21 February 2017

Strategy helps UAE oil and gas sector to expand

Abu Dhabi’s continuous investment in the hydrocarbons industry is expected to secure a favourable position for the UAE in the global market.

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While global oil producers were caught up in a protracted war for market share over the past two years, the United Arab Emirates has been spending some time overhauling its domestic oil sector and streamlining resources for the industry’s next phase of development.

In November, the Abu Dhabi Supreme Petroleum Council, the institution that oversees state-owned Abu Dhabi National Oil Company (ADNOC), approved the company’s five-year plan.

ADNOC has committed to produce an additional 400,000 barrels per day (bpd), taking total capacity to 3.5 million bpd.

Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi, Deputy Supreme Commander of the Armed Forces and Vice Chairman of the SPC, said the company would "build on the foundations laid in the past eight months, during which Adnoc embarked on a journey to evolve into a more agile and resilient company that is strategic, commercially minded and performance driven".

ADNOC also plans to raise gasoline production to 10.2 million tonnes per annum (mtpa) by 2022 with the development of a new petrol and aromatics project, adding 4.2 mtpa of gasoline and 1.4 mtpa of aromatics.

The company has set an ambitious target of raising petrochemicals production to 11.4 mtpa by 2025, from its current level of 4.5 mtpa, by expanding its polyolefin capacity and deepening its petrochemical products portfolio from a world-scale mixed feed liquid cracker.

As part of an ambitious natural gas strategy, the company also aims to make Abu Dhabi “one of the world’s largest sulphur producers” by increasing sour gas production.

“ADNOC plans to maximise the value of its sulphur by working closely with key phosphate markets, while also supporting the development of a local sulphur products industry, including enhancing the existing ammonia and urea industry, with a new generation of advanced fertilisers,” the SPC said in a statement.

BP gains Abu Dhabi as investor

In December, the Abu Dhabi Government and ADNOC granted British oil company BP Plc a 10% interest in the UAE capital’s onshore oil concession, which has a lifespan of 40 years, in a deal worth US$ 2.4 billion.

BP’s own prospects saw a big boost after it said it would issue new ordinary shares worth around 2% of the company’s issued share capital, which will be held on behalf of the Abu Dhabi Government.

BP, which will now lead the project, will also become a 10% shareholder of Abu Dhabi Company for Onshore Oil Operation (ADCO) and the concession alongside Total of France, INPEX Corporation of Japan, and GS Energy of South Korea, which hold interests of 10%, 5% and 3%, respectively.

BP paid more than Total’s US$ 2.2 billion deal that was struck last year, primarily as oil prices are improving.

The deal extends BP’s long-standing relationship with the UAE, which began with the first 40-year concession agreement in the 1970s that had expired in 2013.

In addition, having deep-pocketed Abu Dhabi as a key shareholder brings stability to a company that’s repairing its balance sheet after the oil spill accident in the Gulf Coast in 2010, which cost the company billions of dollars and took a heavy toll on its reputation and financial capabilities.

“This agreement will provide BP with long-term access to significant and competitive resources that we already understand very well. We will bring our people, cutting-edge technology and experience of managing mature giant fields around the world to help maximise recovery from these assets.”

Hefty reserves

The UAE is an attractive oil jurisdiction for oil majors given its abundant reserves of around 100 billion barrels, in addition to its political and economic stability and proximity to the Asian market.

ADNOC said it continues to look for partners to take up the remaining 12% stake of the 40% earmarked for international partners, and analysts believe the UAE company will likely tap Chinese companies as possible investors in the concession.

“The ADCO concession, including the Bab, Bu Hasa, Shah and Asab fields, has total resources of between 20-30 billion barrels of oil equivalent over the term of the concession,” BP said in a statement.

“The overall production in 2016 is expected to average around 1.66 million barrels of oil per day (bpd). The concession, put in place in January 2015, is valid until the end of 2054.”

The Economist Intelligence Unit (EIU) noted that although the process of renewing the foreign concessions of the field over the past three years has been arduous, ADNOC is now showing increased momentum to move ahead with new projects.

“It is expected that performance incentives could yield the foreign companies higher returns than the [US$ 2/barrel] fee,” the EIU said.

The UAE will need to manage its expansionary production policy with its commitment to cut output by 140,000 bpd from January as part of OPEC members’ pledge to cut production by 1.2 million bpd to raise prices.

The OPEC group has committed to maintain their quotas by at least six months, and may extend it if oil prices continue to remain low.

Strategy helps UAE oil and gas sector to expand

Disclaimer: This article is not intended to constitute any advice or an offer. Any forecasts or projections are indicative only. HSBC or any of its affiliates accepts no liability, whether express or implied, arising out of or incidental to contents forming part of the article.

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