Abu Dhabi invests in new energy partnerships and downstream development

Abu Dhabi has one of the world’s largest and most developed hydrocarbons industries, benefitting from its substantial resources and openness to international investment. Building on decades of steady growth and development, the sector is undertaking a shift. The drive to diversify has resulted in higher levels of investment in both non-conventional hydrocarbons and downstream capacity, and increased participation from a widening range of global partners.

ADNOC

The primary player in the emirate’s oil and gas sector is Abu Dhabi National Oil Company (ADNOC), the largest company in both Abu Dhabi and the UAE, and one of the world’s leading oil firms by production. ADNOC has been renewing its strategy under the leadership of Sultan Al Jaber, the UAE Minister of State, who was appointed Group CEO of ADNOC in February 2016. Al Jaber and ADNOC’s primary goal is to ensure the emirate obtains as much value as it can from each barrel of oil it produces.

To achieve this, the hydrocarbons producer is reorganising internally and restructuring its activities to ensure that they are more growth-led, commercially driven and competitive.

Six Decades

In 2018 Abu Dhabi marked the 60th anniversary of the discovery of oil in the emirate. The first well was completed in 1960, and exports of crude oil began in July 1962. Nine years later, on December 2, 1971, the UAE was formed. Instrumental in the country’s foundation was Sheikh Zayed bin Sultan Al Nahyan, ruler of Abu Dhabi since 1966. Sheikh Zayed served as president of the UAE and ruler of Abu Dhabi until his death in 2004, when he was succeeded by his son, Sheikh Khalifa bin Zayed Al Nahyan. ADNOC was founded in 1971 and the Supreme Petroleum Council (SPC) in 1988.

The SPC is the highest decision-making body in Abu Dhabi’s hydrocarbons sector and is responsible for formulating and overseeing the implementation of petroleum policy, objectives and activities in the emirate. It also functions as ADNOC’s board of directors. The SPC’s chair is Sheikh Khalifa and its deputy chair is Sheikh Mohamed bin Zayed Al Nahyan, crown prince of Abu Dhabi and deputy supreme commander of the UAE armed forces.

Resources

Approximately 95% of the UAE’s oil reserves are located in Abu Dhabi. At the end of 2017 the UAE’s proven reserves totalled 97.8bn barrels, or 13bn tonnes, according to the “2018 BP Statistical Review of World Energy”. This is equal to around 5.8% of global reserves. The country’s reserves: production ratio – that is, the reserves divided by current annual production – was 68.1, suggesting that at present levels the UAE could continue to produce oil for almost seven more decades, although ongoing discoveries, developments in extraction technology, and global demand and pricing patterns makes this far more difficult to predict.

Proven natural gas reserves in the UAE totalled some 209.7trn standard cu feet (scf) in 2017, equal to around 3.1% of the global total, with a reserves:production ratio of 98.2.

Mining and quarrying, which includes oil and gas, accounted for approximately 35.9% of Abu Dhabi’s GDP in 2017 and contributed Dh298.8bn ($81.3bn) to the economy, according to the “Statistical Yearbook of Abu Dhabi 2018” from Statistics Centre - Abu Dhabi (SCAD). The sector accounted for 30.4% of gross fixed capital formation activity in 2017, up from 23.6% in 2010, while exports of oil, gas and oil products earned the emirate Dh174.9bn ($47.6bn). Domestic demand has been rising strongly, with primary energy consumption in the UAE averaging growth of approximately 5.5% per year between 2006 and 2016, and reaching 108.7m tonnes of oil equivalent (toe) over that period, according to BP. Of this, oil accounted for 45m toe; natural gas 62.1m toe; coal 1.6m toe; and renewables 0.1m toe.

