Exchange traded funds that tracks Norway, western Europe’s largest oil producer, have been strengthening on the improved outlook following the Ukraine and Russia standoff, but the Norwegian energy sector is coming up against its own political risks.
The Global X Norway 30 ETF (NYSEArca: NORW) and iShares MSCI Norway Cppd Investable Mkt (BATS: ENOR) both declined 1.7% over the past week. Year-to-date, NORW has gained 5.3% and ENOR increased 8.0%.
Last week, the opposition bloc defied the minority Norwegian government and forced Statoil ASA, along with other producers, to power North Sea developments from land, increasing costs and delaying projects, reports Mikael Holter for Bloomberg.
“The result will be a more difficult investment climate on the continental shelf,” Thore Johnsen, a professor of economics at the Norwegian School of Economics in Bergen, said in the article.
The unexpected change comes after last year’s surprise tax increase on oil.
“Twice in a year, the framework for how oil companies operate has been changed,” Erling Kvadsheim, head of licensing policy at the Norwegian Oil and Gas Association, said in the article. “This can make projects less profitable, because you have to include political risk in your calculations, and makes marginal projects less attractive.” [Norway ETF Lags Nordic Rivals]
The parliamentary action requires companies to provide an electrification system for the fields surrounding the North Sea oil deposit and was intended to bolster efforts to cut greenhouse gas emissions.
The initiative “implies increased political risk” for oil producers, analyst Andre Baustad Benonisen, of Danske Bank Markets, said in the article. “It should lead investors to increase their return requirements when they consider investing in the Norwegian oil industry. A central impact of this is a lower activity level.”
Statoil calculates that the government’s move last week could translate to a current value loss of 20 billion kroner, or $3.4 billion, along with thousands of jobs, if it delays development of the Johan Sverdrup deposit.
Statoil is the largest component holding of the Norway country-specific ETFs, accounting for 20.4% of NORW and 19.8% of ENOR. The energy sector also plays a large role in the market, with energy stocks making up 44.9% of NORW and 43.3% of ENOR.
Global X Norway 30 ETF
For more information on Norway, visit our Norway category.