When it comes to energy, Norway always plays an important role. Suffice to say that the leading European country by reserves, production and exports of hydrocarbons uses a mixture of electricity generation methods, based almost exclusively on renewable sources, with 98% from hydro and wind power. In recent years, the Norwegian Government has also invested heavily in the field of alternative energy. Through massive subsidies, they have transformed Norway into the biggest market in the world for electric cars per capita, with 100,000 vehicles for a population of 5 million, including 40% of new registrations in the past year. Now, like a bolt from the blue, along comes a proposal from Norges Bank – the manager of the Norwegian sovereign wealth fund (Government Pension Fund Global, GPFG) on behalf of the Government – to move away from investments in the international oil sector. At first glance, this news sounds stark, especially considering the huge budget of the fund – 8.425bn kroner, €1tn – comes straight from the Norwegian oil and gas export revenue accumulated since 1966.
The Finances of the GPFG
Savvy administration of resources has led the GPFG to becoming a global financial player. Within 10 years, 2007–2017, its value has quadrupled. It now holds equity in almost 9,000 companies in 77 countries around the world, controlling 1.3% of the capital of all the listed companies in the world, with 2.3% in Europe. The GPFG is a shareholder in international giants in a wide range of fields, including Apple, Nestlé, Novartis and Amazon, and also holds capital in global energy players such as Royal Dutch Shell, Exxon Mobil, Chevron, BP and Total. Let's hope they didn’t take it to heart when they read the announcement made by Egil Matsen, Deputy Governor of Norges Bank, on November 16. More than 6% of the Fund's investments are currently in the oil sector, valued at approximately €60bn and spread over almost 400 companies. According to Norway's central bank, these values should be gradually reduced, to make the Oslo Government (and therefore the Norwegian people, who receive substantial income from oil revenue) “less vulnerable in the face of the constant reduction in crude oil and natural gas prices”. Although the Norwegian Ministry of Finance has yet to discuss the implementation of the proposal – and will presumably not do so until fall 2018, the signal to the industry markets and operators is not the most reassuring.
A Climate of Increasing Uncertainty
Firstly, given the (to be honest, low) likelihood that the Norges Bank forecasts turn out to be correct, the implications for an oil industry weakened (and poorer) due to the events of recent years would be dramatic. Despite the agreement between OPEC and other oil-producing countries, crude oil has struggled to exceed the threshold of $60 per barrel reached after the downward dips of January 2015, while the price of gas remains in the doldrums due to huge U.S. production of shale. The possibility of a "permanent reduction in prices", invoked by Matsen to explain the central bank’s new policy, would imply another bloodbath for an industry where 400,000 redundancies and net losses of $170bn were recorded 2015 through 2016. Although such a catastrophic scenario is unlikely, the outlook for the major international energy companies is still uncertain. They could witness an exit from their capital of a global financial player, which should – if pragmatically – believe in the future of the industry. Even though the direct impact on companies like Shell (3.4% of whose shares are held by GPFG), Exxon Mobil (0.82%), Chevron (0.92%), BP (1.65%) and Total (1.62%) would be limited, the real risk is that the move by Norway could result in a domino effect among major global investors, including the Kuwait Investment Authority and the Saudi Arabian Monetary Agency.
The reasons behind Norway's decision
To assess the credibility of these scenarios, it is vital to understand the reasons behind the central bank's decision, and the grounds for such pessimistic assessments. In one sense, the diversification of its investment portfolio in the oil industry is a reasonable move to mitigate the risk in crude oil and natural gas prices, the volatility of which has an intrinsic effect on the performance of the Fund. Suffice to say that, because of the falling prices, in 2016 the Norwegian Government made its first withdrawals from the GPFG, of 105bn kroner (around €8bn). Further withdrawals were needed in 2017, of 50bn kroner, about €4bn. If you then add the very difficult time experienced by the Norwegian oil industry, evidenced by Total's recent (resounding) €1.2bn exit from the Martin Linge field and the Garantiana discovery, Oslo's caution seems justified.
The New Frontier of Energy: Transition
For sure, the boom in renewables and the pressure of the energy transition are essential variables in the Norwegian authorities’ assessments, as are public expectations. The Norwegian people watch the activities financed by the Fund very carefully and are more and more interested in the environment and sustainability, both central issues in the election campaign last September. Even Statoil – Norway's national energy company – has now taken on an industrial strategy more and more focused on sustainability, with significant investments in CO2 capture and storage, and in offshore wind farms. While a doomsday scenario is unlikely for now (and the hydrocarbons era is therefore likely to continue for a long time yet), the lesson to be learned from Oslo is clear: paying more attention to the dynamics of energy transition and sustainability challenges has become a priority that the oil industry cannot afford to underestimate, whether on a local or a global level.