By the time you read this, Marina and I will be beginning our descent into London Heathrow on our way to the annual Energy Consultation at the nearby Windsor Castle.
Ahead are several days of intense private conversations among a select meeting of the most knowledgeable and influential players in the energy world.
Given the people who are assembled at the castle, one of the main topics will be discussion about the emerging global trends in meeting forward energy needs.
Perhaps the most essential ingredient in what is already a seminal concern involves how to bring very different investment streams to bear on rapidly intensifying worldwide needs.
It is for this reason that I have agreed to title my Windsor briefing remarks “Integrating the Next Stage of Global Energy Investment.” My comments are intended to be one of the “anchor” presentations for multi-day talks among both experts/practitioners and ambassadors/ministers.
In the next Oil & Energy Investor, I will provide youwith details on the remainder of my Windsor briefing and, to the extent possible under the Chatham House Rule (the Rule is presented in my last Oil & Energy Investor – “The Dungeon of Windsor Castle Awaits,” February 21, 2019), the reactions by other Consultation participants.
The Main Aspect of the Investment Matrix
Each of the following three themes has been the subject of previous discussions here in Oil & Energy Investor, and will be the focus of our next installment:
- Responses obliged by an accelerated rise in the new balance among distinct types of energy internationally;
- The need to address a deteriorating global energy infrastructure;
- The most important element I intend to advance – establishing an ongoing effort to coordinate investment funds to confront both the changing energy balance and the rising infrastructure crisis.
This last objective is shaping up as the most exciting endeavor I have undertaken in some time. It also requires that several disparate investment venues be applied in a focused way.
That, taken alone, can provide a range of potential geopolitical landmines. Investment vehicles may all be looking to maximize return, but they are often marching to quite different drummers.
In today’s Oil & Energy Investor, I want to focus on one main aspect of the investment matrix: those controlled by governments via what are usually labeled Sovereign Wealth Funds (SWFs).
The bottom line conclusion up front is this: although a highly visible element in global energy investment, SWF is declining in aggregate impact.
Over the past several years, I have analyzed six separate investment sources.
These are summarized in the following slide from my Windsor presentation and include (reading clockwise) the following:
- State-Owned Enterprises (SOE);
- Institutional (investment/merchant banks, hedge funds, and a wide variety of other multi-party investment trusts);
- What I have labeled Private Direct Investment (PDI) to distinguish what has been the single fastest growing investment segment (e.g., individually-directed capital infusions; privately-held investment groups, trusts, and funds; family offices; certain broker dealer-initiated financing, and others);
- Capital Expenditures (CapEx, most resulting from company reinvestments from project or operating revenue);
- Multilateral Development Banks (MDB).
(MDBs are international agencies investing to fulfill global and/or regional objectives. The seven largest currently are the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Inter-American Development Bank Group, the Islamic Development Bank, and the World Bank Group.)
There is certainly overlap, occasionally making it difficult to decide where to place certain investment commitments.
Where to Place Investment Commitments
For example, a portion of CapEx involves revenue from SOEs, especially national oil companies (NOCs) owned by the state. The strict distinction between funds designated as Institutional and what I call PDI is sometimes difficult to make consistently in practice.
Then, several of the investment sources are channeling more financial moves through private equity and funding lines, making the separation of actual totals committed more problematic.
All told, my international advising company, ASIDA, calculates that there is an excess of $1.9 trillion in energy project investment expected in 2019, up from about $1.8 trillion in 2018, and $1.55 trillion back in 2016.
These are summarized in the following Windsor slide:
Now, Sovereign Wealth Funds have traditionally been one of two categories emphasized in estimating overall worldwide energy investment trends (the other being CapEx).
Nonetheless, SWF being considered sourcing as a yardstick for the broader international dynamics in energy investment is becoming less useful.
The Concerns with SWFs
There are at least 92 separate SWFs worldwide.
All of these are owned by governments and have at least $7.5 trillion in aggregate assets under management. The ten largest hold some 80% of the entire SWF total.
Each SWF invests proceeds from natural resource sales – crude oil and natural gas leading the list – or national surplus revenues from broader exports or excess currency reserves – primarily from forex trading.
As the name implies, most of the funds are owned by sovereign (i.e., central) governments, although a few – such as Alaska and Alabama state funds investing oil/gas proceeds – are not national in nature.
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Additionally, the legislative rationale for each fund restricts the purpose for why investment occurs. Worldwide, there are five basic types of SWF objectives, each involving a different “reserve” goal:
- Fiscal stabilization (primarily to guard against commodity or resource price volatility having an adverse central budgetary impact);
- Savings (to preserve and grow wealth for future generations);
- Reserve investment (investing excess reserves to manage currency exchange volatility);
- Reserves to promote economic development and diversification;
- Pension reserve (to offset future retirement funding shortfalls.
SWFs usually seek lower risk targets in longer-term investments.
That means much of that is invested ends up being in low-return but safer sovereign debt issued by other governments. For this reason, U.S. treasury bonds (and to a lesser, extent treasury notes and bills) are well-represented.
In addition, government priorities vary from capitol to capitol, further limiting the extent of financing energy commitments. Remember, much of this can end up being funds channeled through NOCs and other SOEs.
As such, they may not be reflected adequately in the resulting figures.
Overall, the Paris-based International Energy Agency (IEA) estimates that government ownership through whatever venue (e.g., direct and government-controlled fund, SWF, SOE) continues to be a main component in various energy sector categories.
This is summarized in the following slide from my Windsor briefing.
In fact, the IEA states in its most recent World Energy Outlook 2018, that more than 70% of energy investment decisions globally are government-driven.
Yet, and this may be the most telling trend emerging from my analysis, the SWF component of the energy investment total is static, even indicating a lessening of effect moving forward.
Now, let’s return to the “Global Energy Investment” slide I presented above.
Hidden Profit Opportunities
Note that my current estimate of the effective SWF/SOE portion of the “Estimated Investment % by Source” (lower right-hand corner of the slide) indicates it has been declining in importance for several years.
The genuine advances in energy investment have been coming from other sources.
All the above discussion this year will serve as backdrop for my (possibly testy) Windsor differences of opinion with both SWF/SOE and OPEC government representatives. I will lay out what I can next time, with that conversation likely to extend moving forward.
There is an environment emerging in which the global energy investment profile will be changing. I am of the view that more of this will be in avenues where average retail investors will have access.
And that’s a good thing.
For the simple reason that it means we will have greater opportunities for small individual players to partake in a very profitable scenario.
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