Aramco seals oil pipelines deal

A year of talks this week culminated in the sale of a 49% stake in Aramco Oil Pipelines Co. to a consortium of investors for $12.4bn.

What: Saudi Aramco has sold a minority stake in its new oil pipelines subsidiary in a move that shows the company’s intention to monetise its assets in an effort to free up cash.

Why: Aramco has been hamstrung by its guaranteed $75bn per year dividend commitment and it has been working on ways to cash in on infrastructure much the same way as its counterpart in Abu Dhabi.

What Next: The company may now look to monetise other assets in order to allow its capital programme to return to pre-pandemic levels.

State-owned Saudi Aramco announced this week that it has agreed a multi-billion-dollar deal with a group of investors to sell and lease back a stake in its oil pipelines business.

The consortium, led by EIG Global Energy Partners, will acquire a 49% stake in the newly formed Aramco Oil Pipelines Co. subsidiary for $12.4bn. Aramco Oil Pipelines has been accorded 25 years of rate payments for oil transferred through the parent firm’s extensive in-kingdom network.

The announcement brings to an end nearly a year of back-and-forth discussions about the potential deal, which at one point looked to have been derailed because of concerns about perceived loss of control. As previously outlined by Middle East Oil & Gas (MEOG), Aramco will be granted exclusive rights to use, transport through, operate and maintain the network. For this, it will pay a “quarterly, volume-based tariff, payable by Aramco”, according to a EIG. This will be backed by minimum volume commitments and Aramco will retain full ownership of the pipelines.

Deal

The deal values Aramco Oil Pipelines Co. at around $25bn.

Unsurprisingly given the company’s determination to be seen as the world’s top oil and energy firm, the agreement will net the company more than the $10.1bn Abu Dhabi National Oil Co. (ADNOC) received in a similarly structured mid-2020 deal for a 49% share in its gas pipeline subsidiary.

Despite the draw of Aramco’s oil assets, the company sought to improve the deal’s attractiveness by offering potential buyers a syndicated loan which would cover the majority of the lease fee.

In late March, Aramco sent a request for proposals (RFP) to a pool of banks, with Bloomberg sources suggesting that BNP Paribas, Citigroup, HSBC Holdings and Mizuho Financial Group were all involved in providing around $10.5bn.

Aramco was advised on the deal by JP Morgan and Moelis & Co. while HSBC Bank and Latham & Watkins legal firm advised EIG.

In an official statement to press following the announcement, EIG’s CEO Robert Blair Thomas said the deal “aligns perfectly with EIG’s philosophy of investing in high-quality assets with contracted cash flows in critical infrastructure”. The Washington-based company holds around $22bn of energy-related assets around the world.

The other consortium members are yet to be disclosed, but sources told Bloomberg that Abu Dhabi’s Mubadala Investment Co. is in talks to take part. The Emirati wealth fund has around $232nm of assets.

Apollo Global Management, BlackRock, Brookfield Asset Management, Global Infrastructure Partners (GIP) and China Investment Corp. (CIC) have all previously been reported as considering making offers.

Assets

Aramco Oil Pipelines Co.’s key asset is the massive East-West Pipeline (EWP), which is currently undergoing a $250mn project to increase capacity from 5mn barrels per day to 7mn bpd.

At various points over the past two years, the use of drag-reducing agents and “interim conversion of NGL pipelines” allowed for a “temporary mechanical capacity increase” to reach the upper limit for short periods; however, during 2018 and 2019 flows averaged 2.1mn bpd.

The conduit is vital for Aramco as it transports crude from the Abqaiq processing hub in the oil-rich Eastern Province to refineries and export terminals at Yanbu’ on the Red Sea Coast, and completion of the expansion project is targeted in December 2021.

EWP was targeted by Yemen’s Houthi rebels in 2019 when the militants launched drone strikes that disabled the Abqaiq plant and the Khurais oilfield, taking around 5.7mn bpd off the market. More recent attacks have focused on export infrastructure throughout the Kingdom. It is worth noting that Aramco has assumed all operating and capital expense risk relating to the operation of the pipeline network.

As per Aramco’s annual report, the network was key to the company placing 23% of its 9.2mn bpd crude production and 0.1mn bpd of condensate “to in-Kingdom wholly owned and affiliated refineries” in 2020.

Most of the Kingdom’s exports are loaded from the Ras Tanura and Ju’aymah terminals on the Gulf coast, though Aramco has expanded export facilities on the Red Sea in recent years, with the Yanbu’ terminal now capable of loading 6.6mn bpd.

Aramco utilised it full midstream network in Q1 last year when it achieved a single-day crude loading record of 18.8mn barrels to 15 tankers in late March.

Strategy

The company noted that “the transaction represents a continuation of Aramco’s strategy to unlock the potential of its asset base and maximise value for its shareholders,” and MEOG understands from sources familiar with proceedings that further asset monetisation deals may be in the pipeline.

With ADNOC having enjoyed success with this approach, it is reported to be considering an initial public offering (IPO) of its drilling arm. The Emirati firm’s strategy serves as the blueprint for achieving short-term cash boosts while retaining control over vital state assets and Aramco is understood to be plotting a similar course. Speaking to MEOG, Ian Simm, Principal Advisor at consultancy IGM Energy said: “Following the ADNOC model, a logical option would be to sign similar arrangements for minority shares in its five wholly owned refineries at Ras Tanura, Riyadh, Jubail, Yanbu’ and Jazan.”

The company already has four domestic refining joint ventures (JVs) – Petro Rabigh with Japan’s Sumitomo Chemical Co., SAMREF with ExxonMobil of the US, SATORP with France’s Total and YASREF China’s Sinopec.

However, Saudi Arabia is less appealing for foreign direct investment (FDI) than the UAE, as was evidenced by Aramco resorting to guaranteeing a dividend of $75bn per year to shareholders through the first five years after its IPO – a promise that has hamstrung the company’s finances, leading it to tap debt markets to cover the shortfall.

Indeed, Crown Prince Mohammed bin Salman (MbS) last week said that the state would forego part of its 98.27% share of the dividend to recycle the funds through the Saudi economy under the Shareek (Partner) programme.

Riyadh is likely to continue to employ a combination of carrot and stick initiatives if it is to remain competitive with its neighbour or even to become the regional hub that it intends to be.