Adnoc has recently racked up an interesting list of large and innovative financial transactions. That announced today is the biggest yet: $10.1 billion from a consortium of international investors for the 20-year lease of 49 per cent of its gas pipeline unit. This is an important sign of confidence during a tough time for the energy industry.
November 2017 saw Adnoc receive $3bn from a bond issue for the Abu Dhabi Crude Oil Pipeline, the strategic export route from Habshan to Fujairah on the east coast. In December 2017, it raised Dh3.1 billion from the initial public offering of 10 per cent of fuel retail arm Adnoc distribution on the Abu Dhabi exchange. In October 2018, US oil services firm Baker Hughes acquired a 5 per cent stake in Adnoc Drilling for $550 million.
In January 2019, the state oil firm agreed to sell 35 per cent of its refining unit to OMV and Eni for $5.8 billion, and that July it established a trading joint venture with these companies. Also in July, it received about $5 billion for a 49 per cent share in its oil pipelines subsidiary from Singaporean sovereign wealth fund GIC, US private equity groups KKR and BlackRock, and the Abu Dhabi Retirement Pensions and Benefit Fund.
Saudi Aramco, of course, carried out an initial public offering of 2 per cent of its shares in December, raising $29.4bn. But otherwise, Adnoc’s slew of deals is bigger than any other national oil company’s, and it is much more varied.
The deals differ in detail, but the general aim is to free up capital from Adnoc’s non-core or supporting businesses to reinvest in more strategic projects, while retaining control and long-term ownership. Preferable here are relatively simple businesses such as the pipelines, where the future cashflows can be quite easily isolated and valued.
Exposure to the rigours of the market and international partners should improve competitiveness and the understanding of where commercial value is generated. And in the case of companies such as Eni and Baker Hughes, the strategic partner should bring skills and new market access.
The latest transaction has an interesting cast: Global Infrastructure Partners of the US, Ontario Teachers’ Pension Plan Board and Brookfield Asset Management from Canada, GIC, NH Investment and Securities from South Korea, and Snam, the Italian infrastructure firm formerly owned by Eni.
With the exception of Snam and GIP, they are generalist financial investors but four of the consortium have a particular focus on infrastructure. They are attracted by steady, long-term returns. This is particularly important for pension funds, who have to match long-term liabilities in a world of near-zero interest rates.
They are quite different from the international oil companies who acquired positions in Abu Dhabi’s oil and gas production as legacy concessions were restructured between 2015 and 2018. Those featured a wide cast of industry specialists, American, European, Russian, Indian, Chinese, Japanese and South Korean. This brought expertise in international technology and operations, helped diversify the emirate’s political relationships, and built bridges to key future customers for its hydrocarbon exports.
The gas pipeline business, by contrast, is entirely a domestic affair. It moves gas and natural gas liquids (derived from processing raw gas) from offshore and onshore production sites to processing sites, consumers and the offshore Das Island liquified natural gas export facility. The partners will be paid a tariff based on the volumes transported, so they are not exposed to volatile oil and gas prices.
However, they do have to rely on robust flows of gas through the pipelines. National demand has probably dipped during the pandemic and the Opec+ oil production cuts. The emirate is diversifying its power generation by adding nuclear and solar to its gas-fired stations.
On the other hand, Adnoc has ambitious production growth plans from “sour” (hydrogen sulphide-bearing), unconventional and other reservoirs. New industries at the petrochemical and refining centre of Ruwais in Al Dhafra region and the industrial hub at Kizad should create extra demand.
Adnoc’s master plan aims to help make the UAE self-sufficient in gas. Additional opportunities could materialise in exporting to neighbours. Gas, a clean-burning and relatively low-carbon fuel, has a key part in most major petroleum companies’ strategies. A company such as Snam could be a valuable assistant in future-proofing the emirate’s gas infrastructure by improving efficiency, tightening up on leakage of the powerful greenhouse gas methane, and innovating on zero-carbon gases such as hydrogen.
Closing such a big deal amid the coronavirus pandemic without major delays is a welcome achievement for Adnoc. It is a vote of confidence in the country’s stability and financial robustness. The capital thus released can be used by Adnoc or its shareholder for more strategic or diversified investments. At a time when other Middle Eastern countries are struggling to move privatisation programmes forward, this transaction offers some encouragement.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis
