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Aramco advances plan to lease out pipelines

The cash-strapped Saudi NOC is looking to replicate the recent divestment success of its Emirati counterpart Adnoc

While Aramco has paused talks on several large commercial transactions, it is proceeding with plans to cash in on its pipeline business. Several high-profile projects were put on hold or cancelled altogether during the first half of the year as the company sought to maintain operations while safeguarding its highly publicised dividend.

Reports first emerged in March that the Dhahran-based company would look to offload a stake in the infrastructure in a deal worth around $10bn. However, the proposed agreement will not be a sale as was widely reported at the time.

Instead, Petroleum Economist understands Aramco will lease, for a period of up to 25 years, a stake in the pipelines to a group of local banks believed to include Al-Ahli NCB, Al Rajhi and Riyad. Aramco will then pay a set tariff for use of the infrastructure, which includes the East-West Pipeline that is being upgraded to increase capacity from 5mn bl/d to 7mn bl/d.

The premise may sound familiar. There is a growing trend throughout the industry of infrastructure owners and operators selling or leasing pipelines, refineries and distribution assets. Adnoc successfully completed a similar pipeline leaseback-type deal recently and Aramco perhaps saw this and decided to follow suit.

$75bn – Aramco dividend commitment

The deal in question was the lease of a 40pc stake in the Abu Dhabi NOC’s new Adnoc Oil Pipelines subsidiary to asset managers BlackRock and KKR in mid-2019 for a total of $4.9bn. This was followed by the June 2020 agreement to lease a 49pc stake in another subsidiary, Adnoc Gas Pipelines, to a consortium of investors for $10.1bn. These deals have allowed Adnoc to fill its coffers, with the company also cashing in on new subsidiaries for refining ($5.8bn) and distribution ($3bn) while farming out exploration work in new concessions to foreign firms.

Amid uncertainty about oil price and demand, the deal structure holds great appeal for asset owners. Meanwhile, for investors, tariff revenues from Gulf NOCs are about the safest bet out there.

The size of the stake in Aramco Pipelines to be leased out has not yet been made public. However, the company retains tighter control over hydrocarbon-related activities than Adnoc and Petroleum Economist does not expect it to be more than 25pc.

Dividend commitment

For Aramco, the deal would mark another step towards proving that it is a reliable investment proposition. The company has had an eventful eight months or so since it became the world’s most valuable publicly listed company, selling 1.5pc of its shares on the Saudi Tadawul stock exchange in a domestic initial public offering. While this was a success, it was significantly pared back from the international listing originally planned.

In Q1, the company ramped up output as Riyadh entered an ill-timed price war with Russia, triggered by the breakdown in talks over an extension to Opec+ cuts. Under instruction from the Ministry of Energy, Aramco increased production past 12mn bl/d in early April, sending oil prices into freefall, with WTI for May delivery dropping to -$37/bl for the first time ever.

Under greater scrutiny than ever before, the company cannot afford to default on a dividend payment

In response, output was swiftly reduced to below 8mn bl/d following emergency Opec+ cuts, while the company made significant reductions to its 2020-23 capex, laid off a large portion of its expat workforce and rethought its capital project spending.

Following an unsurprising drop in sales, Aramco reported a 25pc reduction in Q1 net profits, and it now faces a shortfall in cash ahead of delivering on its commitment to a $75bn dividend. It has already sought to bridge the gap: it closed a $10bn one-year loan deal in May with a group of ten banks and renegotiated the structure of the recently completed $69.1bn deal to acquire a 70pc stake in petrochemicals firm Sabic, spreading the balance over the next three years.

However, now coming under greater scrutiny than ever before, the company cannot afford to default on a dividend payment, even if only 1.5pc of the total is actually leaving Saudi state coffers.

With the company’s domestic and international refining joint ventures having delivered poor results to date and no sign of Aramco allowing foreign firms to join its upstream concession, leasing out pipelines and perhaps terminals may be its best bet to cover its sizeable commitments.

This article was updated on Thursday 6 August at 1pm.

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