An estimate of the financial value added of the Norwegian Petroleum Fund mechanism

Abstract

In this thesis, we quantify the financial valued added from re-allocating oil and gas resources into a globally diversified financial portfolio. We do this by introducing an alternative approach to management of the oil and gas at the Norwegian continental shelf. We perform the analysis ex-ante, assuming that the Norwegian government at the time before the establishment of the Oil Fund had two choices; To slow down the rate of production and accumulate oil and gas reserves, or to extract these resources at high pace and invest the proceeds in financial assets across the globe. We simulate the expected future values of these approaches over 21 years. Our simulations are highly sensitive to the Brent crude price volatility, and investors risk aversion levels, and this affects the value added significantly. We find that the value added by utilizing the fund mechanism is substantial.