North Sea Oil & Gas - Fueling Great Accumulations of Wealth for the Long-Term Benefit of Norway's Future Generations

The foundation for the significant progress made in so many spheres of society in the 20th Century was...Oil!  The oil-producing nations of the world amassed great wealth with the marketing of oil and petroleum-derived products; those products enabled fantastic progress to be made in industry, government, agriculture, the consumer sector...throughout our modern society. 

A number of formerly categorized as "still developing nations" of the early 20th Century years became quite wealthy when oil deposits were discovered or exploited on their lands -- especially countries like Saudi Arabia and the United Emirates, and Kuwait and Iran and Iraq.

North Sea oil and gas exploration would bring great wealth to certain western nations in the second half of the Century.  One of these was Norway, with significant reserves identified (and exploited) beneath the often storm North Sea waters.

A strategic decision was reached internally in 1990 -- a stream of "surplus" revenues would be directed toward the country's Sovereign Wealth Fund (SWF), officially "the Government Pension Fund" - this inflow began in 1996 and since, the SWF has become the largest Sovereign Wealth Fund in the world. (There is a separate internal fund also receiving funds for domestic investment.)

The Norway SWF invests in 77 countries; the portfolio allocation is in equities (62%), fixed-income (34%) and real estate (3%). The return on investment in 2016 was almost 7%.

The Fund states that it is a "Responsible Investor," with a mandate to integrate responsible investment activities into the management of the fund. 

Sign of the times:  In the flow of news reports and commentaries about the trend to minimize or dis-invest shares of fossil-fuel companies in investment portfolios, comes news from the Nordic nation [the advice] that the Norway SWF should scale back or drop investments in oil & gas stocks. 

The Norges Bank, which manages the SWF's US$1 trillion in AUM, advised that such a step would make Norway less vulnerable to a permanent slide in Oil & Gas prices.  About 6% of the AUM is now in the sector (in such companies as Shell, BP, ExxonMobil). Shell contributed the most to the fund's return in 2016.

Important note:  There were holdings in about 9,000 public companies in 2016; the average holding in the world's listed companies was about 1.3% to 2%, and up to 5% in 28 companies. (Nestle is the largest holding in a single issuer.)

In North America, holdings are in 2,268 companies; 2,107 bonds from 582 issuers; and in 400 (office & retail) properties. Oil and Gas performed best in 2016, Norges Bank reported (29%).  One investment of note is Florida-based NextEra Energy, a U.S. company "driving the transition from coal-based power to clean electricity."

All of this is sort of inside baseball; the SWF is owned by the central government for the benefit of future generations; the Norges Bank operations are part of the government; the Finance Ministry will review the suggestions.  We will likely see important decisions taken by June 2019, according to the BBC.

It will be interesting to watch as the world's largest Sovereign Wealth Fund and one of the world's key responsible investors -- all integral parts of one of the world's important oil & gas countries -- make decisions on fossil fuel investments going forward.

BBC highlights of the latest developments are in our Top Story this issue. And there is more detailed information for you in the Norges Bank Annual Report for 2016.
https://www.nbim.no/contentassets/41460fa6a42b4bd4a758429b90f80da2/government-pension-fund-global---annual-report-2016.pdf

This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view the full issue.