The kingdom of Saudi Arabia is setting out plans to create a $2tn sovereign wealth fund. It will attempt to do this by selling off state-owned oil assets; the country is believed to be preparing for a world without fossil fuels.
This moment was greeted as pivotal by the environmentalist group Greenpeace, who likened the move to banking being abandoned by Switzerland. However, there are others who claim that the Saudis have long wanted to diversify its fossil fuel dependent economy but have never been able to do so.
Fund would be world’s biggest by far
If the sovereign wealth fund does reach the value of $2tn, then it will become the largest fund of its kind anywhere in the world; such a fund would be worth more than double that of Norway’s, which is currently considered to be the biggest.
The plans were announced by the deputy crown prince, Mohammad Bin Salman, a powerful member of the Saudi royal family. The move would involve the Middle Eastern country using its PIF (Public Investment Fund) to purchase industrial and financial assets abroad.
Many people will see this as a watershed moment in the fight against fossil fuels and the climate change that they cause. However, there are many who believe that this change could be seen as more style than substance.
IPO could be as soon as 2017
The first set of shares in the state-owned Saudi Aramco are due to be sold via an IPO (Initial Public Offering), this could happen as soon as 2017 according to some reports. The eventual goal of this move will be to allow Saudi Arabia to purchase some of the largest companies in the world, such as Apple or Google.
In an interview with Bloomberg, the crown prince said:
“IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil.
“What is left now is to diversify investments, so within 20 years we will be an economy or state that doesn’t depend mainly on oil.”
Although Saudi Arabia already has a public investment fund, it is fairly small in size and only around 5% of its assets are held overseas. Last year it completed a $10bn deal with Russia and spent about $1.1bn on a 38% share of Posco Engineering in South Korea.
Armco’s value “anywhere between $1tn and $10tn”
The move to allow foreign investors to purchase shares in the state-owned oil company was first revealed in January. Experts have found it difficult to work out the value of the entire business, but it is believed to be worth anywhere between $1tn and $10tn; if it was worth just $1tn, that would be the equivalent of the combined value of Google and Apple.
The Saudi prince who seems set on modernising his country’s economy, set out more of the plan’s intricacies in his most recent interview, saying that he wanted to use the fund to turn the country into one of the world’s biggest global investors.
This plan is undoubtedly linked, in some part, to the recent crash in global oil prices, which has rocked countries that rely heavily on the commodity to power their economic growth; Nigeria and Venezuela have been similarly effected.
“A future without fossil fuels”
It also shows that the country is beginning to realise that the world is starting to prepare for a future without fossil fuels. This has never been seen more clearly than it was after the world climate summit in Paris last year, which saw an historic global agreement reached on how to tackle the growing threat of global warming.
The were many reports at the COP21 talks, that Saudi Arabia had been attempting to derail the negotiations in an attempt to block a strong deal being reached.
The director of Climate Action Network, Wael Hmaidan, said:
“They are seeing the writing on the wall. The world is changing and it’s making them very nervous.”
Many people at the climate talks said that Saudi Arabia fears for its economy because it is almost completely fuelled by oil sales.
“Anything that would increase ambition or fast forward this energy transition that is already taking place is something that they try to block.”
Saudi Arabia was previously the world’s largest exporter of oil but was then overtaken by the United States of America. According to Enerdata, it is currently the world’s 10th largest producer of carbon emissions.
The country has long cut a difficult figure at annual climate change meetings, and they have often been charged with the accusation of attempting to disrupt international efforts to confront the issue.
However, many people were pleased to note that it had taken up a more helpful stance in Paris. It published a plan to tackle the issue of climate change and promised a “significant deviation”. However, it was also the last of the G20 nations to submit its proposal to the United Nations and many experts have said that the targets that are set out within it are “opaque”.
Back in May 2014, Ali al-Naimi admitted that the world was beginning to move away from carbon producing fossil fuels, and he said that Saudi Arabia was ready to embrace this change.
“In Saudi Arabia, we recognise that eventually, one of these days, we are not going to need fossil fuels. I don’t know when, in 2040, 2050 or thereafter.”
Despite all these concerns surrounding the country’s attitude to towards the climate change talks, it would appear that the kingdom has begun to prepare for such a future.
“Like the Swiss quitting banking”
One senior climate advisor at Greenpeace UK, Charlie Kronick, believes that the fact that such an established name within the oil sector is pulling out is a sign of things to come.
“The image of Saudi Arabia is so inextricably linked to the oil age that this feels a bit like Switzerland quitting the banking sector,” he said.
“The fact that they’re trying to decouple the country’s wealth from oil revenues will be seen by many as yet another sign that the end of the oil age is approaching fast. If the oil titans are looking for an exit strategy, all cannot be well in the fossil fuel sector.”
However some analysts at Capital Economics believe that the Saudi move may be more of a “balance sheet manoeuvre” than much else at the moment.
