Holding companies, order of the day

Bahrain’s decision to set up a $2.6-billion oil and gas holding company aiming to reduce the government’s role in the energy sector, though belated, is a step in the right direction.

The government’s stake in five firms will be transferred to the holding company, which would be under the National Oil and Gas Authority. The five firms are Bahrain Petroleum Company (Bapco), which is 100 per cent state-owned, Bahrain National Gas  (Banagas) (75 per cent), Bahrain Gas Company Expansion (100 per cent), Gulf Petrochemicals Industries (GPIC) (33.33 per cent) and Bahrain Aviation Fuelling Company (Bafco) (60 per cent).
Coporatising has become a trend in the region with governments and private firms creating holding companies to manage their assets efficiently. Recently, the Dubai government created a holding company to manage the government’s stakes in Dubai Financial Market and Dubai International Financial Exchange.
Bahrain’s entity will be called the Holding Company for Oil and Gas and base its headquarters in Manama with the possibility of opening branches, agencies and offices abroad.
The reason behind setting up the new firm is that it will own the government’s stakes in these oil companies and invest them in the fields specified by the National Oil and Gas Authority (Noga). It will also establish new firms and own stakes in internal and external projects.
The firm will sign contracts with individuals, companies and organisations specialising in oil and gas sector.
A work team from the Noga board of directors has been formed to follow up on administrative, financial and logistic phases of the company’s establishment.
“It is no longer a government organisation. It is a company, and as a company it can work more efficiently,” insists Dr Abdulhussain Mirza, Minister of Oil and Gas Affairs and chairman of Noga.
The holding company plans to increase profits of the country’s energy assets by investments outside Bahrain. “It will try to maximise returns by investing outside, including opportunities for investing in oil and gas opportunities,” he says.
However, it will still be linked to the National Oil and Gas Authority and A minister will chair it.
There are many advantages to establishing a holding company. From a financial point of view, it is usually possible to obtain control of another company with less investment than would be required in a merger or consolidation.
A holding company only needs a controlling interest in the acquired company, not complete interest as in the case of a merger or consolidation. Consequently, it is possible to obtain control over large properties with less investment than would otherwise be required in a merger or consolidation.
Another advantage is that shares of stock in the subsidiary company are held as assets on the books of the parent company and can be used as collateral for additional debt financing.
In addition, one company can acquire stock in another company without approval of its stockholders; mergers and consolidations typically require stockholder approval.
Holding companies and their subsidiaries are considered separate legal entities, so that the assets of the parent company and the individual subsidiaries are protected against creditors’ claims against one of the subsidiaries.
However, holding companies and their subsidiaries may be considered a single economic entity, and consolidated financial statements are then prepared for the entire structure.
From a management point of view, the parent-subsidiary relationship of holding companies and their subsidiaries allows for decentralised management.
Each subsidiary retains its own management team, and the subsidiaries become responsible to the parent company on a profit and loss basis.
Unprofitable subsidiaries can more easily be sold off than can divisions of a consolidated business. Subsidiaries retain their corporate identities, and the holding company benefits from any goodwill and recognition attached to the subsidiary’s name. Parent companies may provide specialised staff services for the benefit of any of their subsidiaries.
The new crop of corporations, if run ethically and efficiently, could become versatile entities that raise funds, create employment and contribute to the overall progress of the region.
But a holding company is not the answer to all of Bahrain’s problems with resources. The country has proven oil reserves of 125 million barrels, all in one field — Awali. The Awali field was discovered in 1932 and was the first oil field developed in the Arabian Gulf. In the early 1970s, crude oil production at Awali peaked at more than 75,000 bbl/d. Currently, however, production at the Awali field is declining.
At a time of falling output it is not volumes but the high oil price that is creating a surplus for Bahrain. However, any major fall in oil prices from the current $70 to about the $40 level would hurt all the GCC countries.
In a price-slump scenario, Bahrain would be in the worst fiscal situation in the GCC, with a break-even oil price, based on current spending patterns, of around $43 per barrel (pb).
Saudi Arabia comes in just under $40pb, Qatar and the UAE just over $35pb (although Qatar’s will fall significantly with time) and Oman just under $35pb. Kuwait is in the best situation at $30pb – although even very aggressive non-oil growth forecasts cannot avoid the Kuwaiti economy contracting in both nominal and real terms, says a Standard Chartered study.
Efforts to diversify the GCC economies away from their reliance on the hydrocarbon sector and traditional capital-intensive areas of diversification have a long way to go. The key challenge facing the region is creating enough jobs for a burgeoning labour force. This cannot be achieved in the hydrocarbon sector alone.
Keeping these things in view, the country needs to move fast towards alternative sources of revenue even as it makes best use of its assets.

Talking Business with
K S Sreekumar
sreekumar@tradearabia.net