Norway's $1T SWF & 'Divesting' From Oil

Make no mistake: Norway's gonna cover you in oil for the foreseeable future.

Financial markets are currently in a tizz over Norway's sovereign wealth fund (SWF) investigating the possibility of divesting entirely of its oil and gas stocks. We aren't talking small beer here since it is a $1 trillion fund amassed over the years largely from Norway's oil and gas royalties. Believed to hold an incredible 1.5% of the world's floating stock valuation, it is a relative giant in the business world. With the continuing drive among progressive (read: non-American) countries to move toward renewable energy sources, this announcement is being made out to be the death knell of fossil fuel production--at least in civilized parts of the world not run by reality TV stars and similar riffraff:

Norway, which relies on oil and gas for about a fifth of economic output, would be less vulnerable to declining crude prices without its fund investing in the industry, the central bank said Thursday. The divestment would mark the second major step in scrubbing the world’s biggest wealth fund of climate risk, after it sold most of its coal stocks.

“Our perspective here is to spread the risks for the state’s wealth,” Egil Matsen, the deputy central bank governor overseeing the fund, said in an interview in Oslo. “We can do that better by not adding oil-price risk.”

The plan would entail the fund, which controls about 1.5 percent of global stocks, dumping as much as $40 billion of shares in international giants such as Exxon Mobil Corp. and Royal Dutch Shell Plc. The Finance Ministry said it will study the proposal and decide what to do in “fall of 2018” at the earliest.

It's being portrayed as the canary in the coal mine...or the turtle in the offshore, if you prefer as environmentalists laud the move:

While the fund says the plan isn’t based on any particular view about the future of oil prices or the industry as a whole, it will likely add to pressure on producers already struggling with the growth of renewable energy supplies...

Built on the income that western Europe’s largest energy supplier has generated for more than 20 years, the fund’s investment decisions are guided by ethical rules encompassing human rights, some weapons production, the environment and tobacco. Norway’s fossil-fuel investments are coming under increasing scrutiny from a public that aims to be a climate leader without jeopardizing one of the world’s highest standards of living...

But environmental groups praised the plan. “The world is changing fast, and it’s very risky to put too many eggs in the same basket,” said Marius Holm, the leader of the Zero Emission Resource Organisation. Sony Kapoor, a former adviser to Norway’s government, said the plan is “a belated victory for common sense over the powerful oil and gas lobby in Norway,” calling on the fund to now boosts its “green” investments at least tenfold.  

The rub, though, is that Norway has little interest in shutting down the oil fields its government draws substantial revenues from. As mentioned, a fifth of all state revenues still come from oil and gas. As such, the explanation government officials provide for making this move is actually an honest one. Since the national purse is already exposed to oil prices in a big way, why should it not diversify away from the same industry with its SWF? A true rainy-day fund should not rain on your parade at the same time that economic downturns occur. While the SWF does claim to use ethical criteria in making investments, it would be hypocritical of the SWF to mention environmental reasons for its divestment when the government receives 20% of its revenues from oil and gas.

As such, I would be wary of those portending a Norwegian SWF portfolio readjustment as the "End of Big Oil" or the start of such stocks gradual demise a la Big Tobacco. While there are ethical and environmental reasons bringing us closer to such a point, this move by the Norwegians is probably just another milestone rather than the final nail in the coffin.