The world’s biggest sovereign wealth fund, Norway’s US$1-trillion Government Pension Fund Global, has won support from top Norwegian economists and academics for its plan to dump oil and gas stocks.
This non-binding support from Norway’s top universities is part of the process of hearings and consultations on the proposal to divest from oil and gas stocks. It moves the fund closer to possibly implementing its plan. The Norwegian government aims to reach a final decision on the proposal in the fall of 2018.
The Norwegian fund, created in 1990 to manage the country’s huge oil revenues and support the government’s long-term management of petroleum proceeds, hit the US$1-trillion value threshold last year.
At the end of last year, the fund recommended the removal of oil and gas stocks—more than US$35 billion worth of shares—from the fund’s equity benchmark index to make Norway’s wealth and economy less vulnerable to a permanent drop in oil and gas prices. The oil and gas sector accounts for about 4 percent of the fund’s investment in equities.
Although the fund’s recommendation to exit oil stocks is based entirely on financial risk assessment, the world’s biggest sovereign wealth fund dumping oil and gas investments could have a ripple effect on other large institutional investors at a time in which investors have yet to show renewed confidence in energy stocks and in which some shareholders and investors are calling upon Big Oil to start taking climate change seriously and step up efforts to fight it. Related: $80 Oil Could Kill Smaller Airlines
The Norwegian fund is invested in more than 9,000 companies worldwide and owns 1.4 percent of listed companies around the world and 2.4 percent of all listed companies in Europe. As at December 31, 2017, the fund held stakes in 350 oil and gas stocks around the world, including just over 2 percent in each of Shell and BP, 1.9 percent in Total, 1.4 percent in Eni, 0.9 percent in Exxon worth more than US$3 billion, and just below 1 percent in Chevron worth US$2.24 billion.
As part of the hearing process for the fund’s plan to dump oil stocks, academics from the Norwegian University of Science and Technology (NTNU), the University of Oslo (UiO), and the Norwegian School of Economics (NHH), have supported the proposal in recent consultation letters, arguing that it would diversify risks.
Professors Gernot Doppelhofer, Torfinn Harding, Klaus Mohn, and Krisztina Molnar from NHH support the recommendation, saying that “Given a high exposure to oil and gas in the state’s portfolio outside the oil fund, intuition about diversification suggests that the oil fund should not take on direct oil and gas risk.”
Knut Anton Mork, a professor at NTNU, also supports the plan and says that the arguments for removing oil and gas stocks are “very convincing.”
“The advice given by Norges Bank has a solid scientific basis, and has broad support in both national and international academic communities,” professors at the UiO wrote in their letter, as carried in English by Bloomberg.
The University of Stavanger Business School said that the hearing and plan is “highly relevant and timely” but stopped short of backing the proposal. Related: EVs Could Erase 7 Million Bpd In Demand
The Oslo-based Norwegian Business School, however, says that the question whether to dump oil stocks “doesn’t have as clear an answer.”
“A question of this importance requires comprehensive analyses before the final decision is made,” professors Espen Moen and Richard Priestley and associate professor Espen Henriksen, a former employee at the fund, said.
The academics’ opinions are not expected to weigh in the final decision as much as that of an expert group that the government has appointed to assess and review energy stocks in the fund’s portfolio. The expert group should present its findings in a report by August 24, 2018.
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Regardless of Norway’s decision on this proposal, the fact that the sovereign wealth fund created by the nation’s oil riches now wants out of oil stocks speaks volumes about the new investment world for oil and gas companies.
By Tsvetana Paraskova for Oilprice.com
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It is possible that the Norwegian sovereign fund is trying to cosy up with the environmental lobby or is receiving environmental rather than sound financial advice. Moreover, a $35 bn investment in oil and gas stocks including steaks in the world’s top oil companies amounts to only 3.5% of the fund’s assets.
Through its history oil has experienced a lot of volatility which emanates from its strategic importance and the various economic and geopolitical pressures to which it is subjected at any point in time. But for the fund to give an excuse of trying to make the fund less vulnerable to permanent drop in oil and gas prices is not based on good financial and economic advice. Oil is not in permanent drop and never will be. While oil prices might dip every now and then, they always rise up like the phoenix as is happening now. There will never be a post-oil era throughout the 21st century and far beyond.
The Fund 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
Petroleum of course still has its volatility in the market. Volatility in the investment world comes at a continuing price. Just look at how hedging of the market is playing out right now.
Secondly, petroleum is increasingly expensive to extract, transport and secure. I'll suggest that many investors are coasting today on past perceptions that oil is a hot investment that inevitably cycles back up just fine, even if is currently down. When you look at 4 out of 5 shale companies struggling even with relatively high oil prices, you know something is different in American oil.
Finally, oil is simply the wrong business to be in if you want a cleaner, more peaceful world.
Norway justifies what it is doing in hard financial terms. Could be they are cherry-picking some of their argument. But look at the trends and how oil simply does not make the cut like it once did for a better world.
There is significant cost for a crummy world, even if you do not carry the cost on today's books.