Norges Bank Calls for Gas, Oil Stock Removal from GPFG Benchmark

Switch will decrease government’s exposure to shock vulnerability, bank says.

In a move that Norges Bank ($1 trillion) feels will decrease the vulnerability of the Norwegian government’s wealth to permanent gas and oil price declines, the world’s largest sovereign wealth fund recommended the removal of oil and gas stocks from the Government Pension Fund Global’s (GPFG) benchmark index in a Thursday letter to the Ministry of Finance.

“The Bank’s advice has largely been based on how changes in the investment strategy can be expected to affect return and risk for the fund in isolation. The fund now accounts for a much larger share of the government’s wealth than before, and is an integral part of fiscal policy via the fiscal rule,” the letter said. “For that reason, in the strategy plan for Norges Bank Investment Management 2017-2019, the Executive Board states that in the period ahead, it will adopt a broader wealth perspective when advising the ministry.”

According to the bank’s analysis, GPFG investments and its stake in Statoil result in a total exposure to gas and oil equities twice as large as it would be for a broad global equity index. The letter reveals that, based on estimates from a whitepaper titled “Long-term Perspectives on the Norwegian Economy 2017,” the current value of future government oil and gas revenue is roughly “4,000 billion kroner” ($4.8 trillion) The ministry’s calculations state that “a permanent drop in oil prices of 100 kroner per barrel would more than halve the present value of future oil and gas revenue,” a huge blow to the Norwegian economy.

While oil and gas prices generally rise and fall with the broad equity market—usually during periods of stability— the bank indicated there have been periods where oil and gas prices move contrary to the broad market as well. In addition, oil prices also impact returns in other equity sectors.

To decrease the government’s vulnerability to oil and gas shocks, the bank proposed the fund remove oil and gas companies that are classified as such by the FTSE equity benchmark index from the GPFG’s benchmark index.

“It is the bank’s assessment that the government’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 letter said. “If the relationship between long-term returns in the broad equity market and oil and gas stocks persists, neither the expected return nor the market risk in the fund will be affected appreciably by whether or not the fund is invested in oil and gas stocks.”

Oil and gas equities currently account for roughly 6% of the GPFG’s benchmark index at just over NOK 300 billion ($36 billion).

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