Oil Production & Exports

Abu Dhabi produced approximately 1.08bn barrels of crude oil in 2017, according to SCAD. This was the equivalent of roughly 2.96m barrels per day (bpd), and down 2.1% from 1.10bn barrels (3.01m bpd) in 2016, as a result of ADNOC’s adherence to the production quotas put in place by the Organisation of the Petroleum Exporting Countries (OPEC). However, production represented an increase on 1.07bn barrels (2.93m bpd) in 2015, and a 31% rise from 825m barrels (2.26m bpd) at the beginning of the decade in 2010.

In 2017 the emirate exported 81% of its production, equivalent to 2.40m bpd, down from 2.42m bpd in 2016 and 2.44m bpd in 2015. However, since the beginning of the decade, exports have risen by nearly 20%, from around 2.04m bpd in 2010. The total number of oil production wells in Abu Dhabi has increased by some 40% since the beginning of the decade to 2750 in 2017.

Demand & Pricing

The UAE is one of 15 nations in OPEC, which coordinates production levels among its members to support price stability. In November 2016 the group agreed to the first production cuts since December 2008. OPEC production climbed again in 2018, but with prices softening towards the end of that year, a renewed reduction in output targets in 2019 cannot be ruled out.

Global demand is fairly strong, buoyed by large markets such as China and India, which are heavily reliant on imports, and the strong performance of the US economy. However, growing competition from unconventional hydrocarbons and alternative energy sources, including those used in electric and hybrid vehicles, is exerting downwards pressure on prices. Uncertainty over the sustainability of global growth also has a dampening effect at times.

Key Export Markets

The single biggest export market for Abu Dhabi crude oil in 2017 was Japan, which purchased approximately 31.4% of the total volume, followed by India (15.6%), Singapore (10.8%), Thailand (9.9%), and South Korea (9.8%). Four more Asian markets also ranked in the top 10: Pakistan (7.4%), China (6%), Taiwan (4%), and Bangladesh (1.1%), while New Zealand accounted for 1.3% of exports. The emirate exported 32.5m tonnes of refined petroleum products in that year, a 40% increase on the previous year. The rapid growth is indicative of the success of its ongoing efforts to move the oil and gas sector up the value chain. Major markets for refined products included Japan, which imported 14.2% of the total, the Netherlands (12%), China (11.7%), India (10.8%) and South Korea (10.4%).

Gas Performance

Natural gas production has increased substantially in recent years to approximately 3.1trn scf in 2017, up 13.5% on 2016 levels, according to SCAD. This was equivalent to daily production of around 8.5bn scf. Moreover, annual output has increased by nearly 50% since 2010, which has enabled Abu Dhabi to reduce its gas imports by approximately 5% to 754.4bn scf, the equivalent of around 2.1bn scf per day.

Increasing gas production to meet growing demand is a strategic priority for ADNOC, whose gas development strategy seeks to deploy recent developments in technology, as well as market forces, to tap three main sources of gas: conventional, unconventional – such as, for example, gas caps on oil reservoirs – and the emirate’s substantial reserves of sour gas. Gas is also an essential input for industries that are playing a central role in Abu Dhabi’s economic diversification drive and efforts to strengthen the hydrocarbons value chain, including petrochemicals. “The expansion of gas production will be a vital element in the development of the region and an enabler of energy self-sufficiency,” Salim Shaikh, CEO of Petromar Energy Services, told OBG. “This will also help develop the UAE’s outlook in terms of industrialisation.”

Stripped gas is needed for both power generation and desalination, both of which are seeing higher demand. Desalination, in particular, is increasingly seen as essential to the emirate’s future development. Research published in 2018 by Paris-Sorbonne University Abu Dhabi estimated that water consumption in the emirate has doubled over the past decade and is increasing at an annual rate of 9.5%. To help meet the rising demand the authorities are building one of the world’s largest desalination plants at the Al Taweelah Power Complex. The Dh2bn ($544.4m) plant will produce around 900,000 cu metres of water per day, adding more than 20% to the emirate’s current production capacity.

