Published on 23 August 2019

SUSTAINABLE FINANCE

Norway’s sovereign wealth fund backtracks on its decision to divest from oil

Two years ago, the Norwegian sovereign fund made an impressive move by announcing its divestment from hydrocarbons. This was a strong message for the sovereign fund as it has built its wealth on oil extracted from the North Sea. However, the final plan would only concern $5.7 billion of a $1.1 trillion portfolio.

The Norwegian sovereign wealth fund owns 2.5% of Shell's capital and intends to retain this stake.
@Shell

The Norwegian sovereign wealth fund (GPFG), the largest in the world, has shaken the finance world for the past two years. In 2017, it announced plans to divest from oil in order to protect itself from market fluctuations. This was an ambitious goal involving $37 billion in assets, for a fund that manages assets totaling $1.1 trillion and whose fortune is based on fossil reserves from the North Sea. It took two years for the Norwegian government, a trustee for the public fund that is also managed by the Norwegian central bank, to release a copy of the report. Findings from the report suggest that the fund's strategy is less ambitious than expected.

In March 2019, Norwegian Finance Minister Siv Jensen confirmed this strategy and announced a plan for gradual disinvestment.  However, only companies specializing in oil and gas exploration and production were targeted. Major oil companies, such as Shell and Total, were not targeted because they were very diversified in renewable energies, among others. This was a remarkable ambition for the markets, however, it only represented $7.8 billion dollars.

Increasingly faced with political opposition from two parties more favorable to the oil industry, the government has just lowered its ambitions one step further. According to Bloomberg, divestment would only concern pure producers of crude oil and would not have an impact on integrated companies, service providers, refineries, petrochemicals, etc. Bloomberg estimates that such a strategy represents only $5.7 billion. By way of comparison, this is less than the 2.5% of Shell's capital that the fund owns, or €5.9 billion.

A symbolic measure

"It's the mountain that gave birth to a mouse," says Knut Anton Mork, an economist who led a GPFG strategic committee. Harald Magnus Andreassen, economist and member of the government commission on the subject, affirms that nothing remains the same from the original strategy: "This compromise no longer had to do with insurances on the price of oil (...) it looks like a symbolic measure".

Marianne Groth, Secretary of State at the Norwegian Ministry of Finance, reaffirmed the relevance of disinvestment in an interview with Bloomberg but confirmed that the impact "will be limited." "Since the state's petroleum income mainly comes from upstream activity, it's more accurate to remove upstream companies, rather than to exit a broadly diversified energy sector altogether," she added.

It is important to note that since government revenues are already largely exposed to the price fluctuations of crude oil, the latest strategy is to ensure that the fund is less exposed. This also confirms, as stated by the Norwegian central bank in 2017, that this divestment strategy does not rely on environmental backing but is "exclusively based on financial arguments". The final plan should be announced by the Ministry of Finance in mid-September.

Ludovic Dupin @LudovicDupin

 

 


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