In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
Headline crude prices for the week beginning 18 March 2019 – Brent: US$67/b; WTI: US$58/b
Headlines of the week
Midstream & Downstream
Risk and reward – improving recovery rates versus exploration
A giant oil supply gap looms. If, as we expect, oil demand peaks at 110 million b/d in 2036, the inexorable decline of fields in production or under development today creates a yawning gap of 50 million b/d by the end of that decade.
How to fill it? It’s the preoccupation of the E&P sector. Harry Paton, Senior Analyst, Global Oil Supply, identifies the contribution from each of the traditional four sources.
1. Reserve growth
An additional 12 million b/d, or 24%, will come from fields already in production or under development. These additional reserves are typically the lowest risk and among the lowest cost, readily tied-in to export infrastructure already in place. Around 90% of these future volumes break even below US$60 per barrel.
2. pre-drill tight oil inventory and conventional pre-FID projects
They will bring another 12 million b/d to the party. That’s up on last year by 1.5 million b/d, reflecting the industry’s success in beefing up the hopper. Nearly all the increase is from the Permian Basin. Tight oil plays in North America now account for over two-thirds of the pre-FID cost curve, though extraction costs increase over time. Conventional oil plays are a smaller part of the pre-FID wedge at 4 million b/d. Brazil deep water is amongst the lowest cost resource anywhere, with breakevens eclipsing the best tight oil plays. Certain mature areas like the North Sea have succeeded in getting lower down the cost curve although volumes are small. Guyana, an emerging low-cost producer, shows how new conventional basins can change the curve.
3. Contingent resource
These existing discoveries could deliver 11 million b/d, or 22%, of future supply. This cohort forms the next generation of pre-FID developments, but each must overcome challenges to achieve commerciality.
Last, but not least, yet-to-find. We calculate new discoveries bring in 16 million b/d, the biggest share and almost one-third of future supply. The number is based on empirical analysis of past discovery rates, future assumptions for exploration spend and prospectivity.
Can yet-to-find deliver this much oil at reasonable cost? It looks more realistic today than in the recent past. Liquids reserves discovered that are potentially commercial was around 5 billion barrels in 2017 and again in 2018, close to the late 2030s ‘ask’. Moreover, exploration is creating value again, and we have argued consistently that more companies should be doing it.
But at the same time, it’s the high-risk option, and usually last in the merit order – exploration is the final top-up to meet demand. There’s a danger that new discoveries – higher cost ones at least – are squeezed out if demand’s not there or new, lower-cost supplies emerge. Tight oil’s rapid growth has disrupted the commercialisation of conventional discoveries this decade and is re-shaping future resource capture strategies.
To sustain portfolios, many companies have shifted away from exclusively relying on exploration to emphasising lower risk opportunities. These mostly revolve around commercialising existing reserves on the books, whether improving recovery rates from fields currently in production (reserves growth) or undeveloped discoveries (contingent resource).
Emerging technology may pose a greater threat to exploration in the future. Evolving technology has always played a central role in boosting expected reserves from known fields. What’s different in 2019 is that the industry is on the cusp of what might be a technological revolution. Advanced seismic imaging, data analytics, machine learning and artificial intelligence, the cloud and supercomputing will shine a light into sub-surface’s dark corners.
Combining these and other new applications to enhance recovery beyond tried-and-tested means could unlock more reserves from existing discoveries – and more quickly than we assume. Equinor is now aspiring to 60% from its operated fields in Norway. Volume-wise, most upside may be in the giant, older, onshore accumulations with low recovery factors (think ExxonMobil and Chevron’s latest Permian upgrades). In contrast, 21st century deepwater projects tend to start with high recovery factors.
If global recovery rates could be increased by a percentage or two from the average of around 30%, reserves growth might contribute another 5 to 6 million b/d in the 2030s. It’s just a scenario, and perhaps makes sweeping assumptions. But it’s one that should keep conventional explorers disciplined and focused only on the best new prospects.
Global oil supply through 2040
Things just keep getting more dire for Venezuela’s PDVSA – once a crown jewel among state energy firms, and now buried under debt and a government in crisis. With new American sanctions weighing down on its operations, PDVSA is buckling. For now, with the support of Russia, China and India, Venezuelan crude keeps flowing. But a ghost from the past has now come back to haunt it.
In 2007, Venezuela embarked on a resource nationalisation programme under then-President Hugo Chavez. It was the largest example of an oil nationalisation drive since Iraq in 1972 or when the government of Saudi Arabia bought out its American partners in ARAMCO back in 1980. The edict then was to have all foreign firms restructure their holdings in Venezuela to favour PDVSA with a majority. Total, Chevron, Statoil (now Equinor) and BP agreed; ExxonMobil and ConocoPhillips refused. Compensation was paid to ExxonMobil and ConocoPhillips, which was considered paltry. So the two American firms took PDVSA to international arbitration, seeking what they considered ‘just value’ for their erstwhile assets. In 2012, ExxonMobil was awarded some US$260 million in two arbitration awards. The dispute with ConocoPhillips took far longer.
In April 2018, the International Chamber of Commerce ruled in favour of ConocoPhillips, granting US$2.1 billion in recovery payments. Hemming and hawing on PDVSA’s part forced ConocoPhillips’ hand, and it began to seize control of terminals and cargo ships in the Caribbean operated by PDVSA or its American subsidiary Citgo. A tense standoff – where PDVSA’s carriers were ordered to return to national waters immediately – was resolved when PDVSA reached a payment agreement in August. As part of the deal, ConocoPhillips agreed to suspend any future disputes over the matter with PDVSA.
The key word being ‘future’. ConocoPhillips has an existing contractual arbitration – also at the ICC – relating to the separate Corocoro project. That decision is also expected to go towards the American firm. But more troubling is that a third dispute has just been settled by the International Centre for Settlement of Investment Disputes tribunal in favour of ConocoPhillips. This action was brought against the government of Venezuela for initiating the nationalisation process, and the ‘unlawful expropriation’ would require a US$8.7 billion payment. Though the action was brought against the government, its coffers are almost entirely stocked by sales of PDVSA crude, essentially placing further burden on an already beleaguered company. A similar action brought about by ExxonMobil resulted in a US$1.4 billion payout; however, that was overturned at the World Bank in 2017.
But it might not end there. The danger (at least on PDVSA’s part) is that these decisions will open up floodgates for any creditors seeking damages against Venezuela. And there are quite a few, including several smaller oil firms and players such as gold miner Crystallex, who is owed US$1.2 billion after the gold industry was nationalised in 2011. If the situation snowballs, there is a very tempting target for creditors to seize – Citgo, PDVSA’s crown jewel that operates downstream in the USA, which remains profitable. And that would be an even bigger disaster for PDVSA, even by current standards.
Infographic: Venezuela oil nationalisation dispute timeline