Hive of activity: From oil and gas to EOR and EPC, opportunities abound in the industry

As a close-out agreement was signed for long-held concessions in early 2014 and the government is looking for potential new partners for the development of its oil and gas fields, 2014 may see a shake-up of Abu Dhabi’s hydrocarbons industry. At the same time, the emirate has ambitious targets for increasing oil production, an aim that will require significant investment in enhanced oil recovery (EOR) in its mature fields. The government is keen to procure new sources locally, requiring investment in the emirate’s challenging sour gas reservoirs. This means opportunities in the upstream sector for everyone from oil majors to engineering, procurement and construction (EPC) contractors.

Reserves & Producation

Abu Dhabi holds 94% of the 97.8bn barrels of proven oil reserves in the UAE. According to the US Energy Information Administration (EIA), the UAE has the seventh-largest reserves globally and is the seventh-largest producer, pumping 2.8m barrels per day (bpd) in 2012. The country also holds 215trn cu feet of gas and produced 2.19trn cu feet in 2011, making it the 11th-largest producer globally. Within Abu Dhabi, oil and gas activity accounted for 56.1% of GDP in 2012 and 93.7% of exports, according to the “Abu Dhabi Statistical Yearbook 2013”. The average daily production was 2.59m bpd in 2012, up from 2.50m bpd in 2011. Exports also increased by 4.9%, averaging 2.39m bpd.

The State Of Play

The heart of the oil industry in Abu Dhabi is the Zakum offshore oil platform, the third largest in the Middle East and the fourth largest in the world, according to the EIA. The Upper Zakum field has a current production of 585,000 bpd, with a reserve estimate of 50bn barrels, suggesting a current reserves-to-production ratio of over 230 years. The field is operated by the Zakum Development Company (ZADCO), which is owned by the Abu Dhabi National Oil Company (ADNOC, 60%), ExxonMobil (28%) and the Japan Oil Development Company (JODCO, 12%). ZADCO plans to ramp up production in the field with a $14bn investment programme. This should bring production up to 750,000 bpd by 2017 and 1m bpd by 2024. The company has concluded that it will be able to keep production at this higher plateau for 25 years from 2024.

All the operators in Abu Dhabi’s hydrocarbons sector have plans to expand and improve production from their reservoirs. Abu Dhabi Marine Operating Company (ADMA-OPCO), the other offshore operator, intends to increase its production from the current level of 600,000 bpd to 1m bpd, with the majority of this being completed by 2017. ADMA-OPCO is owned by ADNOC (60%), BP (14.7%), Total (13.3%) and JODCO (12%). Three fields, Umm Lulu, Satah Al Rasboot (SARB) and the Nasr field, will contribute an additional 270,000 bpd, the Lower Zakum field will increase production by 100,000 bpd, while the remaining 30,000 bpd in added capacity will come primarily from the Umm Shaif field.

Ali Rashid Al Jarwan, the CEO of ADMA-OPCO, told the Abu Dhabi Petroleum Exhibition and Conference (ADIPEC) in November 2013 that the firm could invest $19bn in new field developments by 2019.

The Abu Dhabi Company for Onshore Oil Operations (ADCO) plans to increase its production capacity from the current level of 1.6m bpd to 1.8m bpd by 2017. The company, owned by ADNOC (60%), BP (9.5%), Royal Dutch Shell (9.5%), Total (9.5%), ExxonMobil (9.5%) and Partex (2%), operates a number of fields both onshore and in the emirate’s shallow waters, including Bu Hasa (600,000 bpd), Murban Bab (320,000 bpd) and the Sahil, Asab and Shah fields (with a combined production capacity of 385,000 bpd). In November 2013, the company announced that it had begun production on the Qusahwira field. Developed at a cost of around $1bn, the field will have an initial capacity of 30,000 bpd, rising to 53,000 bpd by 2017.

