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Saudi Aramco/BlackRock: pipeline deal shows kingdom is open to FDI


Saudi Aramco is a publicly listed company with only one shareholder that matters: the state. The oil giant therefore has a subtext for agreeing to sell a 49 per cent stake in a gas pipeline network for $15.5bn to a consortium led by US fund giant BlackRock.

The deal not only bolsters Aramco’s finances. It also signals the desert kingdom is open to foreign direct investment, of which it will have increasing need.

FDI in Saudi Arabia of $5.5bn last year was only a quarter of what the United Arab Emirates raked in. Three years on, the country is still working to repair an image damaged by the murder of journalist Jamal Khashoggi by its agents. And it is increasingly fearful of a fast tailoff in global investment in oil and gas.

Its sovereign wealth fund will spend $40bn per year for the next five years on domestic projects. Neom, a “sustainable” megacity that is a pet project of Crown Prince Mohammed bin Salman, will cost an estimated $500bn.

Aramco raised more than $29bn by listing in Riyadh in 2019, selling off just 1.7 per cent. The company meanwhile spent $69bn buying 70 per cent of Sabic, the kingdom’s petrochemical business. It plans to shell out a further $170bn in capital spending.

Investors have qualms. Saudi Aramco’s 2050 bond trades at a yield spread of 160 basis points above equivalent US Treasuries, 30 basis points more than international oil companies, notes Citi.

The pipelines deal shows that prestige foreign investors still care. Indeed, BlackRock cares so much that it is apparently overriding the sustainable principles it makes such a fuss about.

Chief executive Larry Fink trumpeted the Aramco renewables projects BlackRock money will help finance. A cynic might add that Saudi Arabia’s vast wealth, which the rebound in oil prices has increased, is another reason for the world’s biggest fund manager to be pragmatic.

Saudi oil and gas infrastructure produces large, reliable cash flows. The question for other foreign investors is whether to sink money into Saudi projects lacking that underpinning. That “sustainable” new city springs to mind.

The Lex team is interested in hearing more from readers. What’s your reading of this deal? Please tell us what you think in the comments section below.

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