INSIGHT: Abu Dhabi's IPIC takes old-fashioned view on investments

15 August 2011 14:14  [Source: ICIS news]

By Peter Salisbury

LONDON (ICIS)--It has been a tumultuous couple of weeks on financial markets the world over, with share prices collapsing after the US debt downgrade, before moving up on a whim, then down, and then ticking up again on US employment data.

No-one, it seems, has a long-term view on the economic prospects of the US, the world’s largest economy, or the sustainability of debt in the similarly sized eurozone. Failure in either case would be bad news for business the world over.

Nothing is certain and with every piece of negative, or positive, news, markets hit another curve on the gut-wrenching rollercoaster they started out on in 2008.

Petrochemical companies have not been immune to these fluctuations despite a raft of strong results for the second quarter of the year. Most have warned that they are not likely to fare as well in the second half of 2011 as they did in the first, and many have been punished for their honesty.

Stock markets, it seems, are no longer vehicles for genuine investors, but just another place to gamble speculatively on the near future. Bets on the actual long-term prospects of listed companies, their fundamental strengths and weaknesses, are largely ignored.

On financial markets, that is. But slowly, carefully, some companies are taking a decidedly old-fashioned investment position, not on what will happen tomorrow, next week, or even next year, but over the next decade or 20 years. One worth watching for in petrochemicals is the Abu Dhabi government-run investment fund International Petroleum Investment Co (IPIC).

IPIC is no household name – and the press-shy government of Abu Dhabi would probably prefer it to stay that way – yet it is becoming increasingly newsworthy.

ICIS readers’ first real exposure to the company will probably have come in November 2009 when, in a rare interview, IPIC’s managing director Khadem al-Qubaisi said that the fund planned to make a major petrochemicals acquisition in the first quarter of 2010. Earlier in 2009, it had completed the purchase of Canadian plastics maker NOVA Chemicals.

In Europe, Al-Qubaisi named Germany’s Bayer Material Science as a potential target, sending its parent company Bayer’s share price spiralling up to a 14-month high. No purchase was forthcoming in Europe, however, and the managing director’s public appearances have been rare since the interview.

Today, however, the fund could well be eyeing European investments again as it moves to build a giant new petrochemicals complex in its home emirate while share prices remain volatile.

“I would imagine that they will continue to make investments where there are good opportunities,” said Mark Garrett, CEO of Austrian-headquartered petrochemicals firm Borealis, in which IPIC holds a 64% stake, during an 11 August interview with ICIS.

He said IPIC is an ideal shareholder. He said: “They are long-term. They hold on to their shares.”

IPIC also tends to do pretty well from its investments. Borealis was the only European polyolefins producer to remain profitable in Europe during the financial crisis of 2008/09 while NOVA, a distressed asset in 2009, generated a fivefold increase in profits in the second quarter of this year. It also made a cool $1.5bn (€1.05bn) by propping up UK bank Barclays in 2008/09.

The fund’s big bet is that people will be buying plenty of oil, gas and petrochemicals well into the 2020s and 2030s, and it is putting its money where its mouth is.

On 2 August, IPIC announced that it had completed the purchase of the remaining shares in Spanish refiner CEPSA from French energy major Total, which is cutting back its exposure to downstream oil and gas. To date, IPIC has sunk around €7.5bn into the Spanish firm.

CEPSA was the first company the Abu Dhabi fund invested in when it was started in 1988. Then, IPIC was very much an investment vehicle. Today, it is a little more proactive; Al-Qubaisi has just been named CEPSA’s new CEO.

Meanwhile, CEPSA, Borealis and NOVA are just the tip of the IPIC iceberg. The fund’s really big investments are in petrochemicals and refining in the Middle East and North Africa.

IPIC plans to build a new 200,000 bbl/day refinery in the emirate of Fujairah, which will be connected to Abu Dhabi’s abundant oil supplies via a huge 1.5m bbl/day pipeline funded by IPIC, which will allow the emirate access to the strategically important Gulf of Oman.

In Oman itself, IPIC is working with the Oman Oil Co on another refinery project at Duqm that could be expanded to include petrochemicals, while further refining projects are planned in Morocco, Jordan, and Pakistan.

The company’s biggest project is a huge petrochemicals scheme that could cost tens of billions of dollars over the next 10-20 years. Under the banner of Abu Dhabi National Chemicals (ChemaWEyaat), IPIC will invest along with Abu Dhabi Investment Council and state energy giant Abu Dhabi national Chemicals Company (Adnoc) in ChemaWEyaat “chemicals city”, a transformative scheme for the emirate.

The first ChemaWEyaat development will be an aromatics complex in Abu Dhabi’s Western Region, developed by a wholly owned subsidiary, Tacaamol. According to the project management consultant on Tacaamol, the US engineering company Foster Wheeler, the project involves the world’s largest reformer, with a capacity of 70,000 bbl/day.

Part of IPIC’s strategy for the ChemaWEyaat project has been to build long-term relationships with technology providers. Or, in the case of NOVA and Borealis, a joint-venture partner with Adnoc in polyolefins producer Abu Dhabi Polymers (Borouge), the emirate’s first major petrochemicals scheme, to buy them. The fund has also invested in construction expertise, picking up 70% of German construction firm MAN Ferrostaal in March 2009.

Garrett describes the 2009 purchase of NOVA at a knock-down price in the middle of a major financial crisis as “one of the best buys of all time”, and analysts see IPIC as a classic counter-cyclical investor, buying when prices are low and others are holding back; acting more cautiously when the market seems to be oversold.

If the headwinds in financial markets continue, IPIC could well be back in Europe with the shopping list it abandoned in 2009. And given the clear signals on which way it is betting, European chemical engineering firms could do worse than countenance the idea of the Abu Dhabi fund taking a stake in their future.

($1 = €0.70)

Paul Hodges studies key factors influencing the chemical industry on the Chemicals & the Economy blog

By: Peter Salisbury
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