Oil to Games: The Great Transition

A Brief History of Saudi Arabia & Oil

‍In order to understand the Saudi Arabian move into video gaming and entertainment, we need to look to their past, and specifically their relationship with oil. In 1932, under the leadership of Ibn Saud, the present-day Kingdom of Saudi Arabia was formed. The house of Al Saud had ruled the region for hundreds of years prior, and it is one of the few countries on Earth that has not been colonized by a foreign empire. Saudi Arabia is home to the birthplace of the world’s second-largest religion; Islam, which was founded by the Islamic prophet Muhammad, who was born in Mecca in the 7th century. The house of Al Saud remains the royal family of Saudi Arabia today.

In 1938, the course of Saudi Arabia changed with the discovery of large oil reserves around the Arabian Peninsula by the Arabian American Oil Company (Aramco). However, meaningful production did not commence until 1945, after the Second World War. Aramco was originally owned by four American companies: Socal, Texaco, Stanford Oil Company of New Jersey, and Socony Vacuum. In 1973, following the U.S. support of Israel in the Yom Kippur War, the Saudi government bought a 25% ownership in Aramco (Aramco). Saudi, in a response to the war, imposed an oil embargo on any country that supported Israel, and many viewed Aramco’s willingness to sell ownership to the Saudi government as an appeasement to ensure oil trade resumed. Saudi Arabia acquired additional ownership in 1974 bringing their ownership up to 60% (Aramco). By 1980, the Saudi government acquired 100% of the interest in Aramco (Aramco).

Saudi Arabia is the world's second-largest producer of crude oil, behind the United States and trailed by Russia (Visual Capitalist). The country currently sits on 17% of the world’s proven petroleum reserves (Trade.gov). Saudi has 90 oil and gas fields, but only 17 of these fields are currently operational and producing oil. The magic of Saudi oil is that there is natural reservoir pressure, which drastically lowers the cost of oil production. While the average US oil well produces 28 barrels a day with crude production having to be lifted to the surface, the average Saudi well produces 3,000 barrels of oil per day. The average cost of production per oil barrel in Saudi is ~$10 (Statista), considerably cheaper than the average cost in the US of ~$36 per barrel (Statista / EIA).

Saudi Arabia has been successful in increasing the percentage of GDP generated from non-oil industries; however, the chart can be deceiving as it is also layered with Saudi Arabia’s efforts to significantly reduce its oil production over the past few years in an effort to maintain a higher oil price. They reduced their oil production by nearly 1 million barrels in 2023, 9% less than the year prior (EIA).

Oil dominates the Saudi government’s balance sheet, and the government is aggressively pursuing diversification. This is not a new initiative, in every 5 year plan the government has called for diversification with mixed results. Like other oil-reliant sovereign wealth funds, such as Norway's, Saudi Arabia faces the challenge of transferring national wealth from oil to diverse asset classes. When attempting to determine the fiscal dependence on oil, using the needed break-even oil price is often a good starting point. This approach focuses on the necessary oil price to generate sufficient export revenues to pay for Saudi imports. This is calling attention to the fact that Saudi needs the oil prices to stay high to cover its necessary imports, implying a continued and heavy reliance for the health of their economy on their black gold reservoir.

The Public Investment Fund Seeks Local Opportunities

‍Saudi Arabia’s Public Investment Fund (PIF) is the 6th largest sovereign wealth fund in the world, with $925bn in assets under management. The PIF has long been a group that foreign seekers of capital have gone to in order to raise capital, as their historical mandate has often emulated that of an asset manager, with the primary focus being financial returns. However, the 2030 plan set forth by the royal family and government has called for a reshaping of the PIF’s investment strategy to prioritize domestic economic growth and diversification. At the Future Investment Initiative (FII) summit, PIF Governor Yasir Al-Rumayyan revealed plans to scale back overseas investments from 30% to 18-20% of the sovereign wealth fund’s portfolio (Fast Company).

This continued shift toward local investment is an instrumental change from operating as an asset manager to utilizing the $925bn arsenal as a means to manufacture industry internally that will employ their young population. Their population is growing at a healthy pace, in contrast to the vast majority of other developed countries.

