After months of deliberations, Norway’s government proposed in March that the country’s US$1-trillion fund—the world’s biggest sovereign wealth fund—divest from oil and gas exploration companies.
The move by the fund, which has amassed its vast wealth on the back of Norway’s oil and gas revenues, comes at a time when investors are increasingly pressing major oil companies to start taking climate change seriously and to prepare their business portfolios for a world of peak oil demand, whenever that may come.
Norway, however, is motivating its decision with financial reasons, aiming to cut exposure to the oil price risk. More importantly, the fund will not be divesting from any of the Big Oil firms.
While the decision to dump oil stocks initially sent shockwaves through the markets, the list of 134 companies proposed for exclusion includes only firms classified by the index provider FTSE Russell as belonging to the exploration and production subsector. The list is heavy on U.S. shale firms, Canadian oil producers with major oil sands operations, and companies exploring for oil in Africa.
This list could be a telltale sign of what the Norwegian financial experts think of the possible returns in the U.S. shale business, Canada’s oil sands, and oil and gas exploration in developing, and sometimes undemocratic and opaque, economies, Justin Mikulka of the Desmog blog argues.
The list includes Anadarko Petroleum, Apache Corp, Chesapeake Energy, Concho Resources, Continental Resources, Devon Energy, Diamondback Energy, EOG Resources, Marathon Oil Corp, Murphy Oil, Occidental Petroleum, Pioneer Natural Resources—to name just a few of the oil drillers in the U.S. shale patch. Related: Is Beijing Losing Its Footing In South China Sea?
The U.S. shale business, while gushing record-breaking oil production especially in the Permian, is no longer Wall Street’s darling, as both shareholders and banks have been growing increasingly impatient about the lack of the promised fat profits and returns. Many companies promise spending discipline, but many have increased debts to drill more and many struggle to become or stay cash-flow positive.
In Canada’s oil patch, increased production over the past year stretched takeaway capacity to its limits, Canadian oil prices plunged, and oil-producing Alberta mandated a province-wide production cut to help lift the price of domestic crude.
Norway’s list of Canadian companies whose stakes it will gradually divest includes Cenovus Energy, Encana Corp, Seven Generations Energy, and Canadian Natural Resources, but it does not include Suncor Energy or Husky Energy, for example.
The third major ‘group’ of E&P firms on Norway’s list includes companies from India (including Indian Oil Corp), Russia (including Novatek and Bashneft), or UK-listed companies with major assets and operations in Africa, such as Tullow Oil.
The whole 134-company-strong list may suggest that the Norwegian financial experts—who have managed the fund in such a way that its market value has exceeded US$1 trillion in less than three decades since it was created—don’t expect in the future big returns from the shale business, oil sands, or remote frontier exploration. Related: U.S., Canadian Rig Count Plunges As Oil Retreats
Yet, the fund is not selling stakes in major integrated oil companies, and the share of the companies on the list for divestments is only a fraction of its oil and gas equity holdings.
As at the end of 2018, the Norwegian fund held stakes in E&P companies—under FTSE Russell’s classification for such—with an approximate value of US$7.8 billion (66 billion Norwegian crowns). This corresponds to 1.2 percent of the fund’s holdings in equities.
To compare, as of the end of 2018, the fund’s total equity holdings in oil and gas firms had a value of US$37 billion, spread in investments in 341 companies, including just below 1 percent in each of Exxon and Chevron, 2.45 percent in Shell, 2 percent in Total, 2.31 percent in BP, and 1.59 percent in Eni. The stake in Shell alone was worth US$5.9 billion.
The world’s biggest sovereign wealth fund will not be divesting those stakes.
Norway motivated the decision to cull exploration oil stocks with reducing financial exposure to volatile oil prices. The aim of the proposed divestment is “to reduce the vulnerability of our common wealth to a permanent oil price decline,” and “to reduce the aggregate oil price risk in the Norwegian economy,” considering that oil and gas is one of the pillars of the economy and the fund is designed to share the oil spoils with the country’s future generations.
“Many integrated oil and gas companies already have significant renewable energy operations, in absolute terms, and both the expert group and Norges Bank note that integrated companies may have significantly larger renewable energy operations than pure play renewable energy companies,” the Finance Ministry said in its report to Parliament.
“Moreover, it is anticipated that companies that do not have renewable energy as their main business will account for about 90 percent of the growth in listed renewable energy infrastructure towards 2030,” the report says.
This could be a message to Big Oil as well—invest more in renewables to spread the risk of peak oil demand, whenever it comes, to stay relevant with what investors want.
By Tsvetana Paraskova for Oilprice.com
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