Aramco pipeline is net win for BlackRock and Saudi

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The Saudi Aramco logo is pictured at an oil facility in Abqaiq, Saudi Arabia, October 12, 2019. REUTERS/Maxim Shemetov

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LONDON, Dec 7 (Reuters Breakingviews) - Saudi Aramco (2222.SE) has handed both Larry Fink and Mohammed bin Salman a win. The BlackRock (BLK.N) chief executive is part of a group that on Monday announced it was paying $15.5 billion for 49% of a 20-year lease over the oil giant’s gas pipeline network, ultimately controlled by Saudi Arabia’s crown prince. Both leaders gain more than they lose.

The transaction looks identical to last year’s sale by Abu Dhabi National Oil Company of a minority stake in a lease over its gas transmission network to Global Infrastructure Partners and chums. The ADNOC deal implied a $20.7 billion value for 982 kilometres of pipelines. Aramco’s larger 5,000-kilometre network is valued at $31.6 billion. In both cases the state owner retains a majority stake and pays an undisclosed annual tariff to the gas network. Meanwhile, minority investors borrow 80% of the amount they’re putting up, juicing annualised returns on their equity comfortably beyond 10%.

That’s not bad for what looks like a relatively low-risk bet. After all, Saudi Arabia is unlikely to turn off gas supplies to its domestic customers, and Aramco’s majority shareholding discourages it from messing with the tariffs. This raises the question of why MbS didn’t leverage up the assets himself while keeping full control. The answer is that his strategy to pivot the kingdom away from fossil fuels envisages foreign direct investment reaching 6% of Saudi’s GDP, far above current levels. An endorsement from BlackRock, the world’s largest asset manager, is key to encouraging others.

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The calculus for Fink is similarly nuanced. It’s only three years since Saudi agents murdered Jamal Khashoggi in an operation U.S. intelligence agencies say MbS approved. And investing alongside the world’s biggest oil company is potentially perilous for Fink, whose annual letters have implored investors to take climate change seriously.

That said, BlackRock’s western financial peers are doing business with Saudi despite Khashoggi. Fink recently wrote that slashing fossil fuel supply without addressing demand was driving up energy costs. Positioning himself as a champion of gas both as a transition fuel and a forerunner to hydrogen is logical. The involvement of other international investors means BlackRock’s equity check is probably less than $1 billion, manageable for a firm which oversees $9 trillion. If Fink encounters any private criticism, he can always console himself with the investment’s attractive returns.

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CONTEXT NEWS

- Saudi Aramco said on Dec. 6 it had signed a $15.5 billion deal for its gas pipeline network with a consortium led by asset manager BlackRock and Saudi investment management group Hassana.

- The buyers, which are likely to be joined by other international investors, will buy 49% of the newly formed Aramco Gas Pipelines Company, which will lease the rights to cash flows from Aramco’s 5,000-kilometre gas network for 20 years. The state-controlled Saudi oil giant will retain the other 51%.

- Aramco Gas Pipelines will receive a tariff payable by Aramco for the gas products that flow through the network, backed by minimum commitments on throughput. Aramco will retain full ownership and operational control of its gas pipeline network and the transaction will not impose any restrictions on Aramco’s production volumes.

- BlackRock Chairman and Chief Executive Larry Fink said in a statement that responsibly managed natural gas infrastructure had a meaningful role to play in the energy transition.

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Editing by Peter Thal Larsen, Oliver Taslic and Karen Kwok

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