The UAE’s Hope Consortium and Hope Probe illustrate a growing shift from a focus on hard power to a broader consideration of human security and the incorporation of new technologies.
There was a time when the Abu Dhabi National Oil Company was a traditional national oil company, producing and selling oil and gas through long-term contracts and controlling all its upstream, midstream, and downstream operations. Its foreign joint venture partners were the big multinational oil companies – Shell, Total, BP, and ExxonMobil. But in recent years, the company has put in motion a rapid transformation program under a new, dynamic leadership structure.
ADNOC’s chief executive officer, Sultan Ahmed Al Jaber, a United Arab Emirates’ minister of state since 2013, is overseeing an aggressive policy of partial privatization and has brought in new strategic partners to better serve the company’s international operations and export markets. Chinese, South Korean, and European companies have been awarded upstream concessions in recent years as ADNOC has restructured the terms of upstream joint ventures and brought in new blood.
Jaber took over as CEO in 2016 at a particularly challenging time for the industry. Oil prices had fallen to below $30 per barrel from a mid-2014 high above $100/bbl, a price collapse that led to a decline in upstream investment that threatened supply growth. The oil price crash, Jaber has said, was the stimulus needed to revamp ADNOC. Soon after taking over, he oversaw the streamlining of operations by merging some overlapping ADNOC subsidiaries and slashing staff.
Armed with a huge budget – the government approved a five-year spending plan of just over $130 billion in November 2018 – Jaber is investing in new assets at home and abroad while selling off some holdings. His goal is to turn ADNOC into a more agile and diverse operation to rival the international oil majors.
Jaber has said that ADNOC would remain wholly owned by the Abu Dhabi government and that there are no plans to privatize the national oil and gas company. However, some subsidiaries have been offered up to foreign investors.
In January, ADNOC sold 35 percent of its refining business for $5.8 billion to Italy’s Eni and OMV, the Austrian oil and gas company in which Abu Dhabi holds a 25 percent stake through its Mubadala investment arm. Both companies have also been awarded oil and gas concessions. Eni made its debut in the UAE’s upstream sector earlier this year when a consortium it led was awarded an offshore exploration block.
The downstream partnership with Eni and OMV comes within the context of ADNOC’s plans to nearly double its refining capacity to around 1.5 million barrels per day (mb/d) by 2025. This would involve expanding and upgrading the Ruwais refinery, the UAE’s biggest, and turning it into the world’s largest integrated refining and petrochemical complex. This would add value by converting oil and gas into higher value products for exportation. A total of $45 billion has been allocated by ADNOC to the downstream business, including the Ruwais expansion. ADNOC has also formed a marketing joint venture with Eni and OMV to manage international oil sales. ADNOC will retain its majority stake in ADNOC Refining and manage domestic sales.
ADNOC’s latest moves are preparation for significant growth in crude oil and refined products from Asia, the UAE’s traditional export market. Among the more strategic investments is construction of new underground storage facilities in the UAE while tapping into the rapidly growing Indian market with a deal to supply energy-hungry India with crude oil for its strategic oil reserve.
The UAE has the world’s eighth largest crude oil reserves, estimated by the BP Statistical Survey at 97.8 billion barrels at the end of 2017, with all but a small fraction held by Abu Dhabi. The UAE produced just over 3 mb/d in February, according to its direct submission to OPEC. It has capacity to produce more but has been cutting its output to comply with an agreement by OPEC and 11 non-OPEC producers to slash their collective output by 1.2 mb/d, an accord that came into effect in January.
Given that the UAE exports roughly two-thirds of the crude oil it produces, Abu Dhabi had been increasingly concerned about the security of its export flows through the Gulf due to constant declared threats by Iran to shut down the Strait of Hormuz. That was the justification for building a pipeline linking Abu Dhabi’s onshore oil fields to the port of Fujairah, which lies outside the narrow strait that leads out to the Indian Ocean. The pipeline was completed in 2012 and has capacity to carry roughly 70 percent of the UAE’s crude oil exports to markets from the port of Fujairah, which is also the second largest bunkering port for supplying fuel to tankers. Now, Jaber wants to store millions of barrels of oil underground in Fujairah as part of a marketing strategy.
