Targeting the east
ABU Dhabi plans to invest $60 billion over the next five years in a bid to boost UAE’s oil production capacity from 2.7 million to 3.5 million barrels per day (mbpd) and may welcome eastern companies into the cosy western oil club to make it happen.
“You are not going to have a small club anymore. You will have some more upstream presence from the consumer countries. I would expect some other partnerships from Japan, South Korea and even China,” Thaddeus Malesa, a Dubai-based independent energy analyst, says. “If you want to be tied into the future, if you want to have ties with countries with higher demand growth, you will have to let them in. That is really the consideration within the government in terms of getting the best all-around deal for Abu Dhabi,” Malesa says.
Western oil majors ExxonMobil, Shell and Total hold large stakes in concessions that pump most of the oil and gas which has helped transform Abu Dhabi from a sleepy fishing village into one of the world’s largest oil exporters and richest countries over the last five decades. Almost all of crude exports out of UAE, the world’s third largest crude exporter, is sold to Asian countries, but when it comes to concessions Japanese Oil Development Co (Jodco) is the only Asian company with a major stake in one of its four largest oil concessions.
Cosmo Oil Co, also from Japan – the leading importer of emirati oil – was awarded a minor concession in early 2011 and has stakes in a few small fields. But analysts, sources close to the government and industry observers say companies from South Korea and increasingly import-dependent China are likely front-runners when the concessions come up for renewal in 2014. Analysts and sources close to the government expect some shift in concession control from West to East point to a memorandum of understanding signed by Abu Dhabi National Oil Co (Adnoc) and South Korea in March which secured access to at least a billion barrels of reserves for one of the UAE’s biggest crude consumers. The UAE’s oil concessions have an unusual structure which allows producers to acquire equity stakes in return for providing much of the investment and accepting profit margins that analysts say are very tight by international standards.
Adnoc holds a controlling stake in each concession which it operates with several partners – a system which irks some oil companies who do not want to share their technology with rivals. In October last year, the senior vice president of ExxonMobil, one of the largest stake holders in the big concessions, said the multi-partnered structure prevented the US energy giant from bringing in its “best” technology. “The biggest company pushing for change is Exxon,” a senior industry source based in Abu Dhabi says. “They have been lobbying for that for quite some time.” Exxon ... pushing for change in Adnoc rules for concessions But Abu Dhabi’s Supreme Energy Council (SPC), the highest authority on energy policy, will not shift readily from a concession system which has worked well for the wealthy emirate for decades. “We are going through a very conservative period in terms of investment. I would be really surprised if they broke up the concessions,” a senior government source says.
“If we are going to allow any new players, I would say it would be for small fields,” he adds. With the first expiry of Abu Dhabi concessions looming in 2014, international oil company (IOC) executives hope Adnoc and the SPC will announce their plans for the renewals this year. “They are supposed to be making a decision in the next three to four months. But knowing the pace of things in Abu Dhabi, I’d double that time,” the industry source says. Fuel-thirsty Asian companies may also offer more price-competitive bids for pumping out the oil and gas, which could prove vital in swaying Adnoc’s decision in their favour. “I can tell you from experience that whenever there is any kind of bidding, Adnoc would consistently pick the lowest price,” Malesa says. “Even if (a rival bid) is within a 10-percent band it would be rejected, even if the other bidder has better technology,” he adds. US-based Occidental Petroleum beating front-runner Shell in January to develop the large but technologically challenging Shah Gas field was seen by many analysts as evidence of Adnoc’s sensitivity to price.
The complex nature of future oil and gas extraction in the region should ensure western IOCs with experience extracting fuel from tricky deposits in other parts of the world continue to play a major role in the UAE. “Adnoc will explore its options,” a source at Adnoc says. “But you will still have the likes of BP, Shell involved.” With Asian oil demand rising while consumption in the western hemisphere wanes, Asian companies with long-term supply concerns may out bid the established IOCs to secure fuel they need to drive rapid economic growth. “The concessions are not about profits for the next 10 years but more about what this region will look like in 50 years’ time,” a western oil industry source says. Adco ... concessions coming up for renewal in 2014 “They recognise this will be very important in 60 years’ time so they start the relationship today.” It has been a bumpy year for Adnoc, which has also had to tackle problems within the UAE, with a gasoline supply crisis afflicting many of the UAE’s fuel stations in June. As supply shortages in many northern emirates provoked anger among motorists, the UAE government lined up Adnoc to take over the fuel licence of Eppco (Emirates Petroleum Products Company) and Enoc (Emirates National Oil Company) petrol stations. Adnoc boosted supplies to more than 80 petrol stations, averting a more sustained crisis. The recent fuel problems may however herald longer-lasting effects on Abu Dhabi’s energy strategy, with a reshuffle of the senior guard at the Supreme Petroleum Council (SPC), the government body that oversees oil and gas strategy. In late June, Jamal Al Dhaheri, a director at Abu Dhabi Investment Authority, replaced the long-standing former Adnoc chief Yousef Al Omeir as SPC secretary general, while Abdulla Nasser Al Suwaidi was promoted from deputy chief executive to director general of Adnoc. Though the petrol crisis may have been the immediate trigger for change, analysts see longer-term drivers behind the change in the guard at SPC, including the need for Adnoc to be run more efficiently.
