Atlantic Council
Global Energy Forum

Growth and Investment Strategies in a Post-Oil World


Moderated By:
Dr. Christof Rühl
Global Head of Research,
Abu Dhabi Investment Authority

Mattia Romani,
Managing Director, Economics, Policy, and Governance,
European Bank for Reconstruction and Development

Jean-François Seznec,
Nonresident Senior Fellow, Global Energy Center,
Atlantic Council


Location:  Liwa Ballroom, Four Seasons, Al Maryah Island, Abu Dhabi, United Arab Emirates

Time:  9:00 a.m. Local
Date:  Friday, January 13, 2017


Transcript By
Superior Transcriptions LLC

CHRISTOF RÜHL:  So let’s get started.  First of all, a very good morning to all of you.  Thanks for coming early in the morning.  And I’ve been asked to make some housekeeping announcements.  Number one, this session is on the record, so be careful what you say, I guess.  Number two, I should remind you to switch off your phones.  And if somebody wants to tweet, it’s – the hashtag is #AEnergyForum (sic; #ACEnergyForum).  #AEnergyForum, OK. 

There are some other announcements I have to make.  For those of you who are like old-fashion like me and who will rely on this printed program, we had some changes in the size, in the title and in the structure of the session.  So the new title is “Growth and Investment Strategies in a Post-Oil World.”  Not that different.  But unfortunately, William Nash (ph) could not make it, so we are left with two panelists.  And that switched the structure of the sessions, so we now decided I play the moderator.  And to fill the void, I will provide a short introduction and frame the issue, about 10 minutes, and then throw it up to the two panelists we have here.  And let me introduce them.

            To my immediate left is Mattia Romani.  He’s director at the EBRD since 2014 for economics, policy and governance.  He’s also, I think, a very accomplished environmental economist of international standing.  He did work at the Global Green Growth Institute, and before that he was the lead economist at Nicholas Stern’s famous climate change report – I think from 2008, right, was it published.

            And to the far left we have Jean-François Seznec, who wears many hats.  He is, among others, affiliated with the Global Energy Center of the Atlantic Council.  He is also the MD of the Lafayette Group, and he teaches both at Georgetown and at SAIS, at John(s) Hopkins University.  He’s a man with 30 years’ experience in the banking and financial sector, much of which actually in the region here.  And he told me yesterday from 1975 on he was involved establishing banks in Bahrain and New York on behalf of Saudi Arabia.  So there is also some deep regional experience here.

            Let me start by trying to spend 10 minutes or so to frame this topic, this new headline, “Growth and Investment Strategies in a Post-Oil World.”  And the way I thought of doing this is just to raise three issues which come to mind pretty much immediately which we could then use – global issues which we then could use to focus on the more regional picture. 

The first of these three is really the question going back to the title how relevant is this notion of post-oil world?  Because, yes, there’s a lot of talk about renewables, about electric cars, even big international oil companies as we heard now talk about peak demand.  And oil certainly to some extent has become less important, no?  If you think back just the last few years when you had from 2014 oil prices coming down fairly quickly, you can see what happened.  While analysts downgraded their oil price forecasts, other analysts in parallel over the same period continued to downgrade the GDP growth forecast for the world and pretty much for every single region.  There used to be a rule of thumb, which was lower energy prices, and in particular lower oil prices, translated into faster GDP growth.  There used to be even a number to this rule of thumb which said that if the oil price goes up 10 bucks, you have a global – improvement in global GDP growth of about 0.2 percent.  That has not happened. 

And part of the background is this fact that oil has become less important.  When you look at probably the best number in this context, what we call oil intensity, a measure of efficiencies, how much oil do you need to produce a thousand dollar(s) of global GDP, how much oil do you need to produce output, that has peaked in the ’70s, in 1973, and at that time it took almost one barrel of oil to produce $1,000 of GDP globally, 9-point-something.  That’s down, as it happens, by exactly 50 percent.  So now we need about 0.4-something barrels of oil to produce $1,000 of GDP.  And this 50 percent decline means that in any respect you can think of, oil markets, oil players, actors in the oil markets, have indeed become less important. 

But then on the other hand – then on the other hand, if you – if you wonder whether oil will disappear tomorrow, it’s probably time to be a bit less sanguine.  And even those who now talk about peak demand in the next few years are by and large the same people who talked about peak supply a few years ago.  And oil certainly is still the single-biggest fuel in global energy markets.  Oil demand certainly is still growing.  And if you look at some other numbers, you know, you can argue that when you look at the comparison between renewable energy and fossil energy by and large, the renewable numbers are still fairly, fairly small, no?  And when you talk about new technologies and how they drive oil markets, and so one of the amazing facts which will be discussed, I think, in the last session today in more detail, is that shale oil plus shale gas since their inception actually now occupy a much higher share in global energy than does all the new renewables combined, if you leave out old ones like hydro and the direction of biological waste. 

So basically what this means is that there’s no non-oil notion.  You could take it from both sides.  I guess it will then depend what time horizon it has.  But one thing should be very clear, is that this region more than any other would be the laboratory for investigating the changes a non-oil world or a move to a non-oil world would bring.  And we have seen this over the last two years, both on the revenue side for this region and also in the way it tackles – so we have heard about that yesterday – the way it tackles the growing – (inaudible) – renewables.  And so I think that first point, how relevant is a non-oil world for today’s investment strategies and growth strategies, it’s something which is easily relatable to this region.

            The second point I wanted to make relates to a discussion which started at the academic level and which now dominates financial press and investment decisions of big corporations, asset managers and so forth, and that is the question whether we are seeing a systematic long-term secular decline in global economic growth.  Global economic growth certainly has come down from earlier years.  When you take periods between, say, ’65 and the early ’80s, global economic was close to almost 5 percent.  Since then it’s down about to 3 percent.  People have many explanations for that.  From the demand side, the most prominent explanation probably is that we are seeing a systematic slowdown in technical innovation and therefore in productivity, whether you measure it as labor productivity or as total factor productivity.  And that’s where this big headline comes from, “secular stagnation.”  And the reason that it moved from the academic realm into financial press and financial services is obvious, because lower global economic growth translates almost 1:1 into lower returns of your investment.  And so that is also a question. 

