The oil and gas industry is undergoing a significant transformation, with private equity firms stepping in to fill a financial gap left by traditional investors. This shift is reshaping how major oil companies are funding their operations and infrastructure projects. Let's dive in and explore this fascinating trend.
Major players in the private equity world are increasingly investing in the infrastructure assets of national oil companies, particularly in the Middle East. Saudi Arabia and the United Arab Emirates (UAE) have opened their pipeline networks to foreign capital, creating new opportunities for investment. But here's where it gets controversial: private equity firms are also eyeing the infrastructure assets of international oil giants. This move could provide Big Oil with much-needed funds to reinvest in oil and gas production, especially amidst fluctuating oil prices and evolving investor sentiments.
With the ESG (Environmental, Social, and Governance) narrative shifting, public-market investors have become less receptive to the oil and gas industry. This has created an opening for private equity money, which is seen as a viable option for top Western majors to raise capital. They can do this by selling off parts of their pipeline and storage assets. This trend began in the Middle East but is now spreading to international majors, who need capital to maintain dividends, buybacks, and invest in boosting oil and gas production, especially with oil prices around $60 per barrel.
Investors are actively encouraging top executives from major oil companies like ExxonMobil, BP, TotalEnergies, and Eni to consider selling stakes in their pipeline and storage assets to private equity groups. This strategy offers a new way for Big Oil to monetize their infrastructure assets, bypassing the traditional equity-market investors.
During a closed-door meeting at ADIPEC, a major energy industry gathering, private equity teams discussed these opportunities with executives from Exxon, BP, TotalEnergies, and Eni. They suggested that the majors could offload more of their infrastructure assets. One participant at the meeting emphasized the need for these companies to rethink their approach to capital, highlighting the willingness of private equity firms to invest in Big Oil, unlike the less receptive equity markets.
A key advantage of this approach is the ability for Big Oil to attract funds from the infrastructure arms of major investment firms and reinvest that capital into their core business.
Several deals have already been made this year. For example, in March, Apollo-managed funds partnered with BP to invest approximately $1 billion in BP Pipelines (TANAP) Ltd. This BP subsidiary holds BP’s 12% interest in TANAP, the pipeline that transports natural gas from Azerbaijan through Turkey. While BP is monetizing its interest, it will remain the controlling shareholder of BP TANAP, retaining long-term commercial and strategic interests. Prior to that, Apollo and BP signed an agreement for Apollo to acquire a non-controlling stake in BP Pipelines TAP Limited, which holds a 20% share in the Trans Adriatic Pipeline AG (TAP).
Shell also completed the sale of its 16.125% interest in the company owning the Colonial Pipeline in the U.S. to a subsidiary of Brookfield Infrastructure Partners L.P. and its institutional partners. However, other major oil companies have yet to announce similar large-scale deals.
The Middle East has been a pioneer in this trend. In 2020, Abu Dhabi’s ADNOC struck a $20.7-billion deal with Global Infrastructure Partners (GIP) and Brookfield, selling a 49% stake in ADNOC Gas Pipeline Assets LLC. KKR also acquired a minority stake in ADNOC Gas Pipeline Assets this year. KKR's 2019 investment in ADNOC's oil pipelines business marked the first such deal for a Middle Eastern NOC. Last year, KKR and BlackRock sold their 40% stake in ADNOC Oil Pipelines to Lunate, an Abu Dhabi-based alternative investment manager.
Saudi Arabia is also exploring ways to monetize Aramco’s infrastructure. Earlier this year, Saudi Aramco signed an $11 billion lease and leaseback deal for its Jafurah gas processing facilities with a consortium led by Global Infrastructure Partners (GIP), a part of BlackRock. Jafurah is a crucial part of Aramco’s plan to increase gas production capacity by 60% between 2021 and 2030.
Infrastructure deals have flourished in the Middle East in recent months. Bapco Energies of Bahrain sold a minority stake in the Saudi Bahrain Pipeline Company (SBPC) to a BlackRock fund last year. Kuwait Petroleum Corporation (KPC) is also considering raising up to $7 billion by leasing part of its pipeline network.
This trend, initiated in the Middle East, is now expanding to Big Oil, as evidenced by recent deals involving Shell and BP pipelines. Private equity offers a win-win scenario: international majors gain capital outside of traditional markets, and infrastructure funds secure long-term, reliable returns. But, what do you think? Is this a sustainable model for the oil and gas industry, or are there potential risks involved? Share your thoughts in the comments below!
