Asia drills into fresh UAE oil opportunities

The talk of the oil town is the increase in Asian involvement in the UAE’s hydrocarbons sector, particularly after the first awards were announced for the highly anticipated Adnoc main onshore concession.

The previous 75-year contracts expired at the end of 2013 for the onshore concession and Abu Dhabi National Oil Company (Adnoc) has been looking over bids to award new 40-year terms. France’s Total was the first winner to be announced for a 10 per cent stake and operational control over two fields within the concession.

The next two winners came from Asia, with Inpex of Japan taking 5 per cent and South Korea’s GS Energy scooping up 3 per cent.

“There’s definitely a shift to rebalance the 40 per cent Adco stake to include more representation from Asian companies since that’s where the bulk of crude goes,” says Richard Mallinson, an analyst at the UK-based Energy Aspects.

Adco (Abu Dhabi Company for Onshore Petroleum Operations) operates onshore and in shallow coastal waters off Abu Dhabi. It is majority owned by Adnoc.

With 22 per cent of the Adco concession still up for grabs, speculation about the next companies to get a slice of the pie are running high.

Rumbles began growing louder about a Chinese player entering Adco when China Petroleum Engineering and Construction Corporation (CPECC), an affiliate of China National Petroleum Corporation (CNPC), won a US$330 million contract last month. The company will help develop the Mender oilfield, located about 290 kilometres south of the capital.

“Strengthening that relationship is important from a wider business perspective considering China produces 4 million barrels per day [domestically], and many of those fields need enhanced oil recovery [EOR] techniques,” Mr Mallinson says.

This means Chinese companies operating those domestic fields are equipped to bring EOR technology to Abu Dhabi. Adnoc wants its oil recovery rates to reach 70 per cent, a big leap from the global average of 30 per cent. To do this, technology and expertise will be vital to winning contracts.

But it really is not a surprise that more Asian investment would find its way into the country’s hydrocarbons sector as 96 per cent of the UAE’s exported 2.5 million barrels per day (bpd) of crude oil heads east.

What is a surprise is the shift in China’s strategy, moving somewhat from the high risk areas that have previously dominated the Asian country’s oil companies’ balance sheets.

“They still remain willing to go into those places, such as South Sudan, but there has been a lot of domestic criticism in the way Chinese workers have been put at risk and the [response] by the government to treat or evacuate their nationals,” Mr Mallinson says.

While firms such as CNPC and even China National Offshore Oil Corporation (Cnooc) are not going to stop investing in potentially risky environments, it appears as though Chinese companies are looking to balance those risks. “It’s an evolution of strategy,” Mr Mallinson says.

Cnooc’s overseas acquisitions include the Canadian company Nexen two years ago, bought to help it to add value to its upstream portfolio.

In response to an inquiry about its potential interest in the UAE hydrocarbon sector, Cnooc says it is “constantly evaluating potential opportunities worldwide should there be any opportunities that arise”.

Yet the Chinese are not the only companies keeping a close eye on developments. “It’s not by any means just a Chinese story,” says Mr Mallinson.

Energy Aspects says a handful of Indian firms such as Oil and Natural Gas Corporation (ONGC) are becoming more active. “A lot of names have been thrown around for the Adco concession, and they are key customers,” Mr Mallinson says, adding that India received 300,000 bpd of crude oil from the UAE last year while China got a little less at 230,000 bpd last year.

He points to the plans for the UAE to up refining capacity to 1.1 million bpd from its current 700,000 bpd, which he says may mean less crude oil available for export as the refined product will be used more for domestic applications. He adds that this could push major importers to rush to gain plays in the upstream sector in order to secure shares in the downstream.

Sunjoy Joshi, the director of New Delhi think tank Observer Research Foundation (ORF), says that does not necessarily ring true as Abu Dhabi will increase both refining capacity and oil production.

This should create a balance with the UAE continuing to supply the same amount of crude oil to the market.

“In the present situation following the shale boom in the US, Abu Dhabi will need to retain its market share when exporters in Latin America are keen to offer supplies to Asia as the US weans itself off Latin American crude,” he says.

Mr Joshi adds that OVL, the overseas arm of India’s ONGC, could be interested in bidding for offshore license renewals in the UAE.

“OVL has shown interest in a tie-up with the investment and development company Mubadala to jointly pursue assets in third countries.”

The former Indian Oil Corporation managing director Madras Seshamani Ramachandran is pessimistic about the abilities of the Indian firms to compete with the companies that have been entrenched in the UAE for years, pointing out that ONGC has tried unsuccessfully in the past.

He says if it came to maintaining India’s share of the UAE crude exports, which totals 7 per cent of India’s imports, that it was a high possibility that more Indian firms would be “happy to get into the UAE upstream sector”.

But he is not holding his breath.

“The competition is such that we’ve not been very successful, and I don’t think it will change in the future,” he says.

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