And again, this region almost could serve as a laboratory for looking at the implications, because when you compare, for example, the years of high oil prices 2010 to 2014, then you have in the Middle East a GDP growth rate of 4.2 percent.  By Middle East, for simplicity, I mean, the geographic notion east of Suez.  So everything east of Suez, including Iran, and everything in between, growth 4.2 percent before oil prices came down.  Since then, from 2014 to 2016, growth has fallen for the entire region again to 2.2 percent, almost by half, yeah?  And that has consequences for everybody, and of course also for our topic, which is investment strategies in such a world.  So again, we can use this kind of global trend in a pretty neutral way.  No matter where you stand, whether you think this is all – (inaudible) – and there is no global decline and productivity will pick up again, or whether you think we’re entering a totally different world, it doesn’t matter.  You have almost laboratory conditions when you look at the last few years here, which we can use to link it.

            And then the third topic – and I cannot live without it with the Atlantic Council here – which can put this title to life is of course the changed role of politics and policy both on the local level and on the geopolitical level.  We have the local level.  We have – when you start with what has happened with Brexit and Trump – a huge degree of uncertainty, and this uncertainty may translate into investment decisions, but also may translate into economic performance.  Right now, we don’t really know what it means to have locally populist governments.  We don’t know what the proposed fiscal policies – we have an idea.  We don’t know what in particular the impact on trade is for protectionism and this kind of notion.  But certainly there has been a sea change, and it certainly has reflected the capability of economists to make any kind of prediction on economic roles, and it reflects badly on the ability of investors to make informed and long-term planned decisions. 

And the flipside of this local populist government is the geopolitical implications, which are also far from clear.  I mean, how will the major blocs of this world get along with each other?  How much of an overstatement is this notion of a G-O, and how fast will this disintegration of the old political order really proceed?

And once more, even for that third topic, this region is almost like a perfect laboratory, because of course it had its own version of populism – and we think of the Arab Spring and of things which happened during that period – and it is a region which for better or worse long has learned to live with geopolitical uncertainties.  And what we have now is a big uncertainty here.  And you think of the last years of the Obama administration.  He was pretty articulate and open about basically saying you’re on your own in the Middle East.  We made the deal with Iran, and then it’s time to grow up and you find out how you get along with each other.  And what we are seeing right now is the hope in various quarters that either that will be maintained or that this will change by a new American administration taking more actively sides in that conflict.  And so that’s the large source of geopolitical problems, uncertainty, and then of course you have that on the local level when you just think of the particulars of this region and the slow-down in oil revenues – the slow-down in growth I’ve already pointed out – and the fear that somewhere under the surface it may start popping up again.

So these would be the three ways I think one can look at the question.  There may be many others, and I leave it to the discussions.  You can look at it from this post-oil notion, you can look at it from a slower growth performance, which we have seen, and you can look at it from the huge political uncertainties globally and locally, and all three are mirrored in this region almost in a pretty extreme laboratory compared to the rest of the world.

            So let me finish by at least giving a few notions, a few numbers probably on this region – again, the Middle East as defined just simply east of Suez.  We are sitting here in beautiful Abu Dhabi, and we have heard a lot of praise of it.  But if you look at the whole region, there is reason to be worried, and there are numbers which are not very stellar, and I don’t think there’s a big point to always just engage in praising exercises.  So this is a region – I’ve pointed it out already – where global economic growth has come down from 4.2 to 2.2, has fallen also almost by half.  It’s a region which has population growth of 1.8 percent.  The world has population growth of 1.1 percent.  So it’s a substantially faster-growing region.  It’s a region which has almost 50 percent, almost 50 percent, 47.2 percent of its people with an age group of below 25.  And it’s a region – of course, if you would do the calculations, where revenues are more than usually dependent on hydrocarbons, where industry is less developed than other regions with similar income levels, and so on and so forth.  It is not exactly an unproblematic region.

            The best example I could come up with for how to look at these problems sort of in a nonpatronizing way, just by numbers, and to address this nexus between energy renewables and economics, which we address in this – (inaudible) – is by looking at energy intensity.  Now, energy intensity is sort of the broadest efficiency measure we can come up.  Similar like oil intensity, this is the question:  How much energy do you need to produce one unit, one dollar of GDP?  And it turns out that of course this region has an energy intensity about twice as high as the rest of the world, and you could excuse that by saying, well, it’s very hot and we need a lot of energy for cooling.  But this region, it turns out, also is the only region in the world where energy intensity keeps on rising.  The rest of the world has become vastly more efficient.  Again, since the ’70s, global energy intensity has been falling by over 30 percent.  Here, since we have numbers only since ’99, it has increased by 8 percent.  So it was completely in the wrong direction and completely different from the rest of the world.  No doubt this will change now among others because of lower growth and lower oil prices, but the implications when you think it through are vast.  And I didn’t even attempt to look at labor productivity or issues like that.  So it’s a region where these questions of investment, investment strategies, I would argue, are much more relevant than in many other places of the world.  And with that, you know, I throw it open.  And I think what we do is that I first draw on and ask both of you to address this big block of issues and related to this region, and then we go on a discussion.  And since we have some time, we’ll open it to the door for a good piece of that time.

            And let me start with you with the big – you have the international experience.  You work at the EBRD.  It is active across not only this region, but actually is founded somewhere else.  What do you think about this broad topic? 

            MATTIA ROMANI:  Well, thanks, Christof.  As usual, simple questions to answer.  So let me start by saying that sort of my background and the way in which I learned the story about the post-oil world is very much linked to the risks of climate.  So in a way, the story that I know and that I always tell is three parts: one, the risks of climate are enormous and they’re systemic, and therefore no matter who’s president of the United States, sooner or later we need to do something about it, because the risks are so real and so large and so costly to human society that something needs to be done about this.  So that’s the first part of the story. 

