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The Petrodollar Tsunami

Published by Current on 2007-09-21

The fact that Abu Dhabi's government-owned Mubadala Development Company could open its vaults and hand over $1.35 billion for 7.5 percent of the U.S.-based Carlyle Group may be newsworthy, but it's not surprising. What's more surprising is that Mubadala didn't spring for more. Simply put, Mubadala is the cash camel of the United Arab Emirates, one of the wealthiest of the oil-and-natural-gas-producing members of the 12-nation Organization of Petroleum Exporting Countries.

To put it another way, Mubadala officials will tell you privately, the company could have sprung for all of Carlyle, whose current value is assessed at $20 billion. That, of course, would have triggered the sort of political controversy that neither Mubadala nor the emirate of Abu Dhabi - the biggest and richest of the U.A.E.'s seven sheikhdoms - welcomes. As the saying goes, Dubai - another of the U.A.E.'s emirates - has all the flash, but Abu Dhabi has the cash.

It has the cash because virtually all of the 10 billion barrels of the country's crude oil - representing almost 10 percent of the world's total of proven reserves - and 5.8 billion cubic meters of natural gas - or 4 percent of the world's total - lie in the emirate. Nearly 92 per cent of the country's gas reserves are located in Abu Dhabi and the Khuff reservoir beneath the oil fields of Umm Shaif and Abu al-Bukhoosh ranks among the largest single gas reservoirs in the world.

At the current production rate of some 2 million barrels a day, the U.A.E.'s reserves will last another 150 years. And if oil prices keep hovering in the range of this week's record $80 a barrel, the country's surpluses will grow to a point where it just may run out of places in which to invest.

Under an agreement forged by the late Sheikh Zayed Al Nahayan, when the U.A.E. was created in 1971 from the British possession known as the Trucial States, the other six emirates receive the equivalent of monthly allowances. President Zayed is widely credited with holding together the seven emirates with his unique, desert-wise way of keeping various sheikhs from feuding openly over the country's natural wealth

How much disposable cash does Abu Dhabi possess? Conservatively speaking, its surplus for 2007 is likely to be in excess of $500 billion. Abu Dhabi has already invested more than a trillion dollars abroad, some of it in U.S. Treasury bills. This year, the six countries comprising the Gulf Cooperation Council - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates - are expected to invest nearly $70 billion overseas; in 2006, they invested about half that figure. (And on Thursday, the U.A.E.'s bitter rival, neighboring Qatar, announced it was taking a 20 percent stake in the London Stock Exchange.)

As for Mubadala, its very existence highlights a simple, fundamental premise of modern-day nation building: a country's wealth, especially accruing from its natural resources, must be put in service of economic growth.

The aforementioned obviousness notwithstanding, the premise of contemporary nation-building has an important predicate - which is that a country needs strong investment vehicles for channeling its wealth. And in this age of galloping globalization, it isn't enough simply to invest. It is important to invest wisely. It is equally important to invest widely.

That is what Mubadala has been doing since its creation five years ago as a wholly owned unit of the Government of the Emirate of Abu Dhabi. The fact that Mubadala has organizationally performed well during these five years is almost besides the point. With its deep bench of managerial and financial talent, how could it not have? The key point, rather, is this: Mubadala's diversification - its acquisition of strategic holdings in existing domestic or foreign companies - and its investments have been in remarkable synchronicity with the driving objectives of Abu Dhabi's ruling family and economic decision makers.

Those objectives are manifold, but they all underscore a central thesis: the emirate needs to broaden its economic platform and embrace a variety of enterprises. In time, the thesis goes, the oil and gas sector should serve mainly as a fiscal trampoline, a safety net. But the underpinnings of the economy should be a wide range of strategic sectors including utilities, real estate, public-private partnerships, aviation, ship building, health-care, and energy. And, of course, information technology.

Little wonder, then, that Mubadala linked up with Carlyle. According to officials of both companies, part of the deal with Abu Dhabi includes a provision that requires Carlyle to guarantee its $20 billion valuation if - as The new York Times put it -- the firm ever goes public, hinting that it may be an inevitability. In the event that Carlyle - which currently manages about $77 billion in assets -- is valued at less than $20 billion at the time of an offering, the firm would give Mubadala a larger piece of the business to make up for the difference, according to these officials.

Translation: Mubadala is betting that its cash camel will grow fatter.

