The Rise of UAE's State-Controlled Energy Hybrids

With Abu Dhabi’s domestic upstream sector dominated by its National Oil Company (NOC), ADNOC, and mounting surplus government funds seeking opportunities, the UAE government has created a number of energy-specific investment vehicles. These state-controlled firms have become very active in their pursuit of deals abroad, as high energy prices continue to offer attractive returns. Moreover, several international oil companies have struck strategic alliances with these state-controlled firms in the hope of leveraging their political relationships to improve their chances of closing new projects.

Despite the number of energy-sector investments, the firms differ from ADNOC. ADNOC controls access to, and manages, Abu Dhabi’s hydrocarbon resource base; it also possesses stronger operational competencies, and its strategies are defined by the Supreme Petroleum Council. The state-controlled firms were created as investment vehicles, and these hybrid companies have boards of directors which are more involved in setting their strategic direction.

The hybrids are moving away from being purely passive investors towards taking an active role and ultimately developing operational capacities. With aggressive and diversified acquisition strategies, the hybrids are venturing into new sectors, while strengthening their bidding positions by aligning themselves with international oil companies.

As the companies expand their potential target areas, however, ambitions may overlap and conflicts may arise, leading to ad hoc solutions driven by political realities in the short to medium term. Over the long term, as the hybrids’ strategies become more clearly defined and as investment volumes reach a critical mass, there could be a state consolidation strategy to take advantage of economies of scale, cost savings, and technology transfer.

Abu Dhabi currently has four of such firms, whose creation and development have taken very different paths. The International Petroleum Investment Company (IPIC) is the oldest, and has traditionally been a downstream investor, but has recently signaled its intention to enter the upstream through a strategic alliance with Occidental. Mubadala was the first of a new generation of holding companies and made its mark with a number of high-profile deals, including Dolphin Energy and through an earlier alliance with Occidental to secure E&P contracts in Libya and Oman. An alliance with Shell is yet to bear fruit. The Abu Dhabi National Energy Company (Taqa) and Aabar Energy are unique in that they are partly listed on the Abu Dhabi Securities Market (ADSM). Taqa, Abu Dhabi’s conservative power assets holding company, burst onto the international stage in 2006 and has since made a series of upstream and power acquisitions amounting to over $10 billion. It is currently pursuing further deals in the North Sea, where it already has a foothold. Aabar has delivered solid returns to its investors through the acquisition and eventual sale of a drilling and an upstream play in Asia, in which Mubadala recently became majority owner. Outside of Abu Dhabi, Dubai Energy was formed in 2005 and has since been involved in only one deal of significance – the Dubai Mercantile Exchange, a joint venture with NYMEX, though the company is currently evaluation a new strategy looking at the broader energy space, including renewables. With a primary focus on the GCC and then Asia, RAK Petroleum has made small but significant upstream plays in Oman and Australia.

Key Conclusions

Financial muscle and political clout mean that these companies will only become more active and aggressive in their pursuit of new deals.

These state-controlled firms can be viewed as potential partners for international oil companies and to some extent competitors.

Potential clashes should be watched for as these companies expand their target areas of investment.

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Raja Kiwan is a Bahrain-based Analyst in the Markets and Country Strategies Practice, which houses PFC Energy’s expertise in Country Risk and Petroleum Sector Policy. For further information on this article contact Enews_rkiwan@pfcenergy.com.