The second part of the story is that the needs for investment over the next 40 years, 50 years, particularly in energy given population growth, given economic growth are enormous.  International Energy Agency estimates a need of perhaps 40 (trillion dollars), $50 trillion of investment in energy over the next 40 years, so 10 trillion a year perhaps needs to go into new energy investments every year, so an enormous amount for investment that offers an enormous opportunity vis-à-vis the first risks I talk – I talked about, which is really a choice.  What kind of economy, what kind of energy system and economy do we want for the next 40 or 50 years, do we want to lock in?  What foundations do we want to lay for economic growth?  And this is really a question we have to answer now, because the investment we make now will lock in the system for the foreseeable future, therefore a choice on whether we want a hostile world or not is today, and the investments that we make every day will be locked in and therefore determine the future.  And these are the first two parts of the story, as I know it. 

And the third part is a positive part that says that with the technologies we have, with the knowledge we have, we know that laying down the foundations for a different type of growth, for a growth which is less dependent on fossil fuel, also comes together with value-added and jobs, with growth in jobs.  And this addresses the second part, if you want, of Christof’s argument about living in a low-growth world, true.  And if you look forward and you look at what opportunities lay in front of us to create more growth, to create more jobs, well, then the opportunity around investments in sustainability and in technologies that increase energy efficiency and energy – reduce energy intensity, well, those come together with innovation, with jobs, with value-added, with good jobs, as sometimes they’re called.  So this is the macro story, and this macro story comes from the experience that started at least with me with the Stern Review about 10 years ago and that has developed over the last 10 years – so negotiations on climate on one side and innovation on the other.

But I switched jobs a couple of years ago.  I came to the EBRD.  And part of the reason I came to the EBRD is that I wanted to see how the story translates practically in investments, in projects.  Is it true?  Is this story true?  Are we seeing on the ground this story being realized in individual investments?  And perhaps I should say a word or two about the EBRD, because not everybody’s familiar with the institution.  EBRD’s a small international financial institution.  We have approximately, give or take, $40 billion of capital.  So we’re not a huge international financial institution.  But we’re a very peculiar one.  We were created out of the breakdown of the Soviet Bloc and the desire for the countries in the Soviet Bloc to develop markets, but by now really we operate anywhere between, if you want, Morocco and Mongolia, between Estonia and Egypt, so a big triangle, a big chunk of the world that goes from North Africa to really Central Asia.  And we have a real particularity, which is we – for the greatest majority we invest together with the private sector.  And we don’t really subsidize our loans.  So whenever we invest, we invest in market rates and we expect returns from our projects.  We only invest, as Christoph knows, because he was at the EBRD a few years ago, when the project has the characteristic of sound banking, it brings reasonable returns to the bank. 

I’m saying this because what I’m going to tell you next is what is my experience of the project I’ve encountered working at the EBRD, the point to an investment strategy around the post-oil world.  And the investments I’ll mentioned all have these characteristics of being co-investments through the private sector and bringing market returns. 

So, if I look across my experience at the EBRD, what we’ve seen is the most successful areas where I see signals of the post-oil world comes really from energy efficiency and investments related to energy efficiency.  What worked best at the EBRD is an intense work that has been going on looking through our portfolio and talking to our clients about what is the upsell we can do on energy efficiency, where are the opportunities to actually make more money and better money by being better at using your energy and resources.  So our work on energy resource audits to identify and scope resource efficiency investments has been the biggest source of new projects for the bank on energy efficiency.

Another thing that has worked very well is the building of sustainable energy financing facilities, which is doing the same but with our partner banks:  equipping banks that we have credit lines with to do those energy audits with their own clients and identify projects where energy efficiency in particular, but resource efficiency as well, is an opportunity.  And that has also proven extremely successful.  So we now have hundreds of credit lines with banks all over our region where, together with credit, we give the banks the capabilities to do energy efficiency and resource efficiency audit with their own clients.  That has also worked well.

Another thing that we’ve seen working very well are technology transfer programs in which we look at the pipeline of projects and look at whether in those projects new and more efficient technologies can be adopted by our clients.  And again, that has had a really large pickup.  So this area, in my view, is the one that – where we’ve scaled up most our investments and identify really an investment strategy that I would call a post-oil world investment strategy. 

Now let me then come to a second area that in my experience at the EBRD talks well to the macro picture, the macro story I told you earlier, which is the story about renewables.  Six years ago, the International Energy Agency said that solar power prices – six years ago, so we’re talking in 2010 – that solar energy prices would have been competitive to fossil fuels, traditional thermal power generation, by about 2030, which is laughable, because I think last week or two weeks ago, here in Abu Dhabi solar power fell in an auction to 2.4 cents per kilowatt hour.  This is the lowest price ever registered for a solar power auction.  But we have low prices across the board, particularly in this region, 2.9 cents per kilowatt hour in Dubai recently; Morocco is around 3.5 cents.  So the prices have come down substantially. 

And today solar power and onshore wind power are both priced competitively with thermal power in some countries.  Yes, it’s true, we still have an issue about intermittences.  But nonetheless, the systems are so skewed towards thermal power, they can do a substantial amount of renewables at these prices before you run into the issue of intermittences. 

This is an area where we see enormous pickup, and we see enormous pickup from the private sector.  This is traditionally an area where the public sector has always played a substantial role, where subsides were fundamentally making this business work.  What we see is that this is in some countries not the case anymore, and in some countries not far away from this region.  One example is an investment.  It’s the first time we invested in a wind farm, the Khalladi wind farm in Morocco, which is entirely financed by the private sector.  And this is a private sector operator that has made use of a high-voltage grid which has been opened in Morocco to completely developed on a private basis a wind power that will serve private sector customers. 

And this is the context of another trend that we see and again points to me to the enormous opportunities in this area and to the fact that this is by now really market-driven.  It’s a post-oil world, which is entirely market driven, which is the opportunity around selling and buying power between private sector operators and users.  This is – remember the story they were telling us 10 years ago that, you know, this incredible network that Google was facilitating in Silicon Valley in which you would park your car, your electric car, link it to the grid, and this would sell the power that you haven’t used in the night to the people that need it in the night?  You don’t need to go out to the Silicon Valley for this.  You can go to Morocco and you will find that the users there are doing exactly that.  They are selling power that they don’t use and they’re buying power from private sector operator where they use it, and this is done entirely on a private sector basis on the back of a high-voltage network.  So I just wanted to give you some examples of the things that are happening at least under a radar screen. 

