Norway’s ‘oil fund’ cutting investments in E&P firms

Norway’s one-trillion-dollar sovereign wealth fund, popularly known as the “oil fund”, is set to cut its investments in some oil and gas exploration and production companies, the Norwegian government said on Friday.

Bartolomej Tomić

“The Government is proposing to exclude companies classified as exploration and production companies within the energy sector from the Government Pension Fund Global to reduce the aggregate oil price risk in the Norwegian economy,” the government said.

The world’s largest sovereign wealth fund got its first capital in 1996 when the oil revenue from the Norwegian government was transferred to the fund for the first time. The mission of the fund to bring financial wealth for future generations of Norwegians once the oil revenues decline. According to available info, the fund has a small stake in more than 9,000 companies worldwide, and holds 1.4 percent of all of the world’s listed companies.

The Norwegian Government on Friday said the objective of the exclusion of E&P stocks was “to reduce the vulnerability of our common wealth to a permanent oil price decline.”

“Hence, it is more accurate to sell companies which explore and produce oil and gas, rather than selling a broadly diversified energy sector, says the Minister of Finance, Siv Jensen.

Companies classified as exploration and production companies by the index provider FTSE Russell (PDF LIST HERE) will be excluded from the GPFG’s benchmark index and investment universe. The proposal will serve to reduce the aggregate concentration risk associated with this type of activities in the Norwegian economy, the government said.

The list of the companies from which the Fund is to withdraw investment – 134 in all – includes Inpex, Anadarko, Apache, CNOOC, Kosmos Energy, Tullow, and Woodside, to name a few, and, according to Bloomberg, the Fund would divest $7.5 billion worth of stocks in these.

The list for divestment does not include the oil majors such as Royal Dutch Shell, ExxonMobil, BP, Total, or Chevron, ConocoPhillips, Eni with the fund keeping invested in all of them – meaning the oil majors, as Bloomberg put it on Friday, have dodged the bullet.

Also worth noting, oilfield services and supply companies such as Baker Hughes, Bumi Armada, Technip, Transocean, Ensco, and Diamond Offshore are also not affected by the proposal on Friday.

As of December 31, 2018, the Fund had investments in 341 companies within the Oil & Gas sector, including both the supply chain and producers, with total investments worth around $37 billion.

The government said its assessment did not reflect any specific view on the oil price, future profitability or sustainability of the petroleum sector.

“This assessment is thus independent of the government’s current petroleum policy, which remains unchanged,” it added.

Oil industry still important. Fund to phase out E&P firms gradually

“The oil industry will be an important and major industry in Norway for many years to come. The state’s revenues from the continental shelf are, as a general rule, a consequence of the profitability of exploration and production activities. Therefore this measure is about diversification.”

“Exploration and production companies will be phased out from the Fund gradually over time, and plans will be prepared in consultation with Norges Bank,” the government said.

“A permanent reduction in the oil price will have long-term implications for public finances. An exclusion of energy stocks in the GPFG will serve to further reduce the oil price risk, but the effect appears to be limited. We have high capacity to take on such risk, and the oil price risk has been significantly reduced over time, because a large portion of the oil and gas resources has been extracted from the Norwegian continental shelf and converted into a broadly diversified financial wealth abroad,” the government said.

The government also said the energy sector was a broad, comprising integrated companies with businesses throughout the value chain as well as pure play renewable energy companies, and sees a role of the fund here too.

“It is anticipated that almost all of the growth in listed renewable energy over the next decade will be driven by companies that do not have renewable energy as their main business. The Fund should be able to participate in this growth, says the Minister of Finance.

“Climate risk is an important financial risk factor for the GPFG, and will over time have an impact on several of the companies in which the GPFG is invested. The Ministry of Finance will ask Norges Bank to review its efforts relating to climate risk in the GPFG, with a view of strengthening efforts in relation to those individual companies accounting for the largest contributions to the climate risk associated with the Fund,” the Norwegian Government said.

Worth noting, the Government said it didn’t not plan to sell shares in the State’s Direct Financial Interest (SDFI) or in the country’s largest oil company Equinor in order to reduce the state’s oil price risk.

GlobalWitness: Big blow to the oil industry

Responding to Norway’s move to divest oil and gas stocks, Adam McGibbon, Senior Climate Change Campaigner at Global Witness, said: “This is a huge boost for the global divestment movement – and an even bigger blow to the fossil fuel industry. When the world’s biggest sovereign wealth fund signals it’s getting out of companies dedicated to oil and gas extraction, it’s a death knell for fossil fuels.

“Although Norway has not divested from oil majors today, that is only on the basis that they hope that big oil will shift its investments out of fossil fuels and into renewables. With the majors still plowing ahead with vast oil and gas investments, unless there is a deep and rapid change of direction, Norway may just be delaying the inevitable here.

“The fact that this decision was based solely on financial considerations, not even taking into account the fossil fuel industry’s disastrous environmental record, means that investors in every corner of the world will sit up and take notice.”

‘E&P only not good enough’

Sony Kapoor, of the international think tank Re-Define said Norway’s decision to limit the divestment to production and exploration companies alone “represents a victory of big oil lobbying over financial prudence and common sense.”

“It diminishes the more than $40 billion of the planned oil and gas divestment to an almost pointless $8 billion, less than 1% of the Fund, making a mockery of the economic arguments. To say that oil majors, which still invest 95%-98% of their capital in fossil fuels, are important for the transition to clean energy, and use that as a justification for not divesting as the Finance Ministry does, is economically illiterate and deliberately misleading,” he said in a blog post on Friday.

Offshore Energy Today Staff