Abu Dhabi’s Europe M&A hedges an opaque future

OCI

26/01/2024 12:26

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Karen Kwok
       LONDON, Jan 26 (Reuters Breakingviews) - Sultan al-Jaber
is in the middle of an M&A splurge. The chief executive of the
Abu Dhabi National Oil Company (ADNOC) is readying $40 billion
of European deals in the field of gas-guzzling petrochemicals,
less than two months after overseeing a global deal to
transition away from fossil fuels as head of the COP28 climate
negotiations in Dubai. The former offers a promising hedge
against the successful delivery of the latter.
    One of the key uncertainties surrounding both private oil
majors like Exxon Mobil  XOM.N  and Shell  SHEL.L , and national
oil companies like Saudi Aramco  2222.SE  and ADNOC, is what
their businesses are going to look like in 2050. To keep global
warming to 1.5 degrees Celsius above pre-industrial times, daily
oil demand needs to fall from 100 million barrels to around 25
million barrels by mid-century, the International Energy Agency
reckons. If anything like that transpires, lots of oil companies
are going to need a Plan B.
    The cynical strategy for drillers would just be to hope the
climate change fight fails, oil production stays near its
current level up to 2050, and affordable but as yet non-existent
technology emerges to capture the emissions of greenhouse gases.
While UK driller BP  BP.L  is devoting an increasing volume of
its capital expenditure to low-carbon businesses, most oil
majors lack meaningful transition plans. U.S. giants Exxon Mobil
and Chevron  CVX.N  are doubling down on oil via chunky domestic
acquisitions.
    The United Arab Emirates, which wants to actually grow daily
crude production from under 4 million barrels to 5 million
barrels by 2027, has arguably a more constructive way to stay in
business. It’s focusing on the section of oil demand that will
still be around in 2050, even in a decarbonised world.
    Over half of the 25 million barrels a day potentially
consumed by then will be deployed as the raw material for
petrochemicals – the use of fossil fuels to manufacture
plastics, agricultural fertiliser and various other types of
specialty chemicals. That 14 million barrel a day level by 2050
should remain roughly what it was in 2022, the IEA says, even as
oil for petrol-fuelled cars becomes redundant. The key
difference between gasoline and plastics is that users burn the
former, but not the latter. Plastics therefore have much lower
“Scope 3 emissions”, which are a huge part of the climate change
headache – around 90% of the carbon emitted by the oil sector
comes from customers burning oil products, rather than via the
process of extracting the black stuff.
    That’s why ADNOC has been mulling a $30 billion merger of
Abu Dhabi-listed Borouge  BOROUGE.AD , in which it holds an
overall stake of 63%, and Austria’s Borealis, in which European
oil group OMV  OMVV.VI  has a majority shareholding. The
combined entity would be a world leader in the production of
polyolefin, used to make plastics that surround power
transmission cables connecting wind farms, and also to shield
medical devices like inhalers. Borealis makes the chemical
particles, and Borouge brings among other things cheaper input
costs to the table.
    But Jaber’s M&A doesn’t stop there. Before Christmas he
paid Dutch group OCI  OCI.AS  $3.6 billion to acquire its stake
in Fertiglobe  FERTIGLOBE.AD , which gives ADNOC more control of
an Abu Dhabi-listed group that is a key producer of urea and
ammonia used to enhance crop production. He continues to sniff
around Germany’s $8 billion Covestro  1COV.DE , which makes
specialty chemicals used for coatings and foam to stuff car seat
cushions. The ADNOC boss even expressed interest in $11 billion
Wintershall Dea prior to the German oil and logistics company’s
merger with Harbour Energy  HBR.L  in December, and made a $2.1
billion offer to acquire a major stake in Covestro’s rival in
Latin America, Braskem  BRKM5.SA .
    There’s a basic logic to bulking up in the supply chain of
petrochemicals. Furniture, medical devices and car parts made
out of plastics and synthetic rubber may increasingly require
less oil and gas – Borouge, for example, is working on ways to
recycle plastics over time. But demand for them is likely to
persist. Owning more of that capacity offsets some of the loss
of revenue from selling crude ultimately used to make petrol.
    Even so, the M&A flurry doesn’t automatically guarantee
ADNOC a stress-free future. In order to stick with his intention
to reduce ADNOC’s emissions from its own production processes to
net zero by 2045, Jaber would have to find a way to decarbonise
his new acquisitions too. That hinges on chemical recycling
technologies which companies like Covestro are developing with
academia, but these are still at a relatively early stage.
    Meanwhile, ADNOC would struggle to replace all the revenue
it currently makes from selling crude around the world by
flogging petrochemicals. While the unlisted UAE giant doesn’t
disclose group financial data, one very rough proxy is Exxon
Mobil, which produces around 4 million barrels of oil and gas a
day. In 2022 Exxon generated over $410 billion of revenue. If
ADNOC bought Fertiglobe, Covestro and a merged Borouge and
Borealis, that entity would in the same year have only had sales
of around $45 billion.
    Still, relative to historical levels chemicals companies are
trading at a huge discount. After enduring high energy costs
after the Russia-Ukraine war, petrochemicals demand remains weak
because customers are still drawing down from excess stocks
accumulated in two years of supply chain disruptions. On average
the global chemical industry is trading at 8 times EBITDA,
compared to 13 times in 2019, using LSEG data, and analysts at
Barclays expect chemical prices to stay below their long-term
averages this year.
    There’s one other driver: politics. On the face of it,
European politicians have become increasingly wary of overseas
investors owning key bits of its domestic industrial base like
Borealis and Covestro. Yet German and Austrian politicians have
also struck gas supply deals with the UAE, and see it as a
meaningful partner to replace Russian gas that’s no longer
flowing to the continent. How big a factor this is will be seen
in how much control OMV-dominated Borealis retains as and when
it’s spliced together with UAE-controlled Borouge. But on the
face of it Abu Dhabi’s pitch for a big slice of European
infrastructure is one piece of cross-border investment that
shouldn’t end up on the scrap heap.
    Follow @karenkkwok on X
    
    CONTEXT NEWS
    The Abu Dhabi National Oil Company (ADNOC) and Austria’s OMV
are poised to resume talks to agree final terms of a tie-up that
would create a chemicals group with more than $20 billion in
combined annual sales, Reuters reported on Jan. 22, citing
sources close to the deal.
    Three people with knowledge of the situation said there are
still outstanding terms to agree on, with two of them saying
that the companies planned to resume talks possibly as soon as
this week.
    At the ADNOC board of directors’ annual meeting on Jan. 22,
the company committed to increase its spending on
decarbonisation and lower-carbon projects to $23 billion, from
$15 billion previously.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graph: Oil demand and CO2 emissions from oil use in 2050    https://reut.rs/42fp4rm
Graphic: ADNOC-OMV cross-holdings of Borouge and Borealis    https://reut.rs/3UdEURl
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 (Editing by George Hay and Oliver Taslic)
 ((For previous columns by the author, Reuters customers can
click on  KWOK/ 
karen.kwok@thomsonreuters.com; Reuters Messaging:
karen.kwok.thomsonreuters.com@reuters.net))