BlackRock co-leads $15.5 billion Aramco gas pipelines deal

A group co-led by BlackRock Inc. will invest $15.5 billion in Saudi Arabia’s natural-gas pipelines as the kingdom opens up more to foreign companies and looks to fund a huge increase in fossil-fuel production.

The consortium will buy a 49 per cent stake in a new entity that holds 20-year leasing rights over pipelines carrying Saudi Aramco’s gas across the country. Hassana Investment Co., controlled by the Saudi government’s pension fund, will head the group alongside BlackRock Real Assets.

The deal, announced by Aramco on Monday, is part of Saudi Arabia’s drive to sell assets and use the money to fund new industries from artificial intelligence to electric vehicles, while also increasing output of both oil and gas. In a similarly-structured transaction in April, Aramco sold a $12.4 billion stake related to its oil pipelines to investors including Washington-based EIG.

Bloomberg reported last month that BlackRock was among the firms that bid for the gas pipelines. Others included EIG, Italian infrastructure firm Snam SpA and China’s state-backed Silk Road Fund Co.

Other investors may later join the consortium alongside BlackRock and Hassana.

BlackRock’s investment comes even as chief executive officer Larry Fink puts pressure on firms to boost environmental, social and governance, or ESG, standards. Gas is a cleaner fuel than crude oil but still contributes to heating the plant. The deal illustrates that even the most climate-progressive firms can’t ditch polluting industries entirely while the world is still years away from clean energy being able to replace them.

Net Zero

“Aramco and Saudi Arabia are taking meaningful, forward-looking steps to transition the Saudi economy toward renewables, clean hydrogen, and a net-zero future,” Fink said in a statement. “Responsibly-managed natural gas infrastructure has a meaningful role to play in this transition.”

Aramco has said higher gas production will help neutralize emissions from its own operations by 2050. Saudi Arabia aims to reach net-zero a decade later, partly by ending the burning of crude in its power stations and increasing investment in renewables such as solar and wind. It is also investing in technology to capture emissions from its gas fields. 

Expectations that the world can move quickly to renewable sources of energy are “deeply flawed,” Aramco CEO Amin Nasser said Monday in Houston. The world still needs to put money into fossil fuels to meet global energy demand, he said.

Doing otherwise will lead to “energy insecurity, rampant inflation, and social unrest if prices become intolerably high,” he said.

Aramco, the world’s biggest energy company, is also considering allowing foreign investment in its gas fields. Saudi Arabia has said it will spend around $100 billion to increase output, including at the giant Jafurah field. That’s in addition to Aramco’s plan to spend billions of dollars to raise daily crude-production capacity to 13 million barrels by 2027 from 12 million.

The new subsidiary, Aramco Gas Pipelines Co., will receive a tariff for flows through the network. Aramco, which is guaranteeing certain levels of throughput, will retain a 51 per cent stake in the unit.

Aramco said the deal will strengthen its balance sheet. The firm’s debt levels soared last year after it took control of chemicals maker Sabic for $69 billion and oil demand crashed with the onset of the coronavirus pandemic.

Its financial position has recovered this year thanks to a bounce in oil prices. Free cash flow rose to almost $29 billion in the third quarter, covering its quarterly dividend of $18.75 billion, which is the world’s largest. Still, its gearing ratio, a measure of net debt to equity, stood at 17.2 per cent, above management’s preferred cap of 15 per cent.

© 2021 Bloomberg L.P.

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