The Last Barrel
Norway’s bombshell proposal to sell roughly $37 billion in oil and gas stocks from its sovereign wealth fund, to make the nation “less vulnerable” to volatile fluctuations in commodity prices, is the latest indicator that our industry is experiencing significant change. “Our perspective is to spread the risks for the state’s wealth,” said Egil Matsen, deputy governor at the central bank in charge of overseeing the fund. “We can do that better by not adding oil price risk through the fund.”
Globally, the energy sector has been one of the weakest performers of the year, but divestiture of this magnitude “is clearly indicating that this is a completely new ball game,” said Sasja Beslik, group leader at Nordea Bank. “This is a revolutionary thing, they are setting the bar for so many other institutional investors, not just in the Nordic region, but around the world.” He estimates that in approximately 10 years, oil and gas will shrink to about a third of their current presence in most major portfolios. Beslik also said he expects the assets to “diminish substantially” in global stock indexes.
Political correctness run amok. Although banking officials that manage the $1-trillion Norwegian wealth fund insist that their decision to divest oil and gas assets is about diversification, and not environmentalism, it conveniently satisfies both agendas. The sale would include oil company stocks including Shell, ExxonMobil, Chevron and BP. The wealth fund was built from Norway’s hydrocarbon revenue over the last 20 years, and its administrators follow “ethical” guidelines when selecting investments that include considerations for human rights, weapons production and the environment.
The move constitutes the next major step in scrubbing the fund of climate risk after it sold most of its coal interests. While administrators say the action is not based on any projection of future oil prices, it adds political pressure on major oil producers already struggling to recover from the great bust of 2014-17. It’s interesting to note that Norwegian authorities want the country to be a leader in the carbon reduction initiative, while remaining one of the world’s largest oil and gas producers.
Green crusaders delight. Norway’s announcement was met with widespread excitement by environmental groups, as they expect the divestitures to spark a broader sell-off in major oil company stocks. Several leading green proponents took the opportunity to “talk up” the proposed transaction, in an attempt to perpetuate their cause. Paul Fisher, Cambridge Institute for Sustainability Leadership, said that the fund is “no longer prepared to take the increasing risk associated with oil and gas assets, which do not have a long-term future.” Martin Norman, head of Sustainable Finance Campaign for Greenpeace Nordic added, “This is a victory for common sense. We have argued this for some time, and there is no reason for parliament not to approve this.” Stephanie Pfeifer, head of the Institutional Investors Group of Climate Change said investors will look more closely at alignment with the low-carbon transition.
Tobias Fransson, head of strategy and sustainability at the Forth Swedish National Pension Fund calls Norway’s wealth fund a “thought leader,” and “it’s natural” that everyone is watching. Sweden’s AP4 Fund applies “de-carbonization strategies to our global index portfolio,” Fransson continued. “This means that we actively adjust our exposure, to overweight low CO2 emitters and underweight large carbon emitters. Climate-related risks will be a driver of long-term returns.”
In any case, the proposed sale gives these environmental activists powerful context to continue their work and provides industry-backed legitimacy that the cause was lacking.
No green celebration, yet. In spite of the gleeful response by the enviro-community, the asset sale is not guaranteed, and it still has to be approved by Norway’s parliament (earliest vote in June). Given the government’s close ties to the powerful offshore oil industry, and the fact O&G are responsible for 20% of the country’s economic output, the ministry may veto the banker’s recommendation. Additional evidence that Norway is not ready to abandon searching for offshore reserves occurred when Statoil gave approval to start developing its $6-billion Johan Castberg Arctic oil project in the Barents, but only after cutting authorization for expenditures in half.
One brick at a time. Fundamentally, the sale of $37 billion of major oil company assets has little-to-no impact on these mature, global enterprises. But the die has been cast, and the foundation for a transition toward so called cleaner energy has been laid by bankers convinced that fossil fuels are no longer an appropriate long-term investment for their clients.
Transferring O&G innovations
The Norwegian Oil and Gas Association has documented how technologies developed for use in the country’s petroleum sector have been applied to improve products in other industries. A report outlines how 26 technologies are creating value over a wide spectrum of industries from health care to infrastructure construction. One of the more significant transfers has created a non-invasive method to identify narrowed coronary arteries to reduce the risk of heart attacks. The calculations are the same as those used to describe the flow of fluids through reservoir rocks. Another is using coiled tubing to drill and case micro-tunnels for heating, water and electrical cables to eliminate digging up the surface. The association’s director general, Karl Schjott-Pedersen, said “the ability of the petroleum industry to make such contributions depends on constant progress ... and why provision must be made for new activity in the sector.” 
