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August 24, 2007
Cornering the West's energy supply? (updated)
Abu Dhabi has announced the acquisition of Pioneer Natural Resources' Canadian Unit, which makes it the fifth overseas acquisition since November by Abu Dhabi National Energy Co., the United Arab Emirates' investor in oil and power assets.
While some might argue that the Arab world has a base of knowledge and comfort level in dealing with investments in the oil patch, an alternative principle might be worthy of consideration for these investors: the need to diversify the portfolio. Since Abu Dhabi is dependent on the fortunes of the oil industry, a strictly return-to-risk calculation might argue for investment outside the energy sector.
However, maybe another consideration is in play: a geopolitical one. Are the Arab nations determined to control the flow of Western-based oil and natural gas, thereby increasing the Western world's dependence on them? Is the goal to control al the world's energy resources?
These sovereign wealth funds are perilous. They look like they are being deployed for geopolitical reasons and to make the West even more dependent on the whims of the Arab world.
Update: Leonard Hirchen writes:
The article on Abu Dhabi based investment in Canadian oil and gas assets wildly overblows the dangers. In the near term, like all oil and gas operators in Canada, Abu Dhabi National Energy Co. will have to operate its fields within good practise as demanded by the regulatory agencies and professional oil field practise.
The writer ignores the fact that the "control" the foreign company will have on the resources is commerical control only. It is impossible to move the remaining reserves in the ground into another jurisdiction. As is Canadian law, possession of the resources remains with the
Canadian province in which the fields lie. Should a national security issue occur which suggests that Abu Dhabi is not producing the fields consistent with Canadian interests, the provinces involved can terminate the lease and offer them to an another operator on the open market.
There is no way a foreign based operator can destroy a field or prevent production. Owning Canadian assets gives Abu Dhabi almost no leverage on Canada. In fact, the leverage goes the other way. The more Abu Dhabi has assets in Canada, the more Abu Dhabi is a risk for Canadian political interference in the free market of oil and gas in north america.
I suspect that the interest of the national oil companies is to get access to the best access to the world's best technologies as applied in Canada and to diversfy their asset base. In addition, with natural gas prices in a low right now, it is a good time for asset purchases.
Recent tax changes by Canada have made it more attractive to foreign investors than previously. A risk to return calculation as discussed ignores the fact that non energy sector investments may be outside Abu Dhabi's expertise.
To the extent that is wants international trade to continue in a orderly manner and its petroleum products to be marketed at open market prices, Abu Dhabi is effectivelly an ally of the western world. Should Abu Dhabi take a different geopolical posture, Canadian law allows us to responde accordingly.
I am petroleum engineer and senior manager involved in national and international asset purchases by foreign and Canadian companies on a daily basis.
Ed Lasky responds:
Since Abu Dhabi is part of the cartel controlling oil prices, its continuing series of acquisitions of oil and gas companies is a good sign that they, and their fellow cartel members, are determined to keep the price of energy at a very high level. They can buy oil companies with the assurance that asste prices will justify their purhcase price. Other companies, subject to more uncertainty, do not have the same risk return calculations.