BUSINESS OPPORTUNITIES

The emirate has favourable geology for the extraction of oil and gas, with substantial reserves that are reasonably easy to access. Offshore operations are made even more straightforward by the relatively shallow sea, whose depth rarely exceeds 60m. The cost of extracting oil is therefore fairly low, at $6-10 per barrel onshore and $10-13 offshore. With oil prices averaging $70 per barrel over the first 10 months of 2018, Abu Dhabi’s oil industry is still very profitable. Nonetheless, the emirate’s most accessible reserves are starting to decline after several decades of extraction, and the sector’s attention is now beginning to shift towards more technically difficult operations. These include newly explored fields; brownfield development, whereby the lifespan of mature fields is extended through cost-effective technologies; and enhanced oil recovery.

These activities may be more capital-intensive, but they are commercially viable thanks to higher and more stable oil prices. What is more, Abu Dhabi is prepared to make substantial investments in order to increase its oil and gas production, with a view to supplying expanding downstream activities, which are designed to increase the value obtained from each barrel extracted. The emirate also benefits from its very high level of political stability, a factor that is not universal to markets rich in hydrocarbons, or the broader region. Abu Dhabi maintains excellent relations with countries across the world, from long-term strategic partners, such as the US, to large emerging markets, including China and India.

International companies have played a significant role in Abu Dhabi’s hydrocarbons sector, and continue to do so, while the Abu Dhabi government works to ensure the emirate’s resource wealth benefits all of its citizens. An emphasis on investment-led growth and international partnerships is backed by robust and clear governance, legal systems and regulatory infrastructure. “Abu Dhabi is safe and secure, the rules and regulations are clear, and the government is supportive,” Parambath Radhakrishnan, director of business development for the MENA region, at engineering, procurement and construction company KBR, told OBG. “There’s no discrimination against companies. It’s a fair market.”

Abu Dhabi has long been open to international expertise and technology, and has encouraged its global partners to engage with the Emirati workforce and local businesses. Now, ADNOC is redoubling efforts to expand and strengthen knowledge and technology transfer in order to ensure that over the longer term the emirate plays a greater role in innovation and development. Contracts with international partners put a practical emphasis on knowledge and technology transfer.

ADNOC Strategy

In November 2018 ADNOC announced that the SPC had approved its latest five-year development strategy and agreed to capital expenditure of Dh486bn ($132.3m) in 2019-23. Under the strategy, ADNOC plans to raise oil production capacity to 4m bpd by the end of 2020 and 5m bpd by 2030, and will implement a new integrated gas strategy, which is intended to sustain liquefied natural gas (LNG) production to 2040 and provide the opportunity for ADNOC to capitalise on LNG and gas-to-chemicals growth. At the same time, the firm announced new hydrocarbons discoveries of around 15trn scf of natural gas and 1bn barrels of oil.

The SPC also reaffirmed its support for ADNOC’s ongoing transformation into a commercially stronger, more sustainable company. Al Jaber said the SPC’s approval marked “an important new, accelerated phase in the delivery of ADNOC’s 2030 growth strategy,” allowing the company to capitalise on global demand growth, open up new resources, and build in-country value (ICV). He said world oil consumption was nearing 100m bpd, with demand likely to increase an additional 10m bpd by 2040, and natural gas demand forecast to rise by around 40% in the same period. The global market for higher-value polymers and petrochemicals should expand by 60%.

Tender Opportunities

The SPC has said that recent hydrocarbons discoveries underline the benefits of ADNOC’s first-ever competitive exploration tender, launched in April 2018. The tender covers six blocks, four onshore and two offshore, with a total area of nearly 30,000 sq km – around the size of Belgium. The selected partners will bear exploration costs and then take a 40% interest in the blocks once production starts. The blocks are estimated to contain many billions of barrels of oil and trillions of cu feet of gas, and there are already hundreds of targeted reservoirs, prospects and leads.

