A government appointed commission recommended on Friday that Norway’s wealth fund should continue to invest in oil and gas companies. The announcement contradicts advice from the country’s central bank late last year to drop energy shares from the fund’s benchmark index. Equinor photo by Thomas Sola.
Energy stocks make up only 4 per cent of Norway’s wealth fund
On Friday, a Norwegian government-appointed commission recommended that Norway’s wealth fund continue to invest in oil and gas companies, challenging the country’s central bank advice to dump energy shares.
The trillion dollar wealth fund invests Norway’s oil and gas production revenues for future generations in stocks, bonds and real estate abroad. At the end of 2017, energy stocks in Norway’s wealth fund amount to about 4 per cent of the fund’s value, or about $37 billion.
Last November, the Norwegian central bank proposed the fund cut its exposure to oil and gas stocks which would divest tens of billions of dollars from the industry.
The central bank argued that getting rid of energy stocks would cut the fund’s, and in turn, the Norwegian government’s, exposure to oil price fluctuations.
In an interview with Reuters, commission chair Oeystein Thoegersen argued “to get that small insurance (against the fluctuation of the oil price by removing energy stocks), it would cost the fund a lot, as it would be less diversified”.
“Second, you would change an institution that has worked very well. And third, as the years go by, we have less and less oil risk,” said Thoegersen in reference to Norway’s declining oil reserves.
According to the commission, under a scenario where oil prices remain low, the reduction in the government’s net cash flow from oil and gas activities would be substantial. As well, a large sale of energy stocks would challenge the investment strategy of the fund.
“Should the owner seek any additional reduction in oil price risk, it is likely to be more effective to reduce the Norwegian state’s direct ownership in Equinor or the state’s Direct Financial Interest (state-owned oil firm Petoro),” the commission said.
Norway owns 67 per cent of Equinor and 100 per cent of Petoro and a current and past Norwegian governments have ruled out cutting the country’s stakes in those companies.
Norway’s Finance Minister Siv Jensen will announce the government’s decision in the fall. She did not offer any hints about if the fund would shift out of energy stocks. “I look forward to reading the assessment,” she said in a statement.
After the commission’s announcement on Friday, share prices of European oil companies, including Shell and BP, were higher.
Norway’s wealth fund is among the largest investors in a number of oil companies. It owns 2.19 per cent in Shell, 2.17 per cent of BP, 0.94 per cent in Chevron and 0.87 per cent of Exxon Mobil. It also holds 1.42 per cent of Eni, 1.79 per cent in Total and 0.22 per cent of Lundin Petroleum, among others.
In response the the announcement, Egil Matsen, deputy central bank governor told Reuters “we have given our advice and we are now awaiting the government’s decision”.
Tom Sanzillo, Director of Finance for US energy finance think-tank IEEFA, told Reuters “this recommendation will prove to be a failure and the Norwegian Government will be forced to change this as fossil fuel investments continue to drag down global investment indexes and the Norwegian economy”.