The last point I will make is that all of this, the stories I told you, which are really stories of the last five, six years, have happened with fairly low oil prices.  These have not happened with oil prices at 100, $150 a barrel.  And this to me is astonishing, because in the old world we knew investments in energy efficiency, you know, the shift that you would see on energy efficiency, particularly the investment in alternative technologies, would happen mostly on the back of very high oil prices that would prompt that investment.  Well, all of this has happened with fairly low – I understand perhaps not historically the lowest, but still fairly low oil prices.  So that’s a little bit my take on – at least on the first two question you put on the table.

MR. RÜHL:  Thank you.  I’ll come back to that, but let’s hear from Jean-François.

JEAN-FRANÇOIS SEZNEC:  Thank you very much.  It’s a very fascinating topic, of course, and maybe what I can talk about more easily is about the region here, but very much along the lines of what Mattia just mentioned.  I think that the transition to this post-oil is an absolute must.  And in fact, the decline in price of oil has been really a blessing, in my view, to the region here because it has forced the region to focus on really going to the next level.  Perhaps what I’d like to point out is something I have mentioned in the report we have published this week actually, at the Atlantic Council on down streaming Saudi Arabia, which is upstairs, but we have already moved to a post-oil area – era in this region.  It is not showing very much.  But since the mid-70s there has been some decisions by the authorities and the leaderships, especially in Saudi Arabia, on moving away from just oil.  The problem they’ve had is that the price of oil has gone up so much that it has hidden the developments that took place.  I mean, for instance, in the Saudi case we can see that since 1975 they’ve developed the second-largest chemical company in the world.  SABIC today is second to only BASF, in Germany.  And it is an amazing company.  It is taking the natural advantage of Saudi Arabia – in this case, very low-cost energy – and moving in to a big way into chemicals worldwide.  They have operations in 35 countries.  Sadara, which is a new joint venture between Dow Chemical and Saudi Aramco, is a $20 billion investment, which is – but which has started producing some of the most advanced chemicals in the world, including MDI and various isocyanates, which are extremely difficult to make.  Petro Rabigh is a joint venture with Sumitomo, again, with Saudi Aramco.  It is very, very successful.  It is selling chemicals in China and so on, but it’s totally integrated from receiving the crude from Saudi Aramco, refining it and making it into chemicals.  Maaden, which is a very large – a large mining company in Saudi Arabia today is one of the major phosphate producers in the world.  It produces 3 million tons of DAP per year, which is as much as Morocco is producing.  And DAP is based on mixing phosphates with ammonia, which is itself a natural gas.  So it’s a perfect situation for Saudi Arabia. 

18 percent of the aluminum produced in the world today comes from the Gulf, and that’s a huge amount.  I mean, the UAE has by far the largest aluminum plant in the world, right just a few kilometers from here.  And that is a decision which – (inaudible) – and the leadership in Abu Dhabi took a long time ago.  It didn’t come overnight.  They also have a very large chemical base in Barush (ph), in Saudi Arabia, in the UAE, and they have the Dolphin pipeline which integrates some of the production of Qatar to the gas needs of the region.  So in many ways there’s already a fundamental shift towards non-oil-based production.  I mean, it’s oil-based in the sense that they need energy from the ground, but they just add value so that in the long term you’ll take only 10 percent of the amount of energy produced in the region to achieve the same level of income.  And I think that’s very, very important for them. 

The perhaps slightly more upstream than from the chemicals, refining is an enormous development in the country.  I think we have to point out that Saudi Aramco today has, I believe, nine refineries in Saudi Arabia with a capacity of 2.9 million barrels per day, which is going up to 3.3 next year with the addition of a new one.  And they also have eight refineries, or operate eight refineries in various countries of the world for another 3 – or 2.4 million barrels per day.  So they really have a total capacity of about 5-point-something million barrels per day, and it’s a major baseload for the Saudi production of crude.  So it gives them safety in their basic production.  They know they can always produce a minimum of 5.3 million barrels, probably going up to 6.4, and the rest, then it can go into more chemicals and so on.  So they’re not really desperate on just being a one commodity producer, and I think that’s really key to this.

Now, this has come – as I said, it started a long time ago.  In 1975, the decision was made in Saudi Arabia not to sell natural gas anywhere except in Saudi Arabia.  They gathered the gas and they used it to make electricity, to provide feedstock for industry and whatnot. But they did not want to export what really they viewed as their major advantage, which was very cheap natural gas.  They – what we are seeing now, though, is with the factors that were mentioned earlier by Christof is the very large population growth and the fact that the young people are the vast majority of the region, they need to really take advantage of that major asset, is their youth, and to develop it very actively.  So, in order to do that, they have to modernize their system, and one of the ways to modernize their system is through this Vision 2030 they’ve come to in Saudi Arabia.

There is a Vision 2020 in the UAE.  There is now a Vision 2050, in fact, in the UAE.  But this is really to smooth the system away from being controlled by, you know, a fairly small and older group of people.  So you have to open it up to the young.  And that is not so easy to do, of course.  And one of the – one of the key factors, if you like, of changing to a post-oil system is for the states instead of having the people, you know, depend on the state for everything, the Vision 2030 I think is trying to switch that to having the state depend on the people.  And that’s the blessing of the fact that the price of oil is down, and that forces the state to say, well, we can no longer pay for everybody, but now the state has to operate through their people.  And that is really a key difference.  The problem of course is that it really makes some huge requirements on societies for the – for people to not view the state as the ultimate payer of things, but for the people to see that they actually own the states, then that is really creating some major demands.  Major demand is the state will need the people.  The people will own the state, but only if they pay taxes. 

And all of a sudden you have this – the word which is, you know, a very dirty word, you know, taxes.  All of a sudden people will have to pay taxes.  And there has been some effort to pay VAT, they – to develop VAT taxes in the Gulf, and that’s going to happen probably early next year.  The subsidies have declined very substantially.  But beyond that, the sacrifices that are required by the people – the – to – from the people have to be seen by the people as being fair, and therefore there’s a demand by the people to have a more transparent economy, to have an economy where everybody pays their fair share. 