Range Of Crudes

 Abu Dhabi’s fields produce a range of crudes, several of which are sour. The emirate’s premier crude, produced by ADCO, is Murban. It is light with an American Petroleum Institute (API) gravity of 40.2 degrees and not too sour with a sulphur content of 0.79%. In 2012, Murban crude achieved an average price of $113 per barrel, up from $110.6 per barrel in 2011. From July 2014, Abu Dhabi will sell a new crude blend called Das crude. A combination of Lower Zakum (55%) and Umm Shaif grades, the blend will have an API of 39.2 degrees and a sulphur content of 1.3%. Das crude will improve shipping flexibility for ADMA-OPCO’s products. As such, Abu Dhabi’s product was able to trade at a slight premium to the Brent crude benchmark. Brent achieved an average price of $111.67 per barrel in 2012, according to the EIA.

Structure & Oversight

The sector is overseen by the Supreme Petroleum Council (SPC), chaired by the ruler of Abu Dhabi and president of the UAE, Sheikh Khalifa bin Zayed Al Nahyan, and tasked with setting policies and supervising oil and gas production in the emirate. ADNOC, with its 15 subsidiaries across the oil, gas and petrochemicals industries, implements SPC directives and is responsible for operations within the hydrocarbons sector.

Established in 1971, ADNOC is the fourth-largest oil company in the world. The firm maintains a 60% stake in the main field operating firms within Abu Dhabi, working in partnership with international oil majors. ADNOC Distribution, a subsidiary of ADNOC, administers petroleum products and services within the UAE and internationally. The company is among the largest energy distributors in the GCC and has made eco-friendly operations a top priority. Abu Dhabi remains a critical market for many of the world’s leading oil firms.

BP, the British oil major, gets 3.5% of its global oil production from the ADCO concession in Abu Dhabi. Shell receives 4.7% of its global production from the same concession, while ExxonMobil gets 7.45% of its global production from its stake in the ADCO and ZADCO concessions. While such companies are liable to pay tax rates as high as 85%, depending on the particular agreements of the concession, and may have earnings as low as $1 for each barrel of oil they produce, the stable operating environment and ability to take an equity stake in the reserves makes Abu Dhabi an attractive draw.

Operating Environment

The emirate has established a reputation for having a stable and strong operating environment. The ADCO concession has been in place for almost 75 years, while the ADMA-OPCO concession was established in 1953. This illustrates an impressive level of stability in the sector.

While the concessions have been amended in subsequent years, including the introduction of ADNOC as a major shareholder in 1974, the contracts and agreements have been honoured, and the emirate resisted the wave of nationalisation that swept the region in the 1970s. Indeed, Abu Dhabi is one of the few markets in the region where international oil companies (IOCs) can take an equity stake and book reserves. However, there have been some recent concerns over rigidity.

The system of IOCs operating in partnership under large-scale concessions has led to concerns that some majors may be reluctant to deploy the latest techniques because of worries about sharing their proprietary technology with their operating partners. With Abu Dhabi looking to bolster production and improve recovery rates from mature fields, this proprietary technology will be crucial in the coming years.

Concession Renewal

As such, the expiration of the ADCO concession in 2014 and the ADMA-OPCO concession in 2018 may well present an opportunity for the SPC to shake up the sector and change the current structure of the concessions. The renewal of the ADCO concession has become a pressing concern and the hottest topic in the emirate’s hydrocarbons sector. With expiration of the concession at the beginning of 2014 and the signing of a close-out agreement, ADNOC will become the sole risk bearer for the concession area while the bids are assessed. Even though their staff will stay on seconded to ADNOC and the fields will be operated as normal, the reserves will come off the IOCs’ books, in the short term at least.

In November 2013, at the ADIPEC conference, Abdulla Nasser Al Suwaidi, director-general of ADNOC, said that the evaluation of the bids would be complete in three or four months, when it will send its recommendations to the SPC. The new concession will be divided into four blocks with an operating partner for each block. This will allow IOCs to protect their technology while bringing it to bear in Abu Dhabi’s reservoirs. Bids have been submitted for a 5-10% stake in the overall concession. Given the change in structure, and the smaller equity stakes on offer, there may be opportunities for smaller players to get involved in the sector and for companies from Asia, where most of the emirate’s crude ends up, to take a stake in the concession.

