A regional advocacy group forecasts a giant payday from
Bakken hydrocarbons some day. Now the Midwestern
state’s citizens are pondering what to spend it
The U.S. state of North Dakota took a cue from
Norway 30 months ago. Eighteen business, academic and political
leaders from the state flew to Oslo. Their goal: assess how
Norges Bank Investment Management runs Norway’s
Government Pension Fund Global — the
world’s largest sovereign wealth fund.
Since then, North Dakota has ramped up its own
sovereign vehicle, the Legacy Fund, which had
some $2.8 billion in assets at the end of last year. A November
2014 report predicts the fund will double assets by 2017, when
it will first be allowed to disburse money. The big news: The
fund could have $230 billion in assets by 2060 according to a
forecast by the Legacy Fund Initiative (LFI), a group convened
by the Minneapolis-based Great Plains Institute
(GPI), a non-profit focused on energy-related issues that has
operations in North Dakota.
North Dakota and Norway may seem an odd couple.
One is a landlocked Midwestern state, the other a nation of
fjords and mountains. Yet the kinship between the two runs
deep. More than 30 percent of North Dakota’s
population is Norwegian-American. And like its Nordic cousin,
North Dakota is awash in oil, pumped out of the Bakken shale
formation, with an estimated 7.4 billion barrels of oil
available for extraction with today’s
In 2012, North Dakota overtook Alaska to become
the U.S.’s second-biggest oil producer. Its
population: 740,000. Even if that figure grew to 1 million by
2060, the fund would amount to $230,000 per person, versus the
$170,000 for each Norwegian citizen provided by the GPFG.
"We felt that, given the cultural connection
between North Dakota and Norway, it would be tremendously
valuable to have leaders from industry and government spend
some time seeing how the Norwegians have done a tremendous job
developing their oil and gas resources," says Brad Crabtree,
vice president of fossil energy at GPI, who visited the NBIM in
The two funds are grappling with
oil’s epic sell-off; despite a recent uptick,
Bakken crude and Brent are still down some 50 percent from last
year’s peaks. Norway has had two and a half
decades to build up GPFG’s assets while North
Dakota has had just a couple of years. Last December, North
Dakota budget forecasters predicted oil and gas tax revenues of
$8 billion. A legislative committee in January pegged the
amount at half that over the next two years.
Since executive director David Hunter took the
reigns of the North Dakota fund in December 2013 after a career
at HSBC Holdings, he has
helped steer its portfolio out of short-term treasuries into a
broad collection of asset classes overseen by professional
managers. Consultant R.V.
Kuhns & Associates of Portland, Oregon, now RVK, helped
develop the plan, which bears some similarities to
GPFG’s asset allocation.
As of April, 2014, LSV Asset Management, Los Angeles Capital, and Parametric
Clifton were overseeing large-capitalization domestic
stocks for the Legacy Fund, comprising 15.7 percent of the
Affiliates and Parametric ran small-cap U.S. equities (5.4
percent of the portfolio), while Capital Group, LSV,
Vanguard Group managed international stock (14.8
Ten other money managers ran fixed-income portions
of the fund — a total of 25.9 percent of the
portfolio, in addition to inflation—protected assets like
Treasury Inflation—Protected Securities (TIPS), timber and
infrastructure (0.9 percent), and real estate (5.3 percent).
The balance was in cash and short-term fixed-income (32
The target allocation, Hunter says via email, is
50 percent stocks, 35 percent bonds and 15 percent real estate.
"There is no exposure to hedge funds or private equity," Hunter
adds. That too follows NBIM’s lead.
Meanwhile the state is pumping 1.23 million
barrels of oil a day. And it is salting away $110 million each
month into the Legacy Fund.
The big question for North Dakota is what it will
do with the money. That, says Hunter, is not the focus of his
department. "The Retirement and Investment Office is clearly
more focused on the investment of the assets in the Legacy
Fund," he says.
Paul Rose, a professor of business law at Ohio
State University, who writes about sovereign wealth funds,
thinks dialogue is necessary. "You see North
Dakota’s assets increasing tremendously," he says,
"I wonder if they had sophisticated discussions about how much
to set aside and what to do with it."
The LFI is trying to spark such a conversation.
