Norway’s $1 trillion Sovereign Wealth Fund will exit all investments in oil and gas stocks, acting on recommendations by the Norwegian government. The fund is aiming to sell off shares, worth about $7.5 billion, in 134 energy companies. This is being seen as a cautious approach to investments in the energy sector by the world’s largest sovereign wealth fund.
This move will inevitably affect the gas and oil industry, since Norway has assets worth around US$37 billion in its upstream investments that are now being viewed as high-risk. This is due to the increase in price volatility after 2014.
According to The Financial Times, Norway’s Finance Minister, Siv Jensen, said, “The goal is to make our collective wealth less vulnerable to a lasting fall in oil prices.”
“The oil business will be a major and important industry in Norway for many years to come. The government’s income from the [continental] shelf basically follows the profitability of upstream companies. Therefore, this is about spreading the risk,” Jensen added, while announcing the fund’s decision.
This indicates that the companies that will be affected by this decision will not be big oil majors but pure play producers. However, stocks of the former will face some damage in the wake of this move.
The recent decision has been expected for about a year now. In 2018, the sovereign fund’s management recommended this move to make the fund less vulnerable to oil and gas price shocks. After the announcement, the decision has earned the support of several top academics and economists. Currently, oil and gas stocks form 5.8% of the total equity holdings in the fund’s portfolio.
Norway’s sovereign fund currently owns 1.4% of all listed companies in the world and 2.4% of all companies in Europe. It is invested in more than 9,000 companies globally. As of December 31, 2017, the fund held stakes in 350 oil and gas stocks all over the world, which included a little over 3% in BP and Shell, 0.9% in Exxon, 1.9% in Total, less than 1% in Chevron and 1.4% in Eni, with a combined investment value of US$2.24 billion. Around 70% of the fund’s holdings are in the form of shares.
Tax receipts from the production of oil have made the country rich. In the city of Stavanger, where many oil companies are based, expensive Tesla cars lining up the streets of this west coast city clearly show the private wealth that has emerged due to oil.
There are a lot of welfare provisions for citizens, due to the country’s prosperity. A large amount of funds have been transferred to the sovereign fund, which was originally created as a pension fund for Norway’s 5.3 million people.
By the end of 2018, the US$1 trillion fund owned shares of about 300 oil producer and services companies, which included approximately US$6 billion in Royal Dutch Shell (2.5% of the total shares of the company). Its stake in BP dropped to 2.3%, from 3% in 2017.
Environmentalists have appreciated the move as an indication that the world economy is gradually moving away from fossil fuels and towards cleaner, alternative energy sources.
Mark Campanale, the executive director of the climate change thinktank, Carbon Tracker Initiative, said, “The decision is more significant than when the fund sold off its shares in coal companies.”
This shows that while the fund was initially built on revenue from oil and gas, Norway’s Ministry of Finance understands that the future belongs to those who transition away from fossil fuels. Now is the time for smart investors around the world to follow their lead and make decisions driven by the reality of the energy transition.
On the other hand, the impact on the financial market is expected to be quite limited. This decision will be primarily focused on companies that are involved in energy exploration and production activities, rather than the oil giants that perform a variety of functions, from searching for fuel reserves to selling it to consumers.
The Norwegian government has clearly stated that its decision was not due to climate activism but a financial one. As the fund gets a major part of its income from the growing oil and gas industry, the decision to dump these stocks may come as a surprise for many. But the main motive here is to reinvest the money generated from the sale in other sectors. This will help to safeguard the money if there is a sudden drop in oil and gas prices.
As Finance Minister Jensen told The Associated Press, “The objective is to reduce the aggregate oil price risk on the whole Norwegian economy. The Norwegian state is highly exposed to oil.”
Siv Jensen said that she has given instructions to the central bank of Norway to analyse how the sovereign fund was exposed to companies that lead to climate change, since this is now seen as a threat to financial returns. However, there are no conclusive results that show how such analysis would affect investment decisions.
The integrated oil giants were not barred from the sovereign fund’s investments, since these companies were expected to invest their capital to develop and encourage green energy, an area that the government wants to drive.
“They take on much bigger investments than renewable companies do. It would be a mistake as I see it to cut off the fund’s possibility to invest in them,” Siv Jensen stated.
This would provide a lot of relief to major integrated oil companies, as the Norwegian fund consists of a large number of their shares. On the other hand, stocks of small companies, such as Chesapeake Energy and Marathon Oil, will most probably be sold.