Investments in enhancing production offer opportunities for a wide range of companies

It would be hard to overstate the importance of the oil industry to Abu Dhabi. The discovery of black gold in 1954 has led to a transformation of the emirate’s economy. Oil and gas contribute more than half of Abu Dhabi’s GDP – 54.6% of the total in 2013, according to the “Statistical Yearbook of Abu Dhabi 2014”, published by the Statistics Centre - Abu Dhabi.

GROWING DEMAND: Domestic demand for energy is also growing strongly. Primary energy consumption in the UAE as a whole reached 97.1m tonnes of oil equivalent (mtoe) in 2013, up 4.4% on 2012 and accounting for 0.8% of total global demand, according to BP’s “Statistical Review of World Energy 2014”. Of this, 61.5 mtoe was met by natural gas and 35.6 mtoe by oil, indicating the importance of gas to the national economy – hence the large investments being made in upstream exploration and extraction, and midstream distribution infrastructure (see analysis). The UAE ranked ninth in the world in terms of oil production in 2012, according to figures from the US Energy Information Administration (EIA).

Exports

The UAE’s petroleum exports generated $126bn in 2013, according to OPEC. Oil and gas account for around 80% of government revenues and over half of the UAE’s export earnings, the EIA says. Abu Dhabi now exports the majority of its petroleum products to Asia. It has long-standing ties with Japan, which buys around 40% of the UAE’s oil exports, but it also has increasingly close ties with emerging markets in East Asia, including China.

Diversification

While Abu Dhabi is working to diversify its economy, building up sectors including manufacturing and transport and logistics, hydrocarbons will continue to be the primary economic driving force for the foreseeable future. Furthermore, some of the industries that the emirate has identified as priorities for long-term strategic development, such as petrochemicals, are dependent on hydrocarbons feedstock. Indeed, the Abu Dhabi Economic Vision 2030, the emirate’s strategic roadmap for economic development, lays out plans to build up industries which can capitalise on its abundant natural resources.

Production Targets

While new discoveries of substantial oil and gas reserves are regarded as unlikely in the near future, the government aims not only to maintain current production levels, but to increase them in the coming years, as well as sustain them for decades to come. The state-run Abu Dhabi National Oil Company (ADNOC) intends to increase oil output from 2.8m barrels per day (bpd) to 3.5m bpd by 2017, while boosting recovery rates to 70%. This drive is creating a range of opportunities both for operating companies and oilfield services firms (see analysis).

“We feel confident about the projects expected to come on-line during 2015 as part of ADNOC’s investment strategy given their commitment to boosting output levels from oilfields and sour gas reserves,” Salim Shaikh, managing director of Petromar, an oilfield service company, told OBG. “These new developments will account for a broader range of opportunities than before.”

Oil Reserves & Output

Abu Dhabi holds around 94% of the UAE’s oil reserves, according to figures from the EIA. The UAE as a whole had proven reserves of 97.8bn barrels of crude oil (equivalent to around 13bn tonnes) as of the end of 2013, according to data from BP. This means the emirate holds 5.8% of the world’s total proven reserves.

Despite rising production, the UAE’s proven reserves have declined only very slightly, from 98.1bn barrels at end-1993, thanks to ongoing exploration efforts and new discoveries. At current production and proven reserve levels, the UAE has a reserves-to-production ratio of 73.5. This effectively means that its reserves would last 73.5 years in the entirely hypothetical scenario that no more resources were found and production continued at present levels.

Production averaged 3.65m bpd in 2013, up 7.4% from 3.4m bpd in 2012, equivalent to 165.7m tonnes, and accounting for 4% of total global output. Production has risen steadily over the past decade, from 2.72m bpd in 2003, as domestic and international demand has grown. The only exception was a dip in 2009, during the global economic crisis. By 2011, output had recovered to well above 2008 levels.

Domestic consumption saw a rise of 4.2% in 2013, from 748,000 bpd in 2012 to 773,000 bpd, equivalent to 35.6m tonnes, and accounting for 0.9% of total global demand. Consumption has grown strongly over the past decade, from 453,000 bpd in 2003, again with a slight dip in 2009.