The engagement of Austrian integrated oil and gas company OMV in an onshore exploration project in eastern Abu Dhabi signals the willingness of ADNOC to look at smaller, but competent, players. One potential beneficiary is Statoil, the Norwegian oil producer, which opened an office in Abu Dhabi in 2010 and declared its intention to position itself for the relicensing of concessions in 2014 and 2018. The producer has achieved long-term recovery rates of 60% in its domestic market, a figure that is approaching ADNOC’s aim of 70%. Abu Dhabi’s ambitious targets are likely to require the involvement of major IOCs. ExxonMobil, Shell, BP and Total have all deployed carbon-capture technologies and have experience using carbon dioxide for EOR, while Statoil, Maersk, Occidental Petroleum (Oxy) and JODCO have all conducted research projects on carbon dioxide reinjection for oil recovery. “Foreign companies have vast experience meeting stringent environmental regulations in Western Europe,” Neri Askland, UAE country manager for Statoil, told OBG. “As such, they have developed relevant practices and technologies, including carbon-capture and storage technologies that can be applied in Abu Dhabi.”

Whichever firm is selected for the ADCO concession, the terms of the agreement are likely to be different. Jose M Pereira, Middle East representative at Partex, told OBG, “The format of existing concession agreements has proven beneficial, creating a business environment that has enabled the emirate to become an efficient producer of oil and gas. However, incentives need to be improved to attract the necessary technological expertise that will be required to extract greater volumes out of mature reserves.”

Given ADNOC’s ambition of lifting 70% of available oil reserves by 2055, and the subsequent requirements for EOR and an increase in the cost of production, the financial terms of engagement for international firms may be adjusted. Similarly, with natural gas becoming a pressing concern, the pricing structure for IOCs producing this hydrocarbon may have to change to shift the strong focus on liquids.

However, discussions over the pricing structure of the concessions and the margins of ADNOC’s foreign oil partners have been ongoing, with the current concession relicensing simply the latest back and forth. It is clear that Abu Dhabi has been able to garner strong commitments and investments under the current system. Despite the uncertainty surrounding relicensing and restructuring of concessions in the emirate, more than $52bn worth of investments were announced at the ADIPEC conference to bolster production capacity in the coming years, much of which has been committed in the next three years.

Enhanced Oil Recovery 

However, moving forward investments in EOR will be important to maintain and bolster recovery rates in the emirate’s mature fields. According to Abdulkarim Al Mazmi, the general manager and chief representative of BP UAE, EOR techniques, such as water flood, gas flood and an alternation of the two, can push reservoir limits and maximise recovery rates. Salah Al Nowais, director-general of Meisco, told OBG, “The country has made significant strides in oil-related development projects. Coupled with the application of enhanced recovery technology, it will enable output to exceed current estimates. As a result, there has been a heightened interest among principals looking to penetrate this market as they seek to capitalise on increased investment in the sector.”

Abu Dhabi has not discounted the possibility of finding and developing new fields, but in the short to medium term capacity expansion will come from advanced extraction techniques. Georg Wachtel, general manager of OMV Abu Dhabi and director of business development for the Middle East, said, “There is still a lot that can be done to enhance the recovery from existing fields, which is a core strength of OMV.”

With the ADCO and ADMA-OPCO concessions lifting oil for over 60 years, maintaining production rates and field pressure and will become increasingly complex. Some progress has been made, and research is being tailored to maximise oil production. In July 2013, Total announced that it would begin an EOR project in the offshore Abu Al Bukhoosh field in the third quarter of 2013. The company will inject a polymer and surfactant solution into the field and expects to have results from the pilot by the mid-2014. The company has already achieved recovery rates of 55% of the oil in place from the field, well above global averages of approximately 35%. This project follows an earlier pilot in Abu Dhabi’s onshore fields. In 2012 ADCO injected 1.2m cu feet per day of carbon dioxide into the Rumaitha field and is planning further pilot projects into 2014.

