$1tn Norwegian oil fund plans to ditch oil and gas stocks

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"The government's wealth can be made less vulnerable to a permanent drop in oil prices if the (pension fund) is not invested in oil and gas stocks", the fund's managers said.

Deputy Governor Egil Matsen said: "This advice is based exclusively on financial arguments and analyses of the government's total oil and gas exposure and does not reflect any particular view of future movements in oil and gas prices or the profitability or sustainability of the oil and gas sector".

"The return on oil and gas stocks has been significantly lower than in the broad equity market in periods of falling oil prices", the bank explained in a statement.

Oil and gas equities now account for around 6% of the Government Pension Fund Global's benchmark index, or just more than 300 billion Norwegian kroner ($36.49 billion).

Around six percent of the fund's holdings, or $37 billion, consist of oil- and gas stocks such as BP, Royal Dutch Shell and ExxonMobil.

Owning close to 1.5% of global stocks, the Norwegian fund largely follows indices, but is allowed some active management of its portfolio. In 2014, Stanford University said it wouldn't invest in coal-mining companies, and under pressure from environmental activists other USA endowment funds have debated whether they should pull out of fossil fuel investments.

Wikimedia Commons
Wikimedia Commons

While Norway has built much of its sovereign wealth through oil and gas development in the past-six percent of the fund is invested in fossil fuels-it's now home to a fast-growing solar power sector, with solar installations rising by 366 percent from 2015 to 2016. It owns owns more than $660bn-worth of shares in over 9,000 companies globally, and reached the $1tn-mark in terms of assets under management in September.

Government finances in Norway have been hit hard by the drop in oil prices in recent years.

Thursday's recommendation comes at a "good time because the stock portion will now be increased to 70% and that would also mean that we would buy more oil and gas stocks", Matsen said.

The fund has grown so large that even though the Norwegian state is taking less than 3 per cent of the fund's value every year for its fiscal budget in recent years, oil spending now accounts for one in five crowns spent by the state. "We can do that better by not adding oil price risk through the fund".

Norwegian Minister of Finance Siv Jensen said the issues raised by Norges Bank "are complex and multifaceted" and its advice requires a thorough assessment.

If it backs the central bank's proposal, Parliament could vote on it in June 2019 at the earliest.

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