Norway’s $35B Oil Stock Dump Could Hurt The Industry

Last week the world’s biggest sovereign wealth fund—Norway’s $1-trillion oil fund—proposed to ditch $35 billion worth of oil and gas stocks, sending shockwaves through the European oil indexes and rekindling the debate on the rationale of owning oil stocks in the long term.

The proposal to remove oil and gas stocks from the equity benchmark index of Government Pension Fund Global raised questions about how Norway will keep oil companies investing in its fossil-fuel industry if it indeed dropped billions of dollars’ worth of oil stocks, including stakes worth a combined $14 billion in Shell, Exxon, Chevron, BP, and Total.

According to Norway’s oil associations and energy unions, the proposal—which needs government approval expected by the fall of 2018—will not mar Big Oil’s investment plans for Norway. That’s because the possible dumping of oil stocks is part of a financial planning and has nothing to do with the country’s energy policy that has been and is expected to continue to be supportive of the industry that accounts for 14 percent of GDP, 14 percent of state revenues, 19 percent of total investments, 39 percent of total exports, and 7 percent of employment in the country with population of 5.3 million residents.

Sure, the proposal to drop oil and gas investments is a huge thing, considering that it is oil revenue that has allowed the fund to grow to $1 trillion and to hold 1.3 percent of listed companies worldwide and 2.3 percent of listed companies in Europe.

It’s also a big story because it could prompt other funds and fund managers to reconsider how healthy oil stocks investment will be in the face of an uncertain long-term oil future amid the ‘peak oil demand’ narrative.

But Norway’s oil bosses insist that as long as the government’s energy policy and investment and tax incentives for oil companies remain in place, the proposal to dump oil stocks will not stifle interest in doing business offshore Norway.

“This is just one of several negative news stories that are piling up—that’s probably what made me shake my head at the beginning,” Frode Alfheim, the head of Norway’s biggest oil union, Industry Energy, told Bloomberg.

“But I both hope and believe that this isn’t something that will impair international investors’ desire to invest on the Norwegian shelf,” he added.

Even more confident was the Norwegian Oil and Gas Association—an oil industry lobby for companies including Shell, Exxon, and Total. The group’s head Karl Eirik Schjott-Pedersen told Bloomberg that the proposal to reduce financial exposure seems “a lot more reasonable than suggestions from the environmental movement that Norway should reduce this risk by reducing oil activity in Norway.”

“That would lead to the loss of thousands of jobs and huge tax income for Norway,” Schjott-Pedersen noted.

Environmentalists aren’t only calling for reduction of oil activity offshore Norway. They’re also suing the country over the awarding of oil drilling licenses in the Arctic, claiming that they violate Norway’s constitution and the country’s pledge to fulfill the terms of the Paris Climate Agreement.

While the green groups continue to advocate abandoning oil exploration, the oil industry regulator, Norwegian Petroleum Directorate (NPD), and oil major Statoil—in which the government holds 67 percent­—warn that without new oil discoveries, the decline in Norway’s oil production after 2025 would be even bigger than expected.

The ruling Conservative-led minority government is supportive of the oil industry, and two months ago it won re-election in a vote where oil policies took center stage.

If approved next year, the proposal of the wealth fund to drop oil and gas stocks will have more consequences on Norwegian finances and economy by spreading the financial risk, rather than on the country’s energy policy toward the industry, at least in the short term.

By Tsvetana Paraskova for Oilprice.com