Archive for the ‘Industrial investment’ Category

Saudi Aramco Oil Facility

Some may have seen recent news reports of Saudi Arabia targeting $100 oil. TradeFlow21 has tweeted (Jan 18th: “Saudi Arabia is not targeting $100 oil.“) a very helpful article on just the subject. Complementing the article, TF21 adds that triple-digit oil prices are not exactly in the Saudi’s or any oil exporting country’s best interest. Reason being is that often times when oil prices are high, they are accompanied by higher prices almost across the board. In volatile times like now, at home in the U.S. and in countries around the world, wages paid to employees that have not kept up with inflation are partially to blame for discontent. Thus, $100-plus oil is not helpful to Saudi Arabia if it in turn must pay higher prices for materials (and services) for the tens and hundreds of billions of dollars of real investments it’s making.

Bartle Bull, founder of Northern Gulf Partners, an Iraq-focused investment bank, tells us in today’s WSJ:

The expected announcement of Iraq’s new government marks the culmination of a remarkable process. The former bully-boy of the Arab neighborhood has become its only functional democracy. What may be the world’s richest resource economy, once the closed shop of a murderous clique, is today wide open for business.

Driven by what many geologists consider the world’s largest oil reserves, Iraq will probably be the world’s biggest crude oil producer within a decade. The country currently ranks second to Saudi Arabia in official reserves, with 143 billion barrels. With much of Iraq’s exploration still to come after a three-decade hiatus, and with Saudi Arabia’s reserves substantially inflated and already in decline, Iraq could take the mantle as No. 1 in fairly short order.

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The Wall Street Journal reports that the governments of Germany, the UK, and the US are about to reach a deal on export subsidies for commercial airplanes. The agreement covers export-credit financing, a scheme in which airlines pay government agencies fees for financing guarantees that reduce the cost of borrowing and improve access to credit.

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Less than two weeks ago, General Electric and Saudi Arabia’s Ministry of Commerce and Industry announced that they signed a memorandum of understanding (MoU), effectively reinvigorating their 70-year relationship. It should come as no surprise that GE’s areas of core competence and drivers of future growth — energy, healthcare, transportation, and water — are the same areas targeted as key growth sectors for Saudi Arabia. TradeFlow21 views GE and Saudi Arabia as economic juggernauts: longstanding excellence in industrial know-how and manufacturing in the case of the former, and an agglomeration of capital and capital-intensive investment projects for economic sustainability for the latter. While news of such an MoU bodes very well both for GE and Saudi Arabia, and the global economy at large, unfortunately it was easily overshadowed by ongoing fears of the Greek debt crisis and most recently, the specter of panic selling on Wall Street last Thursday. Nevertheless, the founders of TradeFlow21 remain convinced that the Middle East, and Saudi Arabia in particular, represents both an opportunity and a model for real economic investment.

1) Actual (Strategic) Value of “Distressed” Real Estate: Dubai World, the government-affiliated parent company under scrutiny, is strapped with an estimated $24B in debt,including $7.3B in deteriorating real estate assets held by their Nakheel subsidiary. On paper, these assets are distressed. In brick-and-mortar reality, they include new-to-market commercial and residential units that help define the Dubai skyline. Vacancy rates are transitory, but quality real estate will return value if strategically positioned as part of a larger initiative or economic plan. A shift, for example, in the commercial focus from financial services and tourism to energy, such as the creation of a solar-powered city, could restart investment and development.

2) Primacy of DP World: Dubai World’s marine and port subsidiary, DP World, maintains deep-water terminals in over 30 countries from the Americas to Asia. It is simply too valuable a commodity (commercially and politically) for the government to abandon to creditors in courts. DP World’s port presence across the globe is central to the UAE’s identity and prestige.

3) Capitalism 2.0: The Dubai crisis was an inevitable and necessary step in the maturation process of an emerging free-market economy. Sheik Mohammed bin Rashid Al Maktoum’s undisciplined approach to development, coupled with investors who naively assumed their bets were covered by state revenues derived from oil, created conditions that plunged the Emirate $80B in debt. Despite the poor timing of Dubai  World’s announcement of a standstill just prior to the Muslim holiday of Eid al-Adha, Dubai and its flagship company should emerge from the crisis with a new sense of purpose and propriety. Abu Dhabi will likely take the lead in helping Dubai restructure its financial institutions and reshape its strategic thinking as part of a wider effort to regain a measure of market integrity and public trust.

4) Human Capital: Dubai’s “oil reserves” are its people. They are educated (77.9% literacy rate), able, and multi-lingual with commands of Arabic, Persian, English, Hindi, and Urdu. The  serious, sophisticated investor recognizes this as a key attribute in any successful venture. Human capital is the critical “X factor” on a balance sheet.

Last week, the Financial Times reported that a UAE state-linked investment firm planned to acquire a 32 percent stake in Sir Richard Branson’s civilian space venture, Virgin Galactic.  Aabar investments will initially shell out $280 million, plus another $100 million for development of a satellite launch-capable spacecraft. Aabar will also build a science center and spaceport facilities in Abu Dhabi. The implications of this venture cannot be overstated. They are as vast as space itself. The Virgin-Aabar alliance is perhaps a harbinger of the future for a region where cash-rich nations, backed by solvent banks and sovereign funds, aggressively pursue the next generation of disruptive technologies derived from aeronautical research and exploration. The potential commercial as well as military (i.e. security) advantages of a successful space program could dramatically alter the geo-political landscape of the greater Middle East, creating dynamic economies where stakeholders also share in maintaining regional security.