ADNOC looks for global energy transition deals with latest Covestro talks

The UAE's Abu Dhabi National Oil Co.'s transition into a low-carbon global energy company is taking it closer to acquiring Europe's specialty chemicals maker Covestro, which makes some of the world's fastest-growing products used in electronics, home furnishings, and automobiles.

Leverkusen, Germany-based Covestro on June 24 said it and ADNOC have entered "concrete discussions" about a possible transaction, with the starting point for a possible offer at Eur62 for each Covestro share. "We have made good progress in our discussions with ADNOC. Therefore, we have decided to enter into concrete transaction negotiations with ADNOC," Covestro CEO Markus Steilemann said in the statement. ADNOC made its initial interest known in July 2023.

Covestro is the world's biggest producer of bisphenol, used in many consumer products to enhance their strength, and polycarbonates, favored for their toughness, transparency and resistance to high temperatures, according to S&P Global Commodity Insights. Demand for some of its products is expected to grow as fast as 5% a year, according to Commodity Insights, at a time when crude oil faces the possibility of peak demand. At the end of 2023, Covestro had 48 production sites worldwide and employed approximately 17,500 people.

"We welcome Covestro AG's decision to commence confirmatory due diligence on the basis of our final offer," an ADNOC spokesperson said in a statement to Commodity Insights July 2. "ADNOC is a value-adding, responsible, long-term partner and growth-orientated investor, and we look forward to jointly working with Covestro to swiftly progress due diligence for this important transaction."

Main products

Covestro's main products are polyurethane intermediates such as methylene diphenyl diisocyanate, toluene diisocyanate and polyether polyols and key raw materials include toluene and benzene, among the basic building blocks for petrochemicals.

Demand for polyols is expected to grow 2.7% a year through 2028, faster than the global capacity growth of 2%, even though the market is currently oversupplied and is expected to stay that way through 2028, according to the Commodity Insights data. Covestro has also been making strides in chemical recycling technologies for tires and polyurethane mattresses, an area considered to hold strong growth potential.

"While sharpening focus on their core upstream business, which is feedstock for the chemicals sector, ADNOC seems to be looking to get closer to the direct consumer," Rajeev Lala, director of upstream companies and transactions at Commodity Insights, said July 1."Historically, they've been sticking to upstream raw oil and natural gas." Now ADNOC wants to build its presence in renewables, LNG, natural gas and chemicals.

Trading refined products and crude oil is also part of ADNOC's transformation. The ADNOC Global Trading and ADNOC Trading businesses started in 2020 have "unlocked sizeable revenue" for ADNOC, the Abu Dhabi Media Office said on July 1, marking a visit by Abu Dhabi Crown Prince Sheikh Khaled bin Mohamed bin Zayed Al Nahyan to ADNOC's trading floor.

ADNOC plans to extend its trading operations to the US, joining other existing trading offices in Singapore and Europe, it said.

For the time being, however, many chemical markets are oversupplied. Covestro said in February that it expects weak demand in all regions to continue and that the outlook for its core end users in the automotive, construction, furniture and electrical and electronics sectors was "depressed". Its main competitors include Dow, Huntsman Chemical, Wanhua Chemical, Shell, SABIC and BASF.

Chemicals make sense for ADNOC because of its ties to petrochemicals producers Borouge, Austria's OMV and Borealis, Lala said.

OMV talks

In February this year, ADNOC announced that it had completed the acquisition of a 24.9% stake in OMV, increasing ADNOC's interest in both Borealis and Borouge. It also said it was continuing talks with OMV about a possible merger of their shareholdings in Borouge and Borealis. Prior to the OMV transaction, ADNOC had a 54% stake in Borouge and a 25% holding in Borealis. In November last year, Bloomberg also reported that ADNOC was exploring a potential acquisition of Wintershall Dea backed by BASF, citing people with knowledge of the matter. BASF owns 73% of the company, with the rest owned by billionaire Mikhail Fridman's LetterOne.

Last month, Wintershall said it agreed to sell its 10% participating interest in Abu Dhabi's Ghasha concession to a subsidiary of Thailand's PTT Exploration and planned to close its office in Abu Dhabi and all operations in the UAE. Wintershall Dea's activities in the UAE began in 2010, and in November 2018, it was awarded a 10% stake by ADNOC, which operates the Ghasha concession.

Then in May this year, ADNOC said it planned to acquire 11.7% in phase 1 of NextDecade's Rio Grande LNG, its first major investment in the US, and Galp Energia's 10% interest in the Mozambique Rovuma basin Area 4 concession.

The Mozambique transaction is ADNOC's third international upstream deal since late last year and is a "revolutionary shift" for the company that had no direct international upstream exposure before, Lala said in a June 10 report. It "firmly establishes the trend of internationalization for NOCs in the Middle East."