While exploration for undiscovered oil resources in Abu Dhabi continues, over recent years the emirate’s strategy has increasingly focused on enhanced oil recovery (EOR), a range of techniques used to bring to the surface oil that is harder to reach, heavier or both. Increased use of EOR has helped nearly double proven reserves in Abu Dhabi over the past decade (though figures for reserves do not show this due to the extraction rate). Over the coming years, more EOR projects are set to be rolled out, with carbon-capture and carbon dioxide injection technology at the forefront (see analysis).

“EOR will play a critical role in the future of oil supplies,” Andrew Vaughan, country chair at Shell, told OBG. “By adding just 1% to oilfield recovery factors, an extra 88bn more barrels of oil could be produced on a global scale. Ensuring that the best technology is deployed by international oil companies (IOCs) and national oil companies is paramount, and Abu Dhabi has accomplished much in this regard.”

Abu Dhabi has two large refineries located in the Ruwais Industrial Area and a third in nearby Abu Dhabi City, all owned and operated by the Abu Dhabi Oil Refining Company (Takreer), an ADNOC company. The capacity of Takreer’s Ruwais refinery will be more than the doubled in 2015, to 817,000 bpd, as the company will ramp up supply to an adjacent petrochemicals plant, as part of the emirate’s strategy of building more value into its hydrocarbons supply chain (see analysis).

Extra Credit

ADNOC’s Petroleum Institute (PI), a university and research institution geared to the needs of the hydrocarbons industry, will also play an increasing role in EOR development. It already makes a vital contribution in training young Emiratis for jobs in the sector, in partnership with several IOCs and international universities. As Abu Dhabi’s economic development strategy is aimed at increasing employment in the sector among Emiratis, PI is expected to play a major role in this capacity, particularly in helping to expand research and development programmes. Established in 2001 by ADNOC, the engineering and energy industry school has quickly become one of the top institutions of its kind in the MENA region. By concentrating on the five main areas relevant to the energy industry – petroleum engineering, petroleum geosciences, and mechanical, chemical and electrical engineering, PI is expected to make a major contribution to future growth in the sector, (see analysis).

Gas Reserves & Production

Abu Dhabi’s gas reserves are not as large in international terms as its oil resources, but they are still quite substantial. The UAE’s gas reserves as a whole account for 3.3% of the global total, according to BP, ranking seventh in the world in terms of proven gas reserves – most of that is found in Abu Dhabi. The UAE has proven natural gas reserves totalling 6.1trn cu metres (215trn cu feet, tcf). In addition, despite rapidly rising domestic consumption, proven reserves have increased over the past two decades, thanks to ongoing exploration efforts. In 1993 the UAE’s reserves totalled 5.8trn cu metres, and in 2003 6trn cu metres. Production in 2013 was 56bn cu metres (or 50.4 mtoe), up 3.3% from 54.3bn cu metres 2012, and accounting for 1.7% of global output. This has grown steadily over the past decade, from 44.8bn cu metres in 2003, with the exception of a slight dip in 2008-09.

Shifting Gears

The emirate is undertaking a concerted drive to develop its natural gas resources, including its sour gas fields, which have remained unexploited for decades but which can now be extracted commercially to supply growing demand (see analysis). “Abu Dhabi Economic Vision 2030 identifies development of technically challenging sour gas reserves as an engine of future economic growth,” Saif Al Ghafli, the CEO of Al Hosn Gas, a sour gas joint venture (JV) between ADNOC and Occidental Petroleum Corporation (Oxy), told OBG. He added, “Projects like Al Hosn Gas are very important in the UAE’s energy landscape.”

The UAE is a member of the Gas Exporting Countries Forum, an organisation representing major gas exporters that should not be conflated with OPEC. The federation is in the unusual position of both exporting and importing natural gas, including liquefied natural gas (LNG). Domestic consumption is increasing rapidly, thanks to demand from the electricity sector, industry and desalination as the economy and population have grown. Furthermore, around one-quarter of the total gas produced between 2003 and 2012 was reinjected as part of EOR processes. In 2013, the UAE used 68.5bn cu metres of natural gas, up 4.5% from 2012 and accounting for 2% of global consumption (for purposes of comparison, the UAE’s economy accounted for 0.31% of the global total at purchasing power parity in 2013, according to data platform Quandl).

