic region, which is questionable on both technical and moral grounds. Norway can also be criticised for relying too heavily on oil production, which has meant that about one-quarter of its national income has been directly or indirectly tied to a single commodity.

But there’s a great deal that can be learned from the Norwegian experience. Its long-term strategy and firm management, which, as this book explains, has its origins as far back as the early 1900s, is salutary reading for resource-rich countries as they grapple with the aftermath of the biggest mineral and energy boom and bust since the early 1970s. Norway is the small country that’s become the big exception to the resource curse thesis. Its consensus-based political system allowed it to make far-reaching decisions from the very beginning, in stark contrast to other resource-rich countries.

1

OUT OF THE DARKNESS

‘I was born dying.’

Norway’s greatest artist, Edvard Munch, on the poverty and

despair that prevailed during his upbringing in working-class

Oslo, late 1800s

WHEN THE WORLD-FAMOUS ECONOMIST AND DEMOGRAPHER Thomas Malthus visited cold and remote Norway in the late 1790s, he observed a Danish-controlled territory that was living on the very margin of human existence. Not only did the sun shine for just a few hours per day during winter, and not at all in the far north, Norway’s 875,000 people survived on what they could grow in small plots or catch in rivers and the sea.¹² But Malthus also saw that while these descendants of Vikings were no longer plundering foreign shores, they were still very much dependent on the sea as the country possessed very little arable land. People had to live within severe climatic and financial constraints, and young people often deferred marriage and starting a family in order to get ahead.¹³

Things got a whole lot worse not long after Malthus’s visit. The Napoleonic wars led to North Sea naval blockades in the early part of the 1800s, which precipitated economic collapse and widespread hunger. One result of these wars was Denmark’s transfer of Norway to Sweden. After a brief war with Sweden in 1814, Norway agreed to accept a union with its big neighbour despite having created its own parliament and constitution. Towards the latter part of that century, rapid population growth proved unsustainable as crop failures led to more famine, culminating in the mass exodus of more than 1 million Norwegians, most of whom found their way to the United States.¹⁴ It was desperation and emigration on a similar scale to the Irish famine.

In the nineteenth century Norway diversified its very basic economy by drawing on centuries of experience gained from seafaring ancestors. The country became the base for global shipping fleets, and by the early twentieth century about 10 per cent of global tonnage was registered in Norway. Some estimates put the Norwegian registered fleet as the third-largest fleet in the world at the time, and one that generated a major source of foreign currency.¹⁵ Ports and towns along the west coast became service centres for this new industry. While a wealthy elite rose as a result, life remained a struggle for many ordinary Norwegians, even for those living in the capital, then known as Christiana. The life of renowned artist Edvard Munch attests to this experience. Munch’s most famous work, The Scream, a portrait of a ghostly figure overcome with anguish and grief, isn’t a creation from the psychedelic ’60s as some might think. This evocative image reflected Munch’s own harrowing upbringing in impoverished tenement housing in Christiana during the late 1800s. Munch lost two siblings and his mother to illnesses that ravaged the population at the time. These tragic deaths put his father on a path of religious fundamentalism, and left the young Edvard a deeply traumatised individual. ‘I was born dying,’ he said as an old man. ‘Sickness, insanity and death were the dark angels standing guard at my cradle and they have followed me throughout my life.’ ¹⁶

It was not until 1905 that Norway finally emerged as a fully independent country, following 400 years of Danish or Swedish control. At the time of gaining independence, Norway was faced with strong interest from foreign investors, most notably France and Germany, who wanted to build dams to produce hydro-electric power. This issue triggered intense debate in the country and led to the fall of two governments. The conflict was finally resolved when the new parliament passed the Concession Act 1909, which ensured that these resources remained in state hands.¹⁷ The country might have been small but it had developed a capable public service, which took a firm and principled approach to securing the best deal for the new nation.

This brief period of growth and prosperity ended abruptly in 1940 when Norway was drawn into the Second World War. Its location on the north-eastern edge of the North Sea, and its 20,000 kilometre coastline, made it the perfect place for the Nazis to exercise control over this strategic maritime area. German paratroopers invaded Norway on 9 April 1940, and by 5 May all resistance in the south ceased, forcing the king and the government to take flight for England. Under the Nazis, a