How energy funds are used to diversify economies

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The success of Norway’s sovereign wealth fund has encouraged other oil-rich countries to follow in its footsteps by developing their own national funds from energy revenues. Middle Eastern countries have already accumulated vast amounts of wealth from their funds, now using them to diversify their economies into industries beyond oil and gas, to ensure the longevity of their wealth. And countries in new oil regions, such as Africa and the Caribbean, are now seeking to do the same to develop their national economies. Norway’s sovereign wealth fund was established in 1996 to contribute to the national economy, providing fiscal security in the event of a drop in oil prices. It has since helped the government develop a social welfare system, providing quality free education and healthcare, and enabled Norway to invest heavily in many countries, businesses and industries. It has long been hailed as the most successful in the world, valued at nearly $1.4 trillion in 2021.

When the Middle East established itself as a major oil and gas region, several countries decided to create their own funds, to ensure that oil revenues were reinjected into the national economy.

Saudi Arabia is one of the ancestors of the wealth fund, establishing its Public Investment Fund (PIF) in 1971, now valued at $620 billion. Recently, Saudi Crown Prince Mohammed bin Salman decided to transfer 4% of the shares of state oil and gas company Aramco to the fund. This approach supports the restructuring of the national economy, adding about $80 billion at the bottom.

Saudi Arabia is now using its PIF to finance several renewable energy projects, with the aim of diversifying its energy mix and continuing to enrich itself with energy projects during the energy transition. Salman hopes the fund will reach $1 trillion in assets by the end of 2025

The UAE’s $1.4 trillion wealth funds, combined across the various emirates, are now being used as part of the government’s strategy to diversify your economy as the world begins to shift from fossil fuels to renewable alternatives. Having developed its economy on the back of oil and gas, much like Saudi Arabia, the UAE sees this diversification as necessary to secure the future of the national economy.

The new oil regions, which are increasingly attracting the attention of oil companies wishing to develop their low-carbon activities, are now seeking to build up their funds. In Guyana, the government established the Natural Resource Fund (NRF), under the Natural Resource Fund Act 2019, to manage natural resource assets of the country for the present and future benefit of the population and for the sustainable development of the country.

As Guyana rapidly develops its oil industry, experiencing high levels of foreign investment, the World Bank expects economic growth of 49.7% in 2022. The country’s GDP has grown from $4.06 billion in 2012 to $5.47 billion in 2020demonstrating the possibility for Guyana to further develop its economy through a wealth fund.

Similar actions are carried out in the new African oil states. In Senegal, the government hopes to see crude produced from its first oil project by 2023. Operations in the Sangomar field began in 2020 and development is expected to produce 231 million barrels of crude oil. Like Guyana, Senegal has set up a sovereign wealth fund, allocating a minimum of 10% of revenues from the oil and gas sector to the fund. Senegal expects oil production to boost its economy by around 10% in 2023. It will initially use the fund to strengthen the local market.

Ghana, which has strongly influenced the management of Guyana’s oil wealth, set up a Public Interest and Accountability Committee in 2011 to encourage greater transparency in the management of its oil revenues. the Ghana Petroleum Fund (GPWF) aims to provide a permanent income to the country, with the funds being invested in different sectors and used for support the national budget once the oil reserves are exhausted.

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Although geopolitical changes now demonstrate the weaknesses of sovereign wealth funds. Norway invests all of its fund assets in foreign stocks, bonds, real estate and renewable energy projects, which means that geopolitical changes have a significant impact on the country’s wealth. Nicolai Tangen, CEO of the national fund, expects to see a reversal in globalization following the recent Russian invasion of Ukraine and the ensuing conflict, which could see greater friction between world powers.

While the Norwegian wealth fund is strong enough to ride out this turbulence, it reveals the vulnerabilities of diversifying investments in several countries around the world. Norway has decided to freeze and divest its Russian assets, around $2.85 billion at the end of 2021. Although that hasn’t happened yet. This shows that other countries with smaller funds need to consider global market volatility when setting up new investments, to ensure the future stability of their economies.

Several oil-rich countries around the world are using their crude revenues wisely by creating national funds to invest in the future of their national economies. However, they must take into account the implications of geopolitical changes and ensure that they make solid investments to ensure the sustainability of their heritage.

By Felicity Bradstock for Oilprice.com

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