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Letter from the Middle East: Selling off the family silver

Auctioning minority stakes in NOCs’ assets may fill short-term budget holes, but they are no guarantee of long-term change

Gulf countries may appear to be reaching for the Thatcherite handbook in pursuing part-privatisations and attracting outside capital into their oil industries at a time of fiscal stringency and growing pressures for diversification. But, on a closer look, raising funds and driving limited organisational improvements have so far been more prominent than any deep transformation.

Leading the way

Abu Dhabi’s Adnoc has blazed the trail, selling over the past three years minority stakes in its refining subsidiary, drilling company and oil and gas pipeline networks, as well as raising a $3bn bond for its oil export pipeline. It has also formed joint ventures with international partners in fertilisers and LPG shipping.

In September, it added a 49pc stake in its real estate arm and an institutional placement of another 10pc of its fuel retail business—building on a December 2017 domestic IPO of an initial 10pc stake—to this list. In total, Adnoc’s deals have realised more than $28bn, almost as much as the $29.4bn raised in Saudi Aramco’s December 2019 IPO.

$28bn – Raised from Adnoc’s deals

The latter’s share price, at SAR35.70 ($9.52), is currently above the IPO price of SAR32, in sharp contrast with those of Shell, BP or ExxonMobil, which are down c.20pc on their December levels. Part of the relative share price buoyancy comes from Aramco’s commitment to its $75bn dividend—with the government even suggesting it may forego part of its payout while that to private shareholders (still holding only 1.5pc of the firm) is maintained.

Aramco is less healthy on other metrics. Debt at 20.1pc of capital is not high but is above its target range. And a 50pc spending cut planned for next year risks crimping its future strategic aims of petrochemicals and overseas downstream growth. The firm appears set to follow Adnoc’s lead by hiving off a separate pipelines unit, in which it would sell a minority stake to a consortium of local banks.

Followers

What of the other Gulf Cooperation Council (GCC) countries? Qatar and its state-owned Qatar Petroleum (QP) are in a relatively comfortable financial position. While Kuwait has a temporary cash crunch and could run a $46bn deficit in the 2020-21 fiscal year, the estimated $500bn+ assets of the Kuwait Investment Authority provide a cushion. Nationalism and political infighting also make part-privatisation deals unlikely.

Bahrain and Oman have the GCC’s weakest fiscal positions. Bahrain’s relatively diversified economy—hydrocarbons made up just 18pc of GDP last year—sits oddly with near-total government revenue reliance on the oil sector. Oil minister Mohammed bin Khalifa Al Khalifa said in March that the country could put some petroleum assets into a fund in which it could sell shares.

Oman’s debt has reached 60pc of GDP, and it is considering a sale of 20-25pc of OQ (formerly Oman Oil). The country’s new ruler, Haitham bin Tariq, has given OQ’s capable management team a mandate to shake things up. But most of the sultanate’s oil assets sit not with OQ but in its 60pc stake in Petroleum Development Oman, already part-owned by Shell, Total and Portugal’s Partex.

Raising funds and driving limited organisational improvements have so far been more prominent than any deep transformation

The finance-raising attractions of bonds, loans, leases and minority stake sales are clear. They can also drive a stronger commercial mindset and/or organisational and operational improvements. In some cases, they build potentially more widely useful strategic relationships.

But Adnoc’s recent deals are noticeably distinct from the upstream concession restructuring it has pursued since 2014, which brings on board IOCs with relevant technical skills and/or market access. The buyers are primarily purely financial, except for Italy’s Snam in the gas pipeline consortium.

The NOC has been able to bring in capital to maintain payouts to government while funding its ambitious oil capacity expansion, sour gas development, refining and petrochemicals plans, but has remained firmly in control via retaining majority stakes and time limits on leases. This is sufficient for Adnoc—which has already undergone an internal transformation—and for its state owner.

But what of Saudi Arabia, Bahrain and Oman? For them, part-privatisation must also help to energise the domestic economy. Upstream assets would be the most valuable and saleable, but probably would not bring wider diversification and societal benefits. Simply following Abu Dhabi’s playbook may not be enough and—as fiscal pain accumulates—next year may require some more far-reaching and innovative deal-making.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

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