Norway no longer in love with oil

The biggest oil producer in Europe is no longer “in love” with black gold. This comment by Bloomberg comes at the aftermath of the Workers Party of Norway removing its support for offshore drilling in the Lofoten islands inside the Arctic Circle.

The opposition party’s radical turn created a strong consensus in the parliament in order for this region to remain outside the scope of oil projects. It is a blow to the oil industry that enjoyed Norwegian support for years, while it possibly shows that the Scandinavian country is closer to the end of an era, which brought it among the richest ones on the planet.

The end of an era?

Oil companies under the state controlled Equinor, the country’s largest producer, have tried to gain access to the Lofoten islands, underlining that this is essential if Norway plans to maintain current levels of production, since other deposits are being depleted. It is calculated that the archipelago, a natural wonder, contains 1-3 billion barrels of oil.

The Norwegian Association of Oil and Gas appeared surprised and disappointed. Also, the Industry Energy association’s members, an ally of the Workers Party for decades, spoke against the party’s change of stance, saying that “it fuels intense imbalances and is not going to be accepted”.

It should be reminded that recently Norway’s state investment fund decided to stop investing in the shares of oil companies in a largely symbolic move, since it was clarified that investments
in oil companies also having renewables projects will continue.

What divestment
from fossil fuels means

In contrary to Venezuela, Norway is perhaps the only model country when it comes to responsively managing its oil wealth. Norway has a long history as an oil and gas producer and the country used its oil wealth to build the largest state investment fund in the world.

Recently, this fund – the Government Pension Fund Global (GPFG) – made headlines through its announcement that it stops certain investments in fossil fuels. How important is this announcement? It certainly has a symbolic value, due to the size of the fund and the fact that the fund itself is the product of the oil and gas history of Norway. But we should describe this framework.

Even though this piece of news was widely described as “Norway abandons fossil fuels”, as Jim Collins noted in Forbes, “the shares of great energy companies – Exxon, Total, Petrobras, Royal Dutch Shell etc – will continue to be included in the GPFG fund”. More specifically, the fund will retain investments in fossil fuel companies that also have renewables arms.

At the end of 2018, CPFG had a total of 633 billion Euros invested in shares. Of these, the fund participated in 341 companies characterized as “oil and gas” with a total value of over 37 billion dollars.

According to an announcement by CPFG, it will divest from 114 oil and gas companies “in due time”. Companies in the crosshairs include the biggest American producers, such as EOG Resources, Anadarko Petroleum, Apache, Cabot Oil and Gas, Devon Energy, Diamondback Energy and Occidental Petroleum.

Thus, placing things in a specific frame, the fund will retain most of its oil and gas investments. The largest divestment will be EOG Resources. At the end of the year, the fund had a total of 488 million dollars in EOG shares, which constituted a little over 1% of the company’s market capitalization.

According to S&P Global Market Intelligence’s data, energy companies active in the stock market are worth around 5.0 trillion dollars worldwide. This is a sum 135 times larger than the GPFG’s oil and gas participation (most of which stays put).

Among those classified as E&P companies, there are 787 corporations with a total value of 832 billion dollars. The greatest category per value are vertical oil and gas companies and it is dominated by giants such as ExxonMobil and Shell. Globally, there are 51 companies in this category with a value of 2.3 trillion dollars.

The impact in shares

Most of the American oil and gas companies scheduled for divestment recorded liquidation after the announcement. The impact was certainly psychological, but there could be greater effect on the companies where the fund holds a larger share.

There are five participations in oil and gas where the fund controls at least 3%, but none of them are American oil and gas companies. Among those scheduled for divestment, the greatest share is in Delek US Holdings with 2.6%.

Overall, even such an important divestment is a drop in the ocean compared to the scope of the global oil and gas sector. If the world continues to buy fossil fuels, the companies will keep making money and investors keep making money through them.

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