COMMENTARY: Even Big Oil Thinks Big Oil Is Too Risky These Days – Fickling

By David Fickling

What’s an oil producer to do when it sees its core product under threat from declining demand and a war-torn neighborhood? Just ask Abu Dhabi National Oil Co.

The $19 billion all-cash bid for Australian gas producer Santos Ltd. Monday, from a consortium led by the state-owned United Arab Emirates business also known as Adnoc, is one answer to the question.

Adnoc has been on a shopping spree for gas assets in recent years. In common with its far larger peer Saudi Arabian Oil Co., which is currently spending more money developing new gas fields than crude reserves, it’s been gradually transforming itself from a business that lives and dies on black gold, to one that cares as much about LNG ships as oil tankers.

Just look at the list of deals made and mooted lately. Last May, it bought a stake in NextDecade Corp.’s liquefied natural gas export project in Texas. In April, people familiar with the matter told Bloomberg News it was considering a $9 billion bid for Aethon Energy Management’s gas assets in Texas and Louisiana. It’s also interested in buying BP Plc’s gas assets in a potential breakup, Bloomberg News reported last week.

In 2023, Adnoc spun off its own gas business and floated it on the Abu Dhabi stock exchange, where it makes up about one-seventh of the market. Last year, it started building an export terminal at Ruwais in the west of the country, a huge complex sufficient to meet all of Turkey’s needs for imported LNG.

In an environment where Israel’s attack on Iran is ratcheting up the risk of all-out war in the region, there are several advantages to this strategy.

For one thing, there’s the perennial fear that Tehran, if pushed to the brink, may start creating problems in the Strait of Hormuz, as my colleague Javier Blas wrote. The narrow stretch of water is guarded by Iran, Oman, and the UAE. Sustained attacks on shipping haven’t happened since the 1980s Iran-Iraq war, not least because Iran’s export revenues would suffer quite as much as its enemies’. It’s still prudent to minimize the risk from such a weak point, though, in case a cornered Iranian government reaches for desperate measures.

We’re facing a world where oil demand is looking distinctly shaky, with crude production still sitting below the peak it hit back in 2018. Gas isn’t doing that much better, with growth slowing well below historic rates thanks to the collapse in Russian pipeline exports since the 2022 invasion of Ukraine and a rising price that’s deterring potential buyers in developing Asia and Africa. The segment of gas that’s traded as LNG, however, has been a winner, with the capacity of liquefaction plants set to increase by about 40% between now and 2030.

Maritime straits, like gas pipelines, are highly vulnerable to geopolitical meddling. If you can buy LNG assets that aren’t exposed to Middle Eastern wars, however, you can avoid both the chronic decline in conventional petroleum demand, and the acute risks of conflict-driven supply shocks.

These days, such assets aren’t as abundant as a cash-rich national oil company might hope. Santos shares Monday closed at a roughly 13% discount to Adnoc’s cash offer, which has already been recommended by the target’s board. Given the open-and-shut nature of the proposal, that’s likely to reflect worries that Australia’s Foreign Investment Review Board won’t like the idea of a state-owned company that doesn’t even publish financial statements buying the country’s second-biggest petroleum business.

It’s still more likely to get over the line than other options out there. President Donald Trump was happy to boast about the deals struck with UAE businesses during his trip to the Middle East last month — but if you want an outright takeover, the US in its current nativist mood probably isn’t the best place to be looking. The final agreement over the sale of United States Steel Corp. to Nippon Steel Corp., giving the US government a golden share that would allow it to dictate corporate policies, is an indicator of where things are headed.

Other prospective regions such as South America, Central Asia and sub-Saharan Africa are already largely locked up by state-owned and independent oil companies. Europe’s North Sea is in inexorable decline. Pickings are looking slim.

The UAE is better placed than many to ride out the transition away from fossil fuels. Its vibrant non-oil economy means it can balance its budget and current account at the lowest crude prices in the Gulf. Only Qatar and Turkmenistan, among major petroleum exporters, do better — and each is essentially a gas producer, not an oil state. Eking out future revenues as the world’s hunger for oil and gas declines is going to require emulating them, rather than the UAE’s more oil-rich neighbors.