In early March, ADNOC awarded an estimated $1.2 billion contract to South Korea’s SK Engineering & Construction to build the world’s largest underground storage facility, consisting of three caverns each with capacity to hold 14 million barrels of crude oil. Once completed, the underground facility would guarantee the free flow of crude to the international market by bypassing the congested Strait of Hormuz. ADNOC has said that the project “will strengthen the UAE’s position as a reliable supplier of crude oil” and provide it with “greater flexibility,” allowing it to manage and optimize its delivery schedule and support its broader move into trading. The project is already under construction and is due for completion in 2022.
In addition to its domestic storage plans, ADNOC is also expanding overseas. It already has crude storage facilities in Japan and recently signed a memorandum of understanding with Indian Strategic Petroleum Reserves Ltd for crude oil storage in India, where demand is growing rapidly. The International Energy Agency, in its Oil 2019 report, estimates that China and India together will account for 44 percent of the 7.1 mb/d growth in global demand between 2018 and 2024, by which time India’s demand growth will match China’s.
The UAE is well placed to deliver additional supply, having invested heavily in expanding its oil production capacity. It plans to raise output capacity to 4 mb/d by the end of 2020 and to 5 mb/d by 2030. According to the IEA, this means that of all the OPEC producers, Iraq and the UAE are the only countries that will add significant new capacity in the medium term.
In another strategic and bold move, ADNOC signed a deal on February 24 with U.S. investment groups BlackRock and KKR for a pipeline investment agreement worth around $4 billion.* Under the agreement, ADNOC will lease interest in 18 pipelines that carry crude oil and condensate across its onshore and offshore concessions for a 23-year period. ADNOC will retain a 60 percent majority stake in a newly formed entity to be called ADNOC Oil Pipelines and the two foreign partners will have a 40 percent interest. The transaction marks the first time that global institutional investors have deployed capital into key midstream infrastructure assets of a national oil company in the Middle East, ADNOC says, adding that it is laying the groundwork for additional infrastructure-related opportunities with institutional investors.
In 2017, ADNOC offered shares in its retail arm in an initial public offering and in late 2018 sold a 5 percent stake in its drilling unit to the United States’ Baker Hughes.
ADNOC is also forging a stronger alliance with Saudi Aramco, a reflection of the closer political alliance between the two neighboring countries and fellow OPEC members. The two companies are part of a joint venture developing a $44 billion refinery and petrochemical project in India and are exploring further investment opportunities abroad.
In November 2018, ADNOC and Saudi Aramco signed an agreement to explore the possibility of investing jointly in overseas liquefied natural gas business opportunities. Both Saudi Arabia and the UAE, despite being significant producers of natural gas, need additional supply to satisfy growth in demand for gas for power generation and desalination.
“Aramco and ADNOC working together is a powerhouse,” Jaber said after signing the agreement with Aramco Chief Executive Officer Amin Nasser. The Saudi government plans to offer 5 percent of Aramco in an initial public offering that has been delayed repeatedly and is now reportedly due to take place in 2021.
The UAE has led the way in diversifying its revenue sources and has invested heavily in renewable energy, such as solar, and will soon be inaugurating its first nuclear power plant. But Jaber does not see the era of oil coming to an end any time soon and ADNOC’s investment portfolio is heavily weighted to upstream spending.
“Recently we have heard many start speaking about the fact that the era of oil is drawing to a close,” he told the Financial Times in an interview on March 3. “In our view, nothing could be further from the truth.”
* Correction: The article originally stated that ADNOC was in advanced negotiations for a deal with BlackRock and KKR, however the deal was signed on February 24.
is a non-resident fellow at the Arab Gulf States Institute in Washington, a contributing editor at the Middle East Economic Survey, and a fellow at the Energy Institute.
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