ADNOC has called the tender “a major advance” in opening new opportunities in the hydrocarbons sector, and accelerating exploration and development of new resources. The firm is putting an emphasis on selecting bidders with the ability to strengthen knowledge and technology transfer. Six months after the tender’s launch, ADNOC announced it had received 39 bids from companies across the globe.

Developing Downstream

Abu Dhabi’s focus on optimising value from its hydrocarbons resources is having a significant impact at every stage in the production chain, and investments in exploration are being coupled with a strong emphasis on downstream development. Approximately $45bn has been committed to expanding downstream capacity over the next five years, with a view to adding an extra percentage point to GDP by 2025.

ADNOC’s downstream complex at Ruwais, including the large-scale Borouge petrochemicals plant co-owned by Austria’s Borealis, is central to this. The Ruwais site is being developed into the world’s largest integrated refining and chemicals site. ADNOC’s strategy seeks to triple petrochemicals production to approximately 14.4m tonnes a year by 2025, through refining nearly half of the crude oil the emirate procures and raising the proportion of refined products supplied to the petrochemicals industry to 20%. Abu Dhabi is, in particular, aiming to meet growing demand for higher-margin, refined products. “There are many opportunities for international oil companies to collaborate with ADNOC beyond the upstream, including in petrochemicals,” Hatem Nuseibeh, president of exploration and production at Total UAE, told OBG.

Offshore Activity

Another indicator of ADNOC’s rebooted approach is apparent in the offshore segment. In 2018 the company formed partnerships for three new concessions, which were formed from the areas once operated by Abu Dhabi Marine Operating Company. By restructuring the blocks ADNOC aims to optimise their commercial value, broaden its partner base, expand upstream technical expertise in-country and widen Abu Dhabi’s market access to hydrocarbons and derivatives.

ADNOC has retained a 60% stake in each concession. The remaining 40% of the Lower Zakum concession has been awarded to a consortium from India led by ONGC Videsh (10%), Japan’s Inpex (10%), PetroChina – part of China National Petroleum Corporation – with 10%, and Total of France and Italy’s Eni, both with a 5% interest.

PetroChina and Eni were each awarded 10% of the Umm Shaif and Nasr concession, with Total taking the remaining 20%. The third concession area, Sateh Al Razboot and Umm Lulu, was awarded to Austria’s OMV and Cepsa, both of which took 20%. Cepsa is a wholly-owned subsidiary of Mubadala Investment Company, the Abu Dhabi government’s sovereign investment vehicle for strategic development.

A number of the companies with shares in the concessions are long-term partners of Abu Dhabi, while others are new entrants. The ONGC Videsh consortium is the first Indian enterprise to be awarded a stake in the UAE’s hydrocarbons resources, and Eni is the first Italian company to win concession rights in the sector. CNPC’s participation in the offshore partnerships represents a further deepening of energy ties between the emirate and China. The company already has an 8% interest in the Abu Dhabi onshore concession and a 40% stake in the Al Yasat concession – which consists of two blocks, one offshore and one mixed onshore-offshore. The companies Total and Inpex, meanwhile, have been operating in Abu Dhabi for many decades.

Drilling Tie-up

A clear sign of the changing shape of the energy industry came in October 2018, when Baker Hughes (BHGE), a US-based oilfield services company and subsidiary of General Electric, became the first foreign player to be awarded a share in one of ADNOC’s services companies. BHGE acquired a 5% interest in ADNOC Drilling, which supplies oil rigs to other ADNOC businesses and is the Middle East’s largest drilling company, for $550m. The agreement, which valued ADNOC Drilling at $11bn, is indicative of the scale of Abu Dhabi’s oil industry and the scope for expansion.

The deal should bring considerable mutual benefits. For BHGE, ADNOC Drilling is a reliable government-backed partner with extensive business in the rapidly-growing Middle East oil and gas operations market. Tapping into the opportunities provided by the Abu Dhabi market alone could help offset a slowdown in the global oil and gas drilling market.

