UAE flips own script with $4 bln oil pipeline deal

Reverse plumbing. Abu Dhabi is flipping the script. In recent years, the United Arab Emirates’ leading light has blazed a trail by offloading minority stakes in subsidiaries of the Abu Dhabi National Oil Company (ADNOC). Wednesday’s acquisition of KKR and BlackRock’s 40% stake in ADNOC’s oil pipelines, by domestic investment fund Lunate, goes in the opposite direction.

ADNOC’s original template made a lot of sense. National oil company rival Saudi Aramco’s initial public offering of its whole business in 2019 created major disclosure requirements and intense wrangling over the final group valuation. ADNOC’s strategy of selling minority stakes in subsections like oil and gas pipelines avoided all that, but still raised billions of dollars of cash and burnished the UAE’s credentials as a destination for foreign capital.

KKR and BlackRock’s 2019 original purchase of a 40% stake in ADNOC’s oil pipelines exemplified the trend. The buyers spent $4 billion acquiring part of the tariff rights for 18 pipelines, amounting to 750 km, thus valuing the enterprise at $10 billion. Aramco copied that model in 2021 and sold a 49% stake in its oil pipelines subsidiary to investors including EIG Global Energy Partners for $12.4 billion.

Five years on, it makes sense for KKR and BlackRock to exit. They have sold their 40% stake for a similar price to the $4 billion they bought it for, people familiar with the matter told Breakingviews. Given that M&A involving secure infrastructure assets can be loaded up with debt, dividends paid out over the last five years could be roughly the same as the equity originally advanced. That means they may have doubled their money.

What’s less obvious is why Abu Dhabi is buying it back. Arguably paying $4 billion for the assets is a slightly better deal in 2024 than in 2019, because the pipeline network has grown to 806 km. But it rubs against the UAE’s long-term quest for foreign direct investment, which still appears to be an objective judging by the relaxation of limits to overseas ownership in recent years. With neighbouring Saudi wanting to hike annual foreign direct investment inflows to $100 billion by 2030, the risk is the UAE loses its head start.

Lunate is an investment fund set up by Chimera Investment. Chimera is owned by the Royal Group, which in turn is the majority owner of the $239 billion International Holding Company, chaired by Sheikh Tahnoon bin Zayed Al Nahyan, brother of the UAE’s president. Hence the sale could be part of a wider expansion of entities associated with IHC. Or, given that Sheikh Tahnoon is the UAE’s national security adviser, it could just be part of a wider global pattern where states place a greater focus on owning domestic energy assets. Either way, it makes for a departure from a well-understood trend.