Arabs Taking Center Stage Upstream, GCC SWFs Increasing European stakes

Arab NOCs and SWFs are hitting the global upstream sector. New deals are to be expected, especially after the Aramco IPO.

20 December 2016

After the surprise deal made by commodity trader Glencore and Qatar’s sovereign wealth fund Qatar Investment Authority (QIA) on the 7th of December, in which both parties acquired a 19.5 per cent stake in Russian oil company Rosneft, valued at €10.5bn, another Arab deal has hit the headlines. On the 18th of December British oil major BP announced that it has signed an agreement with the Supreme Petroleum Council of the Emirate of Abu Dhabi and the Abu Dhabi National Oil Company (ADNOC) that grants BP a 10% interest in Abu Dhabi's ADCO onshore oil concession.

The deal also entails that the Abu Dhabi government will receive 2% of BP’s issued share capital (excluding treasury shares). Mubadala Development Company, which is Abu Dhabi’s strategic investment company, will hold the new USdiv.2 billion stake in BP. Brian Loft, Mubadala’s executive director at Mubadala, stated that "we will be owning and managing the shares on behalf of the Abu Dhabi government consistent with our portfolio and mandate as an investment company". At present, Mubadala is in the process of merging with International Petroleum Investment Company to form a bn company. The Abu Dhabi entity already is controlling shareholder in Cepsa and OMV, as well as direct operation of oilfields in South-east Asia and elsewhere.


The ADCO deal is not yet finalized. The coming months, several new parties can be expected to be signed up, Asian groups are slated to be the front runners. UAE’s energy focused strategies have already since years been largely Asia focused, but the possibility of bringing in new Asian investments in the upstream can be seen as a watershed development.


Analysts indicate at present that there is only a very short list of contenders for the remaining stake in ADNOC’s flagship onshore oil concession, after the deal with BP. The strategic position of the ADCO concession, which produces more than 50 percent of Abu’s 3.1 million bpd of output, is immense. Part of ADNOC’s future successes depends on the feasibility of increasing ADCO’s production even further. The discussion on the new concession has been already dragging on since 3 years, with British-Dutch oil major Shell as the main victim. The latter has been the main ADCO operator, but has lost its influence at present totally. At present ,the ADCO concession will be managed by a consortium made up of BP, French oil major Total (10%), and Japan’s Inpex and South Korea’s GS Energy (backed by Korean National Oil Co.) holding respectively 5 and 3 per cent. Another 12 per cent is currently still being offered.


Rumored contenders are Chinese state-controlled energy companies, including China National Petroleum Coorporation (CNPC), but also others are still indicated. The last days another contender has emerged. Chinese private oil company CEFC China Energy is slated also to be in advanced talks to secure a stake to develop the ADCO concession. CECF is said to be discussing the acquisition of 10 per cent of the ADCO concession. The costs are said to be around div.2bn.


 The Chinese role has already being discussed since long. China currently ranks fourth as a source of UAE exports in 2014 at bn, which trailed Japan (.5bn), India (.4bn) and South Korea (.8bn). The UAE and China have been supporting lately increased trade and economic relationships. Still the verdict is still out. Chinese and Indian operators, which have been knocking on the doors since years, are considered to be lacking the upstream technological knowledge needed to address the challenges that most fields in Abu Dhabi are facing the coming years. At the same time, opening up ADCO for Chinese participation would also increase China’s already immense influence on oil prices in Asia even further.


Looking at the deal structure ADNOC has been able to put in place with BP, especially the 2 per cent stake in the British oil major, it could be expected that Abu Dhabi would be much more inclined to target a possible deal with another European oil giant, such as Norway’s Statoil. A stake in the Norwegian company, well known for its high technical standards and willingness to take part in challenging operations, would be for the long-term a much better choice. If a deal, based on the BP structure, would be an option, ADNOC could be convinced to take the more conventional road. For Abu Dhabi’s Mubadala it would be another major opportunity, as it would strengthen its shareholdings substantially at very low risks.


The Rosneft deal brings Qatar’s SWF QIA also back into the upstream business with force. As the Rosneft share sale is currently the largest under the Russian privatization program, which was launched at the start of 2016, it not only will bring increased investments into Russia but also presents a major opportunity for Qatar. It also shows that in spite of US and EU financial and technological sanctions against Rosneft, caused by the Russian annexation of the Crimea, which it was thought would deter western companies’ participation in the Russian oil producer’s share sale, non-Western entities still are interested in deals with Moscow. Qatar will be heavily involved in all Rosneft activities in future. QIA is at present Glencore’s largest shareholder, with a 9 per cent stake. Glencore is slated to pay €300m in equity with the rest of the money being provided by QIA and non-recourse bank financing arranged by a European bank, possibly Intesa Sanpaolo. The deal entails also a five-year supply agreement with Rosneft. This will see the Russian company supply 220,000 barrels a day to Glencore’s oil trading arm. Glencore in 2014 already acquired for <.4bn Chad-focused Caracal Energy. A remarkable twist in the whole deal could be that Qatar, via its Rosneft investment also will become a major party in a prospective investment into the major Zohr offshore gasfield in Egypt.


