Last week I discussed the Norwegian Petroleum Fund — or the “Government Pension Fund — Global” as it is known formally — which saw its size grow steadily from the 1990s to its present value of about $740 billion (Dh2.7 trillion).

The performance of the Fund between its first equity investment in 1998 and 2007 yielded average annual returns of 4.3 per cent according to Norges Bank Investment Management (NBIM), a unit established by the Central Bank to manage the fund with a staff of more than 200 people. It as set up on a directive from the Ministry of Finance and approved by Storting, the Norwegian parliament.

Some years have seen losses — 3.37 per cent in 2008 and 2.5 per cent in 2011, caused by the global financial crisis. However, other years have seen stellar results.

For example, in 2010 the returns were 9.6 per cent, or 264 billion Norwegian Kroner (approximately $44 billion). In 2012, as the economy recovered, returns were 13.4 per cent and especially generated from the equity markets.

Even in the first quarter of 2013 the Fund returned 5.45 per cent and gained 219 billion crowns ($37 billion) “as stocks surged amid unprecedented stimulus from central banks to boost economic growth”. The same quarter, the government deposited 60 billion crowns of petroleum-generated revenues into the Fund.

Given these numbers, the 4 per cent of the total value of the fund that is withdrawn by the Ministry of Finance each year to support the annual budget is unlikely to arrest its growth in coming years. Perhaps this is why the populist Progress Party wants to spend more of the oil revenue for research and building infrastructure in Norway. The 4 per cent rule, first established in 2001, is designed to integrate the Fund with the rest of the budget to satisfy current needs while thinking ahead for future generations.

Real estate investments

Since 2011, the Fund started investing in real estate, especially in Europe. However, since this year it is expanding into the US and other overseas markets. Such a move “spreads the Fund’s risk across more markets and can also protect against inflation as rents are often linked to price indices” and “the Fund is gradually increasing real estate investments to as much as 5 per cent of its assets through a corresponding decrease in its bond holdings”.

The investment in the UK’s real estate market is relatively small compared to the total property portfolio or to other investments in equity and bonds there. Norway has a 50 per cent stake — valued at £348 million — in a mall in Sheffield in addition to a £452 million investment in London’s Regent Street.

Yet these investments have brought interesting comments about how the UK squandered its North Sea resources by not establishing a similar fund and by not being able to do cross investments.

Similarly, a deal in 1978 to give Volvo, the Swedish automaker, access to Norway’s North Sea oil reserves for a 40 per cent share in Volvo failed to materialise due to shareholder opposition. Yet the Fund is now the second largest owner of Volvo.

In addition to its performance, the long-term health of the Fund seems to be assured given the forecasts for the oil and gas sector in Norway.

Drop in production

Oil reserves declined from their peak of 11.6 billion barrels in 2001 to 6.9 billion barrels in 2011. At the same time production fell from 3.4 to 2.1 million barrels a day (mbd). Forecasts suggest further declines to between 1.2 -1.5 mbd in 2035, sufficient to keep the fund well supplied with revenues.

Gas reserves were at 2.2 trillion cubic meters (tcm) in 2001 and have declined to 2.1 tcm by 2011. Gas production was at its maximum of 101 billion cubic meters (bcm) in 2011 and may fall by only 20 per cent by 2035. Therefore its contribution to the fund will still be substantial, especially as 95 per cent of the gas is exported.

The numbers are likely to improve if operations north of the Arctic Circle in the Barents Sea, which are now starting, turn out to be more promising especially after the agreement with Russia to delineate the area between the two countries.

The ageing population and the extensive social services and generous pensions will demand much of the Norwegian economy but they can be met by a combination of Fund contributions to the budget, increased government revenue and curbs on expenditure.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.