Greetings from Paris!

Transcription

1 NOVEMBER 20, 2017 Norwegian SWF Moving Out of Oil and Gas Greetings from Paris! Greetings from Paris where I am ensconced in meetings with a group of global energy investors I advise. These gatherings take place several times a year to compare notes and set in motion some pretty big deals. My task in these sessions is to brief on market developments and provide a sounding board for ideas. On this occasion, the agenda was revised last minute by a decision coming from Oslo that guaranteed energy investment decisions internationally would be reconsidered. In a moment, I ll fill you in on some of the high points in what I will tell these folks as well as the position a good friend of mine is going to have in all of this. But first, a few words about where we meet. The room is now called Le Bar Kléber. Located on the ground floor of The Peninsula, our hotel when Marina and I are in Paris, it may be the most famous watering hole in recent history. Many of us simply refer to it as Kissinger s Bar. Because here 44 years ago Henry Kissinger signed the Paris Peace Accord ending the Vietnam War. It was actually a salon then. But leave it to an American Secretary of State to pick such a location. For those who lived through the period, it has become one of those must see political pilgrimage sites in Paris. Centrally located between the Arche de Triomphe and the Eiffel Tower, Le Bar Kléber is nestled in the city s affluent 16th Arrondissement. Easy to get to for those who want to be seen in the trendy urban district anyway. For our purposes, a sequestered room off the main area serves as a convenient place for our talks. A retained car service shuttles meeting participants to and from Charles de Gaulle Airport, the train stations (especially Paris Nord for the Eurostar chunnel from London s St. Pancras), or paneled offices in the city s financial district.

2 NORWEGIAN SWF MOVING OUT OF OIL AND GAS 2 Dr. Moors in Kissinger s Bar, Paris This time around, my briefings had to be revised while we were in flight from Miami on Saturday. Upon arrival, a German reporter I have worked with was already telephoning for comments on the Oslo announcement. Some in the industry believe it may be a fundamental alteration in energy investment directions. The news is a big deal, and the type of move that major players in the energy sector must weigh. The Norwegian Sovereign Wealth Fund (SWF) has decided to sell all of its investments in oil and natural gas companies.

3 NORWEGIAN SWF MOVING OUT OF OIL AND GAS 3 Norway, Norhow This fund was established in 1996 to invest proceeds from the nation s crude oil and natural gas sales, providing a base for the national pension system as well as a central budget buffer against oil/gas pricing volatility. It is often the model used by countries setting up such funds. And if one considers only the proceeds from energy sales and the returns on investments, it has been for some time the world s largest. In September, the SWF became the first worldwide to total more than $1 trillion in assets. It has almost $670 billion in shareholdings in over 9,000 companies across the globe. Consider it another way. The Norwegian SWF has positions in almost 1.5% of all publicly traded companies on all stock exchanges worldwide. About 6% of the portfolio is invested in the stock of oil and gas companies. Moving this more than $40 billion back into the market may have a short term impact. But the real effect lies somewhere else. Some analysts are concerned the decision telegraphs that a major oil and gas producing nation has concluded sector commodity prices (and thereby the market value of shares in sector companies) are moving down. That s a knee jerk reaction and is at variance to what is genuinely happening. For some time, we have not been dealing with a rising tide lifts all boats. This market demands selected investment moves. Specific company positioning, management, and debt burden are more important factors. Demand continues to rise globally and supply is showing signs of reaching a balance. This is hardly a collapsing picture. Instead, I am advising our meetings that this is the latest example of a diversification trend. In fact, other commodity based sovereign wealth funds have already begun such a process and the Norwegians have been slowly reducing exposure to oil and gas equity for a while now. Other large investment funds are also moving in advance of the huge Saudi Aramco IPO scheduled for about a year from now. That placement will instantly produce the largest fund the world has ever seen. From day one, one of its primary objectives will be to diversify out of dependence on oil proceeds. Much of that will be in public equity and private moves outside of the Saudi economy.

4 NORWEGIAN SWF MOVING OUT OF OIL AND GAS 4 On the Bright Side, At Least No Vikings While there are a number of factors contributing to oil price volatility, it is important to realize that the supply/demand balance is no longer heading up the list. Yes, there is significant excess extractable volume that could be dumped on the market, thereby depressing prices. But operators have been through that cycle and the remaining players are not going to revisit shooting themselves in the foot. As prices incrementally rise, there will be increasing production. So this is hardly going to be an environment in which prices rise very fast. In addition, as Brent moves closer to $70 a barrel, some significant resistance will kick in. This is going to be a market in which price changes are likely to take place within rather narrow ranges in the medium term. This does not prevent some infrequent larger moves, but does provide for a slowly rising pricing floor. And that is the focus of traders setting expected costs of the next available barrels, especially in the current backwardation pricing situation discouraging selling forward contracts to offset the gradually rising trend. Primary volatility moving forward is likely to result from geopolitical causes more so than any genuine market fear of oversupply. And that trajectory is slowly rising. Here, debt default in Venezuela, a new round of hostilities and uncertainty in the Persian Gulf, continuing difficulties in Libya and Nigeria, production constriction in Mexico, and the expanding export outlet for US producers, result in an expanding leverage for overproduction both inside and outside OPEC without depressing the overall price. The fears expressed among analysts for another prolonged collapse in oil prices is either misguided or self serving (usually expressed by those Chicken Littles on TV from The Sky is Falling brokerages attempting to support short positions). Yes, this remains a risk weighted portfolio adjustment. Yet that very risk has resulted in some very nice returns as a result of a selected investment strategy. As such, sell oil and gas equity now? Most are still down from where they were in 2014.

5 NORWEGIAN SWF MOVING OUT OF OIL AND GAS 5 Trolling for Insight Despite the improving oil pricing picture, sector equity has still been underperforming other alternatives. The private side on the other hand (direct investment into a broad range of energy projects) has been accelerating for some time. The Norwegian SWF has had to consider the optimum investment approach to balance a domestic budget and underpin heavy social welfare expenses. This is not a bail out of oil and gas because the Norwegians see a collapse on the horizon. There are also no equivalent significant adds to positions in renewable energies. The SWF move is more a policy preference, not any statement on whether the SWF has decided to seek an immediate return. This is, after all, a very long term investor. Additionally, this is a holding adjustment aimed to maximize return from a boarder range of investments. The move, however, does open some interesting alternative pays for other investment sources. That is, after all, why I am spending so much time on this here in Paris. But is everything I have summarized above (and more I haven t) a correct read of the Norwegian SWF approach? With the divestment plan still needing approval from Norway s finance ministry, the decision is not yet technically final, although it would make no sense for the fund to float this news as a trial balloon, as it would only serve to hurt the value of currently held equities. Moreover, I have been advised that the fund had tacit approval from the Norwegian government prior to the announcement, and the SWF s board has already approved the plan. As such, the decision is pretty much a done deal. I should have even better visibility on the situation shortly. This is where that good friend I mentioned comes in to the picture. We have known each other ever since he was at the International Energy Agency (IEA) here in Paris and I was splitting my life between a college professorship and a serving position as a US intel officer with a rising specialty in global energy matters. He has had a distinguished ambassadorial career and now sits on the Norwegian SWF board. We are having a nice secluded breakfast on Wednesday, during which we ll discuss post divestment diversification implications.

6 NORWEGIAN SWF MOVING OUT OF OIL AND GAS 6 About the Author Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment. He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio and television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network. A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.