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CERAWeek: Investors from Asia, Mideast, Australia, eye U.S. pipelines



Petroleumworld.com 03 10 2017

Foreign institutional investors, including sovereign wealth funds, are studying investments in the U.S. interstate oil and gas pipeline network as a way to obtain recurring returns in a low interest-rate environment.

Dealmakers said they are advising funds, including from Asia, Australia and the Middle East, about potential investments that could bring billions of dollars of new capital to the sector.

Other infrastructure areas also have attracted institutional investors. Drawn to the potential for steady long-term incomes, they have purchased stakes in companies operating toll roads, airports and utilities.

Peter Bowden, co-head of energy investment banking at Jefferies Group LLC, said major pipelines with long-term contracts structured as take-or-pay deals from creditworthy shippers are most attractive to foreign buyers.

Under take-or-pay, a firm wanting to use the pipeline agrees to move a certain amount of hydrocarbons for a fixed price but pays a separate penalty price for every barrel of oil equivalent not subsequently transported.

"These assets are dollar-denominated, so if you're a non-dollar-denominated fund looking for dollar assets and infrastructure with a return that will beat inflation, they are the equivalent of the best bond you can buy," Bowden added.

The entry of deep-pocketed foreign institutional investors to pipeline sale processes has added heightened competition to domestic capital already chasing a finite pool of assets, according to dealmakers.

"When assets come up, there is usually a bit of a frenzy that puts upward pressure on the acquisition premium," said one energy attorney who spoke on condition of anonymity.

These funds are exploring two main investment routes. One approach is to buy a project directly through a joint venture with other partners.

The preferred option, however, is providing funds to projects and their developers, typically energy or private-equity firms. This approach helps to overcome two potential hurdles to such transactions: tax liability, and a review by the Committee on Foreign Investment in the United States (CFIUS) for non-American owners.

CFIUS, a government body that adjudicates on deals when there are potential national security implications for an overseas party owning an American company. Such national security objections prompted China National Offshore Oil Corp to withdraw its $18.5 billion bid for California's Unocal Corp in 2005.

Outright purchases by foreigners also raise tax considerations, since pipelines fall under the Foreign Investment in Real Property Tax Act (FIRPTA). Non-American owners are unable to minimize their tax bill by structuring a deal as a Master Limited Partnership, and may have to pay an income tax of up to 15 percent on the asset.


Dealmakers said more foreign entities could start buying directly into pipeline projects as a number of factors converge to eliminate such obstacles.

Structuring an investment to address the tax implications is already fairly straightforward, according to an energy lawyer.

The election of President Donald Trump, and his promised wave of deregulation, is expected to reduce CFIUS objections to transactions. One dealmaker noted the pending purchase of the Port Arthur refinery, the largest in the United States, by Saudi Aramco had not triggered any CFIUS actions. That deal is on course to close in the second quarter.

Infrastructure needs in certain regions of the country should also provide opportunities for further capital deployment, said Osmar Abib, global head of oil and gas, global energy investment banking, at Credit Suisse who spoke on the sidelines of the CERAWeek energy conference in Houston.

Trump has pledged to spend $1 trillion on infrastructure, with much of the capital coming from the private sector.

One area of focus, dealmakers said, could be in the U.S. Northeast, where a bottleneck in the pipeline network prevents gas generated by shale fields including the Marcellus from being moved elsewhere.

Story by David French ;Editing by David GregorioReuters.

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CERAWeek 2017
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