What’s the future for oil and gas? Norway has some ideas

A devastating hurricane caused by climate change wrecks havoc on Norway, leading to the rise of the Norwegian Green Party. Led by an idealistic Prime Minister, who has big plans for thorium-based nuclear power, the new green government cuts off all its North Sea oil supplies to Europe.

In panic, the European Union asks Russia to step in and help. Within days, Russian commandos kidnap the prime minister, fly the Russian flag over Oslo, and threaten a full-scale invasion unless the PM turns on the oil tap again.

The United States, having recently achieved energy independence, has withdrawn from NATO and looks on with dispassion as an isolated Norway fights off EU backed Russian aggression.

Don’t worry, you haven’t missed the latest news bulletin. The scary scenario set out above is from the fictional Norwegian TV political thriller, Occupied, based on an original idea from the country’s best-selling crime writer, Jo Nesbo. As you can imagine, Occupied, which became an instant hit when it was first aired two years ago, also came in for some pretty savage criticism for reviving cold war fears and pitting Scandinavians against Russians.

The poignancy of this brilliant thriller came to mind immediately after hearing last week of the dramatic decision by Norway’s gigantic sovereign wealth fund to dump its entire $37bn portfolio of oil and gas stocks.
Of course, the decision is not on a par with Norway cutting off oil supplies Europe. Not quite. But the news came close, sending cold shivers down the spine of the world’s big oil and gas producers, and setting alarm bells ringing over the fragility of long-term future of fossil fuel production.

No surprise then that Europe’s index of oil and gas shares fell to its lowest level since mid-October upon hearing the news. The Norwegian fund owns 2.3% of Shell and 2% of BP and owns shares in another 370 other oil and gas companies.

The oil giant bosses, already facing the double whammy of lower crude prices and the rapid growth of alternative energy sources, will not have enjoyed the move. By contrast, green campaigners were ecstatic; for them, this is a huge victory. As one campaigner said this “is as astonishing as the moment when the Rockefellers divested the world’s oldest oil fortune.”

The Norwegians, though, are playing this straight, careful to stay neutral above oil politicking. The $1bn fund – known as Norway’s Government Pension Fund Global or Oil Fund for short – made it clear that the planned switch out of fossil fuels is not based on any future view of the industry. Or indeed, ecological concerns about climate change.

In a letter to the Norwegian ministry of finance, the Norges Bank Investment Management, which runs the Oil Fund said: “The analyses show that oil and gas stocks are significantly more exposed than other sectors to movements in oil prices … 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.”

So what does Norway’s dramatic move signify? As the fund explains, it wants to make itself less exposed to any permanent drop in the price of crude oil. Ironically, the Norway earns its wealth from the profits made by its country’s oil and gas producers, mainly the government’s majority stake in Statoil, one of the world’s biggest oil and gas producer.

While Norway is still the Europe’s biggest oil and gas producer, pumping out around 1.8m barrels per day, the Norwegians are concerned that oil production may have reached peak, and that, in time, its own wealth will start declining.

So this is about self-preservation. Having made such a big move, the Oil Fund’s next step is to get the go-ahead from the Norwegian government and Storting, the parliament, before selling off these shares that represent 6% of its overall portfolio. Once it does, the plans are to auction the share stakes next year to avoid saturating the market.

It’s unlikely that Norges Bank would have gone this far without the blessing of the government. Yet insiders say it’s not entirely clear whether Norway’s Conservative-Progress coalition will give its support, as it is nervous about the impact and the geo-politics. However, the country’s two main opposition parties – the Christian Democrats and the Liberals – applauded the decision, as did the country’s one Green MP.

Norway may have the one Green MP but, as the fictional Occupied suggests, the mood of the nation’s 5.2m population is as green as the country’s Nordmann pine trees. On just about every front, Norway is one of the world’s pace-setters in alternative energy sources: its scientists lead on research into thorium-based nuclear power (as the thriller points out) which is considered by many to be a much safer option to uranium-based fuel, and has some of the most advanced geo-thermal technologies on the planet.

None of this is new. Norway has been going clean since the 1990s with moves to cut pollution and traffic congestion. The government was the first in the world recently to set a 2025 deadline on getting rid of petrol guzzling cars and now has the highest per capita number of all-electric battery only cars The deadline is working, helped by tax carrots. As I saw on a recent trip to Oslo, politicians are deadly serious about the switch to cleaner energy: free charging stations are all over the place from museums to shopping centres and the roads are crowded with snazzy Tesla cars. Earlier this year, the world’s biggest charging station – which can take up to 28 cars in half an hour – opened while EVs are given priority on certain roads. They now make up 40% of the nation’s cars: that’s about 100,000 electric cars, more than anywhere else in the world.

Bully for them, you might say. They have the money to do subsidise and experiment – money that comes from oil. It’s true – Norway can fund these new projects and give away tax carrots precisely because of the fortune earned over for years from its huge oil wealth. Yet the blue-eyed Arabs of the North, as they were called famously, after oil was discovered in 1969 in the North Sea, are also famously smart. Not only did the government set up the Oil Fund to protect the wealth, it also set strict limits on how much the government can draw down from the fund each year – 3% of the fund’s value is permitted for public spending.

With their typically Norwegian combination of puritanism and forward-thinking, politicians set out to protect the country’s economy from overheating, to protect the fund for future generations but also to make sure that people continued working with purpose rather than spend themselves silly. Their wealth does not sit easily with them, and there are constant demands that more of the oil revenues should be spent today.
But for now they want to protect what they have but also look forward. There’s an old saying in the north, which is that what Norway does today, the rest of the world does tomorrow. Time to dump those oil shares ? No. This is not selling oil short: this is Norway hedging its bets. And watch Occupied – available on Netflix.