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April 26, 2015

The future of Norway: the world’s largest oil fund highlights climate change concern

Having used its oil riches to accumulate the world's largest sovereign wealth fund of $860 billion, Norway is in a better position than most countries to deal with turbulent times in the offshore industry. With a recent divestment drive against coal and a concerted campaign to highlight the risks of climate action against offshore operations, we look at what the future holds for Norway's oil industry?

By Adam Leach

Norwegian platform

From becoming the first NATO member and European country to invite women into its armed forces to declining EU membership while maintaining strong economic and political links with it, Norway has a habit of making its way pay. Its approach as an oil producing nation is no different.

In 1990, while the rest of the world was happy to reap the rewards of oil revenues as they came in, Norway made its own, unique play. Mindful of its own and others past mistakes of overspending in good times, only to be hit harder in bad, it established a sovereign wealth fund to take excess oil revenues and invest for the future.

Today, 25 years after the sovereign wealth fund was established, and 19 years after it took its first deposit of NOK46 billion ($5.6 billion), the fund outranks all others of its kind and all pension funds with a worth of NOK7,023 billion ($855 billion).

The success enjoyed over the past quarter of a century stands as testament to the financial management of the fund and the performance of the Norwegian offshore industry. However, far more important, for Norway is how the fund sees the next 25 years, and those beyond.

This could indicate that offshore oil will undergo a significant change. In February 2015, the fund announced it was to divest its holdings in 114 companies on the grounds of environmental concern. Adding its voice to a growing chorus of pension funds and ethically minded investors, the fund rid itself of 32 coal mining companies, tar sands producers and many other fossil fuel companies.

Fund calls on companies to face up to climate realities

"Our risk-based approach means that we exit sectors and areas where we see elevated levels of risk to our investments in the long term," said Marthe Skaar, a spokeswoman for the fund. "Companies with particularly high greenhouse gas emissions may be exposed to risk from regulatory or other changes leading to a fall in demand."

A number of companies have backed away from plans to explore for oil in the Arctic.

With regard to coal, the move to divest its holdings delivers on both the financial and political front, exiting a volatile and unpredictable market and appeasing the powerful and vocal faction of voters in Norway that are calling for action to mitigate climate change. But for offshore oil and gas, the issue is far more complex.

With the fund relying on offshore revenues for income, it simply cannot remove itself from the sector, even if it were to divest its holdings. Therefore, the fund is instead taking an approach of proactive engagement in order to steer the industry to a firmer financial footing. In March 2015, the fund announced that it would be calling on companies to test their business strategy against a 2°C world, where global emissions are cut down sufficiently to avoid dangerous climate change.

The request adds weight to calls from environmentalists and policymakers that more than four fifths of the world’s fossil fuel reserves must be left in the ground if climate change mitigation is to succeed. In particular, high risk oil and gas assets, such as those in the Arctic and the Canadian Tar Sands are highlighted as holding huge financial risk, with the ability to break even requiring a global oil price of up to $100 per barrel.

Commenting on the announcement by the fund, Arild Skedsmo, conservation director at WWF-Norway, said: "This is a strong signal of a changing world, facing up to the reality on climate change. This means coal, oil and gas companies in which it invests are being asked to consider just how robust their business model is in a world managing to tackle the worst impacts of climate change.

"So far, most oil companies have dismissed this as unrealistic and placed their bets against global action on climate change."

Statoil faces up to climate change threat

Courtesy of its size and influence, the move by the fund to call on companies to face up is likely to impact across the global offshore oil industry. However, with its influence and focus concentrated on Norwegian operator Statoil, it is there that its impact will be most pronounced.

"This is a strong signal of a changing world, facing up to the reality of climate change."

While the recent announcement from the fund suggests a firming up of its position on testing business plans against climate change action, Statoil has already implemented a number of actions that suggest it is taking a leading role in making the sector more amenable to modern demands. In September 2014, the firm announced the shelving of an oil sands project in Alberta, Canada over cost concerns. Earlier in March of this year, it announced that it has delayed its Johan Castberg oil project in the Arctic Circle until at least next year and admitted that it may be cancelled altogether.

More broadly, the company’s decision to appoint Eldar Sætre, who previously headed up its renewable energy division, as CEO and president suggests that it is positioning itself to comply with the outlook of its majority shareholder. Speaking as CEO for the first time, Sætre stressed the importance of both tight financial management and sustainability to the future of the company.

Outlining his vision of the future, he said: "Statoil´s strategy is future oriented and well anchored. Three areas stand out to me as of particular importance. On the Norwegian continental shelf we will strengthen and extend our position.

"Internationally we will invest where we can create material and profitable positions. We will also strengthen our efforts in the transition to a low carbon society. Competitiveness and sustainability is of critical importance, either in oil and gas production or future projects in renewable energy."

That Sætre voiced his support for moving towards a low carbon society and even highlight the prospect of further renewable energy projects – Statoil is increasing its activity in offshore wind power – complements the position of the fund. But in order to bring significant change, Bevis Longsteth, a former head of the Security and Exchange Commission and a legal expert, suggested that the fund will motivate Statoil to take three fundamental steps.

First, he called for it to publicly accept the science of climate change including the predicted damages if it is not avoided. Secondly, he called for it to cease capital spending in search of more fossil fuels within a ‘reasonable’ timeframe and third, that it use its position to lobby for a removal of fossil fuel subsidies, to raise the carbon tax, and to call for legislation to reduce carbon emissions. profiles 10 of the biggest oil fields based on the latest estimates.

According to Longsteth, carrying out such action would enable Statoil to "become the measure against which all other fossil fuel companies would be tested for inclusion or exclusion from portfolios everywhere."

Whether or not the day is near when Statoil, motivated by the fund, calls for an end to the subsidies that it benefits from directly is heavily in doubt. However, Norway may not be best placed to be that voice when that day arrives.

According to Bjorn Vidar Loeren of the Norwegian Oil and Gas Association, the very foundation of the fund was motivated to give it such freedom. "Norwegian politicians have been very clever, very disciplined, so the day the oil age ends there will be money that can be converted into something else."

Through sound judgement, foresight and a willingness to break with convention, Norway has turned its oil reserves into an investment vehicle that dwarfs all others of its kind. It knew that the profits of today must be made to pay for tomorrow. Now, from divesting from coal to steering Statoil towards a more climate change aware operator, Norway may well, once again, be making a smart play for the future.

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