And in a place like Saudi Arabia, that means basically that some of the groups, like the royal family, like the religious establishment, which basically were given free ride on all the income of the country, all of a sudden that has to become more transparent.  And I think we can see the privatization of Saudi Aramco in particular not so much in terms of the money but in terms of forcing major assets of the country to become transparent.  Therefore, the royal family will not just be able to take money from the – from Saudi Aramco.  There will be – it will be accountable under the IPO rules anywhere in the world.  The countries have to – the companies have to issue audited statements.  We will know exactly how much money goes to whom.  And I think this is very much – in the leadership, I think Mohammed bin Salman, people of this nature, that’s exactly what they want to do.  They want to make the family accountable to the people so that the sacrifices which are required from their people are shared with everyone.  And that is not an easy solution, and that creates a lot of tension, of course, within the country.  But it can be achieved, I think.  And when we hear Mr. al-Falih yesterday mention that the privatization of Saudi Aramco is going to happen, I think it’s exactly that’s the point.  The point is to make the economy transparent and everybody share, and share evenly into this – into this development. 

But the whole meaning of this, too, is when the – if you start having that kind of thing, so how does the state fund itself from Saudi Aramco?  All of a sudden, Saudi Aramco will be seen as a company that will provide money to the state.  And they do that already of course, but now we’ll know exactly how much and how.  And there will be – Saudi Aramco will have to pay a fee for its leases, because Saudi Aramco does not own the oil of Saudi Arabia.  They only own the leases to the oil to Saudi Arabia.  And I’m not sure they are actually leases drafted to this day.  But once they have, these leases will be worth something, and that’s really what JPMorgan Chase and Klein and Company are trying to establish right today, the value of those leases.  Once you have that done, then you can decide how much the company is worth and you can float that.  So once we have those details, then Saudi Aramco can pay royalties for their lease, and then whatever is left they’ll pay 80 percent tax.  But that still will not be enough to fund the state. 

However, we have introduced, once they have done that – and again, that’s one of the sort of secret, if you like, of the Saudi Aramco privatization is that once you start having an official tax on Saudi Aramco, why shouldn’t you have an official tax on SABIC?  Why shouldn’t you have an official tax on the larger corporations?  Because after all, the state control those companies, but the state gets nothing from these companies.  And for the state to really be responsible to the people, these companies are going to have to pay taxes.  And I think once we start on the slippery slope of establishing taxes at Saudi Aramco, it will start establishing taxes for the rest of the economy.  At that point, the state will then depend on the people, so to speak, in the general sense, and not the other way around.  So I think the vision of moving away from the post-oil is very much based on changing society and not so much the economy because that’s automatic and de facto it’s already happened. 

A small fact which I always thought was interesting and which does not show very much in the press normally, but if you take the sales of all the industrial companies in Saudi Arabia today that are traded on the stock exchange in Riyadh – so not only the state-owned company, but there are a lot of private companies that are doing industry – today the amount of sales of these companies total is about $61 billion in 2015, which is 39 percent of the value of the oil sold by Saudi Arabia.  So there has been some success in there. And if the price of oil had gone – had gone down even further, then you’d see even more of a percentage coming from the industrial world.  And I think we’ll see that more and more.  So as the system gets put on steroids, so to speak, and as the society accepts this transparency, which was required from all the groups in Saudi Arabia in particular, I think we will see that they will succeed in that change.  But it is not easy because the beneficiaries of course are perhaps the ones that are least interested in seeing it happening.  I mean, the people know that they pay more for their gasoline, and they were used to paying nothing for their gasoline.  So, you know, it was a bit of an issue.  And we hope that the pressures that are built in between the pressures within the royal family, within the religious establishment and with the people who have to pay more for everything all of a sudden, t­hat it doesn’t stop the system from happening.  So this post-oil world is tricky, and the societies have to change.  So I’ll leave it at that. 

MR. RÜHL:  Thank you.

So let me try to play devil’s advocate here.  What I’m hearing is renewables globally get to the point where they can be market-based, no longer dependent on subsidies, number one.

Number two, the transition to a post-oil world in the sense of having a higher share of clean energy in this particular region has already started.

And number three, these huge transformational changes which we are seeing now most extreme in Saudi Arabia are actually a fertile breeding ground for these new technologies.

And as I said, let me play devil’s advocate and ask you to check the logic of this, starting with the big political picture, the interaction between politics and renewable energy.  We all agree clean energy is good.  We probably also all agree that regulation – not to mention subsidies – just regulation and targets have been extremely important in getting momentum into renewables, moving them with this very low share they have of the global energy sector.  And this is after all what Paris was all about, formulating targets.

Now you have a political development.  You have somebody like Trump coming and his schizophrenic policy, because we actually know more about his energy policy than about his economic policy.  Well, he says, one, I will make it easy to drill.  Two, I’m going to deregulate, including the energy sector.  What does it mean?  Presumably, it means you would find it easier to produce more fossil energy.  So everybody agrees?  But it also means that your abundant things, like CAFE standards, car efficiency standards, which by their own – by the projections of the outgoing administration were designed to limit 2 ½ million barrels per day of oil within the next few days.  So basically what you have here increases supply and it increases demand, makes the world – the energy sector bigger and the world more dirty.  And you can of course translate this into the global – in the global picture saying I don’t care about climate change, so probably more competition, more production of fossil energies.  And because of less initiatives, less targets in climate change, less impetus for countries to sign onto targets to invest into renewables.  Again, the system just moves to a higher, meaning dirtier, level in this discussion.

Question, first question from this big picture.  Is it really realistic to assume that then this particular region will continue and is able, market-based, to increase the share of renewables and is willing, given the squeeze and the taxation issues and all the things you line out about this terribly difficult transition in Saudi Arabia.  Is it willing to invest a part of the shrinking pie into of all the things in the world renewable energies?  Why should they do that?  So they can they first, Mattia, and then will they?

MR. ROMANI:  I think this – first of all, it’d be interesting to listen to Todd Stern later today.  Todd was the U.S. envoy for climate for the key years of negotiations, deep knowledge of what’s going on in the U.S., and he’s going to talk about how this is going to change.  He’s in the room – or maybe not.  But it’d be interesting to see what he has to say. 

