The decision assumes significance on the account of the wealth fund being the world’s largest sovereign wealth fund and in a scenario with sustained low oil prices, it will result in a reduction in the government’s net cash flow from petroleum activities, which could be significant.
On Friday, in stark contrast to an earlier advice from Norway’s central bank, a government-appointed commission recommended that Oslo’s trillion-dollar sovereign wealth fund should continue to invest in oil and gas companies.
Significantly, the decision as to whether shares of the country’s energy firms will form part of its benchmark index, which will result in the divestiture of tens of billions of dollars from oil and gas stocks over time, is expected later this autumn.
In November 2017, shares of European oil and gas companies fell when the Norwegian central bank announced a proposal to cut its exposure – and thus the Norwegian government’s exposure – to the fund to fluctuations in the oil market.
“Divestments of the energy stocks in the (fund) is not an effective insurance against a permanent decline in oil prices. The energy stocks only contribute marginally to Norway’s oil price risk,” said Oeystein Thoegersenm, the commission’s chairman, in a statement.
Incidentally, the fund, which is the world’s largest sovereign wealth fund, invests Norway’s revenues from oil and gas production for future generations in stocks, bonds and real estate abroad.
At the end of 2017, energy stocks amounted to around 4% of the value of the fund, which amounts to nearly $37 billion (315 billion crowns), said the commission.
According to the commission, in a scenario with sustained low oil prices, it will result in a reduction in the government’s net cash flow from petroleum activities, which could be significant. A sale of energy stocks would also challenge the investment strategy of the fund, with broad diversification of investments and a high threshold for exclusion.
Norway’s sovereign wealth fund is among the largest investors in a wide range of oil companies holding stakes of 2.19% in Shell, 2.17% of BP, 0.94% of Chevron, and 0.87% of Exxon Mobil, at the end of 2017. It also held 1.42% of Eni, 1.79% of Total, and 0.22% of Lundin Petroleum, among others.
“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),” said the commission.
($1 = 8.4525 Norwegian crowns)