Sovereign Wealth Fund Institute

Energy resources like oil and natural gas deposits can be an economic blessing or curse. Developing economies that heavily rely on oil and other fossil fuel exports are at risk of a future financial collapse if they don’t fix or contain several risk factors. During the Middle East uprisings of 2011, the gulf countries that maintained power had substantial oil reserves per capita, lower oil break-even prices relating to the fiscal budget, some level of industry diversification and lower youth unemployment. Political and social risks arise for states that fail to diversify their oil revenue in the long run. Government dependence on commodity revenue needs to be curtailed and smoothed. Eventually a nation’s natural resource production will dwindle or downward price movements will cause fiscal budget deficits. Oil rich countries like Norway and Kuwait have created sovereign wealth funds. Sometimes sovereign funds are used as fiscal stabilizers to help fill budgetary gaps.

States relying solely on oil revenue can create future fiscal stability risk.

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In February 2012, Israel’s cabinet publicized a plan to create a sovereign wealth fund. It was approved October 2012. The Knesset failed to get around to passing the sovereign fund law before the government fell later in 2012. In mid-April 2013, the Israeli government re-approved the creation of a sovereign wealth fund to manage profits derived from Israel’s natural gas fields. Legislation on the wealth fund bill still has to be approved by The Knesset. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

On March 1, 2013, Seah Moon Ming joined Temasek Holdings as senior managing director, special projects. He was the deputy CEO at Singapore Technologies Engineering Ltd. He is leading a new business entity created by Temasek Holdings called Pavilion Energy Pte that is focusing on opportunities in the liquefied natural gas (LNG) sector. Specifically, the sovereign wealth enterprise will focus on certain sections of the LNG value chain to ensure long-term LNG supply.

Temasek Holdings is bullish on LNG demand in Asia. In fact, Japan relies on LNG imports for nearly all of its current natural gas demand. Japan is the world’s largest LNG importer. Temasek Holdings doubled its energy investments, offsetting some financial sector investments.

Potential investments could include:

• LNG trading
• Club investing with oil & gas firms
• Building LNG storage and re-gasification terminals
• LNG shipping

Pavilion Energy has initial authorized capital of S$1 billion. In addition, Hassan Marican, the former CEO of Petroliam Nasional Bhd, was named chairman of Pavilion Energy Pte.

Technological improvements and efficiencies in crude oil production have elevated projected U.S. supplies of oil. With regard to natural gas, prices of the commodity are relatively low. Surges in industrial and electric power sectors have augmented the need for growing shale gas production. With the United States embarking on a fossil fuel extraction renaissance, how have public investors reacted?

Real assets in the domain of energy and natural resource investments have tagged the interest of public pensions and sovereign wealth funds. From a portfolio perspective, institutional investors seek to neutralize inflation sensitivities, especially if a deflationary spike approaches. A major deflationary event risk could always occur; however, the chances appear relatively slim for now. For example, U.S. financial institutions have re-equitized their balance sheets and shed off riskier units. Hedge funds are being spun-off. The Federal Reserve has added a ton of liquidity into the markets through various policies and actions.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to Kuwait’s Ministry of Finance, the country posted a record provisional budget surplus of 17.2 billion KWD in the initial 10 months of the fiscal year. The surplus is heavily attributed to high oil prices. Oil revenues increased 11.6% from last fiscal year. Oil earnings make up 94% of total revenues. Under Kuwaiti law, 10 % of revenues are deducted every year which go towards the country’s sovereign investment authority. In this current fiscal year, the government of Kuwait has decided to transfer 25% of revenues into the sovereign wealth fund. The fiscal year for the Kuwait government begins April 1st and ends March 31st.

March 22, 2013, the Cypriot parliament passed emergency legislation relating at setting up the groundwork for a bailout deal. These bills include the creation of a sovereign wealth fund, nationalization of pension assets and imposing strict limits on the movement of capital. The Eastern Mediterranean Sea has offshore gas deposits; capital-intensive infrastructure is needed to extract the gas and transport it. The future sovereign wealth fund of Cyprus has a long way to go to receive funding from offshore gas deposits.

Gas discoveries in the Levant Basin and Central Asia could counter Russia’s natural gas domination in Europe.

Given the geographic size and population, Cyprus accounts for a miniscule portion of the European Union’s overall gross domestic product. Policy actions taken by the European Union and Cyprus will be reverberated with future bailouts. Cyprus could be the first country to exit the Eurozone.

