Oil and gas is now unprofitable

The largest sovereign foundation of the world may abandon investment in the oil and gas sector

The sovereign pension fund of Norway, built on income from oil and gas, in November announced his intention to get rid of oil and gas assets in order to not depend on too unstable prices for hydrocarbons. The stock market responded with a fall in shares of oil and gas companies, and analysts consider it as a signal: investing in oil and gas seems to be less attractive.

What is a sovereign pension fund of Norway

In the late 60s of the last century, Norway began to actively master the shelf deposits of oil and gas, the reserves of which allowed her to quickly become one of the main suppliers of energy resources in Europe. In 1990, a sovereign Pension Fund was founded, where superpituals from the sale of oil began to enter. “The sovereign Pension Fund retains funds for future generations of Norway. Once oil will end, but the income of the fund will serve for the benefit of the inhabitants of Norway, ”the main page of the Fund website says.

Today, the fund is one of the world's largest investors, it accounts for 1.3% of all trading shares in world stock markets. The value of the fund's assets this year exceeded 1 trillion dollars.

The profitability of the fund is formed from three sources: the purchase of shares, the so -called fixed income (purchase of bonds) and investment in real estate. The decision on investments in a particular company is made in accordance with the Benchmark-index, which is established by the Ministry of Finance.

The ministry forms its own benchmark-index for shares of the Foundation on the basis of the FTSE index, calculated by the British stock exchange, which includes companies with the largest capitalization in different sectors of the economy. At the same time, the fund fundamentally does not buy shares of “harmful” companies - for example, tobacco or those that cause too serious harm to the environment.

The shares of oil and gas companies account for about 5.5% of investments, in the third quarter of this year the most significant income came to them - 8.5% of the total income from shares for this period. The total cost of all shares of the oil and gas sector of the fund is about 35 billion dollars. These are shares in the largest oil and gas companies in the world: Shell (2.1%), BP (1.6%), Exxonmobile (0.8%). Among them are Russian companies - Gazprom (0.4%), Gazpromneft (0.4%) Lukoil (0.37%), Transneft (0.5%), Novatek (0.5%).

The main supplier of hydrocarbons in Europe

In November, the Norwegian bank, managing the Foundation, sent a letter in which he called for a revision of the formation of a portfolio of shares of the Fund.

The main sensation is the bank calls for refusing investments in the company of the oil and gas sector.

The solution is in its own way revolutionary and rather unexpected. Firstly, it seems illogical: the Norway economy is tightly tied to the oil and gas sector. The Norwegian company Statoil belonging to the state is included in the thirty of the largest oil and gas companies in the world. It is with Statoil that those countries - primarily the Baltic states - are associated with their hopes - which indicate the need to reduce dependence on Russian energy resources. At the same time, Norway remains a leader in the European Union for oil and gas production and one of the largest suppliers of energy resources to the EU countries - primarily to the UK and Germany.

Secondly, many have doubts the timeliness of this decision. “We believe that time is chosen incorrectly, since the oil market, on the contrary, is going up,” says Pen Magnus Niswein, the head of the analytical department of the Rystaad Energy consulting company.

Indeed, the collapse of oil prices occurred in 2014: from the middle of the year, the average oil price from $ 110 per barrel dropped to a mark below $ 50 per barrel. However, in the past few months, oil price has stably lasted above $ 60 per barrel. So many analysts are wondering: why right now, and not then?

Total rejection of oil and gas?

The Norwegian bank explains its offer in a letter sent to the Ministry of Finance on November 14, the desire to break the dependence of the Norway economy on oil and gas prices. “We came to the conclusion that the vulnerability of state welfare in a situation of long-term drop in oil prices and gas will be reduced if the bank refuses to invest in oil and gas assets, and we recommend that you remove these assets from the Benchmark-Index of the Fund.” Further, the bank analysts explain: Norway is too sensitive to oil prices. According to their estimates, if the cost of oil in the future falls into 100 Norwegian crowns per barrel (about $ 12) - that is, it will return to the value of the end of 2014 - this will reduce the income of the fund from oil and gas.

So far, the decision on a change in the announcement of investments has not been made. “Now this is the task of the Ministry of Finance - to consider the proposal and inform us when a decision will be made,” said Thomas Sevang, a representative of the Norwegian bank. “According to the plans of the ministry, they will study additional information and notify the parliament of the work done in the report in the spring of 2018.”

An important detail: Thomas Sevang emphasizes that "the bank recommends removing oil and gas assets from a benchmark index, not completely." Given the fact that when forming a shares portfolio, the fund has the right to small deviations from the benchmark index, this means that some assets in the oil and gas sector may remain.

Where will the money go, released in case of full or partial refusal to invest in the oil and gas sector? In the Norwegian bank, they do not give an answer to this question, referring to the closeness of information. The most logical is the distribution of funds between the shares of companies of other sectors, where the fund is already investing. However, representatives of "green" organizations hope that the fund will discover new directions.

“I think it would be even more wise solution to use the released oil and gas sector funds for direct investment in infrastructure related to renewable energy - for example, wind farms, solar power plants and hydraulic plants,” says Truls Gulovsen, head of Greenpeace Norway.

Oil and gas companies are losing attractiveness

The stock market has already responded to the offer of the Norwegian bank. After it was announced, the shares of most large oil and gas companies that are in the portfolio of the fund - including Gazprom, Transneft and Lukoil, fell for a short period of time, but quickly recovered - apparently, following the growing price of oil.

But the next fall, when the government’s decision will be announced (and it is unlikely to reject the proposal of the Norwegian bank), the shares are again risking falling.

How much - depends on how the fund will sell the shares: if there are many shares of one company at the same time on the stock market, their value will naturally fall. This also applies to Russian companies.

In addition to the direct dependence of the value of shares on their number in the market, which will depend on the fund strategy - and so far it is impossible to predict it - the symbolism of this decision is no less important. Phy Magnus Nisweong believes that the initiative of the fund can cause domino effect, since many large investors “consider the Norway Foundation as a guideline for navigation in the field of oil and gas finances”. In other words, for other owners of BP, Shell or Gazprom shares, this decision is to think about whether to get rid of these shares. What will lower their cost even more.

In addition to the unpleasant effect, which Gazprom and other oil and gas companies presented in the portfolio of the Norwegian Foundation will feel, in the case of reducing the cost of their shares, this decision is doubly unpleasant for Russia.

Truls Gulovsen believes that the intentions of the Norway Pension Fund are a signal to other raw materials: the oil and gas era ends.

“The share of the oil and gas sector will decrease over time,” Gulovsen is sure.

Perhaps a statement about the end of the era of oil and gas so far sounds premature. But the fact that the share of energy produced due to renewable energy sources grows around the world is a fact. In 2016, at the expense of the sun, water and air, 24% of all world electricity was developed. Russia lags behind the global trend: only 13% of electricity is produced on renewable sources, and due to the “latest” - wind and sun - slightly more than 1%.

“Oil is no longer a story about the future,” Truls Gulovsen believes. - We observed the same thing on the example of the coal industry. This trend continues - now with oil and gas. ”