Fat pipeline

Lower oil will unclog more pipeline deals

Cheaper oil is set to unblock more pipeline deals. For major energy companies desperate to protect their dividend, selling infrastructure not linked to oil prices is a no-brainer. There is plenty of interest from investors, as Total's £585 million ($907 million) gas pipeline sale in the North Sea shows. That will help overcome thorny deal issues.

Total's deal is not the first selloff since oil began sinking last year: BG sold a 543 kilometre Australian pipeline for $5 billion in December, for example. More recently BP offloaded its stake in another North Sea pipeline network. But the scene is set for more of these transactions as oil majors hunker down for a prolonged oil slump. They need to raise as much cash as possible to sustain their dividends.

One factor that should drive deals is a wall of money from pension, sovereign wealth, and private equity funds, as well as commodity traders chasing infrastructure investments like pipelines or gas terminals. For oil companies, these assets aren't core and their value hasn't been affected by the oil price. Sales can also generate capital gains, like Statoil's sale of its stake in the South Caucasus Pipeline.

The snag is that crafting oil infrastructure deals isn't straightforward. The value of any pipeline depends on the creditworthiness of the oil company paying to use it. Sellers who continue using the pipes they have sold must pay fees over time, which rating agencies might count as debt, which could undermine the case for selling. Sometimes, it might be cheaper just to raise capital by increasing debt. Where pipelines have several users, others may have the option to bid too, complicating the sale process.

The bigger issue is that oil infrastructure has operational risks. It's essential to energy projects, so sellers need buyers to be trustworthy. For funds, these assets are also riskier than buying, say, an electricity grid. Some investors prefer pipes in investment-grade countries. Fundamentally though, it's about supply and demand. The oil industry needs funds and has assets to sell, and investors have cash to invest. That points to more deals.