BlackRock and Aramco: Deal signals renewed interest in fossil fuel infrastructure

According to some reports, major asset managers such as BlackRock, Brookfield and Apollo are approaching fossil fuel companies with proposals to acquire parts of their energy infrastructure. This comes as lower commodity prices and investor concerns put pressure on the balance sheets of some fossil fuel companies.

According to Financial Times, representatives of major private asset managers met with the heads of fossil fuel corporations at a conference in Abu Dhabi. The large firms are offering fossil fuel companies deals to acquire or lease some critical infrastructure.

An emerging trend?

This “trend” was demonstrated this year by Saudi Aramco, which in August leased a stake in the pipeline network for its Jafurah project to Global Infrastructure Partners (owned by BlackRock) through a lease-and-leaseback deal. According to some sources, it is considering further deals of this kind, as the Jafurah project is considered highly lucrative and many private companies would like to “get involved” in some way. Jafurah is a massive gas field that Aramco has added to its portfolio. Its main purpose is to use the gas for domestic power generation, although the field’s total capacity is estimated at more than 200 trillion cubic feet of gas. The Saudis want to produce up to two billion cubic feet per day from it by 2030.

Historically, however, similar deals have been struck by companies in Abu Dhabi, which sold a pipeline to a consortium of GIP, Brookfield and Singapore’s sovereign wealth fund. Similar transactions have also been carried out by state-owned fossil fuel companies in Kuwait, Bahrain and other countries.

Why are such deals happening?

This is something of a new trend, reportedly sparked by the Jafurah deal, which attracted significant interest from private capital. Although these massive companies, often directly or indirectly state-owned, have traditionally not opened their projects to foreign capital, lease or sale-and-leaseback arrangements are attractive to them. Essentially, these deals involve a company selling or leasing its infrastructure, such as a pipeline, over the long term and immediately leasing it back. This helps the energy company raise cash and potentially avoid taking on substantial debt.

This is now likely happening in particular because of the turbulent period of recent years, when falling oil prices put pressure on these companies’ financial results, while they seek to maintain high returns for their investors. At the same time, this year has seen a retreat from climate targets, so some companies are generally less concerned about being associated with fossil fuel projects. Deals that give them lucrative assets as well as a stable income from leasing them out are attractive. In addition, investment in fossil fuel projects is picking up again. According to some data, private equity investment in fossil fuel companies rose by 131% last year.