Norway’s sovereign wealth fund – a state-owned investment fund worth approximately a trillion dollars – recently announced it was divesting from oil and gas exploration companies around the world. Not surprisingly, many oil and gas stocks declined following the announcement.
While this is good news for the climate, this was simply a smart business decision. Norway’s sovereign wealth fund, known as the Government Pension Fund Global (GPFG), primarily exists due to Norwegian oil production. And the fund will continue to be a major investor in companies like Exxon.
It appears it’s just cutting its losses on money-losing endeavors like fracking in America, tar sands oil production in Canada, and frontier exploration by U.K. companies in Africa and South-East Asia.
“The government is proposing to exclude companies classified as exploration and production (E&P) companies within the energy sector from the [fund] to reduce the aggregate oil price risk in the Norwegian economy,” the Finance Ministry explained in a statement announcing the move.
Dumping losing assets
What that translates to in America is essentially a divestment from the shale oil and gas producers like EOG Resources, Apache, Continental, Diamondback, and Chesapeake. Apparently, the fund managers are tired of losing money on fracked oil and gas.
The move certainly comes at a bad time for the American fracking industry. Their previously endless supply of loans from Wall Street has also started to dry up, leading to budget cuts, layoffs, and reduced oil production.
In Canada, among the companies targeted for divestment is Canadian Natural Resources, LTD – an Alberta tar sands oil producer. The Canadian tar sands oil industry has been losing money for several years and several major oil companies have sold tar sands assets, including Devon Energy’s recent announcement it was getting out of the tar sands production business.
How could the shift to a low carbon economy impact #Canada? #Norway’s US$1-trillion wealth fund, the biggest of its kind in the world, will begin dumping shares in oil and gas companies including some Canadian names ➡️ https://t.co/mOW0vuXlzc— Canadian Leadership Congress (@CLCongress) March 14, 2019
The Canadian government is now propping up the failing business model for Alberta’s tar sands, but Norway’s state fund doesn’t seem impressed. Of course, Norwegian investors sitting on a trillion dollars in the government’s sovereign wealth fund have reason to be skeptical of the Canadian government’s acumen for handling the oil business. Compared to Norway, Canada’s own oil-backed sovereign wealth fund is a complete disaster, with a mere $17 billion dollars.
Norway’s state wealth managers appear to have taken a good, hard look at the finances of these American and Canadian companies and recognized losing money was bad for business.
In addition, Norway seems to have peered across the sea toward the UK and seen nothing but wells (and profits) drying up.
The U.K.’s North Sea fossil fuel sector has hit a “$10 billion impasse” since oil prices plummeted last year. And among the companies that Norway has pledged to pull its investments from are Nostrum, Ophir, Premier, Soco, and Tullow – all of which are listed on the London Stock Exchange.
Premier remains a major player in oil and gas extraction on the U.K.’s side of the North Sea. But the trend in that region is definitely towards decommissioning rather than exploration – and Norway’s fund has clearly read the runes.
That downward trend is partly what has led a lot of UK fossil fuel companies to look further afield. Tullow claims to be Africa’s “largest independent oil and gas producer,” and Ophir has assets in Tanzania, Mexico, and South East Asia. Nostrum operates in former Soviet Union countries, and Soco has assets in Vietnam.
DeSmog U.K.’s Empire Oil investigation previously outlined how companies like these were operating in frontier markets in some of the most politically unstable regions in the world with limited regulatory oversight or concern for the communites they impact.
With hundreds of thousands of schoolchildren taking to the streets calling on leaders not to lock countries into high-carbon futures, Norway seems to be going with the flow and no longer wants to be associated with this oddly neo-colonialist activity.
Financial press works to downplay reality
While some headlines initially misrepresented this move by claiming Norway was divesting completely from the oil and gas business, the fund’s divestment from just exploration and production companies still represents a significant comment on the long-term financial viability of the targeted companies.
Still, this early media misstep led to some aggressive pushback from members of the financial media. One Forbes columnist went so far as to call coverage of the Norwegian fund’s latest investment decision “fake news” and wrote “the bottom line is that Norway’s GPFG is not divesting its energy holdings.”
However, that might come as a surprise to all of the energy companies being dumped by the fund.
Another Forbes columnist argued that this move was just a minor change and concluded:
“But in the grand scheme, even such a significant divestment is a tiny drop in the bucket compared to the scope of the world’s oil and gas sector. If the world keeps buying fossil fuels, companies are going to make money selling them, and investors are going to make money owning them.”
Perhaps these columnists are right and Norway’s move should be ignored and all of these oil and gas companies have a bright future.
Or perhaps – like when the GPFG divested from 122 coal companies in 2015 – the fund is just ahead of the curve.
Climate risk acknowledged as ‘important financial risk factor’
The recent divestment was a business decision to limit the Norwegian government’s exposure to oil price risk and was not made out of concern for the rapidly warming climate. However, the fund’s managers are concerned about the impacts of climate change on its investments, which did factor into this decision.
In the white paper “Energy Stocks in the Government Pension Fund Global”released as part of the decision, the authors acknowledge that climate policy may negatively impact some of its energy holdings, which in turn will affect future investment decisions.
“Climate risk is an important financial risk factor for the GPFG. Climate change, climate policy, and their effect on technological developments may over time have an impact on several of the companies in which the GPFG is invested, including those in the energy sector.”
The team managing Norway’s state investments is concerned about the financial risks of climate policy but only from an investment standpoint.
Most of the money in Norway’s sovereign wealth fund comes from the profits it derives from oil and gas production. The decision to drop certain oil & gas investments isn’t based on climate change but fear of price volatility in oil and gas stocks. https://t.co/WDqG0Yy43r— Mark Hand (@MarkFHand) March 11, 2019
Norway has been very shrewd in converting its oil resources into a massive diversified fund that supports the Norwegian economy. The move is something countries such as Canada and the U.K. could have replicated but instead they passed up the opportunity.
While Canada is doubling down on the oil industry – using taxpayer money to overpay for pipelines and bail out the oil-by-rail industry – and the U.K. continues to prop-up a domestic offshore oil industry in irreversible decline, Norway is divesting from companies that expose it to the risk of those same industries.
Based on Norway’s track record, including offloading coal investments in 2015, the odds are looking good for its decisions.
Additional reporting by Mat Hope.