RISING TIDE

Abu Dhabi 2019 | ENERGY | REVIEW

With a combination of heavy investments in ambitious upstream projects with Chinese, Indian, and European firms in 2018 and an easing of OPEC production restrictions and rising prices, Abu Dhabi is losing no time in boosting medium- and long-term output.

With 4.5% of the world's known oil reserves, the UAE continues to be the fourth-largest oil producer in the Middle East (after Saudi Arabia, Iraq, and Iran) and the eighth largest in the world. With known reserves of 92.2 billion barrels, oil and gas account for 30% of national GDP. Given that Abu Dhabi possesses 94% of the country's reserves, its exploration and output are nearly synonymous with the national industry, whose total output inched up in 2017 from 2.79 million bbl/d in February to 2.89 million bbl/d by the end of June.

While this is still well below the country's peak of nearly 3.2 million bbl/d before the OPEC cuts of 2016—a series of measures to stabilize prices, which had bottomed out at barely USD30/barrel that year—the government-run Abu Dhabi National Oil Company (ADNOC) said in early July that it is ready to increase output in line with OPEC and allied partners, namely Russia. ADNOC, said a spokesperson in July, “has the ability to increase oil production by several hundred thousand barrels of oil per day, should this be required to help alleviate any potential supply shortage in the market." Not only could this push the UAE's output to 3.3 million bbl/d before the end of autumn, ADNOC claimed production could very well hit 3.5 million bbl/d by the end of the year.

OPEC's willingness to increase output is largely for four reasons: as the oil glut of 2016 has finally dissipated, prices have rebounded to nearly USD80/barrel; production is down in important OPEC members such as Libya, which is pumping less than half its pre-2011 levels, with Venezuela barely at half its 2014 levels; renewed sanctions against Iran are cutting the world's fifth-largest producer off from international markets; and, last but not least, U.S. President Donald Trump, faced with dangerous mid-terms in November, has been aggressively pushing American allies within OPEC such as Saudi Arabia and the UAE to boost output, this time by an additional 2 million bbl/d.

A RISING TIDE

With both prices and output rising, it has been a very busy year for Abu Dhabi's energy market. Through mid-July alone the Emirate awarded roughly USD8 billion in upstream concession stakes to firms from China, India, and Europe, including older players such as Total (France) and newer entrants such as the China National Petroleum Corporation (CNPC), India's ONGC Videsh, and Italy's ENI.

In March, ADNOC awarded the CNPC a 40-year concession worth USD1.175 billion for a 10% stake in its Umm Shaif and Nasr concession, for which it paid USD575 million, and Lower Zakum, for which it paid USD600 million. In Lower Zakum, which lies southeast of Umm Shaif and Nasr, CNPC will join an Indian consortium led by ONGC Videsh, Inpex (Japan), Total, and Eni. ADNOC retained a 60% stake in both. Whereas the 20-m deep Umm Shaif concession was discovered in 1958 and lies 150km northwest of Abu Dhabi city, the Nasr concession was first discovered in 1971 but was not brought on-stream until 2014.
Three months later, ADNOC doubled down and awarded a subsidiary of CNPC, BGP Inc., a USD1.58 billion seismic study projects to survey some 53,000sqkm in the country, 30,000 of which are offshore and 23,000 onshore. Scheduled for completion by 2024, it will be the world's largest such survey to date. As per the agreement, BGP will acquire 2D and 3D seismic data with the ability to capture images of the subsurface structure from as deep as 25,000 feet beneath the ground.

FACE-TO-FACE DIVIDENDS

Coming on the heels of Chinese President Xi Jinping's three-day state visit to Abu Dhabi, his first trip abroad since winning reelection in March, the move was part of two broader trends. First, a larger effort by the UAE to strengthen its relationship with direct off-takers and gain direct access to the huge potential the Asian market holds in the downstream segment. Second, a critical part of China's broader efforts to diversify and secure its energy sources. Though China is thought to be the world's fifth-largest oil producer with output of 4.78 million bbl/d, it still imports 42% of its oil from the Middle East, the vast majority of which passes through UAE waterways. Currently purchasing 7% of the UAE's yearly exports, China is worried about insecurity and unrest in Iraq and Iran, whence it imports 8.5% and 7.3% of its oil, its fourth- and sixth-largest suppliers. Hence its push to ratchet up its investments in Abu Dhabi. Contrast this with Japan, which already imports 62% of the UAE's crude. With the world's second- and third-largest economies increasingly dependent on Abu Dhabi for their energy needs, the health of the sector seems in good hands.