“The issue of the natural gas to meet the increasing power demand in the country has to be addressed. The utilisation of gas will become increasingly important in the coming years, whether it is to recover oil or for power consumption,” Hatem Nuseibeh, president of Total UAE, told OBG.

Demand has almost doubled from 37.9bn cu metres in 2003, growing every year but for a slight dip in 2009. “We see the demand for gas in Dubai growing at a very rapid pace, especially as the emirate lays the groundwork to prepare for the Expo 2020,” Mohamed Damak, general manager of SERGAS Group, told OBG.

Sector Oversight

Each of the UAE’s seven emirates is responsible for the regulation of the oil and gas sector within its own borders. This sovereignty is clearly particularly important for Abu Dhabi, where the vast majority of the country’s oil deposits are found. Abu Dhabi’s Supreme Petroleum Council (SPC) sets the emirate’s objectives and policies regarding the oil industry, and thus is the most important body determining the UAE’s oil policies and sector strategy – giving it substantial influence over the direction of the broader economy.

The federal Ministry of Energy also has some scope to set policies and planning directives at the national level, but only within the boundaries set by the constitutional rights of each emirate. Under Federal Law No. 24 of 1999, the Federal Environmental Agency has the responsibility of regulating and assessing the environmental impact of projects, as well as developing environmental protection standards. Each emirate’s environmental department (in Abu Dhabi’s case, the Environment Agency – Abu Dhabi) is responsible for enforcing and administering these requirements and any emirate-specific environmental laws and regulations.

However, ADNOC is the de-facto regulator of health, safety and environment (HSE) affairs in the emirate’s oil and gas industry, and it has an HSE policy and management system designed to ensure compliance with federal HSE requirements. Each concession may also have its own HSE obligations.

ADNOC

The state oil company, ADNOC has responsibility for much of the sector’s day-to-day operations, including in partnerships with IOCs. ADNOC was founded in 1971 and is one of the world’s largest oil companies. In many ways it has been at the forefront of the emirate’s development and a major force behind its emergence onto the world stage.

ADNOC has 19 subsidiaries operating in the oil, gas and petrochemicals sectors, including in exploration, processing and distribution, and several operate in partnership with international companies as shareholders under concession agreements.

Subsidiaries include the Abu Dhabi Company for Onshore Petroleum Operations (ADCO), the Abu Dhabi Marine Operating Company (ADMA-OPCO), the Zakum Development Company (ZADCO), Abu Dhabi Gas Industries (GASCO), the Abu Dhabi National Tanker Company, Takreer, ESNAAD, the National Drilling Company, Abu Dhabi Polymers Company and the Abu Dhabi Gas Liquefaction Company (ADGAS), among others. In 2013 and 2014 ADNOC also established several new operating companies, including Al Dhafra Petroleum Operations Company, Al Yasat Petroleum Operations Company and Al Reyadah, a firm that will focus on exploring and developing carbon capture, usage and sequestration projects.

ADCO, ADMA-OPCO and ZADCO have responsibility for the exploration and extraction of both oil and gas resources, while GASCO processes and oversees initial distribution of the emirate’s onshore natural gas, including associated gas recovered during the oil-extraction process.

ADNOC also has a distribution and retail arm, ADNOC Distribution, which has been growing its network of service stations across the UAE, as well as developing new systems to deliver gas to major real estate developments in Abu Dhabi City.

Another major player about to make a substantial impact on the country’s gas supply through its Shah sour gas field is the Abu Dhabi Gas Development Company (Al Hosn Gas), a JV between ADNOC (60%) and Houston-based Oxy (40%).

Crude Types

Abu Dhabi produces three main grades of crude. Historically, the most popular has been Murban, which is relatively light and sweet, with an American Petroleum Institute (API) gravity of 40.2 degrees and a sulphur content of 0.79%. The Upper Zakum stream has a gravity of 34.4 degrees and a sulphur content of 1.7%, according to the EIA.

In July 2014, ADNOC made its first shipment of the new Das crude grade, produced by ADMA-OPCO. A cargo of 640,000 barrels left Das Island Port for Japan on the 52nd anniversary of the company’s first crude oil shipment. Das is a combination of the existing Lower Zakum and Umm Shaif streams, which will be superseded by the new grade, and is another light, sweet crude with an API gravity of around 39.2 degrees and sulphur content of 1.3%.

