Norway fund's green shift may unsettle Reliance, ONGC, Indian Oil, Oil India

The decision of Norway’s Government Pension Fund Global (GPFG) comes against the backdrop of uncertainty in global oil markets and concerns about climate change that have led several countries to harden their focus on renewable energy.

GPFG, which earlier stopped investing in coal projects, has made 253 investments in Indian equities so far totalling $7.39 billion. Of this, it has invested a total of $658 million in RIL ($485.19 million), ONGC ($108.74 million), Indian Oil ($61.6 million) and Oil India ($2.03 million).

GPFG owns stakes of less than 1% in each of the four companies.

“The government is proposing to exclude companies classified as exploration and production (E&P) companies within the energy sector from the Government Pension Fund Global to reduce the aggregate oil price risk in the Norwegian economy," the Norwegian government said in a statement on Friday.

It said those classified as E&P companies by the index provider FTSE Russell as belonging to its so-called subsector “0533 Exploration & Production" in the sector “0001 Oil & Gas" “will be excluded from the GPFG’s benchmark index and investment universe".

“The proposal will serve to reduce the aggregate concentration risk associated with this type of activities in the Norwegian economy," it said, adding that investments in “exploration and production companies will be phased out from the Fund gradually over time."

International crude oil prices have been impacted by factors such as the moves made by the Organization of the Petroleum Exporting Countries (Opec) and Russia to cut supplies. Also, the US has imposed sanctions on state-run oil firm Petr leos de Venezuela SA, and President Donald Trump has pulled the US out of a 2015 pact with energy-rich Iran that was signed to curb the Islamic Republic’s nuclear programme in return for ending sanctions.

To be sure, GPFG will remain invested in integrated global oil majors, while Indian E&P companies do not foresee a major impact on their market value given the marginal holdings of GPFG.

“We observe from our shareholders data that the shares held by GPFG are a small percentage of the total equity capital of Indian Oil (currently 0.19% of the paid-up share capital) and hence it is believed that the sale of GPFG’s shareholding may not have any significant impact on the market price of Indian Oil shares," an Indian Oil spokesperson said in an emailed response to queries.

“The shares held by GPFG are free-float shares and we observe that shares are being traded by the investor from time to time."

Queries emailed to RIL, ONGC and Oil India on Monday remained unanswered.

Experts say multilateral and bilateral agencies as well as sovereign wealth funds have been ceasing investments in businesses that contribute to climate change.

“The decision by such investors to disinvest from listed companies would not impact the operating companies immediately. If the trend continues, in the mid and long term, E&P companies would increasingly find sharing risk difficult. That sets the alarms ringing," said Deepak Mahurkar, partner and leader (India oil and gas industry practice) at PwC.

Research organizations have favoured GPFG’s step.

“This decision is likely to stimulate greater debate in the investment community about the viability of fossil fuel stocks. It should also encourage investors to direct fund managers to produce portfolios with less fossil fuel exposure," said Tom Sanzillo, director of finance at Institute for Energy Economics and Financial Analysis, in an emailed statement.

This comes at a time when India and Norway may join hands in areas such as energy after Prime Minister Narendra Modi attended the India-Nordic Council Summit last year. Norway’s Equinor ASA (earlier Statoil ASA) might enter India’s upstream hydrocarbon space in partnership with ONGC for deep-water exploration, Mint reported on 18 April 2018.

“The objective is to reduce the vulnerability of our common wealth to a permanent oil price decline. Hence, it is more accurate to sell companies, which explore and produce oil and gas, rather than selling a broadly diversified energy sector," Norway finance minister Siv Jensen said in the statement.

“This assessment does not reflect any specific view on the oil price, future profitability or sustainability of the petroleum sector. This assessment is thus independent of the government’s current petroleum policy, which remains unchanged," according to the statement.