A senior emerging markets economist at Capital Economics, William Jackson, said:
“The government’s revenues will technically come from investment [from the PIF], rather than directly from oil sales, but the key point is that the investment income itself is still derived from oil.”
Rockefeller Family Fund to divest from fossil fuels
Saudi Arabia are not the first “big name” to consider moving away from fossil fuels in recent times. The Rockefeller Family Fund recently announced that they would be divesting all their holdings in fossil fuel as soon as possible.
RFF, which was formed by John, Laurance, Martha, David and Nelson Rockefeller, said that ExxonMobil, the world’s largest oil company was “morally reprehensible”.
The wealthiest man in American history when he passed away in 1937, John D Rockefeller made his billion dollar fortune from ExxonMobil’s precursor Standard Oil.
The Rockefeller Family Fund, which has comparatively small holdings of just $130m, said in a public statement:
“There is no sane rationale for companies to continue to explore for new sources of hydrocarbons. We must keep most of the already discovered reserves in the ground if there is any hope for human and natural ecosystems to survive and thrive in the decades ahead.
Exxon “morally reprehensible”
“We would be remiss if we failed to focus on what we believe to be the morally reprehensible conduct on the part of ExxonMobil. Evidence appears to suggest that the company worked since the 1980s to confuse the public about climate change’s march, while simultaneously spending millions to fortify its own infrastructure against climate change’s destructive consequences and track new exploration opportunities as the Arctic’s ice receded.”
The charge of being morally reprehensible, which the RFF levelled at Exxon, was in reference to an investigation currently being carried out by the New York attorney general, Eric Scheiderman, into claims that Exxon deliberately lied to its shareholders and the public about the risks of climate change. The investigation began in November.
When the investigation was launched, an Exxon spokesman said:
“We unequivocally reject the allegations that ExxonMobil has suppressed climate change research.”
“History moves on, as it must”
The Rockefeller Family Fund said that although they have previously made money from oil, “history moves on, as it must”.
“Needless to say, the Rockefeller family has had a long and profitable history investing in the oil industry, including ExxonMobil. These are not decisions, therefore, that have been taken lightly or without much consideration of their import.”
This latest divestment from the Rockefeller family, away from fossil fuels, is not the first in recent times. The Rockefeller Brothers Fund (RBF) announced that it was divesting all of the $45bn it had in fossil fuel investments.
The Bank of England is also reported to be considering its position with regards to holding fossil fuel investments, in a trend that looks like it may finally be gaining momentum. This string of recent divestments comes at the same time as it was reported that global investment in renewable energy in 2015 was double that of investment in fossil fuels.
“A new and significant trend”
A professor of energy policy at the University of Exeter, Catherine Mitchell, has called this change “extremely significant” and says that it clearly demonstrates the new trend in energy investment.
“We are looking at serious sums of money being invested in clean energy, with the dirtiest forms of fossil fuels the losers. This is the direction of travel that we need to see to have a chance of escaping the worst impacts of climate change.”
Roughly £200bn ($286bn) was invested worldwide in 2015, which is higher than the previous record of $278bn- set in 2011. This is according to research that the UN Environment Programme published last Thursday. The numbers do not include investment in large hydroelectric plants but the statistics do include onshore and offshore wind farms, biomass and solar.
China’s focus switching to renewables
A huge 36% of this global investment was from China alone, as the country tries to use clean energy to combat its severe levels of air pollution. Total Chinese investment went up by 17% from 2014 to 2015, reaching a total of $103bn.
It is thought that this increase is set to continue over the coming years, as China recently released its new five year plan to shift its focus to renewable energy.
Perhaps the most surprising thing about this trend is the fact that it has come at the same time as fossil fuel prices plummeting worldwide. However, because of the fact that the report only covers investment from 2015, it may have failed to properly portray the true impact of the continued fall in fossil fuel costs; it is possible that this will effect future investment trends.
Investment in the US was also up, as rules governing the level of spending on renewables took effect. However, even though investment went up by one-fifth, the new total of $44bn is still less than half of China’s.
Europe falling behind on green investment
Europe had an extremely weak performance in this area, after previously being a leader in renewables. Total investment dropped by a fifth to just $49bn, in spite of a big increase in offshore wind. This is according to a report conducted by Bloomberg New Energy Finance and the Frankfurt School of Finance and Management.
It is believed that some of the figures for Europe will have been effected by the drop in the cost of solar panels- around 60% since 2009. But Mitchell believes that it is also a sign that politicians should be doing more to encourage investment in renewables.
“Globally, we are seeing a rapid take up of renewables alongside a switch to more energy-efficient and flexible electricity systems. Technology changes are facilitating that transition, but increasingly it is governments that are holding it back, as policy makers are failing to put in place policies that can keep up,”
“This is particularly the case in the EU, that has been prone to a ‘boom and bust’ approach to renewables deployment [by which an initial enthusiasm from politicians is followed by a rowing back as the costs of subsidies become apparent], which will see [member states] lose out to countries that can provide more long-term policy clarity.”