The introduction of the Das blend dovetails with ADMA-OPCO’s aim to increase its production capacity and exports, which will involve boosting the total volume of oil coming to Das Island for processing, storage and export to 765,000 bpd. The mix of two crudes allows storage in unified tanks, freeing space for extra capacity and allowing more efficient and flexible shipping. The unified blend saves loading time, as there is no longer the need to pump two different grades into tankers, allowing swifter delivery and less time at port.

The grade thus helps meet demand by allowing an increase in production and export capacity. Introducing Das crude, Abdulla Nasser Al Suwaidi, director-general of ADNOC, said that the company’s aim of maintaining its position as one of the world’s most reliable oil and gas suppliers depended on innovations like the new blend.

Contracts & Partnerships

Under UAE law, depending on the specifics of the concession, all oil and gas resources belong to the emirate of Abu Dhabi. Abu Dhabi’s government is able to generate income from the development of these resources through equity participation in projects, taxation, and bonus, royalty and milestone payments, as it sees fit. In Abu Dhabi, concessions have historically been granted to ADNOC; a JV enterprise in which ADNOC takes a majority stake; or a project company with or without ADNOC’s equity participation. In the latter case, when ADNOC has not been an initial participant, it will invariably have the right to take equity during the project lifespan. Contracts are usually private agreements and the specific terms are not published publicly.

Breakdown

Abu Dhabi’s structure for energy contracts has traditionally been production-sharing agreements (PSAs) between ADNOC and private companies (generally large international players), with the state company taking a majority share.

ADMA-OPCO operates on offshore oil and gas resources, in the Umm Shaif and Zakum fields. The company is a JV between ADNOC (with a 60% stake) and three partners with equity stakes under concession – BP (with a 14.66% stake), France’s Total (13.33%) and Japan Oil Development Company ( JODCO, 12%). The concession is due to expire in 2018.

ZADCO operates the Upper Zakum oilfield, which is the fourth largest in the world, as well as the Umm Al Dalkh and Satah fields, also offshore. It is a JV between ADNOC (60%), US-based ExxonMobil (28%) and JODCO (12%). Upper Zakum covers around 1200 sq km, and current production is 500,000 bpd. The ongoing project known as UZ750 aims to increase this to 750,000 bpd, with this level sustainable for 25 years. The $10bn project is slated to be completed by 2017. ADGAS, meanwhile, is a partnership between ADNOC (70%), Japan’s Mitsui & Company (15%), BP (10%) and Total (5%).

Recent developments show Abu Dhabi’s willingness to work with new entrants as well as ADNOC’s long-established partners. In 2011 Oxy replaced ConocoPhillips as the main partner in the Al Hosn Gas company. In 2012, Korea National Oil Corporation and GS Energy, part of Korean conglomerate GS Group, won a concession covering two onshore areas and one offshore area, while the same year Germany’s Wintershall and Austria’s OMV were brought in by ADNOC to assess the Shuweihat sour gas and condensate field. This will be borne in mind by bidders for the new ADCO concession (see below).

Due to these PSAs earnings for IOCs can be as low as $1 per barrel, with terms set decades ago in many cases, but the partners enjoy a range of benefits: Abu Dhabi’s ample and relatively easily extractable resources; a very stable operating environment and government support; and equity stakes in the project companies and bookable reserves. Abu Dhabi did not follow the path of nationalisation taken by some parts of the region in the 1970s, and international partners are seen as integral participants in the development of the industry.

Taxation

In the absence of federal tax legislation, the taxation of hydrocarbons developments is the responsibility of individual emirates. The sector is one of the few areas in which tax is levied, with the aim of ensuring that the citizens of Abu Dhabi benefit directly from the emirate’s vast oil wealth. Tax rates are set at a minimum of 55%, but concession holders are generally issued with a fiscal ruling by the SPC setting a rate of up to 85%.

While these rates may seem high by the standards of other sectors, again they are seen as a necessary trade-off for access to the emirate’s resources and the benefits of the equity-ownership concession structure. Taxes have not deterred a number of the world’s largest energy companies, and the strong interest in upcoming concession tenders indicates that this remains the case.