For ADNOC the tie-up brings in a major international player with the technology and know-how to support long-term development. In an interview with Reuters, Al Jaber said that the partnership would “allow ADNOC Drilling to be not only a local player but a global specialist in the drilling and oil service business,” and that it would help strengthen the firm’s competitiveness and efficiency. He also said that the agreement came at an important time for ADNOC, as it looks to boost both conventional and unconventional hydrocarbons extraction, and build its regional footprint. The companies said in a statement that the deal would help ADNOC increase drilling activity by 40% by 2025, while also raising the number of unconventional wells, and support the company to meet its target of reducing drilling time by around 30% by the end of 2019.

BHGE will have a seat on the board of ADNOC Drilling, and will establish a dedicated training team to assist with knowledge transfer. The transaction is expected to be closed by the end of 2018, with operations under the new structure starting in 2019. The company will operate in the UAE and, later on, possibly overseas, Al Jaber said. Indeed, ADNOC Drilling could certainly leverage the new partnership for further international expansion, building on the strengths of both of its partners.

Capital

For most of its history, ADNOC has largely relied on its own balance sheet to finance investments for future growth which, as an exceptionally cash-rich company, it has been in a position to do. However, with an ambitious development policy in place, the company is now turning to other means of finance when appropriate, particularly if alternative sources of capital liquidity are more efficient.

ADNOC’s capital-raising activities have provided a significant number of opportunities for leading international investors in recent years and, given the scale of the company’s investment plans, will continue to do so. In 2017 ADNOC issued a $3bn bond backed by Abu Dhabi Crude Oil Pipeline. In December 2017, it launched an initial public offering of ADNOC Distribution, offering 10% of its share capital and raising $851m. The offer was more than 22 times oversubscribed, indicating the extremely high level of interest in the company and investor confidence about its future.

Research & Development

Technology plays a vital role in ADNOC’s 2030 growth strategy, and the company has placed increased emphasis on ensuring that its partners contribute technology and knowledge transfer, while building home-grown research and development capacity. ADNOC continues to seek partnerships both with private companies and universities to develop and use new technologies that can enhance its performance, from increasing the value of existing and new product lines and raising refinery capacity and utilisation, to increasing the profitability of its product portfolio. With its partner Borealis, the company operates the Borouge Innovation Centre, which focuses on developing new products and applications. In 2017 approximately 20% of ADNOC’s petrochemicals revenues came from products developed in its own laboratories, and Borouge now has more patent applications than any other UAE company.

In-country Value

All business partnerships with ADNOC now include an ICV assessment integrated into the tender evaluation and award process. ADNOC’S ICV strategy is central to the government’s overall aim of encouraging the growth of the private sector and strengthening its contribution to the UAE’s economic development and diversification. It aims to ensure that local businesses benefit from the large-scale investments being made in transforming the oil and gas sector. “ICV will be critical in supporting the local industry and creating even more jobs in the UAE. For the country’s industrial and manufacturing capabilities to grow further, industry will need to be supported. ADNOC’s ICV strategy aims to provide that support,” Yousef Al Nowais, chairman and managing director of Arab Development, a civil, mechanical and electrical engineering, and contracting services firm, told OBG.

Since April 2018 all of ADNOC’s goods and services suppliers have been obliged to evaluate and declare their certified ICV scores for the previous fiscal year. Companies without ICV certification are still permitted to participate in tenders, but may be disadvantaged. Evaluation will be carried out annually.

Outlook

Abu Dhabi and ADNOC have for decades been highly attractive partners for international hydrocarbons companies. The emirate offers not only abundant oil and gas resources, but an advantageous governmental and regulatory infrastructure. ADNOC’s renewed focus offers global investors great clarity. Partners are able to play an ever-greater role in developing all parts of the value chain, with billions of dollars of contracts made available. In return, the emirate expects concrete contributions to building ICV, developing added value, and building the domestic knowledge and technology base.