The gulf countries are augmenting their economic clout in Southeast Asia by providing capital and energy expertise. Oil storage facilities are of mounting importance in the region. The race of having more oil storage capacity is tightening up between Singapore and Malaysia. With cheaper land and less regulations, Malaysia is attempting to outflank Singapore’s Jurong Island to be the tank storage leader in the region. Jurong Island is a strategic petrochemical hub; land reclamation efforts ensured demand has been met.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

On March 12, 2013, Japan became the first country to successfully extract natural gas from underwater deposits of methane hydrate. Methane hydrate is a frozen gas that is referred to as flammable ice or fire ice. State-run Japan Oil, Gas and Metal National Corporation (JOGMEC) have been spearheading the initiative.

Japan is a major importer of energy. In fact, the country is the number one importer of liquefied natural gas (LNG). With renewable sources of energy like wind and solar still in early stages and the catastrophic nuclear incident, this breakthrough could be a net positive for Japan’s energy needs. The big question presents the issue of commercial viability and scalability. If the technology is scalable like fracking was for the Americas, it could greatly influence energy extraction. This possible technological impact would increase flows to sovereign wealth funds and possibly create new energy funds globally. If Japan were to rely less on LNG imports, it would have a negative effect on current LNG exporters.

Cost-effective, innovative extraction methodologies lead to energy bonanzas.

Before people get their hopes up, there are some pressing issues. It will take time as Japan plans to have a commercially viable model in place by 2019. In addition, methane hydrates are located in colder environments or places that are challenging to drill and extract.

JOGMEC believes at a minimum there are 1.1 trillion cubic meters of methane hydrate in the Eastern Nankai Trough where it is currently drilling. This amount of methane hydrate is enough to provide Japan with enough natural gas for a little more than a decade. In total, off Japan’s coast there is an estimated 7 trillion cubic meters of methane hydrate.

For 2012, Norway’s Government Pension Fund Global (GPFG) returned 13.4%. Regarding fixed income performance, the sovereign wealth fund returned 6.7% in which corporate bonds produced the best returns for the asset class. Geographical allocation to equity investments is based on total market value. Government bonds are allocated by country according to the size of its overall output.

“The fund’s performance reflects development in global financial markets during 2012,” says Yngve Slyngstad, CEO of Norges Bank Investment Management (NBIM), the fund’s manager.

2012 Asset Class Returns

• Equity Investments – 18.1%
• Fixed Income – 6.7%
• Real Estate – 5.8%

Singapore’s Temasek Holdings increased their stake in Repsol SA. Repsol is Spain’s largest oil company; they recently announced the sale of their liquefied natural gas assets to Royal Dutch Shell Plc for US $4.4 billion cash excluding debt. Temasek Holdings purchased 5.04% of treasury shares (64.7 million shares at € 16.01) from Repsol for 1.68 billion SGD (US$ 1.35 billion). Temasek Holdings now holds a 6.3% stake in Repsol.

Temasek Holdings has been steadily augmenting their portfolio in the energy sector, backing both emerging companies and established players.

Tay Sulian, managing director of investment at Temasek Holdings, said: “The investment in Repsol deepens our exposure to the energy sector through a high quality growth-oriented company.”

He added, “The sector is a good proxy for the needs of transforming economies and growing middle-income populations, both of which are part of Temasek’s investment themes. We are pleased to have the opportunity to invest in Repsol, and will continue to look for good, long-term investments in the energy space.”

In May 2012, the government of Argentina’s nationalization of YPF SA exerted stress on Repsol’s financial health. Repsol’s credit rating was on the verge of junk status, a major risk for a capital intensive industry.

For Repsol, the deal with Temasek Holdings was discounted causing a €148 million cash loss for the company. On the other hand, the deal should have a positive impact on the company’s credit rating, while increasing the stability of their balance sheet.

Source: TANAP

The pipeline will deliver gas from the Caspian field of Shah Deniz to Europe.

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On February 12, 2013, California State Senator Noreen Evans (D) introduced SB 241, a bill that will fund higher education and state parks in California. The bill would impose a severance tax on oil producers in California. The bill is co-authored by fellow State Senator Mark Leno (D) who is Chair of the California Senate Budget Committee. Democrats hold a majority in the state senate. Currently, there is no statewide severance tax on oil and gas production in California, but there is a small statewide assessment on oil and gas produced in the state.

The bill would enable the California Education and Resources Reinvestment Act (CERRA) which would impose a 9.9% severance tax on the extraction of oil from the ground or water within California’s jurisdiction. To be precise, the 9.9% severance tax would apply to the gross value of each barrel of oil severed. The tax revenue, along with interest and penalties, would funnel into a proposed Oil Severance Fund. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The government of Chile will infuse US$ 2 billion into its sovereign wealth funds. The two sovereign wealth funds, the Pension Reserve Fund (PRF) and Social and Economic Stabilization Fund (ESSF), will amount to US$ 22.9 billion in size.

Chile is the world’s leading copper exporter. In addition, copper is Chile’s main export product.