ADCO Concession

ADCO controls around 40% of the UAE’s oil output, according to the EIA. According to ADCO, its fields include Bu Hasa, with output of 575,000 bpd; Bab Habshan (380,000 bpd); and Sahil, Asab and Shah (with a combined production capacity of 525,000 bpd). In November 2013 ADCO announced it had commenced production at the Qusahwira field, which has been seen investments of $1bn. The field had an initial capacity of 30,000 bpd, expected to rise to 53,000 bpd by 2017.

Until January 2014, ADCO was a JV, with 60% in the hands of ADNOC and the remainder held under concession by international partners. These were ExxonMobil, Royal Dutch Shell, Total and BP, each with a 9.5% stake, and Portugal’s Partex, with 2%, in an agreement dating back to the 1970s, when ADNOC acquired its stake in the company.

The first agreement with the foreign partners was inked in 1939, with a 75-year timeframe. The partners received oil equivalent to their equity stake. The ADCO concession expired in 2013, and a new concession tender was issued.

Thus, as of early 2015, ADCO was fully owned by ADNOC, while ADNOC examined bids by a range of international players, including some of the previous partners. Despite the fact that most of the partners have not worked on the fields in any capacity, they continue to maintain good relations with ADNOC.

New Era

In late January 2015 ADNOC and Total became the first to sign a new ADCO concession agreement for 40 years that granted Total rights to Abu Dhabi’s onshore oilfields. Total received a 10% participating interest and management of Bab Habshan, Bu Hasa, South-east (Sahil, Asab, Shah, Qusahwira, Mender) and North-east Bab (Al Dabb’iya, Rumaitha, Shanayel). In a statement to the Emirates News Agency, ADNOC also said that additional companies were expected to be added.

Any other new concessions are also expected to run for a similar period of 30 to 40 and will include the medium-term goal of sustaining ADCO’s production at 1.8m bpd beyond 2017. Total will have the opportunity to participate in maintaining production on maturing reservoirs by addressing EOR challenges, while ramping up production at the newer ones – Qusahwira and Mender. ADCO is aiming to achieve its production target of 1.8m bpd and maintain that until 2044. Neither company had announced further details regarding the concession agreement as of early February 2015.

Putting Firms To Work

In exchange for participation in secure long-term developments, concessionaries will be expected to provide proprietary technology, particularly for EOR, to support ADCO’s production goals, David Westerman, ADCO’s senior vice-president for corporate support, told OBG. “There will be more direct responsibility to bring technology, so that ADCO can benefit from it,” he said.

Many sector players agree that the sharing of technological innovation and proprietary technology is key to long-term growth. The new concession – or concessions – could possibly be structured differently to the previous one, though there is as of yet no clear confirmation that this would be the case. Sharing technology and innovations could prove a challenge for some firms, however.

“The sharing of technology will be one of the challenges faced in the future by all respective participants and ADNOC,” Georg Wachtel, general manager of OMV Abu Dhabi and director of business development for the Middle East, told OBG.

It is possible that the new structure will include “Chinese walls” between international partners in order to help in addressing these concerns. “Creating blocks of ownership with different IOCs in them encourages companies to deploy their best technology as part of their competitive strategies,” Abdulkarim Al Mazmi, president and general manager for BP UAE, told OBG. “Doing so affords the potential to access more business, more reserves and hence more value. This is also a way to diversify risk, as a single IOC may not have all the answers.”

Furthermore, smaller shareholders can play a positive role in concessions generally by facilitating cooperation and helping to smooth over difficulties that can arise. Jose M Pereira, the Middle representative for Partex, told OBG, “Minority shareholders are integral to a concession mix as they play a pivotal role in mediation between major IOCs.”

Runners & Riders

The government took its time with issuing the ADCO concession again, preferring to weigh up the different bids received with a view to restructuring the concession process. All the previous concession holders, with the exception of ExxonMobil and Partex, have submitted bids, international media has reported. Exxon decided to withdraw from the process after it won an improved deal on the Upper Zakum concession.

In November 2014, AFP reported that the other bidders are the Beijing government-owned China National Petroleum Corporation, the Korean National Oil Corporation, Japan’s Inpex Corporation, Statoil of Norway and Russia’s Rosneft.