Given the demand for natural gas for power generation and industry, carbon dioxide injection is also increasingly seen as a potential alternative. Ali Rashid Al Jarwan, the CEO of ADMA-OPCO, told OBG, “EOR has traditionally relied heavily on replacing the crude oil in reservoirs with natural gas. But as Abu Dhabi is facing a shortage of gas, we are exploring other options, and have already begun research on how to do carbon dioxide injection offshore. It is currently a feasibility study. It will develop later on into a pilot study and then go into full-scale operation. But this is really long term.”

Increased surveillance will be key. Al Mazmi told OBG, “When it comes down to EOR techniques, the most important element is to understand the reservoir and how it behaves. This understanding comes from many years of managing it, carrying out surveillance and modelling the results. That allows a very sophisticated view of how to most efficiently utilise carbon dioxide, water and gas to more effectively sweep the reservoir.”

Carbon Dioxide

The biggest challenges to the increased use of carbon dioxide injection are the cost, the sourcing of the carbon dioxide and the organisation of the sector. Most cost factors will inevitably be determined by local conditions. However, in a study of carbon dioxide EOR in US reservoirs by the Global CCS Institute, capital costs were $5.88-34.61 per barrel, while operating and maintenance costs ranged from $2.80 to $10.72, depending on the reservoir. Given the current market price of crude, this does not present a significant barrier to the deployment of the technology within the emirate. The bigger issue is the sourcing of the carbon dioxide for injection. A Businessweek article in May 2012 estimated that ADCO would require 400m-500m cu feet per day of carbon dioxide if it were deployed in all the operator’s fields.

Abu Dhabi is already taking steps to source carbon dioxide through capture projects. Masdar, a wholly owned subsidiary of the government-owned investment firm Mubadala Development Company, in a joint venture agreement with ADNOC (which will own 51% of the entity) is developing the region’s first commercial-scale carbon capture, utilisation and storage project. The company will capture up to 800,000 tonnes per year (43m cu feet per day) of carbon dioxide from the Emirates Steel facilities in Abu Dhabi, compress the gas and pipe it to ADNOC’s oil fields. The project is expected to be complete in 2016. In November 2013 at the ADIPEC conference, it was announced that the new joint venture has signed a Dh450m ($122.5m) agreement with Dodsal Group for the EPC contract. The Masdar Institute also completed a carbon capture-and-storage research project with Siemens in May 2012. The project evaluated carbon purification requirements for pipeline transportation, EOR and carbon dioxide geological storage. It also assessed stream specifications and impurities in major capture technologies for carbon dioxide and finalised the selection and evaluation of the processes for improvements.

Gas

Such a development is strategically important given the pressure on gas supplies in the emirate. Natural gas production stood at almost 2.8trn cu feet in 2012, with a daily average of 7.6bn cu feet, a 20.8% increase on 2011, according to ADNOC. However, given the demands of industry and the fact that almost all power generation is currently met by gas-fired power plants, the pressures on supply are substantial. Consumption rates of natural gas are expected to double in the next decade, reaching 5.19trn cu feet in 2015 and 6.32trn cu feet in 2020.

ADNOC provided 40.9% of the required fuel for power generation in 2012 (the rest came from the Dolphin Energy project, a joint venture between Mubadala, Oxy and Total, which pipes gas from Qatar’s North field to the UAE). Electricity generation accounts for almost 60% of the UAE’s total gas consumption, according to the Abu Dhabi Council for Economic Development. Growth of power demand in the emirate means that the burden on gas supplies will increase substantially. The Abu Dhabi Water and Electricity Company (ADWEC) predicts that annual gas consumption across the whole power network will grow by 46% between 2012 and 2016 to 1011.67trn British thermal units (Btu) in the latter year. A major contributor to meeting this demand will be imports of liquefied natural gas (LNG) via Emirates LNG, a new joint venture between Mubadala Petroleum (50%) and the Abu Dhabi-based International Petroleum Investment Corporation (IPIC, 50%). Established in March 2012, the company will provide further diversity in the UAE’s energy supply capability by building and operating the Middle East’s first land-based LNG regasification facility in Fujairah, which will provide an import capacity of 9m tonnes per year.

