A mega pipeline

Recently, the Brazilian government announced that it would privatise a raft of oil and gas, energy and infrastructure assets in a bid to boost the economy and trim debt. The divestment programme will come with guarantees attached, assured Wellington Moreira Franco, the man in charge of getting the private sector more involved with revamping Brazil’s run-down infrastructure. Concession returns offered would be “realistic”; long-term financing would be secured. “We will restore confidence by expanding the legal security for investors,” he added.

We won’t know whether Brasilia honours its promises for several months. But some investors are not waiting to find out. In mid-September, it emerged that a consortium led by Brookfield's infrastructure group is in the home stretch of acquiring a 2,500km network of Brazilian gas pipelines from Petrobras for more than $5 billion. The group, which is said to include China Investment Corporation and Singapore’s GIC, had been in talks with the state-owned giant since at least last spring.

This transaction has some unique features to it. Petrobras is facing a crisis caused partly by the collapse in oil prices, but also by severe mismanagement, state meddling and a mammoth corruption scandal. But the deal did not come alone. Shortly after, Global Infrastructure Partners announced its acquisition, alongside co-investors, of a 20 percent stake in Spanish behemoth Gas Natural for €3.8 billion. The company runs grids in Spain and Latin America; it is also the third-largest electricity distribution business in its domestic market.

The identity of one of the sellers underscores the wider dynamic at play. Half of the stake GIP is buying comes from Spanish oil and gas group Repsol, which has offloaded €3.2 billion of assets so far this year as part of an ambitious divestment programme. The company is not alone in its quest for cash. Royal Dutch Shell, Italy’s Eni and France’s total are all looking at multibillion euro/dollar asset disposals

Two forces are driving the industry at large to put non-core assets on the block. 

First, as you might have guessed, is the impact of low oil prices. Multinationals, which have already mothballed most of the capex-hungry projects they could afford to pause, have no other choice but to refocus on their core businesses to plug the dent caused by dwindling revenues. Second, is the majors’ rebalancing towards natural gas – the world’s most economic fossil fuel in an age of toughening environmental standards. But building fresh LNG infrastructure is notoriously expensive. Energy groups are trying to build their war chest by selling their less essential assets.

In the case of infrastructure funds, the stuff of the past may well turn out to be the opportunity of the future. While the billions to come on the block won’t all be midstream, pipelines stand a good chance of featuring prominently among the pack, not least because their value is less directly impacted by oil prices (meaning sellers are more likely to get the prices they want). For the likes of Brookfield and GIP, who have funds north of $10 billion to deploy, that’s an attractive prospect: one or two mega-opportunities a year for half a decade and you’re ready to go back to the market. 

How sustainable midstream-focused strategies are remains to be seen. Just like fossil fuels, the flow of pipelines on sale will sooner or later dry out. Another tectonic shift will then be needed to make the majors move again.