$12.5 billion pipeline deal shows oil still king for investors in Saudi Arabia

Dubai: Saudi Arabia is celebrating one of the biggest foreign-investment windfalls in its history after netting more than $12 billion by selling off a stake in the oil pipelines that traverse the desert kingdom.

But the country may also be facing an uncomfortable reality as a result. As carefully cultivated relationships with firms such as BlackRock Inc. and SoftBank Group Corp. have yet to draw in the desired investment, it's turning to the jewels of its energy industry to attract new money.

Last week's sale of the stake to EIG Global Energy Partners LLC shows how reliant Saudi Arabia is on its traditional mainstay and the challenges Crown Prince Mohammed bin Salman faces in diversifying the country away from oil and gas to achieve his Vision 2030 goal. The likes of BlackRock and SoftBank haven't invested back into the country as much as the government might have hoped, while foreigners favour revenue-rich energy assets over tourism and entertainment.

"Entertainment and tourism might have had a better year of foreign direct investment in 2020 if Covid had not happened," Karen Young, resident scholar at the American Enterprise Institute in Washington, said via e-mail. "But all the same, the core investors who see value in Saudi will be interested in the largest and most profitable sector, and that is still very much oil and energy."

Though EIG, the Washington-based private equity firm led by Chief Executive Blair Thomas, is a prominent investor in North America and Europe, it barely resonates in Saudi circles. It hasn't made a single equity purchase in the Middle East until now, let alone the kingdom itself, and its management team has never shown at Saudi Arabia's marquee "Davos in the Desert" conference, an event attended routinely by investment leaders from The Blackstone Group Inc.'s Stephen Schwarzman to Ray Dalio of Bridgewater Associates LP and the Carlyle Group's David Rubenstein.

Saudi Arabia attracted $5.5 billion in net FDI flows in 2020, equivalent to about 1 per cent of its economic output, according to data compiled by Bloomberg, which means the EIG deal brings more than twice last year's total. The government's goal is 5.7 per cent by 2030, hence the temptation to offer up prized energy assets such as parts of Saudi Aramco, the state-owned energy giant, Bloomberg reported.

"This is the latest milestone in an ongoing shift," said Jim Krane, a fellow at Rice University's Baker Institute for Public Policy in Houston. "Mohammed bin Salman and his advisers keep finding novel ways to coax cash out of Aramco without disrupting its operational capability. Right now it's cash that the kingdom needs and Aramco controls the spigot."

EIG beat out rivals including Apollo Global Management Inc. and Brookfield Asset Management Inc. to buy the stake. It's now putting together a consortium of other investors to join the deal.

While several global investors have forged closer ties with Saudi Arabia in recent years, most of them see it more as a source of capital than an investment destination. The kingdom's flagship Public Investment Fund, or PIF, is the largest investor in Softbank's $100 billion technology vehicle, with an allocation of $45 billion.

The PIF has also pledged as much as $20 billion to help Blackstone Group LP build the world's largest infrastructure fund.

The reasons are manifold, ranging from the inconsistency of the Saudi legal system to an economic slump as the country adjusts to lower oil prices.

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