How Adnoc, KKR and BlackRock brought a global infrastructure investment approach to the region

The 23-year lease deal for 18 of Adnoc's crude pipelines is a landmark for the UAE and wider region

Adnoc has announced that it has entered into a landmark multi-billion-dollar midstream pipeline infrastructure partnership with KKR and BlackRock. To mark the occasion, a signing ceremony was held today at its headquarters with Dr Sultan Al Jaber, Minister of State and Adnoc Group chief executive, Larry Fink, chairman and CEO of BlackRock and Henry Kravis, co-chairman and co-CEO of KKR. Courtesy AdnocShow less

Adnoc, KKR and BlackRock have entered into a landmark partnership agreement over some of the Abu Dhabi firm's crude oil pipeline assets, which will be leased to a vehicle owned by Adnoc and the two asset managers for 23 years.

Adnoc receives a $4 billion upfront payment as part of the transaction and also retains absolute sovereignty and management of the pipelines.

This is the first time that leading, global institutional investors have deployed capital in 'midstream' infrastructure assets, in the UAE.

Midstream refers to one of the three stages of the oil and gas industry that includes processing, storing, transporting and marketing oil and gas.

The deal is attractive because of Adnoc's high-levels of proven reserves and production, as well as contractual minimums in place. It can deliver downside-protection and long-term cash flows to investors.

What is midstream?

Midstream is the segment of the energy value chain that accounts for the transportation and storage of crude, related product and other liquids. It is an integral part of the energy ecosystem as it links the production of oil with export or refining facilities.

Why are midstream assets so attractive?

Oil, gas and product pipelines are laid over hundreds of kilometres of land or water. This kind of critical infrastructure is relatively straightforward to monetise. The operating company brings on outside investors for all or parts of the network and pays tariffs for the volumes of crude and product that will be transported via the pipelines. In the case of Adnoc's deal with BlackRock and KKR, the difference is that the infrastructure is not being sold but instead leased over a long period. Regardless of the specific structure of this deal, according to KKR, it is aligned with its "strategy of investing in essential midstream infrastructure backed by proven reserves and production, and with long-term cash flow visibility”.

Why have producers in the region not opened up their midstream assets before?

Oil producers in the Middle East have closely held all aspects of their value chain as an integral part of their sovereignty. Creation of national oil companies closely matched the formation of nation states in the Middle East, with these state-backed producers viewed largely as champions of economic might of the region as a whole. Midstream assets are also highly sensitive. Given their geographic spread, they are more vulnerable to natural, technical as well as security risks than exploration, production and refining facilities. Hence, Adnoc has not sold any or part of its pipelines but instead has agreed to lease the assets long-term, which means it retains ownership and management. BlackRock's chief executive Larry Fink made it clear that his company's involvement in the deal with Adnoc reflects a "strong commitment to the UAE and the Middle East more broadly". Such opportunities allow for for international investors to access the region's oil and gas sector on a purely commercial basis.

"I have been proud to have spent many years building relationships in the region and believe that the economic transformation in the UAE represents attractive growth opportunities for investors from around the world to participate in the economic growth of the region," he said.

Why has Adnoc decided to invite foreign partners to invest in its midstream assets?

According to Adnoc Group chief executive Dr Sultan Al Jaber, "this landmark infrastructure transaction is a clear example of how we are unlocking and optimising value from our assets through the smarter origination and more sophisticated structuring of our transactions and partnerships, as well as attracting the world's premier institutional investors." 
Since 2016, Adnoc has been transformed into a more commercially-driven entity and is evolving into an integrated energy player. The company has consolidated its various units under a single brand umbrella, floated a 10 per cent stake in its fuel retail arm and earlier this year invited energy majors Eni and OMV to take a 35 per cent stake in its refining unit, for example. The decision to open up pipeline assets comes from a similar drive to engage foreign investor capital to generate greater efficiencies in its value chain. KKR said that Abu Dhabi's leadership "has articulated a vision for economic transformation in Abu Dhabi across sectors, with an important role for foreign investment to bring in capital, ideas, and technology" and that its investment "can be an important signal to the international investment community that this transformation is taking place".

How has Adnoc retained sovereignty over the assets in the KKR-BlackRock deal?

The national oil company, whether inviting investment upstream - for exploration and production of oil and gas - or downstream, which includes refining and petrochemicals, has largely stuck to a strategy of retaining a 60 per cent majority stakeholder interest across assets. In this case, it will own the majority of the special purpose vehicle which is leasing out the pipelines. The remaining 40 per cent will be held by BlackRock and KKR.

Is this the first large pipeline-related transaction for Adnoc?

Adnoc subsidiary Abu Dhabi Crude Oil Pipeline (Adcop) in 2017 issued a $3bn bond, its first ever and one of the region's largest-ever non-sovereign bond offerings. The bond received more than $11bn in orders, and was an early indication of the company leaning towards optimising new capital structures to run its business.

How will Adnoc use the funds from its latest pipeline deal?

According to the company, both the upfront and long-term proceeds from the deal could be used either for future projects or as part of dividends to the Abu Dhabi government - its sole shareholder. This typically depends on its ongoing capex and opex needs. However, the company noted that deals such as the bond, as well as the pipeline transaction, will help it mitigate some of the cyclical nature of the sector such as volatile oil prices. Such deals also help the government in terms of its own fiscal planning as Adnoc is better able to predict - in the near-term at least - what it is likely to be able to pay to its shareholder. Dr Al Jaber said that the pipelines deal "demonstrates how Adnoc’s wider transformation and value creation efforts are generating new, more diversified and predicable future sources of revenue and value for Abu Dhabi and the UAE".

Why are BlackRock and KKR investing in pipeline assets in Abu Dhabi?

BlackRock, the world’s largest asset manager and New York-based private equity firm KKR are both investing in the Adnoc assets through their global infrastructure funds. The UAE’s energy infrastructure is viewed as a stable, long-term and risk-free by global investors.

For institutional investors such as BlackRock and KKR, Abu Dhabi energy assets represent consistent income. There is also the opportunity for growth as Adnoc is planning to increase production capacity over the next five years and to unlock its new hydrocarbon discoveries.

Will there be more such deals in the future?

Adnoc has created an infrastructure unit to hold all of its pipeline interests. In time, this unit is expected to add further select Adnoc infrastructure assets and become the key vehicle for a new and innovative investment platform. While this is KKR’s first direct investment in the region, it said that there is the potential to do more. "KKR’s partnership with Adnoc demonstrates the opportunity for value-add foreign private investment across different sectors in the UAE,” the firm said.

What does this deal mean more broadly for the UAE investment landscape?

All three parties believe that there is the opportunity to do more in the UAE. Dr Al Jaber said that the transaction underlines how Adnoc is "accelerating its role as a driver of long term and sustainable FDI into the UAE". BlackRock's Mr Fink said that "public-private partnerships like the one we have forged with Adnoc will be critical to the continued growth of the region, and we look forward to continuing to participate in such partnerships in the future.”