The Nigerian Ministry of Finance plans to augment the size of Nigeria’s sovereign wealth funds to US$ 5 billion within the next three years. Currently, the Nigerian Sovereign Investment Authority (NISA) manages US$ 1 billion. The authority will start making investments in March 2013 after board approval. Investments from the infrastructure fund of the NISA will begin in the second half of 2013.

Political tension regarding oil resource money has existed between the Nigerian government and state governors. This has been an impediment of monetary transfers to the NISA.

The government of the Falkland Islands has made an initial transfer of £8.274 million to the new Oil Development Reserve. This first deposit is their goal towards emulating a sovereign wealth fund based on the Norwegian model.

Oil exploration firms are aiming at 8.3 billion barrels in the area around the Falkland Islands. The region is underexplored but could yield high-impact wells.

2012 has come to a close; Russia is preparing to fill up its reserve fund, the initial sovereign wealth fund of Russia. Created in 2004, the reserve fund assists in fiscal budget stabilization if global oil prices decrease at a certain price level. The reserve fund invests in conservative fixed income securities, typically low-yield and highly liquid.

The Russian Ministry of Finance plans to move 900 billion rubles (US$ 30 billion) of oil and gas surplus revenue into the reserve fund. Oil and gas surplus flows will continue to flow into the reserve fund until it reaches 7% of gross domestic product or there is a legal change.

Size of Reserve Fund in Billions USD – Click on graph to see full size

Source: Ministry of Finance – Russia

China’s National Social Security Fund (NSSF) will purchase 2 billion yuan (US$ 317.98 million) worth of A shares of common stock in GD Power Development Co Ltd in a private placement. The NSSF will purchase 50% of the company’s newly issued shares.

The NSSF will have a 5.32% stake in the company, allowing the NSSF to be the number two shareholder.

The NSSF plans to hold the shares for at least three years. GD Power is one of China’s big five energy firms.

Revenue Figures for GD Power Development Co., LTD
in Million yuan

Source: Filings

Malaysia’s Khazanah Nasional Berhad is selling up to 60 million shares in Tenaga Nasional Bhd. In fact, Khazanah has slowly been selling off shares in Tenaga over a period of years. Tenaga Nasional Bhd is Malaysia’s biggest electric utility.

This sale will reduce Khazanah’s ownership in Tenaga Nasional to 34%. CIMB Group Holdings Bhd and Deutsche Bank are joint bookrunners on the share sale. Malaysia’s Employees Provident Fund Board is the second largest shareholder.

The R$1.17 trillion South Africa’s Public Investment Corporation (PIC) along with SunEdison, Chint Solar, and the Kurisani Youth Development Trust announced a deal for R$2.6 billion (US$ 314 million) in equity and long-term financing for two South African solar projects.

The two utility-scale projects will have a total power capacity of 58 megawatts. These are the first utility-scale solar projects in the Limpopo province. South African Utility Eskom will purchase the power through a 20-year purchase power agreement (PPA).

Two Solar Utilities

• Soutpan Solar Park – 28 Megawatts
• Witkop Solar Park – 30 Megawatts

“The Public Investment Corporation always seeks to invest in projects that aim to achieve the Government Employee Pension Fund’s dual objective of investing for financial return and for positive social, economic, and environmental results,” said Dr. Dan Matjila, the PIC’s Chief Investment Officer. “PIC is passionate about environmental sustainability and contributing towards cleaner energy and a greener economy, hence we saw value in this investment. Over and above that, PIC is pleased that this investment will contribute immensely to job creation, particularly in Limpopo. The project is expected to create 318 jobs during construction, and 55 jobs on an on-going basis, with 44 of those designated for historically disadvantaged individuals. This investment will stimulate much-needed economic activity, thus directly contributing to the country’s economic development agenda.”

Abu Dhabi’s International Petroleum Investment Co. (IPIC) plans to raise about $2.9 billion in bonds. IPIC is seeking to attract fixed income investors so that it can leverage and finance more energy investments and projects. IPIC continues to invest and buy into refinery, liquefied natural gas developments, and other assets in the hydrocarbon value chain.

This would be the largest Arab corporate debt sale in 2012; however, in October 2011, IPIC raised $3.75 billion from bond sales.

IPIC plans to sell $750 million in 3-year bonds and 2-part 1.65 billion in euro-denominated ($2.4 billion) debt maturing in 5.5 years and 10.5 years. The IPIC is owned by the Emirate of Abu Dhabi. Since 2012, the government of Abu Dhabi has made six equity contributions to IPIC totaling US$ 3.5 billion, the latest in 2008. To date, IPIC has not paid any dividends to the government.

The arrangers include: BofA Merrill Lynch, BNP Paribas, and the National Bank of Abu Dhabi P.J.S.C.