Week in Review Godt Nytt År!

Norway’s proposal to cut tariffs for future Gassled gas transportation contracts by 90% is a rude reminder that regulatory risk is alive and well in 2013.

Godt Nytt År! That’s ‘Happy New Year’ in Norwegian, although if you’re one of the investors that helped plough up to $5 billion into Gassled, the country’s gas transportation network, you might be thinking the government has a perverse way of wishing it.

This week, just 15 days after 2013 dawned, the Minister of Petroleum and Energy (MEP) Ola Borten Moe dropped a bomb on Gassled’s private sector partners: tariffs for future gas transportation contracts will be cut by 90 percent in order to stimulate further development on the Norwegian continental shelf.

Minister Moe was nonchalant about the proposed changes, telling the local press: “Norwegian policy has always been to take out the super-profits on these resources and tax it heavily. We’re well within the boundaries of our job and our mandate as regulator. There will still be very good returns in Gassled after these changes.”

But the likes of Allianz, the Canada Pension Plan Investment Board (CCPIB), the Abu Dhabi Investment Authority (ADIA) and Canada’s Public Sector Pension Investment Board – which spent over $4 billion in the summer/fall of 2011 in a veritable frenzy of direct investment activity – are unlikely to be quite as nonchalant as Moe.

At the time, Gassled seemed like the safest bet in the world: a true-blue, regulated monopoly transporting about one-sixth of the gas consumed in the European Union. Plus, it was located in oil rich, northern European Norway. What more could investors have wanted?

Here’s how a Deloitte report trumpeted the virtues of the Gassled investment in November 2011: “With a 7 percent pre-tax inflation-linked return, an investment in Gassled is considered a high yielding, long-term safe concession-based placement for institutional investors. The risk profile of the investment in Gassled can best be described as a Norwegian government bond [emphasis added].”

So, Gassled: a high-yielding government bond from a rich, stable country – what’s not to like about that in a low interest rate environment?

Only later in Deloitte’s report do we discover that investors buying into Gassled are actually buying into a “joint governance structure [that] does not have a balance sheet or audited financial statements”.

Plus, “there are no guarantees that the MPE will keep today’s tariff levels”. And by the way, “failure to meet regulatory targets triggers tariff relief to shippers, with the consequence that investors do not receive expected revenues”. Just like fixed income, really. Or not.

How will the proposed changes – if they materialise unchanged – affect investors’ pre-tax 7 percent return? Solveig Gas Norway – the Allianz/ADIA/CPPIB consortium that owns some 25 percent of Gassled – said it checked its concession life and debt service coverage ratios, and all should be fine “until at least 2017”, with dividends safe.

Njord Gas Infrastructure – a pairing of UBS Infrastructure Fund and CDC Infrastructure, which owns 8 percent of Gassled – said it was “concerned about the implications of the proposal” and added that, while its potential impact will not be substantial over the short to medium term, it will increase over time.

But “short to medium term” is almost certainly not the period of stable returns institutional investors had in mind when they bought into Gassled.

As Deloitte puts it, “pension funds and sovereign wealth funds with long-term liabilities are in great need of safe, long-term investments. To bring pension funds into funding of new gas infrastructure requires a structure where there is a large degree of certainty for future cash flows”.

Clearly the Norwegian government has a different conception of “certainty”. But it has offered a timely reminder that regulatory risk is alive and well, is the pre-eminent risk in infrastructure today, and is country-agnostic.

“A leap of faith has been required for new investors in Gassled,” wrote Deloitte, in hindsight rather ominously. Our advice to Gassled’s investors, courtesy of an old Bon Jovi song: “Right now we got to/Keep the faith”.