Hooton on the Norway model
Matthew Hooton writes at NBR:
In the 1960s and ’70s, Norway’s mainly left-wing governments decided to make their country of four million rich. In 1963, they asserted sovereign rights to North Sea natural resources; exploration began in the mid-’60s; a state-owned petroleum company, Statoil, was launched in 1972; and the profits, taxes and royalties later put into the government’s petroleum fund, set up in 1990.
The fund is now worth approximately NZ$860 billion, or around $172,000 per Norwegian. By 2030, it is forecast to be worth as much as NZ$4 trillion, or around $800,000 per Norwegian, and exists primarily to pay generous superannuation.
Meanwhile, Statoil has evolved into a classic mixed-ownership model company, with the government owning two thirds and the remainder trading on the Oslo and New York stock exchanges. It is now the world’s 38th largest public company with a market value of NZ$98 billion and profits of $15.6 billion. This is more than the entire NZX.
The thinking behind Norway’s approach is that a country’s natural reserves are intergenerational property, they are worth nothing under the ground, and the industries are inherently unsustainable: eventually, even if far in the future, the field will run dry.
The best strategy, therefore, is to get it out of the ground as soon as possible, monetise it, but avoid an economic sugar rush by investing the money for future generations.
As opposed to the competing strategy of never ever dig anything up or drill for anything.
Oil is already New Zealand’s fourth largest export earner, after dairy, meat and wood. The government collects around $400 million in royalties each year, plus another $300 million in company tax. The present value of future royalty income alone, just from known reserves, is an estimated $3.2 billion.
Relatively conservative MBIE studies suggest that, if exploration continues to grow at current rates, royalties could yield another $5.3 billion in present value terms. If there is faster growth in exploration, the estimate is $9.5 billion.
Even that may be conservative. It has been suggested the value of our offshore oil reserves could be in the trillions. Solid Energy isn’t a very good precedent right now, but New Zealand could choose the Norwegian Statoil model to secure that wealth.
Currently, oil royalties just go into the consolidated fund, to pay for everything from welfare payments to Wellington arts festivals.
The risk Mr Weake identifies is that, if large oil deposits were found, the temptation for a government would be to put the money into something to help it through the next election. He argues we should establish cross-party agreement now on what we would do with that wealth.
He is surely right. God knows what decisions a desperate John Key and Bill English would make – let alone a desperate David Shearer and Russel Norman – if we struck oil in the lead up to a close 2017 re-election campaign.
I am sure Russel Norman would refuse to spend any money earnt from dirty oil!
So here’s some friendly advice to the minister: have a chat with Mr Weake and his industry colleagues, take a trip to Oslo and the North Sea, face down the crypto-anarcho-neosyndicalist Greens, achieve consensus with Labour, and get New Zealand’s equivalent of Norway’s oil fund and even Statoil up and running before the election.
One could call it Kiwioil!