Both deals can not only be considered as a fundamental change in GCC Upstream but also showing a more aggressive investment strategy popping up at GCC SWFs. Geopolitical changes in 2016 are now showing their first results, as Qatar has opened up to Moscow, while Abu Dhabi is trying to cement its UK-links.


The GCC Upstream, which largely has been ruled by two main streams, NOCs and Western IOCs, is now opening up to more direct participation of non-Western entities. Abu Dhabi’s willingness to include Asian operators is commercially not remarkable. As the overwhelming majority of Emirati crude and gas (LNG) is being sold in Asia, business ties are being expanded to solidify bilateral relations. From a technical point of view, the impact of Asian operators will be disputable. The lack of knowledge and overall capabilities of Chinese and Indian operators to deal with the immense challenges facing Abu’s fields is staggering. ADNOC’s choice to include still these parties, instead of taking onboard more competent IOCs or Independents, is obviously based on geopolitical assessments and not on operational grounds. The latter shows a willingness to substitute technical capabilities for commercial opportunities. Another remarkable feat is the fact that no US-based IOCs or Independents have been given stakes in the ADCO concession. It would have been a very commercially attractive and technically prudent strategy if the likes of Chevron or Exxon would have been taken onboard too. 


Putting the operational issues aside of the above mentioned deals, the role of Arab SWFs in the Global Upstream Sectors is growing. After several years of being very conservative, largely due to the ongoing financial crisis in the Middle East (low oil prices), mainstream Arab SWFs now seem to be moving back into the global energy markets. Mubadala and QIA are showing a healthy appetite for international upstream (and possible downstream) assets. The investments made in Rosneft and indirectly BP show that international oil is back on their target lists. Commercially it is clear, overall valuations of these assets are still very low, acquisitions will bring high ROIs in future, especially if current oil price developments are continued. At the same time, Arab SWFs are showing again to be managed not only by commercial indicators but also by geopolitical indicators. The fact that QIA has become a major investor in Rosneft is not only based on a financial assessment, but also will be increasing Qatar’s links with Moscow. The potential for both sides is immense. QIA’s entrance to the Russian market opens up new inroads for further investments in energy, metals and food assets in Russia. Possible links to Russia’s defense conglomerates also should not be put aside.


For Moscow, the hefty Qatari investment is a significant stimulus for its fledging economy. At the same time, Qatar and Russia are not only interested in an increased crude oil link, as both are top gas exporters too. An increased bilateral relation also will bear fruit on this side. Russia has been very interested in entering the GCC gas sectors since years, without real success until now. Gazprom however could be now given the opportunity to enter via this new Moscow-Doha link. For the regional situation, an increased Russian-Qatari cooperation is challenging. Possible adversity between Qatar and Saudi Arabia/UAE could be increased if the Russian-Qatari friendship will be expanded to the military situation in Syria or Iraq.
Mubadala’s involvement is also significant. The Abu Dhabi-based SWF is at present heavily involved in the merger with IPIC. The latter deal seems to be put in place very quick, but it is still struggling to get all in place. To be charged with the management of another major project, aka the div.2 bn BP stake, is not a small issue. It will take Mubadala’s attention for a part, as dealing as a shareholder of an IOC, with Western/UK rules, is something else than having to deal with minnow oil companies such as OMV. Still, its impact will be large.

Mubadala’s overall impact on global upstream will increase substantially, while it also will gain direct access to possible hard-needed technology (BP) to deal with its struggling projects in Bahrain or Iraq (KRG). Interesting to keep an eye on will be the possibility that rumors, which have already been published widely in the international press, about a possible involvement in Abu Dhabi’s other energy company TAQA, could now become reality. The latter is now possible as it would bring TAQA’s European assets on the North Sea, which were sold by BP before, back into contact with its mother company. A synergy would be possible.


QIA and ADNOC/Mubadala have created a new very interesting commercial-geopolitical environment in the GCC. After years of resource nationalism, which has brought some Western oil companies on their knees, GCC operators, directly or indirectly, have returned to be vying for a position of an NIOC (National International Oil Company). Qatar and Abu Dhabi have shown that a prudent way of investment can bring more benefits than by only buying shares on the stock market. The year 2016 ends with a Big Bang, however, 2017 could be a real revolutionary year. An assertive GCC SWFs investment strategy, targeting core business (oil, gas, energy, defense) on a global scale, could increase the political power of the separate member countries substantially. 


Saudi analysts and advisors will be watching these developments for sure, as their time of prominence is approaching very fast. If the ARAMCO IPO will be announced, more acquisitions are to be expected. Aramco’s current global leadership will only be enhanced if it has a new war chest filled with div trillion or more.

The upstream cake is still full of cherries, as valuations are low, while reserves are under pressure in general. Arab sweets could really use some additional Western cherries. Maybe time to pick up already some additional oil, gas and defense shares, as Arab SWFs (led possibly by Saudi’s PIF SWF) are coming.


(Additional info also via www.ArabSWFMonitor.com, where you also can assess other reports, subscriptions or contacts for analysis)

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