Voters approved the fund in 2010 to safeguard assets and employ
oil and gas revenue for economic growth. To quote its mission
statement, the fund will "preserve the real, inflation—adjusted
purchasing power of the monies collected."
North Dakota directs 30 percent of taxes from oil
and gas into the fund. According the state’s
constitution, earnings from the fund cannot begin to be spent
until July 1, 2017, at a rate capped at 15 percent of the
fund’s principal balance every two years.
Two-thirds of each house of the legislature must agree. That
fails to establish a purpose for the fund — a classic
"The Norwegians said that it’s really
important to get consensus on the management purpose of the
fund before it accumulates billions more," says Crabtree. "One
of the major takeaways was to put into place a project to come
up with recommendations for the fund’s use." He
adds that the state needs to decide what the money should be
Rose agrees. "I know that North Dakota is trying
to be as careful and thoughtful as they can, and consulting
with Norway can’t hurt," he says. "The biggest
concern I have with North Dakota’s Legacy Fund is
— and I hope this proves to be unfounded —
the danger that it will become a political football, and that
politicians will be continually lobbied about how to spend the
Avoiding pitfalls is just as important, says Rod
Backman, a former director of the state’s Office of Management and
Budget and an LFI member. "One thing we learned from Norway
is not to follow the Alaska pattern, where you take the money
and write a check to citizens," he says. "It
wouldn’t be productive in terms of generating
The LFI’s report, "North
Dakota’s Legacy Fund: Building a Bridge to the
Future," harnesses data about the fund’s recent
and historical revenue and balances. It recommends focusing on
a 25-year scenario that it says "offers state policy-makers a
pragmatic middle ground between spending everything and
LFI emphasizes a "reinvest, replace and spend"
policy — disbursing 25 percent of annual earnings from
2017 to 2039 and reinvesting the remaining 75 percent back into
the fund until oil production peaks. That will generate $100
billion by 2050 and $230 billion ten years later. "The proposal
recommends using fund earnings to replace declining state
revenue once oil production peaks and and starts to fall," says
Crabtree. "I think that kind of framework can endure."
Spending options for the 25 percent are plentiful.
Among LFI’s ideas: building a world-class
educational system, funding 'bold, visionary and
transformative’ infrastructure projects, without
specifying what those might be. Another suggestion is to create
a so-called genius initiative to promote the development of
private and public innovation, such as game-changing technology
"Part of the 25 percent should be utilized for key
goals to move the North Dakota economy forward — and
part of that is diversification away from oil," says Backman.
"The genius initiative is about how we can be a part of finding
the next Google or Facebook,"
he says, referring to two California—based internet giants.
Crude prices are the spoiler. LFI assumes $80 a
barrel. Crabtree says that oil prices will affect the
accumulation rate of the fund but not LFI’s
Most oil forecasts are for prices above current
levels. "If the long—term fundamental projection changes, then
I suppose it might influence how people think about managing a
fund like this," says Crabtree. Backman says the framework of
replacement and spending still applies, regardless of crude
prices. "You would just be dealing with smaller amounts of
The damage from the crude sell—off is already
apparent. The number of drilling rigs fell to 156 in January,
down from 200 three years ago. Production of one
million-barrels-a-day last April may be winding down.
But the state has danced this dance before.
It’s waiting out the deep freeze in prices. Today,
however, some question the feasibility of profitable shale oil
production at $50 per barrel. "We’re trying to
respond prudently but not with any sense of panic," says
Crabtree. "The state has gone through significant price swings
Crabtree points out that the boom — and
the fund itself — are both young. "The vacuum where
there is no conversation was understandable, but
it’s important not to let that go on too long," he
says. "What protects the fund in Norway is a shared cultural
understanding. There is no profound constitutional protection
— any sitting parliament could change what happens to
the fund — but it’s a shared sense of
purpose that protects it."
So far, it seems, Crabtree and the rest of the LFI
may be talking to themselves. Senate Bill 2344, which
recommended setting up a foundation to oversee the direction of
the fund and enact many of the group’s
recommendations, was scuttled on February 9 in a 5-to-2 "do not
pass" senate committee vote. The bill goes to a full vote by
the state’s senate within a week from today.
Typically, says Backman, a thumbs-down recommendation by a
committee means the end of a bill. "But who knows," he says,
"someone could give a passionate speech on the floor and
convince the senate to pass it."