In 2011, Canada’s largest pension fund plowed about $760 million into a state-controlled Norwegian pipeline network, citing the country’s transparent regulatory environment and expecting the project to deliver stable returns for a long time.
One risk the Canada Pension Plan Investment Board didn’t see coming was that the government of Norway, which prides itself on being one of the world’s safest corners for investors, would slash the rates the pipeline can charge for carrying natural gas.
The fund, along with another Canadian pension plan and some of the world’s largest institutional investors, is now suing the Norwegian government, whose action will cut the amount of revenue they are paid. The investors say they may only get half of the return they had expected, leading to multibillion-dollar losses. The plaintiffs haven’t said what damages they are seeking.
“Sophisticated, long-term infrastructure investors have seriously recalibrated their assessment of Norway,” said Mark Wiseman, chief executive of CPPIB, in a letter last year to the Norwegian finance ministry.
With yields on debt securities at rock-bottom levels, the lure of steady, long-term returns is drawing many big investors to pipelines, ports and other infrastructure projects. But bankers and lawyers in the sector say the Norwegian case has some investors reassessing the political risk of this kind of investment in Europe, where governments, especially of Nordic countries, have been seen as reliable partners.
A trial in the lawsuit starts April 27 in Oslo. The investors suing Norway all declined to comment, as did Gassco AS, the company that runs the pipeline network. The government declined to comment on the lawsuit; a spokesman said petroleum-related policy must benefit Norwegian society as a whole.
“In Europe, litigation relating to an infrastructure project is extremely unusual. The fact that there is very little political risk for investors in Europe is partly what makes infrastructure projects attractive, so it’s not in Europe’s interest to find itself with such a case,” said Ian Andrews, a partner at Linklaters, a London law firm.
Such changes are rare in Europe, but not unprecedented. The Spanish government, amid a painful budget crisis, has repeatedly slashed subsidies to solar-energy projects, effective retroactively, to the chagrin of investors who funded their development.
At the crux of the dispute is Gassled, a 5,000-mile network of pipelines that stretches across the North Sea, linking oil and gas fields off Norway’s coast to terminals around Europe. It carries about one-fifth of the European Union’s daily natural gas supplies. One of Gassled’s main hubs for processing gas is the Kollsnes plant, on a small island on the west coast—an hour outside of Bergen, Norway’s mountainous second city. Kollsnes handles up to 143 million cubic meters of gas daily that is extracted from three fields and piped through four subsea lines before coming ashore at ports in seven European countries.
The network was built up over many years starting in the 1970s. Ownership was, consolidated in 2003 under a single entity, known as Gassled, which is operated by Gassco, a state-owned company. Over the years, major international investors including the Swiss bank UBS AG and France’s Caisse des Dépôts et Consignations, a state-owned financial institution, bought stakes in Gassled. The largest deal came in 2011, when Statoil ASA, Norway’s state-controlled oil and gas giant, sold a roughly 24% stake to a group comprising CPPIB, Germany’s Allianz Capital Partners GmbH and Abu Dhabi’s sovereign-wealth fund, for about $2.5 billion. The state now owns 46% of Gassled, and Statoil owns another 5%.
Once built, pipelines are seen as a relatively safe investment. The tariffs energy companies pay to transport natural gas are usually fixed for many years, regardless of whether gas prices rise or fall. The predictable returns make them especially attractive for long-term investors like pension funds and insurers.
But in January 2013, the Norwegian government unexpectedly announced a public hearing on plans to cut the rates that Gassled can charge by 90%. The government’s rationale: Cheaper transport costs would encourage more offshore exploration and development. Norway’s economy depends heavily on oil and gas, but many of its existing fields are running out.
The investors were blindsided. “It is inconceivable that the Ministry did not communicate that a fundamental change…was under consideration,” some of the investors who are suing said in a letter in March 2013. They complained that the cut would cost them 40 billion kroner in lost revenues, or $5.1 billion, and would halve their expected return.
In June that year, the government decided to cut the tariffs. The charge to ship a cubic meter of gas from the fields to the U.K. or the continent will fall from 0.0982 kroner (0.0123 cents) currently, to 0.0098 kroner, starting on Oct. 1, 2016.
In court papers filed April 13, investors said the change in tariff is unlawful and infringes their property rights. They said that under “agreed and crucial assumptions” made during negotiations, tariffs should have been fixed until at least 2028.
Statoil, which ships gas through the pipeline network, stands to gain substantially from the decision. It has a 5% stake in Gassled, but its interests in gas shipment are much larger. A spokesman said Statoil is “both owner and customer in Gassled, with an emphasis on the customer role.” He declined to comment on the case.
In a court filing, the Norwegian government conceded that if the tariffs hadn’t been changed, revenue for the investors would have been higher. For investors, “this makes a difference,” the government said, but argued that it is obligated to manage its petroleum resources so that all of Norwegian society benefits.
Buyers always have this risk that their tariff might be regulated,” said Ernst Nordveit, a professor of energy and resource-management law at the University of Bergen. “I find it hard to see how the investors could win this case.”
Other observers anticipate damage to Norway’s reputation as an investment partner.
This is an example of something that shouldn’t happen in the developed world,” said Alex Wong, head of infrastructure industries at the World Economic Forum. “If you are investor, that’s a black mark on the record.”
Investors in European infrastructure are paying close attention.
“This case will reduce the willingness of investors to work with the Norwegian government in the future,” said Giles Frost, chief executive of Amber Infrastructure Group, a London-based investment company. “It’s like baseball. That’s Norway’s first strike. But the difference is that you can’t really afford more than one.”
The Original Posted by By GEORGI KANTCHEV in London and ESE ERHERIENE in Oslo/The Wall Street Journal