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How Energy Wealth Funds Are Being Leveraged To Diversify Economies

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The success of Norway’s sovereign wealth fund has encouraged other oil-rich nations to follow in its footsteps by developing their own national funds from energy revenues. Countries across the Middle East have already accumulated vast amounts of wealth from their funds, now using them to diversify their economies to industries beyond oil and gas, to ensure the longevity of their wealth. And countries across new oil regions, such as Africa and the Caribbean, are now looking to do the same to develop their national economies.

The Norwegian sovereign wealth fund was set up in 1996 to contribute to the national economy, providing fiscal security in case of a decrease in oil prices. It has since helped the government to develop a social welfare system, providing quality free education and healthcare, as well as allowed Norway to invest heavily across many countries, companies, and industries. It has long been hailed as the most successful in the world, valued at almost $1.4 trillion in 2021.

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

Saudi Arabia is one of the forefathers 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 percent of state-owned oil and gas firm Aramco’s shares to the fund. This move supports the restructuring of the national economy, adding around $80 billion to the fund.

Saudi Arabia is now using its PIF to fund several renewable energy projects, in a bid to diversify its energy mix and continue gaining wealth from energy projects during the energy transition. Salman hopes the fund will achieve $1 trillion in assets by the end of 2025

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

New oil regions, which are gaining increasing attention from oil firms looking to develop their low-carbon operations, are now looking to establish their funds. In Guyana, the government set up the Natural Resource Fund (NRF), under the Natural Resource Fund Act 2019, to manage the natural resource wealth of the country for the present and future benefit of the people and for the sustainable development of the country.

As Guyana rapidly develops its oil industry, seeing high levels of foreign investment, the World Bank anticipates economic growth of 49.7 percent in 2022. The country’s GDP grew from $4.06 billion in 2012 to $5.47 billion in 2020, demonstrating the opportunity Guyana has for developing its economy further through a wealth fund.

Similar actions are being taken in 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 started in 2020 and the development is expected to produce 231 million barrels of crude oil. Like Guyana, Senegal set up a sovereign wealth fund, allocating a minimum of 10 percent of revenues from the oil and gas sector to the fund. Senegal expects oil production to boost its economy by around 10 percent 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 Wealth Fund (GPWF) aims to provide a permanent income for the country, with the funds being invested across different sectors and being used to support the national budget once oil reserves run dry.

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Although geopolitical changes are now demonstrating the weaknesses within sovereign wealth funds. Norway invests all the assets from its fund in foreign stocks, bonds, property, and renewable energy projects, meaning 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 subsequent conflict, which could see greater frictions between world powers.

While Norway’s wealth fund is strong enough to weather this turbulence, it reveals the vulnerabilities of diversifying investments across several countries worldwide. Norway decided to freeze and divest its Russian assets, around $2.85 billion at the end of 2021. Although this has yet to happen. This shows that other countries with smaller funds must consider the volatility of the global market as they set up new investments, to ensure the future stability of their economies.

Several oil-rich countries around the globe are using their crude revenues wisely by establishing national wealth funds to invest in the future of their national economies. However, they must consider the implications of geopolitical change and ensure they make solid investments to ensure the longevity of their wealth.

By Felicity Bradstock for Oilprice.com

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