Norway Becomes Petro-State as Investors Balk at Hidden AAA Risks

Norway, home to the world’s biggest sovereign wealth fund, is betting it can afford to ignore investor outrage.

After shocking global credit markets in 2011 by pulling support from the once AAA and now junk-rated lender Eksportfinans ASA, the government unveiled plans in January to cut tariffs on gas transport by 90 percent, sapping income for those funding the venture by as much as $7 billion.

Investors are now asking themselves how much risk they’re willing to accept to gain access to western Europe’s biggest oil and gas reserves. And while Norway boasts a stable AAA rating and the world’s smallest default risk, the government’s decision to ride roughshod over investors is starting to resemble actions seen in less stable democracies such as Venezuela and Russia.

The planned tariff cut “undermines Norway’s reputation as a stable and predictable country for investments,” Solveig Gas Norway AS and Silex Gas Norway AS, two of the companies backing the pipeline network that charges the tariffs, Gassled, said in a March 15 letter. It “represents an unauthorized intervention in the infrastructure owners’ legally protected rights and expectations,” they said.

The government says it’s now reviewing feedback from investors and other parties affected by the cuts. Companies controlled by UBS AG, Allianz SE, Canadian pension funds and Abu Dhabi’s sovereign wealth fund together spent $5.6 billion on acquiring a 44 percent stake in Gassled.

Proving Irresistible

The investors argue the proposed 90 percent cut would reduce returns to 4 percent, well below their projected minimum of 7 percent, according to a hearing letter released last week. The group says Norway’s attempt to change the rules is illegal and will damage the nation’s image abroad.

Yet as Europe’s deepening debt crisis rekindles demand for safety, Norway’s appeal as a rich haven may prove irresistible. The nation boasts the biggest budget surplus of any AAA government, while credit derivatives suggest it’s the world’s safest investment.

So far, the spat has had little impact on Norway’s markets. The krone in February hit a record on an import-weighted basis and is up 1.3 percent against the euro over the past 12 months even after the central bank signaled it may cut rates to counter appreciation. Eksportfinans bonds have also rallied since the November 2011 announcement. The yield on the company’s 5.5 percent $1 billion note maturing in 2016 eased to 4.07 percent on March 20, compared with a high of 10 percent in November


Rich State

“You have a certain freedom of action when you’re as big and rich as the Norwegian state,” Torger Reve, a professor at the BI Norwegian Business School in Oslo, said in a March 13 interview. “You’d need to be pretty unreliable to damage the reputation of the Norwegian state. It’s one of the best-funded nations in the world.”

The Gassled investors, which also include Infragas Norge AS and Njord Gas Infrastructure AS, last month appealed to Prime Minister Jens Stoltenberg to intervene. He declined to meet with them, saying the issue is being handled by the petroleum ministry.

“I don’t know what expectations they had for returns,” Lars Erik Aamot, head of the ministry’s oil and gas department, said in an interview last month. “What they have paid isn’t relevant to our policy.”

Even oil and gas producers, which stand to benefit from the tariff cuts after selling their stakes in the pipelines in 2010 and 2011, warned that the move may harm Norway. Companies including Statoil ASA, Royal Dutch Shell Plc, Exxon Mobil Corp. and Total SA all sold stakes in the pipelines well before the tariff cuts were announced. Statoil, which still holds 5 percent of the network, is 67 percent owned by the Norwegian government.

‘Right Balance’

The “right balance” is important, Martin Tiffen, managing director for Total in Norway, said in a letter to the oil ministry. “New shippers should be able to reliably forecast future tariff levels” to “have the necessary confidence to undertake investments,” he said.

The gas tariff dispute has reminded investors of Norway’s indifference to credit markets 1 1/2 years ago, when the Industry Ministry decided to wind down Eksportfinans. The lender, created half a century ago to fund Norway’s exports, lost government backing after European capital rules forced it to limit its loans. The move triggered junk ratings at Standard & Poor’s and Moody’s Investors Service, roiling investors based in Europe, Asia and the U.S. holding about $39 billion in bonds.

Eksportfinans Suit

Eksportfinans is now seeking to unwind its outstanding debt of about $20 billion amid a lawsuit from hedge fund Silver Point Capital LP, which says it suffered a default on its Japanese bonds. The company has said it’s confident in contesting the claim.

Norway has also shown it won’t shy away from confrontations when it comes to trade, and last year angered EU officials and Nordic neighbors by raising tariffs on cheese to protect local products including Jarlsberg, which is shipped across the world.

Norwegians have rejected EU membership twice in referendums, most recently in 1994 when the no side won 52 percent of the vote. Norway’s krone has soared 19 percent against the euro since the start of 2009, when the euro area sank into its debt crisis.

Norway’s mainland economy, which excludes oil and gas production and shipping, will expand 2.75 percent this year, after growing 3.5 percent last year, the central bank forecast on March 14. The economy of the 17-nation euro area will shrink for a second year, both the European Commission and the International Monetary Fund estimate.

Local Concern

Norwegian registered unemployment is below 3 percent, compared with more than 11 percent in the euro area.

Investments in Norway’s offshore oil and gas fields will grow 16 percent to 199 billion kroner this year, reaching 7 percent of gross domestic product, the statistics office estimated this month.

Still, the Labor Party-led government’s approach to foreign investors has raised concerns at home. Norway’s state-run pension fund is among the critics after its investment in Njord Gas Infrastructure AS, which holds a stake in Gassled, was hurt by the proposed tariff cut.

The fund, which bought bonds from Njord in 2011, said in a March 15 letter it will reconsider infrastructure-related investments. New Norwegian infrastructure projects will face “significantly higher borrowing costs, which would rule out market financing of such projects,” Lars Tronsgaard, deputy chief executive officer of the pension fund, warned this month.

Political Uncertainty

The opposition, which is leading in the polls ahead of September general elections, has also criticized the government’s treatment of investors.

“It’s unfortunate that investor groups of this size are starting to question whether they have to price in political uncertainty,” Siri Meling, a lawmaker and energy spokeswoman for the Conservative Party, said in an interview.

Norway, which started pumping oil in 1971, has seen its production more than halve over the past decade. The government argues that the lower tariffs will help make offshore discoveries more profitable and encourage exploration and recovery rates. A combination of unchanged tariffs on existing contracts and lower tariffs on new volumes will ensure “reasonable returns” for the owners, it said in January.

According to Reve at the business school, the cuts are also justified since returns on the pipeline investments have been, and are forecast to be, higher than estimated.

Not Natural

“If they’ve made more than forecast, I see that as an argument to lower tariffs,” Rolf Golombek, a senior research fellow at the Oslo-based Ragnar Frisch Centre for Economic Research, said in a March 6 interview.

Returns, adjusting for inflation and tax, on investments in Norway’s pipelines were 10 percent in 2012 and would reach 10.5 percent in 2028, based on past and current contracts, according to a report from the system’s operator, Gassco AS.

“It’s not natural to have a place with extremely high profitability and such low risk,” Reve said.

As the government prepares its final ruling on the Gassled tariffs, Solveig, Silex, Njord and Infragas have all said they may snub future investments, including buying out oil companies that are spending 25 billion kroner on the Polarled pipeline, a new link from fields in the Arctic.

That would leave oil producers with cash tied up in infrastructure, which was what they had sought to avoid by selling out of Gassled two years ago, Solveig’s Chief Executive Officer Trygve Pedersen said last month.

It probably won’t come to that, professor Reve said.

“My bet is they will continue to invest in gas pipelines,” he said. “Risk exists, even when you do business where the Norwegian government is involved. You have to look at that as normal, commercial risk.”