Norway’s $1 trillion oil fund should sell out of upstream oil and gas producers, according to a recommendation from the country’s government that has sent shockwaves through the energy sector.

However, the world’s largest sovereign wealth fund has given a reprieve to the global oil majors, with the decision to focus divestments on companies that solely explore and produce oil and gas rather than large integrated groups such as BP Plc (NYSE: BP) and Exxon Mobil Corp. (NYSE: XOM).

Norway’s oil fund owns about $37 billion in oil and gas shares, raising fears in Oslo over the impact of a sustained fall in energy prices to the Norwegian economy.

Norway is already western Europe’s largest producer of petroleum, which has become the cornerstone of the country’s vast sovereign wealth fund.

“The goal is to make our collective wealth less vulnerable to a lasting fall in oil prices,” said Siv Jensen, Norway’s finance minister.

The oil fund owns about NKr 70 billion (US$7.9 billion) of shares in dedicated producers, with a much larger NKr 323 billion shareholding in the large integrated energy majors that cover all aspects of the business from discovering and producing to refining and distributing.
Share prices in oil companies fell following the announcement early March 8 in Oslo, with U.K.-based Tullow Oil Plc down almost 3%.

“Upstream companies are the ones that give us our income on the Norwegian shelf,” Jensen said.

Asked about why the fund should stay invested in integrated companies that represent the lion’s share of exploration and production in the petroleum industry, Jensen said that such groups were “in all likelihood” the ones that would make the main investments in renewable energy in the future.

The move is likely to be seized upon by environmentalists as an example for other big global investors.

The Norwegian oil fund, which is already barred from investing in large coal producers or consumers, initially sparked the debate, jolting markets, when it recommended 18 months ago that it divest from oil and gas for purely financial reasons rather than environmental ones. It argued that Norway could reduce its sensitivity to the oil price without hurting returns.

Norway is facing growing questions about its own oil industry, the largest in western Europe and the source of wealth for the oil fund as well as the main contributor to its rise to one of the richest countries in the world.

Oil companies have pushed for decades for new acreage around the picturesque Lofoten Islands in the Arctic Circle to be opened up but it looks increasingly likely that political parties will reject this. Some politicians have also begun to query Norway’s generous tax regime to oil explorers.

Jensen insisted that the decision had no impact on Norway’s policy on oil or its economy and did not reflect any view on future prices or sustainability of the industry.

“The oil business will be a major and important industry in Norway for many years to come. The government’s income from the [continental] shelf basically follows the profitability of upstream companies. Therefore this is about spreading the risk,” she added.

Oil and gas shares accounted for 5.9% of the oil fund’s $623 billion equities portfolio at the end of 2018 with it owning stakes of more than 2% each in BP, Royal Dutch Shell Plc (NYSE: RDS.A) and Total SA (NYSE: TOT) and about 1% each in Exxon Mobil and Chevron Corp. (NYSE: CVX).

A government-appointed commission recommended that the fund keep its oil and gas stocks, arguing that divestment was not an effective insurance against a permanent decline in petroleum prices.

Norway has faced cries of hypocrisy over its attempts to balance being one of the world’s largest petroleum producers and an environmentally engaged country, pushing the likes of Indonesia and Brazil to protect their rainforests and becoming the leading nation for electric cars.

The fund appears to be allowed to still invest in oil and gas companies if they have activities in renewable energy. “Everything indicates that almost the entire growth in listed infrastructure for renewable energy over the next 10 years will be driven by companies that do not have renewable energy as their main activity. It is a growth the fund should be able to take part in,” Jensen said.

The government’s recommendation is not the final word as Norway’s parliament still has to approve the move later this spring.