But my understanding is that some trends have been set in motion would be very difficult to stop them because their commercial trends.  So the cheapest place in the world to produce wind today is Texas, right?  Texas is always the cheapest onshore wind in the world, and they have an enormous industry by now that has the usual power the large industry in the U.S. has and the huge usual lobbying power up the Hill in Washington – (inaudible) – that has invested massively in this sector.  And it’s not going to go out.  It’s going to stay.  So there are some commercial trends that have been set in motion, and I don’t think these are going to stop suddenly.  That’s the first observation.

The second observation is that a lot of the regulatory framework in the States, including on car emissions, is not federal.  It’s state-based.  And, you know, things will change, but perhaps not this quickly on some elements of the emissions regulations in the U.S.  So do I believe that everything will be the same regardless of what the energy policy will be in Washington?  No.  I think it will not change the direction of the trend, but it will change the speed of change.  So the speed will be affected, I think. 

Do I think there will be a switch back from gas into coal in the U.S., therefore undermining the probably single most important element of the trend in terms at least of emissions – although I do realize not in terms of the post-oil world because it’s a move to gas?  No, I don’t believe that’s the case, first, because, again, the commercial interests are very large in the switch to gas.  Second is that if I was an investor that has to decide to put money in a power plant today, even if I felt that in a Trump world coal would be acceptable, I mean, a presidency lasts only so many years, and certainly less years, regardless of whether it’s one or two, than a coal fire power plant.  So would I want to lock myself into a coal fire power plant for the next 20, 25 years?  Probably not.  So I think there are a number of reasons why these trends are set to continue in the same direction, but I am worried about the pace and speed. 

MR. RÜHL:  So if the train continues but slows, what does it mean for the constrains here? 

MR. SEZNEC:  Well, I think it will in fact encourage really the move in post-oil, as I said before.  I think I’s a blessing that there are some changes happening because I think the people – the region sees that it’s got to really move away from being dependent on one or two commodities – I mean, natural gas and oil.  So I think they are pushing very hard going downstream in value-added production.  I think that – I think that a rule of thumb would be to say that the vision is really to make the same type of income on 10 percent of the production of crude oil, which could happen in the next 10 or 20 to 30 years.  So I think that probably will be the case.  I think in the short term with the Trump administration, no one knows where this is going to go.  I don’t think anyone knows where the prices will go.  Right now, the feeling oftentimes – and I think that’s the way you feel too, Christof – is that there is a long-term price downward price trend on oil.  But this goes through these enormous cycles.  Twenty years ago, the price of oil was going to 10 and five years ago everybody thought the price of oil will go up forever.  Twenty years before, the price of oil is going down forever, now it’s going down forever.  I think we don’t really know where it’s going in the end.  So I think they have to move away from just that conundrum.  And I think we are seeing that happening. 

In terms of technology, it’s very interesting what I heard yesterday here, is that the UAE’s investing in clean coal technology, and I thought that was very interesting.  Now, I don’t know how clean coal is very useful, but one could dream of a day where UAE technology will come and help the West Virginia coal miners.  I mean, you know, that will be – I mean, I think – I’m not sure I’ll see that while I’m alive.

MR. RÜHL:  That will be the day.

MR. SEZNEC:  But there is a transfer of technology.  A company like SABIC sells its technology in the world today, and we’re seeing that.  Emal, which is – as I mentioned before is the largest aluminum company in the world, does not have foreign technology.  It has its own technology.  So I think these things are developing sort of by themselves automatically.  Now there’s enough of a baseload of technology, of productions to really start moving forward, perhaps, and hopefully much faster.

MR. RÜHL:  But let me push the envelope a little bit and bring in economics.  So I buy the argument lose global regulation and change and policies may slow the trend but not change it.  But then coming back to this region, I mean, look out the window.  Drive through Abu Dhabi.  How many solar panels do you see?  So both these arguments, I’m hearing the wisdom of the leadership.  This is a region heavily based, as you have mentioned, on emission-intensive industries, aluminum smelters, refineries, this kind of stuff, petrochemicals.  It’s not exactly clean stuff.  It’s also a region, yes, we hear about investing in clean coal, but right now we have invested in nuclear power big time.  And it’s not exactly a region, despite all these press reports about very cheap offerings on the solar front and people walk away and give the (big one ?) back.  Nobody talks about that, no?  So if I add to that current state affairs and history and declarations of good intentions one more time, the severe economic constrains which you have pointed out so well on the example of Saudi Arabia, not to mention other more populous, less rich countries in this region, then I don’t understand why this heavy economic constraint should lead to more investment and a new set of industries in a world where this is not as attractive as before. 

MR. MATTIA:  No, I fully agree.  I think one fundamental – the linchpin of this – and this is happening to an extent in the region, at least in our experience, is energy tariffs, is really moving to market-based energy tariffs, because that’s the first, most important market signal, then generates a change in the mindset and generates the structural change that we want to see happen gradually.

Let me give you one example that comes from east of Suez, although a little bit further north, so something that Jordan did recently that to me was a gamechanger.  So Jordan is liberalizing its energy tariffs, and in this context – and I’m talking under the control of Hanan Morsy, my lead economist for the region is sitting there, so if I say anything wrong, Hanan, please chastise me and put it right.  But what they did is they passed a law, which was highly controversial, that says that if the fossil fuel prices go up, the energy – the power producers will pass on – have to pass on the price onto consumers, they can’t keep the price the same, and book the deficit into the budget.  And this is a rule they passed for issues of macro stability, because they had a real issue about the power producers passing on the cost of higher fossil fuel prices if the fossil fuel prices go back up, pass them onto the budget.  Now they can’t by law.  The have to pass these on to the consumers.  This has generated enormous controversy in Jordan, but the other thing it’s generated is a queue in front of the EBRD office to install solar panels – literally a queue.  Every industrial producers, mall, shop, things they invest has asked us can you please help us put up solar panels.  So I guess the point I want to make is that once you create the right price incentives so that the real cost of energy is passed on to consumers and users, then the incentives are right to set up the solar panels that you don’t see out here. 

