Big decisions: Retendering rounds can lead to greater sector efficiency

With the 75-year concession agreements for Abu Dhabi’s onshore oil production set to expire in 2014, executives at oil and gas companies throughout the world will stay keenly attuned to the re-tendering process. Predicting the outcome will not be easy as the new tenders come at a time of unprecedented change in the global energy market. State-owned Abu Dhabi National Oil Company (ADNOC) announced in April 2012 that it is evaluating many proposals as it prepares the final list of bidders for the 2014 concessions. Beyond that, little has been given away, and the industry is bracing itself for the possibility of significant changes to the status quo.

“Everything is being revisited,” ADNOC’s director-general, Abdulla Nasser Al Suwaidi, told the press in September 2011. “The terms, what would be required from the [international oil companies (IOCs)]… this is going to be a new agreement.”

The stakes are high, given that onshore operations in the emirate account for over half of the UAE’s total oil output – which by 2014 is due to exceed 3m barrels per day – along with sizeable reserves of natural gas. These resources are currently operated by a joint venture known as the Abu Dhabi Company for Onshore Oil Operations (ADCO), which includes four of the largest and most experienced IOCs: BP, Shell, Total and ExxonMobil. Each of these holds a 9.5% stake in ADCO, while Portugal-based Partex Oil and Gas holds 2%, and ADNOC retains the remaining 60%.

STANDING GROUND: The international majors are expectedly keen to retain their presence in the emirate, and have made their interest public. In September 2011 BP reiterated its intention to remain a leader in onshore activity in Abu Dhabi, and Shell Abu Dhabi chairman, John Barry, stated in October the same year that his company was “very interested” to carry on pumping oil in the emirate, as well as helping to develop its natural gas reserves.

On top of their interest to remain in the rink, the internationals will also be keen to secure themselves a good deal – one that allows them to form profitable partnerships and facilitates the best use of their technologies. “The challenge for Abu Dhabi is to find the right commercial framework to incentivise partners with the greatest technological expertise to work with ADNOC,” Morten Mauritzen, the president of Exxon- Mobil Abu Dhabi, told OBG. Rex Tillerson, the chief executive of ExxonMobil, which also holds a 28% stake in the offshore operations of the Zakum Development Company, emphasised at the World Petroleum Congress in Doha in December 2011 that “the concession structure that served all parties well in the past is just no longer appropriate in today’s environment, both in terms of cost and prices.”

GLOBAL SHIFT: ADNOC’s current onshore concessions have their origins in an agreement signed on January 1, 1939, when oil representatives on behalf of Western powers sought to guarantee supplies for their increasingly energy-hungry economies. Fast-forward to the 21st century, and it is the economic powerhouses and growing populations of the East that are now eager to shore up energy security and supplies.

Recognising Abu Dhabi’s weight in global oil markets, leaders from India, China, South Korea and Japan made a point to attend the January 2012 World Future Energy Summit held in the emirate, where the major players in the Abu Dhabi energy industry gathered. In that same month ADNOC announced that the 2014 concessions would be tendered publicly rather than negotiated privately, giving rise to speculation that the door is being opened to Asian multinational oil companies for the 2014 concessions.

This was followed by an announcement in March 2012 that the Korea National Oil Corporation is to form a $5bn joint venture with ADNOC, guaranteeing South Korea supplies of Abu Dhabi’s crude from three oilfields, two onshore and one offshore. The development is expected to be completed by 2014 and may ultimately supply South Korea with 43,000 barrels per day. While the Korean deal does not necessarily reflect the potential outcome of the 2014 retendering process, talk of Asian entrants into Middle Eastern energy markets has certainly been increasing, both in Abu Dhabi and throughout the world. Chinese oil and gas companies are on a rapid foreign expansion, and the country has reportedly invested over $230bn in external mergers and acquisitions in the past five years, over half of which has been in natural resources.

WEIGHING INCENTIVES: Another factor to be considered when comparing the longer-established IOCs to national oil companies in China and other rising Asian powers is that the former group must ensure that their investments secure returns for their shareholders, while the latter are perhaps more concerned with guaranteeing a steady flow of oil than they are with the costs of their investments. As such, agreements with Asian players could give Abu Dhabi more power to negotiate deals that allow the emirate to retain a greater share of revenues. Relatively inexperienced Asian entrants will be keen not only to tap Abu Dhabi’s reserves, but also to benefit from the decades of industry expertise that has accumulated there.

Following the January 2012 signing of a cooperation agreement between ADNOC and the China National Petroleum Corporation (CNPC), CNPC has begun studying five onshore and two offshore blocks in Abu Dhabi. Its vice-president said in June 2012 that he expects to have a firm agreement signed by the third quarter of the year and to begin drilling in 2013. The UAE’s energy minister, Mohammed Al Hamli, commented that it is natural for his country to want to strengthen relations with China and other nations in the East Asia that are already the major importers of Emirati crude. At the same time, there are clearly strong incentives for Abu Dhabi to continue its cooperation with the older IOCs. As the emirate’s fields mature and more advanced equipment is required to keep both the oil and the gas flowing, the government will be keen to secure the very best technological offering that it can. “Conventional developments in the oil and gas sector have become commoditised and can be performed by many companies around the world. More mature fields require unconventional techniques, expertise and new technology; this is where IOCs can add the most value,” Abdulkarim Al Mazmi, the general manager and chief representative of BP UAE, told OBG. Certainly, price will not be the only factor in the government’s decision.

From the perspective of the older IOCs, too, there is good reason to keep a foothold in Abu Dhabi. Even with large international companies looking to invest in the wave of new unconventional discoveries outside the region – such as North American shale gas – and as geopolitical tensions and economic uncertainty drive volatility in oil markets, these companies will also want to keep a balanced portfolio of investments. As an established and politically stable focal point for the Middle East’s energy industry, Abu Dhabi is considered a safe choice by watchful shareholders.

The 2011 “Global Petroleum Survey” by the Fraser Institute, which surveyed 478 companies about the various barriers to oil and gas investments throughout the world, found that the UAE was among the Middle East’s four most attractive jurisdictions, along with Bahrain, Qatar and Oman. The same perspective holds for clean technology investments, as an onshore investment in the middle of the Arabian Desert may seem relatively low risk, particularly in the wake of BP’s 2010 oil spill in the Gulf of Mexico.

LOOKING AHEAD: As 2014 approaches, all stakeholders will be keeping a close eye on how new energy investments play out in the region. Recent bidding rounds suggest that the rise of new entrants, especially from China, will continue apace. Bidding rounds in Iraq between 2009 and 2011, for example, received more than one-third of the total expected production that was awarded to the CNPC.

However, the Iraqi industry is in many ways – politically, economically and technologically – a world apart from its counterpart in the UAE. Other countries in the region, such as Oman and Bahrain, have in recent years continued to engage IOCs in order to boost flagging output, develop unconventional gas fields and tap difficult heavy oil reserves.

One possibility some experts have suggested is that Abu Dhabi could decide to alter the structure of the concessions such that more straightforward projects would be handled by new entrants and the more advanced reservoirs remain reserved for the better-established players. The government may also decide to split the current ADCO mega-consortium, assigning different companies to different assets, and thereby allowing international rivals to implement their individual technologies to the fullest extent.

The government of Abu Dhabi has numerous options for addressing new concessions, and the new structure is expected to reflect the emirate’s long-term vision for the sector. Additionally, the outcomes of the current reorganisation will likely shape the debate on future tenders, as in 2018 standing concessions for Abu Dhabi’s offshore reserves will be up for renewal.