Saudi Arabia is enjoying one of the largest foreign-investment windfalls in history, after selling a stake in the oil pipelines, that run through the desert kingdom for more than $12 billion. However, as a result of this, the nation could face an unpleasant fact. Since carefully cultivated partnerships with firms like BlackRock Inc. and SoftBank Group Corp. have failed to attract the desired investment, it is turning to the jewels of its energy sector to attract new capital.
The selling of the stake to EIG Global Energy Partners LLC last week demonstrates how dependent Saudi Arabia is on its conventional mainstay, as well as the difficulties Crown Prince Mohammed bin Salman faces in diversifying the country away from oil and gas, in order to achieve his Vision 2030 target. International investors prefer revenue-rich energy assets over tourism and entertainment, so companies like BlackRock and SoftBank haven't put as much money back into the country as the government had hoped. “If Covid had not occurred, the entertainment and tourism industries would have had a stronger year of foreign direct investment in 2020,” says the study. Karen Young is a resident scholar at the Washington-based American Enterprise Institute.
“However, the core investors who see Saudi Arabia as a good investment would focus on the largest and most lucrative field, which is still oil and energy.” Despite the fact that EIG, a Washington-based private equity company headed by Chief Executive Blair Thomas, is a major investor in North America and Europe, it has little clout in Saudi circles. “However, the core investors who see Saudi Arabia as a good investment would focus on the largest and most lucrative field, which is still oil and energy.”
According to data collected by Bloomberg, Saudi Arabia received $5.5 billion in net FDI flows in 2020, equal to about 1% of its economic production, implying that the EIG agreement would bring in more than double that amount. The government's goal is 5.7 percent by 2030, which explains why it may be tempted to sell off precious energy assets like Saudi Aramco. Jim Krane, a fellow at Rice University's Baker Institute for Public Policy in Houston, said: "This is the latest milestone in an ongoing transition." “Mohammed bin Salman and his advisors keep coming up with new ways to extract money from Saudi Aramco without jeopardising the company's ability to operate. Currently, the kingdom requires currency, and Aramco is in charge of the supply.”
To acquire the share, EIG beat out competitors Apollo Global Management Inc. and Brookfield Asset Management Inc. It is now assembling a group of additional investors to participate in the transaction. Although, some international investors have established closer relations with Saudi Arabia in recent years, the majority of them regard the country as a source of capital rather than a destination for investment. With a $45 billion investment in Softbank's $100 billion technology vehicle, the kingdom's flagship Public Investment Fund, or PIF, is the biggest shareholder. In addition, the PIF has committed up to $20 billion to assist Blackstone Group LP in the development of the world's largest infrastructure fund.
The causes are numerous, ranging from the Saudi legal system's inconsistency to the country's economic downturn as it adjusts to lower oil prices. The detention and imprisonment of dozens of Saudi businessmen at the Ritz Carlton hotel in Riyadh in 2017, and the murder of dissident writer Jamal Khashoggi, the following year haven't helped matters. Between 2008 and 2012, FDI into Saudi Arabia reached a high of more than $26 billion per year. Large refinery and petrochemical projects established with foreign partners during those years, when oil averaged over $90 a barrel, were the main drivers. As a result of the subsequent decline in oil prices, average FDI into Saudi Arabia has dropped to about $6 billion per year.
“Despite steps to liberalise and open the economy to new industry investment, FDI has not come in the way that was expected,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. This year, FDI could increase even more. Last week, the kingdom signed agreements to construct solar power plants with developers such as Electricite de France SA and Marubeni Corpo, and the sale of the world's largest desalination plant is expected to be completed later this year. FDI increased by 20% in 2020, owing to deals worth $1.5 billion with Alphabet Inc. and Alibaba Group Holding Ltd. to build cloud-computing hubs. Saudi Arabia is following a model that neighbouring Abu Dhabi successfully adopted in selling assets of its main state-owned energy explorer. In recent years, the emirate has earned more than $20 billion by taking foreign investors into some of its core properties, rather than seeking an initial public offering of its state-owned energy company Adnoc. EIG looked at a few of the Adnoc assets on the market but couldn't come to a deal. As a result, a source familiar with the situation said, it didn't want to miss out on the Aramco deal.
According to people familiar with the situation, Saudi Aramco is encouraged by the valuation and interest created for the pipeline’s transaction, which means the oil giant could seek more disposals in the future. According to people familiar with the situation in December, it has already tasked boutique investment bank Moelis & Co with developing a plan for selling stakes in some subsidiaries. “It's a great deal for Aramco, but it's also a new kind of investment strategy,” said Young of the American Enterprise Institute, “in that it is “giving up” even more in terms of investor access to knowledge and leverage over operations than an IPO.”
“It is a true alliance, a long-term effort with outsiders, and it represents an entirely new degree of confidence outside of the business and government.” According to its website, EIG was established in 1982 and has invested over $34 billion in the energy sector. It has stakes in Abengoa SA, Cheniere Energy Inc., Chesapeake Energy Corp., and Kinder Morgan Inc., all of which are located in Houston.