MR. SEZNEC:  Well, that’s very interesting, to draw on an example.  I must say, fascinating.  The – one thing though, Christof, to – I cannot really answer the point, but that one thing is what these countries here in the Gulf have to do is work with what they have, and what they have is plentiful oil and plentiful natural gas.  That’s the base of what they have to work with.  So they must go from that.  That’s their natural advantage.  So they have to – you know, going into chemicals is the logical extension, because if you have a lot of carbon molecules, what do you do?  I mean, you know, you have to use them to add value to them, develop the technology to make the products.  Where it’s creating an interesting point on that is that basically what we’re developing in these regions are economies that are really going to compete in – and are competing already enormously – with the U.S. and the German producers in particular, and with the Japanese producers.  So they’re going, as they – as you mentioned earlier, their growth is relatively limited in the world.  The market shares will change very drastically and they’ll be a lot of fights between the producers of this region and the producers of chemicals in China, in Japan, in Europe.  And we see the problems you’ve seen all over Europe of the refineries are not very efficient compared to the refiners here in Europe, and yet people are out in the street in France fighting for this and fighting for that, because they cannot produce as cheaply as here.  So I think they have to work with what they have.  And, yes, it is perhaps more polluting, but if you can reduce your – if you can make the same type of income with 1/10th the production, then eventually it’s better.

MR. RÜHL:  Well, I think we can have a long academic argument on whether investing into oil-related, gas-related industries is the best way to diversify your economy.  And refineries certainly and other places with cheap labor, like in India, can compete.  My question was – and let me push you one more time – this is really when you have a situation in which taxation is included in which, no?  Here now you have – they include billing, all these things which you want to do to pay for the electricity we use, no?  So whether that is not – the direct translation of that is not toward a situation where people say, OK, if I have to pay for it, I wasn’t the cheapest, which currently I think we can agree it’s not.  You need additional mechanisms, but as (lined out ?), it’s not solar or wind.


MR. RÜHL:  Isn’t that simple truth?

MR. SEZNEC:  Well, yes, I think definitely for today the price of gas is so low here that it is still cheaper than solar.  And I think that’s one of the problems.  There are some technical issues on the solar that haven’t been resolved in terms of the amount of heat that solar panels can take.  So that is something they’re working on.  So I think it might be too early to really make – you know, the Moroccan example is great because the heat in Morocco is not as high as here, and the solar panels can do much better and more efficient in Morocco than they can be here.  So I’m not saying it’s not going to happen.  I’m saying it has to be worked on.  We’re still pretty far away from achieving much more solar success here.  There’s some money invested in that, but we’ll see.

MR. RÜHL:  Let me throw this up and – yeah, invite comments.  Could you introduce yourself?  And there should be a microphone somewhere.  And also, please ask whom you direct your question to.

Q:  It would actually be to you, Dr. Rühl.  My name is John Cavanagh from the Australian Embassy here in the UAE.

I feel like we might have missed an opportunity if we closed this session without hearing from you as head of global research at Adia about, you know, this is – the world’s taken on the third-largest sovereign wealth fund.  What are you looking at investing in, you know, in this post-oil environment and what is Asia doing?  What are you interested in, without giving away the keys to the kingdom?  What can you tell us about what you are looking at in thematically and geographically?

MR. RÜHL:  First of all, I think you heard enough from me, more than usually for a moderator, at the beginning – (laughter) – and more than most people would ask for.  Secondly, I have to disappoint you.  Adia is an instrument of diversification, including diversification away from this region.  So most of our investments are not here.  

Over here.

Q:  My name is Phillip Cornell.  I’m at the Atlantic Council, and formally at Saudi Aramco.

My question is to Jean-François in particular.  We talked about how, you know, this region opening forces them to for example open up the oil and gas sector, and that can release a lot of liquidity, most dramatically in the Aramco IPO.  Now that presents a lot of opportunities, but also a lot of risks, and it depends how that liquidity’s managed.  So I would ask you, what is your, for example, confidence in the public investment fund that will be set up?  I mean, I think quite symbolically it’s sitting in a relatively empty financial district in Riyadh, which is – and at the same time, so what does that present for outside investors into Saudi Arabia?  And thirdly, would you put your own money into an Aramco IPO? 

 MR. SEZNEC:  It’s very easy for me to invest money I don’t have, so assuming I had money I probably would – yeah, I would go against investing in the IPO.  The PIF is a very interesting animal.  Now PIF is not new.  PIF was created in 1972 and was always in charge of helping the private sector first and eventually public companies into going into industry.  The idea of PIF was to provide capital so shares would be – to companies so companies would be successful, with government help, through the PIF, and then the shares sold to the public.  That never happened.  (Chuckles.)  PIF always kept the shares.  That’s human nature, I guess.  But – so they’re now using PIF as a vehicle, and that’s indeed going to become a major, major entity, because the only way that the – in my view, anyway, that the IPO can take place is that if all the shares of Saudi Aramco are owned by PIF, and then it can be divvied up, a certain percentage going to the public offering. 

            Then, PIF will have these hundreds of billions of dollars; they’ve already invested money from other things into Uber and other things like this, and do much more like Mubadala is doing.  And I think the model for PIF is really Mubadala, except it will be Mubadala multiplied by 10, you know, from 60 billion to 600 million – more than that – like a few trillion.  So I think PIF will be a good – a good outfit for that.  It’s totally controlled by the civil service – no influence from the royal family, and I think that will be very good.  So I trust that the people there will invest properly.  And how they do it, I’m not sure, and, you know, we’ll see.  But they will go into – one of their jobs will be to invest in the – especially in the smaller companies.  So they’ll have plenty of money; so I suspect they’ll do a sub fund, if you like, within PIF to invest into the small and medium-sized enterprises, which is the only, really, place where jobs will be truly created.

            MR. RÜHL:  The third question was, would you put your own money it?

            MR. SEZNEC:  I answered that. I said I don’t have any, to answer the question.  But if I had some money, I think I would.

            MR. RÜHL:  OK, back there.

            Q:  Ibrahim Fahimi (ph) from Abu Dhabi.

