Private sector consolidation is defining the strategy of Arab Gulf countries for reasons of financial and political expediency. When money is free-flowing, it is easy to have multiple enterprises despite the redundancies of competing businesses.
In the past burgeoning economies allowed governments, their officials, the merchant class and middlemen to benefit both directly and indirectly. But now, states are putting their own revenues first and ensuring that nothing impedes production or profitability.
Governments in the United Arab Emirates and Saudi Arabia already control a significant portion of the economy. They also wield substantial influence over the private sector, so the evolution in their approach towards further control is unsurprising. Indeed, in a region where there is no partisan rivalry with the opposition, there are few obstacles to the state consolidating enterprises and institutions. Consolidation allows for these governments to institute policies more uniformly, but it does not address problems of complacency and a lack of competitivity.
All change at ADNOC
The most high profile case in point is the recent restructuring of ADNOC (Abu Dhabi National Oil Company). The changes included the integration of independently operating business units of ADNOC under a unified common identity. These have made it easier for vendors and partners to deal with ADNOC. Contracts, vendor registration and procurement for ADNOC and its affiliates are being gathered into a single structure.
ADNOC’s transformation is driven by an internal management decision but also appears to be part of a larger push by the government of Abu Dhabi to consolidate businesses and assets. IPIC has merged with Mubadala and First Gulf Bank has been merged with National Bank of Abu Dhabi. The result is mega entities that wield considerable influence and financial resources.
The most notable development at ADNOC from the perspective of foreign investors that management has allowed several of the concessions signed with international energy companies more than seven decades ago to expire. ADNOC has then taken sole responsibility for the concession or has looked to other potential partners. This approach does not appear to have negatively impacted ADNOC’s operations or output, demonstrating that the state-owned energy company is capable of overseeing operations of its mature fields.
The transformation and consolidation of ADNOC has nonetheless changed the way it deals with its foreign partners. ADNOC is now seeking to maintain a pragmatic balance when choosing who it works with, premised on the most basic of questions: What have you done for me lately? What can you do for me that the others cannot? It redistributed the concessions, some of which were traditionally allocated to established European or American oil majors, bringing Chinese, Japanese and Korean companies on board.
Case in point is the sale of a stake in ADNOC Drilling to Baker Hughes; the pivot by ADNOC to the Asian market through joint ventures with China; and the announcement of the concession with Eni and other partnerships. Nonetheless, there are still political considerations. While the Asian companies provide capital and a market, the old Western partners in the US, UK and Europe provide cutting-edge technology and geopolitical cover.
Challenges and pitfalls for consolidation
Meanwhile in Saudi Arabia economic consolidation has been accompanied by political centralisation. The planned acquisition of petrochemicals company SABIC by Saudi Aramco seems to be being driven by a new political force within the kingdom. Namely crown prince Mohammad bin Salman al-Saud, who has gathered significant political power around himself and his father King Salman. But consolidation seems insufficient to address major issues such as bureaucracy and a tendency to complacency, particularly in government institutions that are sluggish.
An important move to address these challenges would be the allowing of 100 percent foreign ownership of companies operating in these countries. This would mean that foreign companies could decide to continue to work with local partners or decide to go at it alone. By giving the choice, the national oil companies (NOCs) could benefit from more competitive bids that do not include markups and provide relevant technologies — as opposed to conventional ones. In adopting this approach to competition, the NOCs could also start dictating terms on the transfer of technology and commitments on in-country value.
Another issue is how regulations restrict competition. A level playing field is needed to encourage foreign companies to engage. Insular policies cannot guarantee that major changes will take root, the region’s history shows this: we have no tangible reforms yet to how foreign business can operate despite the much-advertised claims of change and innovation over the past three years. All this brings things full circle, suggesting that consolidated NOCs will probably seek to influence government policy and ensure greater competition.