A year after its high-profile launch, Abu Dhabi's energy investment firm XRG, a unit of Abu Dhabi National Oil Co. (Adnoc), is navigating significant hurdles in its ambitious quest to become a global energy powerhouse. Formed with the intent to deploy billions of dollars on international energy deals, XRG has recently seen its largest acquisition effort collapse and another major transaction hanging in the balance, highlighting the complexities of mega cross-border deals.

The firm officially abandoned its planned $19 billion takeover of Australian natural gas producer Santos Ltd. this week, concluding a months-long endeavor. This setback was not attributed to regulatory issues, but rather to a breakdown of trust between the parties. Reports indicate Santos sought to shift capital-gains tax liability to XRG and its partners, and concerns arose over a methane gas leak that XRG reportedly learned about only through the media. Santos was reportedly surprised by XRG's decision to withdraw the bid.

Adding to XRG's challenges, its year-long negotiation for the takeover of German chemical maker Covestro AG is now at risk of being jeopardized by an impending European Union competition probe. Despite these significant setbacks, both XRG and Adnoc have reaffirmed their commitment to pursuing further acquisitions. Industry analysts, like Rachel Ziemba of the Center for a New American Security, note that these events underscore the difficulty of acquiring relatively large companies, especially when the expectation of Abu Dhabi's deep pockets can lead to inflated valuation expectations.

The collapse of the Santos deal, while a blow to the associated banks, is also seen by some as an early indication of Adnoc's willingness to exercise financial discipline, even with its vast resources. Robin Mills, founder of Dubai-based consultancy Qamar Energy, suggests this tactical display of being able to walk away might influence future negotiations, including those with Covestro and the European Union.

XRG was established in November as an international-focused unit of Adnoc, designed to be nimble and acquisition-oriented. It operates under the oversight of Adnoc CEO Sultan Al Jaber, who outlined an expansive investment strategy last year, including plans to acquire US gas assets and expand into powering AI and data centers, aiming to cover the entire energy value chain. The firm's board boasts significant international energy and dealmaking experience, including Blackstone Inc. President Jon Gray and former BP Plc CEO Bernard Looney, with former Morgan Stanley banker Klaus Froehlich leading Adnoc's international expansion.

While struggling with these high-profile mega-deals, XRG has successfully acquired assets in the US, Turkmenistan, and Mozambique. Adnoc itself recently partnered with OMV AG to form a chemicals giant valued over $60 billion, transferring a 25% stake in OMV to XRG earlier this year to consolidate its international portfolio. XRG initially targeted $80 billion in assets with plans to double that over the next decade. This month, Adnoc further bolstered XRG's funding capabilities by transferring approximately $120 billion in stakes from its listed energy companies in Abu Dhabi, providing access to cash flow and dividends for future deals.

According to Carole Nakhle, CEO of Crystol Energy Ltd., the Santos deal's failure is more of a setback for the Australian firm than for Adnoc, though it represents a missed opportunity for the Emirati energy giant. Nakhle suggests that the outcome reveals XRG's 'cautious, measured approach rather than a bold, risk-heavy strategy' in its investment decisions.