We are talking about new technology in solar energy and renewable, but I didn’t hear from you the effectiveness of new technology in ultra-deep water – actually, the technology of ultra-deep water, developed in last 15 years, giving us, globally, almost 25 percent of the oil production as built today – also, more or less, 25 percent in total global gas production.  And now the oil and gas coming from ultra-deep water is now cost-effective, and even competing with the conventional resources.  Do you think that more investment will go to invest more and more in ultra-deep water?  Especially now, most of oil companies is doing huge investment – multi – tens of billions – in Mediterranean Sea.  So do you think that this will affect the global market?

            MR. RÜHL:  Ultra-deep water, not exactly a renewable, but you want to venture a guess?

            MR. SEZNEC:  I’m sorry, which kind of water, sir?  What was the – I didn’t understand the question.

            MR. RÜHL:  The question was whether there would be more investment going into ultra-deep water or into export.

            MR. SEZNEC:  Oh, deep water, yes.

            MR. RÜHL:  Maybe Mattia can just say one, or a –

            MR. ROMANI:  (Chuckles.)  Hardly a post-oil world, but we shall see.  I don’t know, it’s – do we see – first of all, EBRD invest in – invests very little in exploration and production in general, so we don’t have any direct experience, but, you know, I used to work for Shell for many years, and this was an area that Shell has invested in massively over the years, and very successfully so.  In fact, some of the Shell investments – some of the BP investments were the ones that actually took the prices down to start with.  So of course, there’s promise for that.  Last time I was looking at the numbers, I didn’t see what you’re suggesting, which is that by now, ultra-deep water oil and gas is competitive to the lowest prices – marginal prices of extracting oil and gas, and I would need to be updated on the technology to, you know, see how the prices have come down to those lower levels.  But certainly, there is potential in terms of volumes.

            Q:  David Goldwyn, Atlantic Council.

Christof, a question for you, and one for Mattia.  Christof, if I can turn your question back on you – with respect to renewables, most of the places in the world where there has been significant investment in the absence of carbon pricing is where there has been policy support for renewables.  And so, that’s true in the U.S. with, you know, production and investment tax credits – it’s been true in Germany, true in China and India as well.  So I guess the question is for ADIA, and for you, where in the world are you investing in renewables, and how confident are you that the policy support will be there to do it?  We heard from Patrick Pouyanné – his concern that he was in that space, but not making money yet.

            And I guess the question I have for you, Mattia is to really challenge this notion that sustainability necessarily creates growth.  You know, the head of Exxon, one of the big U.S. utilities, talks about, the utility of the future is going to be run by a guy and a dog, and the dog’s job is to keep the guy company, and the guy’s dog is to feed the job.  (Laughter.)  You know, that it’s going to be completely automated.  And so, you know, as we move to digitization and to – and to more sustainability, we’re weakening demand for hydrocarbons, particularly in this area, and we’re not creating jobs.  So what’s the pathway in this area in particular for job creation, if there’s a big move to sustainability?

            MR. RÜHL:  So I’ll just give you – I’m the moderator – (chuckles).  But I do think, yes, it’s the core – from an – even an economist’s stance – the core of the problem is that they are not yet globally competitive, so if you want to push renewables, you have two ways to do it; either you regulate – and we all know the history of government regulations and its great successes everywhere – or you internalize the price, which means you have a price for carbon.  And then you have two more questions: do you want to tax it, or do you want to have a carbon market?  And I think, for reasons of – you won’t have a carbon tax everywhere at the same time, and you know that taxation through multinational institutions never happens, so I think, for practical reasons only, I would always advocate for a – for a carbon price which starts in those countries who can afford it, and where the electorate supports it, basically, and then meanders from there.

            MR. ROMANI:  I can’t resist to sort of add one thing to this part of the – of the question.  Sometimes, it’s important, though, to distinguish between the sort of difficulties of setting regulations, which sort of minimize uncertainty, which is the issue that you have in investment, vis-à-vis the presence of externalities.  The presence of externality is simply there.  This is, you know, economics.  It hasn’t got to do with regulations; the externality exists.  Whether the externality is the externality of the cost of the carbon emissions, because it causes damages because of climate change, or whether the externality is, for instance, the dependence on a single fossil fuel for your energy, i.e., energy security, the absence of energy security is a negative externality.  And a lot of the investments in renewables is actually driven by that externality, as opposed to the externality related to the cost of carbon.  I’m thinking, for instance, about countries across Central Asia that have invested heavily in renewables because they want a diversified energy system that doesn’t depend on importing gas from their neighbors all the time.

So what I would say is that, while I agree with you that the regulatory framework is uncertain, the presence of externality isn’t, and therefore, that should reassure investors that, one way or the other, with some uncertainties in the long term, those prices – (inaudible) – make their way to the market.  But I do realize that not everybody has the luxury, like you have, of investing in very long-term – you can invest in very long-term, and therefore, take into account the externalities even before you take into account the uncertainty of the regulatory framework.

            Anyway, on the second part of the question on jobs, that’s the toughest – the toughest, really, question to answer, and I’ve looked quite a bit into this, and there’s quite a lot of academic research on this topic.  Do we have a – sort of a final answer that the move to sustainability will create jobs in the sustainability sector itself?  No.  I can’t say that we can absolutely say for sure that a world based on renewables and based on a sustainable management of the energy system will provide you more jobs in those sectors than the jobs.  But the second observation I have is that the fossil fuel sectors, per se, is not a big employer.  Refineries today are run by men and a dog in, sort of, advanced refineries.

So the question, really, is, in a world which is structurally different, would there be more jobs or less jobs?  Well, that depends entirely by the ability of the economy to create growth.  If the economy creates growth, that will come with jobs.  Can I tell you in what sectors those jobs will be now?  No.  They’ll be across a number of sectors.  Some of them, you can imagine – services, coding, IT, advanced systems and so on and so forth.  Some of those jobs, we can’t imagine.  They will appear in sectors we don’t know exist yet.  So, in my view, the answer, really, is, create the system that is best at creating value added, and therefore, economic growth, and that will come with jobs.

            MR. SEZNEC (?):  If I could – could I add –

            MR. RÜHL:  That was a good – we are – I am getting heavy signals that we are out of time, and I’m supposed to tell you that the briefing for the World Energy Outlook is upstairs, and the New Africa is here.  And I would ask you for a round of applause for the panelists.  Thank you.  (Applause.)