Norway’s central bank (Norges Bank) in a letter to the finance ministry has recommended the removal of oil and gas stocks from the benchmark index of the country’s $1 trillion Government Pension Fund Global (GPFG) – the world’s biggest sovereign wealth fund, also called the 'oil fund'.

In the bank’s view, this will make the government’s wealth less vulnerable to a permanent drop in oil and gas prices.

“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,” said Norges Bank deputy governor Egil Matsen.

The apparent irony that Norway doubts the stability of the long-term value of oil and gas – the very source feeding its sovereign wealth fund – will not have gone unnoticed in the world's fossil markets. The spot price for Brent Crude oil was 1.55% lower on the day at $62/barrel in early afternoon in Europe, according to data from Recharge's sister publicationUpstream.

Norges Bank since the establishment of the GPFG has advised the finance ministry in line with the requirements in the mandate on how changes in investment strategy can be expected to affect return and risk for the fund.

The bank says its analyses of the oil price risk in the government’s wealth are based on the government’s future oil and gas revenues, the government’s direct holdings in Statoil and the GPFG.

The analyses show that oil and gas stocks are significantly more exposed than other sectors to movements in oil prices. In periods of stable oil prices, the returns on oil and gas stocks have largely moved in tandem with the broad equity market.

However, in periods of substantial and prolonged oil price changes, the difference in returns between oil and gas stocks and the broad equity market have been considerable. The return on oil and gas stocks has been significantly lower than in the broad equity market in periods of falling oil prices, Norges Bank explains.

Therefore, Norway’s wealth can be made less vulnerable to a permanent drop in oil prices if the GPFG is not invested in oil and gas stocks, the bank concludes.

Oil and gas equities currently account for around 6% GPFG’s benchmark index.

Norges Bank didn’t mention where the funds should be invested instead. The government early last year decided against investing in renewables infrastructure, as it is seen exposed to high regulatory and political risk.

Transition

Norway's central bank says ditch fossil stocks from $1tn 'oil fund'