Sources have said BP has approached a number of sovereign wealth funds, including the world’s largest, Abu Dhabi Investment Authority, to secure cash to fend off takeover bids while it deals with its massive US oil spill.
Sovereign funds invest an estimated $3 trillion of windfall revenues from oil and exports for future generations and.
On the surface, investing in a major oil firm is unlikely to help these funds diversify their oil-generated capital. However, it could actually give them the expertise and technology needed to diversify their oil-dependent economy.
“SWFs over the last two years have been actively investing into technology transfer from an economic diversification point of view. From this perspective, BP actually have an attractive portfolio,” said Victoria Barbary, senior analyst at financial advisory group Monitor.
“Gas is greener, cheaper. Gas prices are far less volatile than oil prices. As gas is going to become very popular in the next 10 years, having an expertise in gas exploration is attractive because it will maintain flows of money into sovereign wealth funds.”
Abu Dhabi is trying to develop renewable energy and clean technologies via its alternative energy firm Masdar, which is owned by its sovereign fund Mubadala.
Among the big exporters mentioned in context of a BP stake are China, which has been focusing on investments to meet its growing energy needs.
The Government of Singapore Investment Corp. (GIC) already owns around 0.7 percent of BP.
From a portfolio perspective, BP may become an attractive play on emerging markets as its growth is closely correlated with energy consumption in fast-growing developing economies.
“Sovereign funds are cash-rich. If you’re in it for a long time, you can take a calculated risk,” said Pervez Akhtar, a Dubai-based partner in law firm Allen & Overy specializing in corporate finance.
BP hopes to raise $10 billion from asset sales this year as part of its plan to fund a $20 billion clean-up fund set up under pressure from US authorities.
Reports of BP talking to sovereign wealth funds have helped its shares recoup some losses after they lost more than half their market value since the April 20 explosion on a drilling rig caused an undersea well to rupture.
Sovereign funds became an almost routine speed-dial for those looking for long-term cash during the financial crisis and they have replaced hedge funds and private equity as major capital providers with some $80 billion investment into troubled Western banks.
But their status as “investors of last resort” proved short-lived. The value of their investments in banks plunged in the short term, sparking public criticism at home where politicians concerned by domestic economic troubles became too impatient to wait for the stakes to show a profit.
This, along with some backlash from Western countries that grew concerned that these investments were being made for political rather than commercial reasons, has prompted many funds to curb headline-grabbing activities in developed markets.
Political risk came onto their radars after a UK acquisition by Dubai-owned DP World in 2006 created a storm in the United States because of fears it would give the group control over some US ports, which some saw as a security threat.
“BP has a very high political risk. We don’t know how the regulatory environment in existing and future oil investment will look like," Andrew Ang, adviser to Norway's sovereign wealth fund, told Reuters.
“Political risks associated with SWFs’ investment will become more important especially as a large amount of government deficits will require these governments to sell off their assets,” added Ang, who is also an associate at the US National Bureau of Economic Research and a professor at Columbia Business School.
Over the past year some funds have formed joint ventures with Western countries, while others invested in infrastructure or resource-related projects in frontier markets which satisfy national strategic needs with potentially fat returns.
“SWFs would only bite if they see an attractive proposition. I don’t think SWFs will buy a stock just because it’s cheap. They're not just big stupid money. They’re smarter than we give them credit for,” Barbary said.