PARTNERS IN HIGH PLACES

Not to be left out, India has also been stepping up its investments in Abu Dhabi. Entering the Emirate's upstream sector for the first time, in February India's ONGC Videsh, a subsidiary of ONGC, was awarded a 40-year, 10% stake in the Lower Zakum concession, for which it paid USD600 million. With stakes in 39 projects across 18 countries, ONGC Videsh was the second-most profitable state-run company in India in 2017, while its parent company, ONGC, caters to nearly half of India's retail customers, with 11 of the country's 23 refineries. Reliant upon imports for 79% of its oil needs, India already imports 8% of its oil from the UAE—a figure only expected to get much bigger. On par to double its energy consumption by 2040, India is expected to account for 25% of the world's total energy growth by that year.
Alongside the concession agreement, ADNOC and the Indian Strategic Petroleum Reserves Ltd (ISPRL) also agreed to build a nearly 5.9 million-barrel storage facility in the southern Indian city of Mangalore. Apart from further securing India's medium-term energy needs, this will help ADNOC meet burgeoning demand in markets across South and Southeast Asia. As analysts on both sides have rightfully noted, these investments, particularly in Abu Dhabi's upstream sector, have transformed the countries' traditional buyer-seller relationship into a long-term investor relationship and “taken our bilateral engagement in the oil and gas sector to a new level," as Indian Prime Minister Modi said at the signing.

DOWNSTREAM

The Emirate also has hugely ambitious downstream plans. In May, ADNOC announced plans to invest USD45 billion over the next five years with various partners to boost the Emirate's downstream leverage and “stretch the value of every barrel." At the heart of its downstream strategy, ADNOC plans to build the world's largest integrated refinery and petrochemical facility in the town of Ruwais, 250km west of Abu Dhabi city. With the larger goal of boosting refining capacity by 65% by 2025, or some 600,000 additional barrels a day, this would bring the Emirate's total refining capacity to 1.5mbd. ADNOC is also planning to treble petrochemicals production 14.4 million tons a year through the construction of another facility in partnership with the Austrian firm Borealis. The Emirate is certainly striking while the iron is hot.

GAS

While talks around renewables may arouse more excitement from a wider audience, the major shift in the energy industry is bound to happen in the hydrocarbon segment. According to BP's annual Energy Outlook, natural gas will overtake oil in the Middle East to become the dominant fuel, accounting for around 60% of consumption by 2040. As such, Abu Dhabi and the UAE are seeking to position itself at the center of this regional trend, although industry leaders interviewed by TBY affirmed its prevailing regime of low, fixed gas prices is hardly sustainable in the long-run. With an eye at protecting industrial customers, executives in the hydrocarbon industry gas met by TBY affirmed prices of natural gas should be subject to reforms to represent the actual dynamics of the supply and demand in the region, even if this means a consider a higher burden on consumers.
Abu Dhabi produces 3 billion standard cubic feet of gas per day, around two thirds of which is supplied to ADNOC's gas companies, representing the driver for the UAE's primary energy consumption generating electricity and desalination, with the remaining third injected into reservoirs to maintain wellhead pressure maintenance. Although the country has a substantial amount of proved natural gas reserves, these have a high sulfuric content which makes extraction hard and costly. As such, Abu Dhabi is seeking to further expand its production capacity and supply: ADNOC awarded two front-end engineering and design contracts for ADNOC's offshore sour gas project involving the Hail, Ghasha, and Dalma fields, which could meet 20% of UAE's gas demand by the second half of the next decade: It also announced plans to construct a new sulphur pipeline that will carry molten sulphur produced by its Shah field sour gas operation. Finally, Mubadala secured a 10% stake in Egypt's Zohr field.
The major player in the gas segment is Occidental Petroleum, which holds 40% a 30-year joint venture with ADNOC Sour Gas for one of the largest natural gas developments in the Middle East, located in the Shah field. It also supplies natural gas to the UAE through Dolphin Energy, a trans-border natural gas project with Qatar.