Norway’s trillion dollar wealth fund dump oil and gas shares

Norway has one of the largest wealth funds in the world, valued at USD $1 trillion. The fund is looking to sell approximately USD $7.5 billion in shares of 134 energy companies over time, including twenty-six Canadian producers such as Canadian Natural Resources Ltd. and Encana Corp. but not large producers that also own refineries such as Suncor Energy Inc. and Husky Energy Inc.

The fund owns large amounts of oil and gas shares, where the vast majority of independent exploration and production companies, along with many independent refiners, are in North America. At the end of 2018, it owned shares in around 300 oil producers and service companies. Tax revenue from oil production have made Norway rich and underpin the country’s generous welfare programs. A significant proportion is siphoned off into the fund, which was conceived as a pension account for the country’s 5.3 million inhabitants.

The Norwegian government said its motivation is financial, not climate activism, where the fund derives its income from Norway’s booming oil and gas industry. Re-investing the proceeds in other sectors is considered a way to keep the money safe should oil and gas prices fall. Minister of Finance Siv Jensen said, “The objective is to reduce the aggregate oil price risk on the whole Norwegian economy. The Norwegian state is highly exposed to oil.

Environmental activists hailed the decision as a sign that the global economy is increasingly moving away from fossil fuels toward cleaner energy, however, the financial impact is limited since it only focuses on companies that trade solely in exploration and production rather than the integrated oil giants, that do everything from searching for fossil fuels to selling them to consumers.

The Norwegian fund has a stake in more than 9,000 companies worldwide, including Apple, Nestle, Microsoft, and Samsung. On average, the fund holds 1.4 percent of all of the world’s listed companies and about 70 percent of its holdings are in shares.

Sixteen months ago Norway’s central bank advised dropping oil and gas stocks from the country’s trillion-dollar sovereign wealth fund to mitigate the risk from “a permanent drop in oil and gas prices.” However, last August a government commission recommended against such divestment. It reasoned selling wouldn’t reduce risk much and would in fact narrow the fund’s diversification, shifting its composition so markedly away from the broader market’s could increase risk.

Last week, the government approved the sale of some oil and gas stocks, but rather than divesting the fund’s entire holding – 341 stocks worth about USD $37 billion, as of December 2018 – it will dispose of 134 stocks, worth roughly USD $8 billion, or 0.8 percent of the fund. The stated rationale is that the disposals focus on exploration and production companies, which have the highest correlation to oil and gas prices. These firms are distinguished from integrated oil and gas companies, which are, Norway reasons, less directly correlated with prices and include several companies investing in renewable energy. Selling those wouldn’t curb commodity exposure much and could actually lead to missing out on exposure to a growing sub-sector of energy hedging its oil-and-gas risk.