Much of Abu Dhabi’s existing gas infrastructure is owned and operated by Abu Dhabi Gas Industries ( GASCO), a subsidiary of ADNOC. The company focuses on the extraction of natural gas liquids (NGL) from associated gas and natural gas in the main concessions. It currently has a processing capacity of 5.5bn cu feet of feed gas per day, producing 285,000 barrels of condensate, 4500 tonnes of sulphur and 28,000 tonnes per day of NGL. Separately, the Abu Dhabi Gas Liquefaction Company (ADGAS) is responsible for LNG production and marketing.

Boosting Output

An important element of the strategy to produce more gas locally has been building the infrastructure to deliver more of the conventional associated gas found in Abu Dhabi’s offshore fields. Currently, while 40% of Abu Dhabi’s oil output comes from the offshore fields, only 25% of its gas is sourced offshore. This is likely to change following the delivery of GASCO’s $11bn integrated gas development project in June 2013. This included the new Habshan 5 complex, 15-km north-east of the company’s current facility at Habshan. This complex includes four gas-processing trains, a NGL recovery unit, four sulphur recovery units and additional utilities.

Additional facilities have also been built at Ruwais, including a further NGL train and six liquefied petroleum gas storage tanks. The construction of an new pipeline bringing gas from the offshore reservoirs ( predominantly the Umm Shaif field) and onshore processing facilities at Ruwais has added 22.6m cu feet of gas per day to domestic supplies.

However, this is just part of the $25bn that ADNOC is spending to bolster natural gas production and supply up to 2015. In the period from 2011-15, spending on gas will exceed investment in oil and petrochemicals projects (total spending will be $40bn). The biggest projects involve the development of tight and highly sour gas in Abu Dhabi’s onshore reservoirs (see analysis). The Al Hosn Gas project, a joint venture between ADNOC (60%) and Oxy (40%), was established in 2010. It will produce 500m cu feet of sales gas (network) from the Shah field when production starts in late 2014.

In May 2013 Shell won the $10bn contract for Abu Dhabi’s second sour gas project at the Bab field. It is anticipated that this will add 520m cu feet of gas to Abu Dhabi’s supplies by 2020. The construction contracts for the development are expected in 2015. ADNOC is hoping to get good results from appraisal projects that could bolster gas production. In July 2012, the company signed a technical evaluation agreement with Austria’s OMV and Germany’s Wintershall for the appraisal of the condensate and sour gas field at Shuwaihat. OMV and Wintershall are equal partners, with the latter taking the role of operator. The companies are planning to drill up to three appraisal wells and obtain a 3D seismic survey of the field. The deal was the first upstream project for OMV in the emirate. The firm, which is 24.9% owned by Abu Dhabi’s IPIC, has extensive experience in sour oil and gas fields due to its operations in around the world in Austria, Pakistan, Kurdistan and Tunisia. “The very high content of hydrogen sulphide and of carbon dioxide is one of the key challenges here,” Wachtel told OBG.

New Exploration

 In June 2013 ADNOC signed the first pure exploration agreement since the 1960s, once again turning to OMV of Austria. The agreement for exploration in the eastern area of Abu Dhabi, west of Al Ain, is for four years and if successful should lead to a concession agreement. Details of the deal, including work programme commitments (such as the number of wells and number of 2D and 3D seismic surveys) and the size of capital investment, are not public.

However, OMV is bullish about the prospects of success. “We believe there is still some significant exploration potential in the emirate,” said Wachtel. Over the coming years, the company aims to establish the Abu Dhabi venture in one of its core countries, contributing significantly to its global production. The OMV deal suggests that Abu Dhabi might be turning to smaller independent oil firms, as well as the super majors, to bolster its capacity.

As for where this increased output will go, the Abu Dhabi Crude Oil Pipeline (ADCPO), on which construction is expected to begin soon, will allow Abu Dhabi to export crude oil directly from the port of Fujairah. The port can handle 1m-tonne-capacity vessels, thereby lessening the emirate’s dependence on using the Strait of Hormuz and other Gulf oil terminals. The pipeline, which will travel from ADCO’s facilities in Habshan through Sharjah and Ras Al Khaimah to Fujairah, will transport 1.5m bpd of crude oil over a distance of 380 km. The project also includes construction of pumping stations, a main oil terminal with storage capacity of 8m barrels and offshore loading facilities at Fujairah, all due to be operational by the end of 2016.