Western firms face stiff competition from Asian players seeking a foothold in the Gulf, with an eye to supplying fast-growing Asian markets as demand in the West stagnates. Global intelligence company IHS forecasts that the Asia-Pacific will account for 34.4% of global oil consumption in 2024, up from 26.4% in 2014. Abu Dhabi already exports most of its oil to Asia-Pacific countries.

Locking in this relationship with long-term deals with companies in the region could potentially make strategic sense, particularly given the demand outlook and rising competition.

The dynamics of the global oil market in late 2014 may have strengthened Asian companies’ cases, as prices fell on slowing demand, and Gulf countries including the UAE and Saudi Arabia looked to secure long-term market share in Asia. Nonetheless, given Western companies’ track record in the country, they are unlikely to be left out altogether.

Similarly, local companies’ participation in the upstream oil sector could also rise. Mubadala Petroleum, a subsidiary of state-owned investment firm Mubadala Development Company, for example, has a memorandum of understanding with ADNOC covering cooperation in a number of areas. The company’s working interest production already stands at around 400,000 barrels of oil equivalent per day, and includes a range of operated exploration and production projects in South-east Asia.

Opec & Prices

The UAE is a member of OPEC, which Abu Dhabi joined on its own as an emirate in 1967 before the formation of the federation. OPEC brings together many of the world’s largest oil producers, and accounts for around one-third of international oil production.

The UAE is a leading member of OPEC, and often works closely with its largest oil producer, Saudi Arabia. At an OPEC ministers’ conference in Vienna, where the organisation’s headquarters are located, in November 2014, the UAE and Saudi Arabia were among the countries that successfully pushed for production to be maintained, despite calls from some members for a cut in output in the wake of declining global oil prices. OPEC agreed to continue with the production ceiling of 30m bpd for all countries in 2015, 1m-1.5m bpd over the organisation’s own estimates for oil demand. In the wake of the decision, prices have continued to fall, with contracts for March 2015 trading at $49.68 a barrel for Brent crude in late January 2015. Whatever OPEC’s policies, some analysts maintain that, for 2015 at least, the market will dictate prices more than producers.

Abu Dhabi is one of the hydrocarbons exporters that could benefit from lower prices in the short to medium term, as this could allow it to gain a greater market share in Asia in particular.

Furthermore, a decline in prices in the short term, while the world economy is still performing somewhat sluggishly, could bolster growth and build demand in the medium term.

The emirate is well prepared to weather lower oil prices, given its substantial foreign exchange buffers, a lower break-even price for its budget than some emerging-market producers and its huge hydrocarbons reserves. In December 2014 Sultan bin Saeed Al Mansouri, UAE minister of economy, said that the country had no need to worry about price weakness, and that it would still continue to run a healthy budget surplus through to 2019.

Outlook

Abu Dhabi’s economic success and international prominence are to a large extent attributable to its successful hydrocarbons industry, most importantly its huge oil reserves. Ongoing exploration has seen these stay steady despite continuing extraction and rising local demand.

Over the coming years, ADNOC and its partners will focus on enhancing recovery rates at existing fields, a trend that is already well under way. In some cases, such as that of Upper Zakum, production rates are actually expected to rise substantially, helping ADNOC reach its target of 3.5m bpd by 2017, a level it hopes to sustain over the longer term.

This will entail increasing the use of EOR, technology which is already being piloted in Abu Dhabi and which is being developed by a number of the international players present in the emirate. Additionally, investments in education and research should also see the emirate reaching its targets.

ADNOC’s ambitious production plans will require more in terms of technical commitment from its partners, but these will also stand to benefit from involvement in one of the world’s leading hydrocarbons sectors, with robust government support – and access to those large reserves. All of ADCO’s new partners will be expected to bring more technology and innovation, probably in exchange for guarantees on intellectual property.

In the gas segment as well, the emphasis is on boosting production through tapping more technically difficult reserves. Al Hosn Gas recently commenced production from the Shah Gas field and is bringing gas to fuel the industries that are driving Abu Dhabi’s economic diversification. Such a strategy should help to increase the value added in the emirate’s hydrocarbons supply chain.

The investments being made to meet production targets are already providing opportunities for a wide range of operating companies, service firms and contractors from around the world. Competition is rising – understandably, given the size and scope of the energy sector. Both international and domestic players who are willing make the necessary investments and innovate will continue to reap rewards.