Little wonder too, that prior to the Carlyle deal, Mubadala plunged into the IT with brio, and brimming with institutional self confidence. It partnered Electronic Data Systems (EDS), the American outsourcing behemoth that employs some 120,000 men and women around the world, and set up Injazat Data Systems as a 60-40 venture. Little wonder, too, that this joint venture soon found clients ranging from the Environment and Wildlife Development Authority (EWDA) to the U.A.E. Offsets Group (UOG) to the Abu Dhabi Water and Electricity Authority (ADWEA).

ADWEA, in fact, awarded Injazat a 10-year outsourcing contract to manage all of its IT requirements. Lest it be thought that the contract was given mainly because of Injazat's first-rate pedigree, let it also be noted that there was an extraordinary confluence of ADWEA and Injazat's respective goals - the emiratization of staff and the accelerated education of personnel. ADWEA's staff is currently about 40 percent national, and it seeks to push that figure to a full 100 percent. Injazat wants to boost employment of nationals, particularly smart young graduates of the Higher Colleges of Technology. Hard to quarrel with that.

Harder still to find fault with Injazat's contention that it intends not to compete with the private sector but to cooperate with it. The fact that the company's provenance is the Government of Abu Dhabi occasionally sends a frisson of apprehension through commercial companies. But Injazat has little to gain by spawning friction, and everything to lose by not infusing the private sector throughout the Gulf with confidence that it is indeed charting a new course in sustainable economic development.

That course has already led to several intriguing deals abroad. Mubadala, for example, acquired a 35 percent equity share of the Italian business-aircraft manufacturer Piaggio Aero. It led to the glitzy world of Ferrari, where Mubadala acquired a 5 percent stake. It led to the Netherlands, where Mubadala acquired a 25 percent stake in LeasePlan Corporation, a fleet-management giant. It led to Libya, where Mubadala acquired a stake in nine oil exploration sites.

And the pioneering course in diversification of investments has led Mubadala to neighboring Qatar, where it poured a formidable amount of money into a gas processing plant.

The Qatar deal, in fact, was in itself associated with a larger project, Dolphin Energy. Owned 51 percent by Mubadala, it's creating the first cross-border natural gas network of the six countries of the Gulf Cooperation Council. Natural gas from Qatar's North Field transits through Dolphin's huge gas processing plant at Ra's Laffan, where valuable commercial byproducts are extracted. The dry gas is then transported by pipeline to Abu Dhabi via Dolphin's 370-kilometer pipeline. And how much natural gas is being pushed daily? Some two billion cubic feet, first to the U.A.E., and, in 2008, onward to Oman.

Indeed, Oman is figuring quite prominently in Mubadala's plans, which are increasingly emphasizing regional cooperation. So there's an agreement for the development of the Mukhaizna heavy oil field. That's being implemented by a wholly owned subsidiary, Liwa Energy Limited, which will increase production to 150,000 barrels per day from the current 10,000 barrels.

There's the agreement with Oman Oil Company to develop the Salalah Methanol Project, which will produce 3,000 tonnes per day.

It is not that Mubadala's deals are necessarily only outward bound. There's significant cooperation with other emirates within the U.A.E., too. Take, for instance, Dubai's aluminum smelting company, Dubal, with which Mubadala has a project going to build a $6 billion greenfield aluminum smelter complex at Taweelah in Abu Dhabi. Producing 1.2 million tonnes annually, it will be biggest single-site aluminum smelter in the world. It will also create more than 4,000 jobs, which are expected to be held by nationals.

As Sheikh Zayed would often say, nation building demands the prudent utilization of natural resources in the service of economic growth. Perhaps one should add another vital element to that fundamental. A nation's institutions of economic development need to keep up not only with the exigencies of domestic economic development but also the demands of the global market place. There is no longer "out there," and "us in here." Mubadala has already constructed the nexus between Abu Dhabi and the vast world outside. To put it another way - perhaps a slightly old fashioned but nevertheless quite relevant way - Mubadala has shown how it's done.

It is also encroaching on the territories held by some local entities in the U.A.E. For example, Mubadala is reported to be developing educational institutions that would compete with the three national systems of higher education - the U.A.E. University, Zayed University, and the Higher Colleges of Technology. Mubadala's strategy? No surprise: linking up with foreign entities that export educational products and systems, particularly in the United States, Britain, Ireland and Australia.

Old Arab saying: Never compete openly with your brothers. New Arab saying: Do whatever it takes.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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