Looking at the oil price crisis of 2015-2016, what were the major lessons for IOCs like Shell?
The oil and gas industry, in the last few years, was losing focus; now the talk is about peak oil, which is a far cry from the discussions that were happening only a few years ago. As far as the Middle East is concerned, although the region bears a low unit cost, when we add both the commercial terms and the fiscal overlay, the breakeven price then becomes fairly high. In this sense, rather than talk about price levels per se, the focus should be on ensuring project resilience during low price environments, since projects get postponed, re-started, stopped again, and so on as a result of spikes and drops. As a result, the industry needed to re-focus and changes needed to be made. This led Shell to reduce its capital investment by around 50% from its 2014 levels (including BG) and to engage in a more selective investment approach, marked by the USD25-30 billion cap communicated to our shareholders. Moreover, as the industry changed, it pushed Shell and ADNOC to reevaluate the technical challenges and costs of the joint development Bab sour gas reservoirs as it made no sense to continue with a high cost gas development where the alternative supply was cheaper. This led to a joint decision to exit. Nonetheless, we will continue to play a role in the Abu Dhabi energy fabric, whether through formal joint-ventures or advisory technical support to ADNOC across the different segments of the industry. Reflecting back on our presence specifically in Abu Dhabi since the 1930s, and generally in the UAE over 50 years ago, through a vibrant downstream aviation, chemicals, and lubricants business, Shell is proud to have a substantial footprint with over 500 staff working out of its UAE offices. At Shell, we not only look to partner with host governments and national operations operators, but also believe in being embedded in a B2B relationship with UAE SMEs, in addition to our core value of supporting the local communities and environments in which we operate.
Can you give us more details about Shell's relationship with ADNOC since 2016?
On the upstream side, Shell continued to support ADNOC on various projects regarding enhanced oil recovery (EOR), which led to significant cost optimization of developments, as well as exploration system studies that enabled the recent exploration tenders. Following the signing of an agreement in 2016, we have been providing extensive exploration studies, mapping out petroleum systems across Abu Dhabi's ecosystem, collecting all available data, and setting up a new framework within 17 months of intensive efforts. As a result of these studies, ADNOC released the recent blocks that opened up for tenders. When it comes to midstream, it is all about gas capture and reinjection to sustain oil production, and Shell is a 15% shareholder in ADNOC Gas Processing, with 68% being owned by ADNOC, 15% by Total, and 2% Partex. In terms of downstream, we continue to provide technology and licensing opportunities and explore channels to further support ADNOC with optimal cost-effective solutions.
How is the UAE positioned within its stated energy transition strategy?
The UAE has been a leader when it comes to energy diversification. At an Abu Dhabi level, Masdar was launched in 2006, and today it holds a large portfolio of renewables projects that include solar power in the UAE and wind farms across North West Europe. On a UAE level, the UAE Energy Strategy was launched in 2017, during which an ambitious goal was set for an energy mix composed of 50% fossil fuel and 50% non-fossil fueled energy by 2050. As such, Abu Dhabi and the UAE have been showing a clear interest in reducing their reliance on oil to the benefit of gas, which is expected to represent 38% of the hydrocarbon makeup. Broadly speaking, all the necessary steps for the achievement of these energy targets are being taken at the right pace, and there will be many opportunities for experienced IOCs to support Abu Dhabi on this front.
What are the major risks that could affect the energy market in the region in the short to medium term?
As an industry, we have an aging workforce, and attracting and developing competent and capable workforce represents an actual risk in the region. Additionally, as facilities age, there will be a need for significant investments in the upgrade and rejuvenation of assets and this can lead to asset integrity exposures. On the supply side, it is becoming more difficult to access the easy oil and gas resources and therefore projects will need different technological solutions such as enhanced oil recovery and unconventional gas production, which, if not deployed effectively and in a timely manner, could lead to supply disruptions. Finally, there will always be black swan events that no one can fully anticipate, and these are not only related to geopolitics and regulations. This is where stress scenarios represent a healthy approach for businesses to be ready to face the future with confidence.