Net cash flow from extraction of petroleum
The central government’s petroleum income, also referred to as net cash flow from extraction of petroleum, consists of three main elements:
1. Tax and excise from extraction of petroleum
2. Net revenue from the State’s Direct Financial Interest (SDFI)
3. Return on ownership interests in StatoilHydro
Tax and excise mainly relate to the taxable surplus in enterprises in the petroleum sector. These enterprises pay ordinary corporation tax corresponding to 28 per cent of their profit. In addition they pay an additional tax due to exceptional opportunities of making profit. The additional tax is 50 per cent, resulting in a marginal tax of 78 per cent. Moreover, the petroleum enterprises pay area excise, CO2 tax and NOX tax, which are indirect taxes for which the amount payable depends on the amount of petroleum extracted.
The State’s Direct Financial Interest (SDFI) was set up in 1985 as a result of the petroleum settlement in 1984, which led to Statoil’s ownership interests on the continental shelf being divided in two parts. Statoil kept one part while the other was transferred to the SDFI, which is directly owned by the government. The public corporation Petoro AS was set up in 2001 to administer the SDFI.
StatoilHydro was set up in 2007 as a result of the merger between Statoil and Hydro’s oil and gas activities. With an ownership interest of 62.5 per cent, the government is the majority shareholder in the new company. In accordance with a decision by the Storting, the ownership interest will increase to 67 per cent.
The ownership interests in StatoilHydro generate significant revenue to the central government through dividends and the potential sale of shares. In 2001, the revenue from sales of shares in Statoil was included in the net cash flow.
The Government Pension Fund – Global
In 1990, the Storting adopted the Act relating to the Government Petroleum Fund and set up the Government Petroleum Fund, which was renamed the Government Pension Fund – Global in 2006. The purpose of the fund is to support the long-term management of petroleum revenues. It is a tool for handling financial challenges connected with the rise in public pension expenditures and declining petroleum revenues in coming years.
The government’s total net cash flow from the extraction of petroleum shall, in its entirety, be transferred to the fund. In addition to the return on capital, this makes up the fund’s revenue. The part of the fund’s income that is to be used in the fiscal budget is later transferred from the fund to the income side of the budget. This transfer, which is determined by the Storting, corresponds to the non-oil deficit in the fiscal budget and illustrates how much of the petroleum revenue is used each year. In 1996, the first net deposition in the Government Pension Fund – Global was made on the basis of a surplus in the fiscal account in 1995.
The Government Pension Fund – Global is a fiscal policy instrument which provides an overview of the government’s use of petroleum revenue. The Ministry of Finance is responsible for the management of the fund, and has delegated responsibility for the operational management to Norges Bank. Formally the fund is an account which corresponds to investments by Norges Bank in foreign securities. The return on these securities reflects the fund’s return. There are also strict rules with regard to which markets and securities the fund can invest in. This ensures that the fund is securely managed on the objective of high return subject to moderate risk.
Fiscal rule
As the income from extraction of petroleum rose, a fiscal rule for the use of petroleum revenue was established in 2001. The rule aims at a gradual phasing in of petroleum revenues and states that the expected return on the fund can be used. The expected real rate of return on the fund is estimated at 4 per cent. This means that the fiscal budget can be settled with a deficit corresponding to this rate of return. However, the fiscal guidelines emphasise that although the use of the petroleum revenue can differ from the fiscal rule there should be consistency between the use of revenues and the rate of return in the long run.
The non-oil deficit determines the amount to be transferred from the fund to the fiscal budget. The structural non-oil deficit in the fiscal budget shows the changes in the budget balance except for petroleum, corrected for level of activity, transfers from Norges Bank, net interest income in addition to trend level and technical accounting changes. This is the deficit concept of the fiscal rule.
Liabilities connected to the Government Pension Fund – Global
Repurchase agreements and resale agreements in securities are frequently used instruments in the administration of the Government Pension Fund – Global. The fund sells a portfolio of securities accompanied by a repurchase agreement. In the accounts, the portfolio remains on the asset side of the fund’s balance sheet. The corresponding sales value is entered as a loan from the buyer on the liability side of the balance sheet. The reverse situation is called a resale agreement or a reversed repo.
The European System of Accounts (ESA) states that repurchase agreements should be included in the balance category loan. This means that liability connected to repos in the Government Pension Fund – Global is included in the official estimation of Norway’s gross debt. As repurchase agreements inflate both sides of the balance when using the ESA, the gross debt presents a misleading picture of the financial situation of the general government in Norway.