“There has been a perception that Adnoc had become lethargic, and rumours that some of its contracts were failing to benefit the country as a whole,” says Samuel Ciszuk, Middle East energy analyst at IHS Global Insight. The new leadership takes charge at a critical time for the emirate, which is looking to boost oil and gas production and advance a number of alternative energy projects, including renewable schemes. Much of the focus of its efforts will be on building market share in the rapidly growing Asian economies. In July, it struck a potentially significant agreement to double oil exports to China to 200,000 bpd from 2014. With Chinese oil demand forecast to grow by six percent this year, boosting supply to the world’s strongest growth markets is a clear priority for Adnoc. Yet in order for it to be in a position to increase sales to the world’s growth economies, Adnoc will need to progress plans to add at least 700,000 bpd of production capacity – and for this to work out, analysts say Adnoc chiefs will have to agree terms over the next couple of years with the large international oil companies that are partners in the country’s largest fields.
ExxonMobil, Royal Dutch Shell, BP, Total and Partex are partners with Adnoc in the onshore concession operated by Adnoc affiliate, Abu Dhabi Company for Onshore Oil Operations (Adco). Adco is overseeing a series of projects that will boost overall production from 1.4 mbpd currently to 1.8 mbpd. Two new fields are being developed by Adco, the Qusahwira and Bab fields that will add 250,000 bpd by 2014. Adco will also redevelop Bida al Qemzan field, adding 20,000 bpd to take production to 250,000 bpd by the third quarter of 2012.
The Adco concession comes up for renewal in 2014 and the foreign partners are angling for more attractive fiscal terms. The partners currently receive just $1 a barrel of oil produced from the concession, a price set back in the 1980s when operating costs were substantially lower than today. More favourable returns would be the quid pro quo for the provision of critical technology to improve production at the Adco fields. BP for one has been vocal on this front, with officials at the British supermajor saying it was barely making any money on its Abu Dhabi concessions. The offshore sector is another future area of activity. The Upper Zakum field is operated by Zakum Development Company (Zadco), 60 percent owned by Adnoc with the Japanese Oil Development Company and ExxonMobil holding the remaining stakes. Zadco is mulling the use of extended reach drilling from four artificial islands to expand production from 550,000 bpd to 750,000 bpd by 2015, hiking the oil recovery rate to 70 percent.
The company is preparing for contract awards for the construction of offshore pipelines and for processing facilities on the four artificial islands that will draw more oil from Upper Zakum. The majors holding equity stakes in Abu Dhabi’s largest oilfields will be holding a watching brief on the progress of the emirate’s most ambitious oil and gas project in its portfolio – the $10 billion Shah sour gas development. Adnoc’s speedy replacement of its joint venture partner at the Shah field, Conoco – which pulled out in April 2010 – by US major, Occidental, showed Abu Dhabi is still a strong draw for international oil companies (IOCs), even for the most technically challenging schemes. The partners aim to produce around 500 million cubic feet a day of network gas and a significant amount of condensate and natural gas liquids starting in 2014.
Oxy will hold a 40 percent participating interest in a 30 year contract. Work began in April, with the shifting of sand ahead of the drilling in deep deposits of sour gas. Industry eyebrows were initially raised at the appointment of Oxy, which is smaller than the other majors active in Abu Dhabi. However, despite some questioning of Oxy’s capacity to undertake such a capital-intensive and technically complex operation, the company’s experience in developing the Mukhaizna heavy oilfield in neighbouring Oman may have stood it in good stead. “Oxy have proven themselves in a number of technically advanced projects,” says Ciszuk. “However, it’s still wait and see on the Shah project. They don’t seem to have secured significantly better terms than Conoco, and there are a lot of doubts as to whether Shah will be profitable,” he says.
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