The Norwegian government has been advised to shed equity holdings in oil and gas companies from its sovereign wealth fund, the world’s largest.
In a letter to the Ministry of Finance, officials of Norges Bank cited the amplified vulnerability of the government’s wealth to oil-price risk.
Norges Bank Investment Management oversees the foreign-currency portfolio of the Government Pension Fund Global (GPFG), worth about $1 trillion, for the ministry.
About 4% of the GPFG’s holdings are oil and gas stocks, the values of which tend to follow oil prices.
The government’s sensitivity to oil prices also comes from its oil and gas revenue and its 67% interest in Statoil. Values of the Statoil stake and the GPFG’s holdings of oil and gas stocks are about equal.
The letter noted that the present value of the government’s future oil and gas revenue recently was estimated at $480 billion, subject to uncertainties of production rates and costs and of oil prices.
It estimated that a permanent drop in oil prices of $12/bbl would cut that value by more than half while also devaluing oil-company stocks and Statoil.
“We conclude that the vulnerability of government wealth to a permanent drop in oil and gas prices will be reduced if the fund is not invested in oil and gas stocks and advise removing these stocks from the fund’s benchmark index,” Norges Bank officials said. “This advice is based exclusively on financial arguments. It does not reflect any particular view of future movements in oil prices or the profitability or sustainability of the oil and gas sector.”