Oil Field Services

 Abu Dhabi’s current plans for oil production expansion and gas field development are good news for the independents and should present plenty of opportunities for oil field services firms. Ali Saeed Al Ameri, the chairman and CEO of Al Shoumoukh Group, a group of companies focusing on trade, energy and technology, told OBG, “Increased government investment in the oil and gas sector has driven growth in demand for drilling products and services. Along with an expected rise in oil production capacity, these developments will provide opportunities for the private sector to play a greater role in the industry, specifically in downstream services.” They are also vital for the country to continue diversifying the sector. “In order for the UAE to improve its competitiveness and achieve sustainable economic growth, increased investment in downstream industries and across the entire hydrocarbons value chain will be required,” Ebubekir Koyuncu, the interim manager at Linde Engineering, told OBG.

“The current economic development plan of Abu Dhabi is to continue the expansion of the downstream refining and petrochemicals industry. This involves very large capital expenditures over the next five years and provides great opportunities for growth as demand for advanced technologies, products and equipment increases,” Al Nowais of Meisco told OBG.

Contracts worth a total of $3.5bn have been awarded to EPC companies in the oil and gas, petrochemicals and power sectors in the UAE by November 2013, according to figures from MEED Projects. ADMA-OPCO was the third-largest client for these services in the GCC behind Saudi Electric Company and Saudi Aramco. There is a large inventory of work for oil field services companies and EPC contractors. This has benefitted several global players. For example, in third-quarter 2013, WesternGeco, a business segment of the world’s largest oil field services company, Schlumberger, won a contract from ADMA-OPCO for an 800-sq-km ocean bottom cable survey of the Umm Shaif field.

One of the biggest beneficiaries of Abu Dhabi’s contract slate has been the UK’s Petrofac. In April 2013, Petrofac Emirates was awarded a $3.7bn contract in a consortium with Daewoo Shipbuilding and Marine Engineering by ZADCO for work in the Upper Zakum field. In the same month, the firm won a $500m contract from ADMA-OPCO for the engineering, procurement, installation and commissioning contract for package three of the SARB project. In fact, Petrofac is the top EPC oil and gas contractor in the region by contract values, according to Construction Week. Given the number of large projects being undertaken by major contractors, there are also significant opportunities for subcontracting work available, and this has helped to create a highly competitive market for small and medium-sized enterprises in the sector.

Education & Training

Given the emirate’s plans to boost production levels, ensuring there is a sufficient pool of skilled workers locally will be important in meeting the targets set for 2017. Established in 2001 by ADNOC, the Petroleum Institute (PI) plays a central role in supporting the continued growth and development of the local industry, according to its acting president and provost, Ismail A Tag, and this will be particularly important in the years ahead. “There is a danger of a technology gap on the horizon. As many leading and experienced engineers leave their positions, we have to develop the means to transfer their knowledge so that the new, younger generation is equipped to successfully manage projects going forward,” Tag told OBG.

As of 2012, the institute had a total enrolment of 1356, and has plans to raise this to 2000 students in undergraduate and graduate programmes in the near future. The PI has a particular focus on educating Emirati nationals, who make up around 80% of its students, and all students attend the institute free of charge, in return for a commitment to work at ADNOC for a set number of years (see Education chapter).

Outlook

With the emirate looking to boost crude production, the additional EPC contracts flooding the market are likely to be welcome. Abu Dhabi’s ambitious plans to bolster oil production, improve gas extraction and boost recovery rates are leading to a raft of investment opportunities across the sector, from upstream opportunities in the new concession agreements and potential exploration and development contracts to EPC tenders executing contract work for the operators. While much of this work will be in tight plays or require advanced EOR technology, there are also likely to be opportunities for independents and smaller players as ADNOC looks to diversify and broaden the potential of the sector to maximise its vast hydrocarbons wealth.