Another big step has been taken to end the hydrocarbon era, if the decision by Norway’s sovereign wealth fund to dump oil stocks and investments is a sign on the wall. After the news broke, “fossil free” NGOs and others declared the Norwegian SWF Government Pension Fund (or “Oil Fund”) decision to divest as a major victory for the Green Movement. Norway’s official reaction is, however, that the pension fund has chosen to divest its oil and gas related stocks the coming years due to financial considerations.
No links have been made to environmental or climate change issues in the decision making process. Still, there are signals that oil companies are facing a steep uphill battle, if the Norwegian decision is translated into policy in the next couple of months. Norway’s “Oil Fund”, holding assets of around $1 trillion worldwide, is seen by institutional investors as a beacon. Still, the Norwegian decision needs to be assessed on its merits, and not on political statements or NGO assessments, forgetting the fact that the full financial structure of the fund has been, and partly is still, based on Norway’s enormous oil and gas revenues. At the same time, Norway’s decision-making process also seems to be influenced by national elections.
The decision by the “Oil Fund” was already in the offing since 2017, when Norway's Central Bank called for the divestment of oil stocks in order to reduce the Norwegian state's exposure to the volatile oil sector. The official statement that the decision has been made on purely financial arguments is however disputable. The oil and gas sector has been rather volatile the last couple of years, but overall, the returns on investments in international oil and gas companies and services have been in principle very good. At the same time, most pension funds have been very active the last decades in oil and gas futures markets, where hefty profits were sometimes even the main basis for the yields on investments being presented to the respective shareholders, aka the contributors and pensioners. Related: Saudis Follow Up On Deeper Oil Output Cuts Promise
Norwegian officials also have been referring to the fact that there is a major threat to the sustainability of the global oil and gas sector. To hold this assessment of the global oil market as a real and possibly main factor to divest oil-related stocks and bonds is very strange. The profitability of the hydrocarbon sectors in the world is still not under pressure. Some even argue that due to current lack in investments in upstream, or divestments of assets by institutional investors, the remaining operators and service companies are looking at very profitable short- and mid-term future. With higher oil prices expected in the mid-term, the yields on investments are not at all under pressure. Most analysis even predict a possible supply gap in the next few years as demand is still set to increase to maybe 120-130 million bpd. Investments in high-tech service providers and E&Ps could still churn out fat profits.
Some aspects are maybe playing a much bigger role than currently is being addressed. The Norwegian fund has been showing low returns on investments. As reported several days ago, the fund released its results over 2018. In the report, the fund stated that it returned -6.1% in 2018, largely due to weak equity markets. This resulted in a loss of 485 billion kroner, bringing total assets to 8.25 trillion Norwegian kroner or $945 billion in total, in comparison to a return of 13.6% in 2017. Overall net returns for the five years ended Dec. 31 was 4.75% and 8.3% over the 10-year period. In 2018 the fund made a return of -9.5% on its equities (63% of the fund’s allocation), in comparison to 19.4% in 2017. A fixed-income allocation of 30.7% added 0.6% for the year vs. a 3.3% gain for 2017. Analysts indicated at that time that changes will be made soon inside of the fund.
The oil fund holds $37bn of shares in oil companies such as BP, Shell and France's Total. The first indications given by Norwegian officials are that the fund will not be divesting yet its stakes in these large oil majors which both explore for and refine oil, such as Shell, BP, Exxon and Total. The main focus of this divestment will be smaller independent oil firms. The fund holds around $8 billion in them. Even though NGOs and fossil free investors are hailing the decision by the fund as a major victory, it should not be forgotten that the Norwegian fund holds 67% of Equinor, Norway’s oil and gas giant, formerly known as Statoil. In stark contrast to this, the fund will be gradually phase out its investments in companies such as Chesapeake Energy and China's CNOOC. Related: The Next Major Flashpoint For U.S. Shale
The fund’s divestments also will take several years to be completed. The main reason for this slow divestment policy is a pure financial one. By slowly pushing the stocks on to the market, the fund hopes to be able not to destroy too much value or disrupt the market.
Still, one can bet on it that most oil and gas CFOs will be having a short and tiring weekend. After the news emerged that the “Oil Fund” is considering to become the “Green Fund”, red lights will have gone on inside of the headquarters of Schlumberger, Halliburton, Aker and others. A continuing build-up of NGO and governmental pressure in the West is trying to end the ‘oil and gas era’. The Norwegian decision is not the first, as an ever-growing list of pension funds and institutional investors in the US, UK and EU, are openly ending their support for the fossil sector. This movement will put increased pressure on privately owned companies looking for financing of their future projects. This development is not only impacting the financing of future projects but is also putting increased pressure on the overall share value of these companies. At a time of immense demand for energy and petroleum products, these movements are not the right ones.
Some even could state that pension funds, set up to support future financial returns for their major shareholders, the pensioners, are shooting themselves in their own feet. The movement to divest in fossil fuel companies puts not only future energy supplies at risk, but also the financial situation of the funds themselves. Without going into an ideological discussion, pension funds should be taking a prudent and future proof investment strategy, in which the financial situation of their main stakeholders should not be risked. Following a global divestment hype of fossil shares and bonds, these very returns could be at risk. Not only by destroying shareholder value, as share prices will plunge, but also by disrupting affordable future energy supplies. Maybe it will be best, as a shareholder, to use your voting rights to entice or force companies to address future energy supplies and a sustainable economic future at the same time. By ruling out fossil fuels as a whole, these goals are not going to be met.
By Cyril Widdershoven for Oilprice.com
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Moreover, the fund’s decision is motivated by an attempt to burnish its environmental credentials by cosying up to the environmental lobby and is thus receiving biased environmental advice rather than a sound financial advice.
The argument about declining return on oil and gas stocks is not only erroneous but it can’t be substantiated under any scenarios. Norway’s sovereign wealth fund has only to look at the huge profits oil majors like Shell, ExxonMobil and Statoil are making to realize the absurdity of such a claim.
If Norway’s sovereign fund was advised by oil experts like me rather than being influenced by the environmental lobby, it would have realized that there will never be a post-oil era or a peak oil demand throughout the 21st century and far beyond. Oil is not replaceable and electric vehicles (EVs) will never be able to replace oil in global transport now or ever.
Norway’s sovereign fund should have studied the way Qatar’s sovereign fund, one of the world’s biggest, has been handling its global investments with impressive success, astuteness and farsightedness. The oil industry is and will continue to be the world's most profitable industry well into the future.
My advice to the fund is that it should reconsider its decision and seek wider advice from international oil experts.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London