Norway’s trillion-dollar massive wealth fund is planning to dump oil and gas firms from its benchmark index. This means investments in these companies could be cut off, according to the deputy central bank chief in charge of the funds. Energy stocks could drop further as a result, making them even bigger losers this quarter.
If the parliament adopts this, the fund would divest several billions of dollars from oil and gas stocks over time. It currently holds 6%- or approximately $37 billion- of the equity index of the fund’s benchmark.
The objective is to reduce Norway’s government’s susceptibility to the continuous decline in the price of oil. Concurrently, the fund is increasing its exposure to equities from 60% to 70%.
In its letter to the Ministry of Finance last Thursday, Norges Bank recommended removing stocks belonging to oil and gas stocks from the GPFG (Government Pension Fund Global). The fund which, ironically, was developed from proceeds of Norway’s oil wealth, will focus on other sectors of the business economy.
In a statement made by one of the bank’s officials, the revenue from oil and gas stocks have been significantly lower in comparison to the broad equity market, due to the incessant drop in the price of oil.
“Therefore, it is the Bank’s valuation that the government’s wealth can be made less susceptible to a permanent decline in the value of oil prices if the GPGF stops investing in oil and gas stocks,” the bank said.
According to the Deputy Governor, Egil Matsen, “This advice is solely based on financial arguments and the analyses of the government’s total oil and gas risk, and does not represent any specific outlook for oil and gas prices in the future. Nor does it indicate the sustainability or profitability of oil and gas sector,” he concluded.
Since mid-October, Europe’s index of oil and Gas shares .SXEP, has been at its lowest and was trading low at 0.39% last week.
The Bank’s recommendation came in a letter sent by the central bank to the ministry of finance and was signed by Oeystein Olsen, its governor. It also contained the signature of the fund’s chief executive, Yngve Slyngstad, the deputy central governor, Egil Matsen mentioned in a recent interview.
“We are simply advising the ministry to take out the oil and gas sector from its stake in the fund, and it is demonstrated in the FTSE reference index,” said Matsen.
The fund is the largest sovereign wealth fund in the world. It capitalises Norway’s returns from the production of oil and gas for prospective generations in stocks, bonds and foreign real estate.
It is one of the biggest investors in a diverse range of oil firms. By the end of 2016, its stakes held 2.3% of Royal Dutch Shell (RDSa.L). 1.7% of BP (BP.L), 0.9% of Chevron (CVX.N) and 0.8% of Exxon Mobil (XOM.N). It is no surprise that these stocks may join other losers in the Norwegian market.
An oil analyst at Santander bank, Jason Kennedy, says, “The risk of the oil sector is the number of investment funds that will reduce their exposure to extractive sectors.”
The fund also had 1.7% of Eni (Italy), 1.6% of Total (France) and 0.9% of Lundin Petroleum (Sweden), as well as others.
The fund has become so large, that even though the Norwegian state is using under 3% of the fund’s value annually for its fiscal budget, oil expenditures now account for only 1 in 5 crowns made by the state.
The proposal continued to shake the core of equity markets last Friday, sending down the Stoxx Europe 600 Oil and Gas index by 0.17% early in the trading day. Shares at Exxon, Shell B and BP also suffered losses.