by Patrick J. Schena
By any measure, the role of the energy sector in any economy has strategic implications for both economic development and national security. Countries that are predominantly or rapidly emerging energy consumer nations struggle to sustain economic growth, while ensuring adequate access to future energy sources. In many such countries, the energy sector is controlled or dominated by state-owned or government-linked corporations, further adding to the complexity of strategic sourcing.
The strategic consequences associated with both the production and consumption of energy have been accentuated in recent years as the world has undergone a quiet revolution in energy sourcing. Technological advances have facilitated access to “unconventional” sources of both oil and gas, even as renewables become more economically viable. These developments have the potential to significantly modify the structure of global supply and demand for energy and so the economics that in part drive energy security.
Given the transitional nature of global energy sourcing and the tight link between energy use and economic development, long term returns on investment across key components of the sector –unconventional sources, renewables, and both up and down stream services– are attractive to institutional investors who anticipate expanding energy usage along with the sustained growth of emerging and frontier economies.
Like their private counterparts, SWFs too have been attracted to the energy sector, having directly invested USD $75-100 billion by some estimations, much of this since 2009. SWFs expend considerable effort to establish themselves as financial investors and to disavow association with multi-impact or “double bottom line” investing, particularly when perceived to involve the geopolitical interests of the sovereign. However, as a practical matter, it would be naïve and perhaps disingenuous to consider SWF investment in energy-related projects in strictly financial terms.
In this short brief, the objective is rather to examine SWF investment in the energy sector as strategic private equity.