The Saudi government believes one of the core pillars to promote this industry diversification will be through the gaming industry. As a part of the 2030 vision plan, the government established a National Gaming & Esports Strategy which set the targets of creating 39,000 jobs and launching 250 games companies in Saudi Arabia by 2030. Brian Ward is the CEO of Savvy Games, which is the dedicated gaming arm of the PIF (who we had the pleasure of hosting on our firm’s Game Changers Podcast). He believes this employment goal is feasible when using Canada as a comparable. Canada has a population of 40m, only about 8% larger than the population of Saudi Arabia, and there are over 400 games companies and 35,000 gaming jobs in Canada today (Deconstructor of Fun).

‍Saudi Arabia Needs New Industry For Its Young Demographic

‍Mohammed bin Salman Al Saud (MBS), the Crown Prince and Prime Minister of Saudi Arabia, is openly an avid gamer himself. He is 39 years old, and part of a generation that has grown up with the proliferation of gaming in every facet of life, like most millennials. The game Age of Empires is cited as his favorite game in the book “Blood & Oil”, which gives readers a glimpse into the royal family and his succession. The author of the book credits Age of Empires as a contributor to MBS’ keen ability to strategize, to think critically, and ultimately to win at whatever game he is playing. Age of Empires happens to be one of the Konvoy team’s favorite games, so we wholeheartedly agree.

This is in a similar vein to what Elon Musk referenced on Joe Rogan’s podcast, emphasizing that video games make better surgeons, claiming they are 26% better overall than their non-player colleagues (National Library of Medicine). Today's leaders, like British Prime Minister Rishi Sunak, grew up with video games, not just weekend trips to the arcade—shaping their connection to technology and culture (The Mirror).

Aside from the gaming industry being a personal passion, MBS and the PIF see an opportunity to repeat what Finland, Iceland, and other historically non-core entertainment hubs have done and latch on to contribute to building the virtual worlds dominating a significant portion of young people’s time every day. Saudi Arabia is well positioned to be a gaming hub with 78% of their workforce having higher education (Trading Economics). Also 39% of the population in Saudi Arabia is under the age of 30, which is significantly higher than the U.S., China, and nearly every other top 15 world economy. The Saudi Arabian population is well-educated, young, and strongly positioned to make a dent in the largest digital entertainment industry: video gaming.

Saudi Arabia's investments in sports and video gaming over the past decade reflect the strategic effort to diversify its economy away from oil and position the country. Below are a few highlights of investments Saudi has made across sports and gaming:

‍Sports Investments:

• 2016: Saudi Arabia initiated Vision 2030, highlighting sports as a key area for social and economic development.
• 2019: Hosted its first Formula E race and the inaugural Saudi International golf tournament, part of the European Tour.
• 2020: Acquired an 80% stake in Newcastle United Football Club via the Public Investment Fund (PIF), expanding its influence in global football.
• 2021: Hosted major events like the Saudi Cup (world's richest horse race) and the first-ever Formula 1 Grand Prix in Jeddah.
• 2022: Signed long-term contracts for hosting global sports events, including agreements with LIV Golf.
• 2023: Saudi Arabia secured the hosting rights for the 2023 FIFA Club World Cup and intensified bids for the 2034 FIFA World Cup.

Video Gaming & Esports Investments:

• 2017: Began exploring gaming as part of the Vision 2030 agenda, emphasizing youth engagement.
• 2021: Established Savvy Games Group (backed by PIF) with a $38 billion budget to build a robust gaming ecosystem, including investments in global companies like Activision Blizzard, Scopely, and Nintendo. A majority of this has been allocated, and it is believed they will likely be allocating further.
• 2023: Launched the National Gaming and Esports Strategy to create 39,000 jobs, develop 250 companies, and contribute $13.3 billion to Saudi’s GDP by 2030.
• 2024: Plans to host the Esports World Cup annually in Riyadh and inaugurate the Olympic Esports Games in 2025.

Saudi Arabia has invested well over 5% of the PIF in entertainment over the course of the last five years; this is a targeted and well-calculated push. They realize the urgency needed to diversify their economy as their reliance on oil continues to become more precarious.

‍Takeaway: Saudi Arabia needs to continue aggressively diversifying its economy and continue using its large sovereign wealth fund to build up alternative industries at home. MBS, being a younger leader, is perfectly suited to push this agenda and industry forward and help Saudi Arabia with their young educated population to become a production powerhouse in entertainment. Over the next five years, Saudi Arabia is poised to become a destination where foreigners not only seek funding but also actively invest, especially in video gaming.