Why Norway fund’s divestment from the oilsands could trigger a bigger fund exodus


CALGARY — The world’s largest sovereign wealth fund has divested from four Canadian oilsands companies over concerns about carbon emissions, adding to the woes of the already embattled domestic energy sector.

Shares in Suncor Energy Inc., Canadian Natural Resources Ltd., Imperial Oil Ltd. and Cenovus Energy Inc. all tumbled between 5 per cent and 7 per cent Wednesday after Norges Bank Investment Management, the country’s $1 trillion oil fund, said it would exclude those companies from its portfolio, citing their “unacceptable greenhouse gas emissions.”

The fund reportedly held stock worth $1.15 billion in the Canadian companies at the end of 2019.

The decision is ‘poorly informed and highly hypocritical’

Alberta Energy Minister Sonya Savage

NBIM, which is a unit of the central bank, said it had taken a long time to sell shares of several of the blacklisted companies in a reasonable manner due to the “market situation, including liquidity in individual shares.”

It always sells its holdings before any exclusions are announced, to avoid excessive market movements.

In addition to those four oilsands companies, the fund also dropped Swiss-based Glencore Plc., U.K.-based Anglo American Plc, Germany’s RWE AG, South African petrochemicals firm Sasol and Dutch company AGL Energy. Egypt’s ElSewedy Electric Co., and Brazilian companies Vale SA and Electrobras were also excluded for causing environmental damage.

However, the Canadian oil industry believes the exclusion did not account for the industry’s efforts to reduce emissions in recent years.

“Pulling investments from the oilsands and claiming it’s for climate change reasons is more about publicity than fact,” Cenovus president and CEO Alex Pourbaix said in an emailed statement, adding that the company has cut its emissions intensity by 30 per cent in the past 15 years and plans to cut it by another 30 per cent over the next 10 years.

“Our company is committed to finding solutions to the global challenge of climate change while continuing to be a significant contributor to the Canadian economy through taxes, employment and buying goods and services from businesses across this country,” Pourbaix said.

Oilsands companies have been under unrelenting pressure in recent years to reduce greenhouse gas emissions and improve their environmental performance after a string of European banks such as BNP Paribas, ING and HSBC Plc have also pared back on lending to the industry.

A number of European oil companies such as Royal Dutch Shell Plc have reduced their investments in the oilsands to cut their carbon footprint and pivot toward less intensive forms of energy such as natural gas.

Now, the exit from the sector by the world’s largest sovereign wealth fund with assets, built up through oil revenues from Norway’s offshore oil reserves, further exacerbates that pressure.

Canada’s federal government added to the industry’s woes Wednesday, noting that fossil fuel companies must be more transparent in their approach.

“We’ve seen investors around the world looking at the risks associated with climate change as an integral part of investment decisions they make,” Prime Minister Justin Trudeau said Wednesday, adding that many companies in the energy sector understood the investment climate is shifting.

“There is a need for clear leadership and clear targets to reach on fighting climate change to draw on global capital,” he said.

On Monday, Ottawa rolled out a bridge financing plan for companies with at least $300 million in revenues, which is expected to aid aviation and energy sector.

Companies that ask for the help will also have to show how they are contributing to reducing greenhouse gas emissions over the coming years, tying the cash to the Liberals’ promises on the environment. That will include oil and gas companies that are also facing a hit from a global drop in oil prices.

Suncor, Canadian and Imperial did not respond to a request for comment before deadline.

NBIM is now the highest profile fund to exit the oilsands after a number of university endowment funds divested over the past few years. Japan’s Mistubishi UFJ Financial Group joined a long list of European banks to signal they would reduce transactions in the industry on Wednesday.

Shares in all four companies fell sharply Wednesday morning, but analysts say their tumble was roughly on pace with the broader decline in oil and gas stocks.

“They’re underperforming the market but they’re not underperforming energy,” Eight Capital analyst Phil Skolnick said, adding that “energy is having a really bad day.”

Skolnick said most of the market expected the Norwegian fund to divest from Canadian Natural and Cenovus as it had already signalled it would move away from exploration and production companies in the oilsands, but he said there was a chance that Suncor and Imperial would be spared the exclusion because of their integration with refineries.

It’s becoming increasingly difficult for large fund managers to buy into the Canadian oil and gas industry because large funds try to buy large-cap indexed players and the market capitalization of the domestic oilpatch has shrunk, Brompton Funds senior vice-president and chief investments officer Laura Lau said.

“Part of the problem is there’s no market cap left to buy,” Toronto-based Lau said, noting that companies such as Husky Energy Inc. were now part of the small cap indices.

Lau said Canadian oil and gas companies need to do a better job communicating their efforts to reduce their emissions to prevent the continued exodus of large funds from the sector.

“I think they have to do a better job of communicating. I think they actually have done a good job of bringing (emissions) down but it’s the communication they need to improve,” Lau said.

Norway’s sovereign wealth fund was built up over decades using the proceeds of oil revenues and the country’s state-controlled oil producer, Equinor SA, is planning to ramp up its drilling program this year. As a result, the decision is “poorly informed and highly hypocritical,” Alberta Energy Minister Sonya Savage said in an emailed statement Wednesday.

“As Norway, the 15th largest oil producer in the world, is set to drill more oil wells than ever before, one could only imagine Norges Bank’s decision to be more focused on commercial competitiveness rather than environmental consideration as the world looks for reliable source of oil to fuel the coming decades,” Savage said.

The Norwegian government owns 67 per cent of the shares in Equinor, which is also a joint-venture partner with Suncor in drilling projects in the North Sea and offshore Newfoundland and Labrador.

Equinor spokesperson Erik Haaland said in an email there is “no connection between Norges Bank Investment Management and Equinor” and the two operate independently.

“The decision does not impact Equinor’s relationship with Suncor,” Haaland said.

Earlier this month, Equinor, suspended its forecast but maintained its long-term forecast for average output growth of 3 per cent per year from 2019-2026.

With files from The Canadian Press and Reuters

• Email: [email protected] | Twitter: geoffreymorgan


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