Gassled: Regulation Risk in Low-Risk Norway

In April 2010, infrastructure fund Njord Gas Infrastructure AS bought ExxonMobil’s 9.428% stake in Norwegian gas pipelines Gassled. Njord was interested in Gassled’s steady returns and Norway’s regulatory/political consistency and transparency. Once built, pipelines were seen as a relatively safe investment as tariffs to transport natural gas were usually fixed for many years (whether prices rose or fell) and bookings were made years in advance. Others followed Njord’s lead in 2011 and 2012 to buy into Gassled – four infrastructure funds owned 44% of Gassled after the acquisitions. It came as a shock when a year after the transactions went through, the Norwegian government decided that returns were too high and decided to cut the tariffs charged by Gassled to transport gas by 90%.

The case highlights the risks in long-lived assets like infrastructure assets, and the rising political risks even in supposedly stable environments (Western Europe) as governments face rising budget deficits, high energy prices and rising demand, which can lead to regulatory intervention. Political risk has always been associated with emerging markets where the rule of law is less stringently enforced. The case serves to point out that such assumptions will need to be scrutinised in the future and risk-weighted in asset valuations. It underscores the importance of due diligence in today’s increasingly fraught environment. Focusing on the valuation of infrastructure assets, it illustrates how changes in assumptions (e.g. tariffs) affect valuation.