The Mubadala-Ipic merger is bigger than two of the biggest recent energy acquisitions: Shell's US$52 billion purchase of BG and Halliburton's cancelled $28bn deal for Baker Hughes.
The $127 billion combination of state-owned Mubadala and International Petroleum Investment Company (Ipic), announced last week, may be driven by housekeeping in Abu Dhabi. But it also offers the chance to rethink the emirate's energy investments.
In strategy, assets and geography, the two entities are quite different beasts. Apart from their partnership in the much-delayed Emirates LNG import terminal in Fujairah, they overlap little.
Mubadala's energy investments are focused upstream, the business of producing oil and gas. Its output, notably from Dolphin Energy, which supplies Qatari gas to the UAE, and fields in South East Asia, totals 411,000 barrels of oil equivalent per day. It owns Abu Dhabi's green energy vehicle Masdar. And in these ventures, it is usually the lead partner or an active non-operator. But most of its assets are in non-energy sectors – real estate, health care, defence, aerospace, semiconductors and aluminium.
Ipic holds primarily downstream, minority interests, with a focus on Europe. Its portfolio includes the Spanish refiner Cepsa, petrochemicals units Borealis and Nova, strategic oil pipelines in Egypt (Sumed) and the UAE, Japan’s Cosmo Oil – as well as 24.9 per cent of Austria’s integrated oil company, OMV, which is developing oil and gas fields in Abu Dhabi. Cepsa and Cosmo also have a joint-venture operating fields offshore in the emirate.
While Mubadala made Dh1.1bn in profit last year, Ipic recorded a Dh9.9bn loss after writing down various assets and has a much heavier debt load. Investments in the commodity trader Glencore and two banks have not turned out well. Ipic also has to resolve its continuing dispute with 1MDB, the Malaysian investment fund embroiled in a corruption scandal, from which it is claiming $6.5bn in arbitration proceedings.
The merger should bring cost savings, elimination of duplicate jobs and more coordination between two companies that have followed separate strategies. At a time of low oil prices, this is one of the deal’s primary drivers.
The tie-up does not yet resolve the problems of the third state-owned energy investment company in Abu Dhabi. The heavily indebted Taqa has an arrangement to sell its oil and gas assets – spanning the North Sea, Canada and Kurdistan – at book value to an Abu Dhabi government entity. The Kurdish assets would be a good fit for Mubadala; the others, mature oil and gas fields, are unattractive in today’s market.
At the same time, while Taqa has a large power and water generation portfolio in Abu Dhabi, Mubadala has utility investments in the GCC and Algeria, possible currency for an asset swap.
The new Mubadala-Ipic will face challenges. One is managing a sprawling and diverse portfolio with little natural synergy, even without considering the non-energy assets. Will Ipic’s downstream investments be combined with Mubadala Petroleum and will some long-delayed projects, such as the Fujairah refinery and the Al Gharbia petrochemicals venture Chemaweyaat, be cancelled? Another issue is how to get maximum value from minority investments in listed companies.
Mubadala-Ipic, albeit indirectly through OMV, Cepsa and Cosmo, is now a significant player in Abu Dhabi's oil and gas fields. It may be ready to operate directly in the emirate at the same time that Adnoc has just formed an international arm with $1bn of starting capital. Though Abu Dhabi may have battened down the fiscal hatches, now is a good time to be looking for oil and gas assets. At the same time, the emirate's own fields need technology, investment and efficient operators.
Improved costs and governance are important but the potential to create new value is more interesting. With the Saudi Aramco IPO in the works, and other Middle Eastern neighbours seeking to attract capital, Abu Dhabi needs to make the most of its own diverse energy assets.
Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis.
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