GCC countries are selling prime assets to fund economic transition.
Over the last few months, most Gulf Cooperation Council (GCC) countries have been cutting themselves multimillion-dollar deals selling energy assets or issuing bonds off the back of them.
Saudi Arabia and the United Arab Emirates (UAE) are leading the trend. In April, Saudi Aramco agreed to sell 49% of its pipeline network to a US-led consortium for $12.4 billion. In June 2020, Abu Dhabi’s national oil company, Adnoc, raised $10 billion selling gas pipeline leasing rights. The company is currently considering an IPO for its drilling and fertilizer businesses—for $1 billion each, sources close to the deal say.
In other Gulf states, national oil companies are eying the bond market. Qatar Petroleum sold $12.5 billion in bonds to help fund the North Field expansion, a megaproject that should allow the tiny Gulf state to become the world’s largest liquified natural gas producer by 2030. In April, Oman’s oil company sold $750 million in bonds; and, according to Bloomberg, Kuwait Petroleum plans to borrow up to $20 billion on international debt markets to maintain production levels. Experts expect more deals in the energy sector as pandemic-driven stimulus packages run out.
Funding Diversification
GCC countries sit on almost 30% of the world’s oil and more than 20% of its natural gas. For a few years now, governments have been trying to break free from the oil rent.
“Gulf countries appear to be taking their money out of the oil and gas market and, we hope, will invest it wisely,” says London-based David Manley, senior economic analyst at the Natural Resource Governance Institute.
Saudi Arabia and the UAE started privatizing before Covid-19. In late 2019, Saudi Aramco made the headlines by raising $25.6 billion in a record IPO. In 2017, Adnoc sold part of its fuel distribution network for $851 million in a similar deal.
A lot of the money raised by national oil and gas companies is used to fund the petro monarchies’ economic transition. In the past, Gulf states would have paid for these projects out of pocket; but governments are now forced to watch public spending, due to the steep decline in hydrocarbon revenue.
“It’s not a knee-jerk reaction. A lot of thinking has gone into this,” says Adnan Fazli, Transaction Services partner at global professional-services firm Deloitte. “This is part of a monetization initiative. The desire is to create liquidity to invest in the transformation of economies, without necessarily having to take on debt.”
Foreign investors—who have rarely been allowed to come near the Arab world’s crown jewels—are a bit more welcome now. “We are talking about some of the largest private equity and infrastructure investors globally,” says Fazli. “For them it’s a financial investment, a tool to generate quality returns for their shareholders; and the way these investments are structured precisely caters to that. The operators continue to have control over these businesses, as they had before, and investors get a return over the duration of their investment.”
If Gulf countries are allowing foreign investors in, they are also careful to structure transactions that leave themselves in control. In the upcoming Aramco pipeline deal, for instance, the Saudi giant remains the majority shareholder and keeps operational control of the pipelines. “If you look closely at what they are selling, it’s not the core business but assets that are adjacent,” says Dubai-based Bart Cornelissen, a partner at Deloitte and its Energy Resources and Industrials leader. “They would sell the pipeline, for example, but keep the oil field.”
Behind all this, the bigger worry for Gulf states is how to remain relevant in a context of the global energy transition. “The question is, which country or which company will be able to produce oil until the end?” says Cornelissen. “The only way you can ensure that is by producing as cheaply as possible, and what we are seeing now in the Middle East is a further drive down the cost curve.”
Still, it may be hard to stay the course. “Everyone is realizing the energy transition is real,” says Manley. “But if the barrel hits $100 again, worries will fade and governments might forget about developing away from oil and gas.”
