Abu Dhabi deal may usher in foreign investment in Middle East oil

13 March 2019 (Last Updated March 13th, 2019 10:40)

Under the terms of the agreement, BlackRock and KKR will pay $4 billion upfront for 40 per cent of a newly formed entity called Adnoc Oil Pipelines.

Abu Dhabi deal may usher in foreign investment in Middle East oil
Founder and CEO of investment firm BlackRock, Larry Fink, says the company “will hold board members accountable” if they fail to address sustainability.

A $4 billion deal announced in late February between the Abu Dhabi National Oil Company (Adnoc) and the US-based financial firms BlackRock and KKR & Co may mark the start of a new wave of foreign investment in the United Arab Emirates, as well as providing a model for deals in other countries in the Middle East and North Africa (Mena) region.

The details of the deal were announced at a signing ceremony on 24 February.

Under the terms of the agreement, BlackRock and KKR will pay $4 billion upfront for 40 per cent of a newly formed entity called Adnoc Oil Pipelines, which will lease 18 of Adnoc’s domestic oil pipelines for a period of 23 years.

Adnoc Oil Pipelines will, in turn, be paid a tariff by Adnoc for the volume of crude and condensate that flows through the pipelines, with Adnoc agreeing to a minimum flow rate.

Adnoc investment: Unlocking capital for long-term projects

The deal forms part of a series of transactions by Adnoc aimed at releasing capital for investment in its long-term plans, including investing $45 billion in the downstream sector to significantly increase refining and petrochemical capacities.

Earlier deals include the agreement to sell 35 per cent of Adnoc Refining to Eni and OMV. In January, Adnoc announced that Eni would take a 20 per cent stake and OMV would take 15 per cent in the company, which is valued at $19.3 billion.

Adnoc also raised funds for investment in December 2017 by listing 10 per cent of Adnoc Distribution, the largest operator of retail fuel service stations and convenience stores in the UAE. This raised $851 million, making it the largest IPO in Abu Dhabi in a decade.

Midstream novelty offers hope

The deal with BlackRock and KKR is different to previous investments with the Gulf Cooperation Council (GCC) members as it is the first time a foreign institutional investor has partnered with a national oil company on domestic midstream infrastructure, as opposed to pipelines that cross international borders such as the Dolphin Gas Pipeline between Qatar, the UAE and Oman.

Richard Mallinson, an analyst at UK-based research company Energy Aspects, says other similar deals could follow.

“There are various examples of downstream partnerships across the big Middle Eastern oil producers, including the SATORP and YASREF joint venture refineries in Saudi Arabia, but midstream deals for domestic pipelines are less common.

“Rosneft’s purchase of a controlling stake in the Kurdish oil pipeline in late 2017 was related to an export asset, even though the pipeline itself doesn’t cross the Iraq-Turkey border.

“This new deal appears to include a broader range of pipelines within the UAE, which potentially marks a further inroad for international investment into Middle Eastern infrastructure.”

Tom Quinn, a senior research analyst, at the consultancy Wood Mackenzie agrees: “This deal frees up around $4 billion for Adnoc to invest in expansion projects as it looks to grow capacity to 5 million b/d of oil.

“We may see other Middle Eastern national oil companies look to replicate this type of deal as they seek more innovative ways to restructure their finances.”

Middle East precedent has roots in the US

Though the deal is unique for the Middle East, KKR has significant experience of executing similar deals in the US, and Henry Kravis, co-CEO of KKR, has made it clear that he is interested in making more infrastructure investments in the Mena region.

“We have done deals like this in the US – we’ve bought in and basically leased back to the operator as we have done here,” he said.

“I am looking at this as hopefully the first in a long string of investments that we can make in the region … the one thing that is missing is capital for infrastructure … you’re going to see more and more public-private partnerships.”

It is not yet known what shape the next deals will take, but it may not be long until more agreements with foreign investors are revealed.

Speaking after the deal with BlackRock and KKR was announced, Adnoc CEO Sultan Al Jaber said there was significant interest from institutional investors and a total of 10 entities were initially involved in talks about investing in the Adnoc Oil Pipelines joint venture.

He added: “We will not stop here. This is a step in the right direction. We will soon be unveiling and communicating to the world many other similar investment opportunities.”

Adnoc is not alone in seeking to free up capital to invest in future developments.

National oil companies across the region are increasingly seeking new ways of financing their megaprojects and, so far, these have included public-private partnerships in a variety of forms.

If Adnoc is successful with its innovative fund-raising plans, it could unleash a round of copycat deals that would see institutional investors pumping billions of dollars into infrastructure across the Middle East.

MEED
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