Gulf producers cannot ignore Norway’s retreat on oil

Cornelia Meyer

AFP

Almost 16 months ago, Norway’s Government Pension Fund (GPF), the country’s sovereign wealth fund, announced it would divest from its oil and gas holdings to mitigate against drops in oil prices. The government established a commission to study the issue, and now a compromise has been reached.

The fund will divest only from pure exploration and production (E&P) plays, retaining integrated stocks in the likes of ExxonMobil, BP and Shell. Of its 341 oil-related stocks, 134 will have to go — $7.5 billion of its $37 billion portfolio — but that is only a dent (0.8 percent) in a fund worth a trillion dollars, $632 billion of which is invested in equities.

The GPF is managed by an arm of the country’s central bank on behalf of the government, which sometimes uses it to balance the budget. Finance Minister Siv Jensen said that the divestment “does not reflect any specific view on the oil price, future profitability or sustainability of the petroleum sector,” adding that oil “will be an important and major industry in Norway for many years to come.”

The reasoning behind diversifying the fund’s assets from Norway’s core economic activities makes sense given its dependence on oil and gas. The country is, after all, Europe’s largest producer. Moreover, Norway does not play in the refining and chemicals sector, hence the limitation on divesting pure E&P plays. The value of E&P stocks is more susceptible to oil price swings, and the GPF also cited the record of supermajors in investing in renewable energy, like solar or wind, for hanging on to their shares.

16 months ago, Norway’s Government Pension Fund (GPF), the country’s sovereign wealth fund, announced it would divest from its oil and gas holdings to mitigate against drops in oil prices. Cornelia Meyer

The numbers and the motivation, though, are neither here nor there: It is the perception that matters. It is true that the oil industry will continue to be significant for Norway. According to BP’s latest Energy Outlook, fossil fuels will still account for more than 60 percent of global energy demand by 2040. Oil’s share will be the largest, exceeding a quarter of the total.

However, there is huge pressure on governments and energy companies to reduce their carbon footprints. Take, for instance, the EU’s “zero carbon guidelines” for 2050. Investors are increasingly jumping on the bandwagon, and many banks and pension funds have followed suit. Shell has changed its emissions policies and Glencore is limiting its coal production. Coal is out when it comes to the global investment community — oil will have to work if it wants to remain an attractive proposition.

When the sovereign wealth fund of a country such as Norway divests from any part of the energy value chain — whatever the motivation and however small the relative share of the divestment — people take notice.

The perception has ramifications for the global oil industry at large. While the national oil companies of Gulf Cooperation Council (GCC) countries will still be able to find investment, companies such as Saudi Aramco will be under closer scrutiny, if and when they list on international stock markets. Their share price will then be exposed to movements of the sector at large.

Let us not forget that pension funds and insurance companies are among the most important institutional investors. Their decisions are increasingly influenced by public sentiment. GCC governments and their oil companies cannot ignore what happens in the world’s largest sovereign wealth fund — both in terms of reality and how it is perceived.





Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources

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