Prospective GCC deal for Occidental assets a step towards regional gas market

The partnership to buy a 40 per cent stake in Occidental’s Mena unit would be a major step for cross-border energy investment in the region.

Major Middle East oil assets don’t come up for sale very often. So it’s not surprising that, as Reuters reports, Abu Dhabi’s Mubadala, Qatar Petroleum and Oman Oil might team up to buy a 40 per cent stake in Occidental’s Middle East and North Africa unit. But it would also be a major step for cross-border energy investment in the region.

Outside the supermajor oil firms such as Shell and ExxonMobil, Occidental has the largest Mena portfolio. It holds a quarter of the Dolphin pipeline, which delivers gas from Qatar to the UAE and Oman; it operates the large Mukhaizna heavy-oil field in Oman and Bahrain’s only oil and gasfield. In all these ventures, it partners with Mubadala, Abu Dhabi’s state-owned strategic investment company. It also has stakes in the demanding Shah sour gas project in Abu Dhabi, fields in Iraq, Yemen and Libya, and has operated successfully for many years in Oman near the Al Ain border.

Recently, Occidental has come under pressure from activist shareholders in the United States who believe its Middle East assets offer mediocre returns, expose it to political risk and consume capital that could better be deployed in booming North American shale plays. Selling a minority stake eases these concerns while keeping Occidental in the region. Other North American companies – Apache in Egypt, Talisman Energy in the North Sea – have recently done similar deals.

A joint bid makes excellent sense for the three prospective consortium members. The likely US$8 billion to $10bn price tag would be a lot for any of them alone. Keeping a majority stake leaves Occidental as the operator of these challenging projects.

All its GCC projects are highly strategic for the countries concerned. And it might have been politically difficult for one of these state-owned enterprises to dominate a crown jewel project in a Gulf neighbour. Interestingly, for the first time, Mubadala would be investing in oil and gas production within Abu Dhabi itself.

If the consortium did indeed negotiate an acceptable price with Occidental, it seems unlikely that any rival suitor would emerge – who would want to bid against Qatar Petroleum for assets in Qatar? But, tempting as the assets are, these state giants also have to ensure they don’t close the door on new international investors in other projects.

The package is not without problems. Insecurity and disruptions make the Libyan and Yemeni assets hard to value. And a consortium could experience conflicts of interest: Qatar Petroleum, in particular, would sit on both sides of the table in the negotiations over an expansion of the Dolphin pipeline.

Perhaps more fundamentally, any consortium members should think what comes next. Would the deal be a consolidation of existing assets in their neighbourhood, ensuring no undesirable interloper snaps them up? Would it be a step in building a wider Middle East portfolio, particularly if other western companies scale back, and building bonds with Arab states beyond the GCC? Or should they next diversify into other geographies, as Mubadala has done in South East Asia and Qatar Petroleum in the US?

Such a partnership could be an opportunity to revitalise GCC energy integration. Since the start-up of Dolphin in 2007, progress on an Arabian Gulf gas grid has stalled, leaving five gas-short neighbours surrounding Qatar, which holds the world’s third-largest reserves. Cross-border energy investment – particularly between the leading oil producers – is a rarity.

Of course, the GCC’s largest member remains conspicuously absent both from the prospective Occidental deal, and from gas trade. But something closer to a true regional gas market would meet the region’s needs more quickly and economically than the current division into “energy islands”. And tangible economic links, rather than political talk, may forge a more solid Gulf unity.

Robin Mills is Manaar Energy’s head of consulting and the author of The Myth of the Oil Crisis