Strategic autonomy and technology transfers take center stage in a shifting UAE procurement policy.
Restructuring of state oil company Abu Dhabi National Oil Company (ADNOC) is gathering pace as new Director General Sultan Al Jaber overhauls the company management and operational structure to bring it in line with the more commercial-oriented business model of international oil companies. Jaber took over the helm of ADNOC in February, after winning accolades at the government-owned investment fund Mubadala, where he was head of energy, after which he went on to launch the highly successful renewable energy company, Masdar, making the UAE a global leader in the field.
Lower oil revenue since mid-2014 may be one of the underlying reasons for restructuring the country’s energy business, but it also casts a harsh light on a state oil company run more like a large government bureaucracy, with many of the same operational inefficiencies. ADNOC is the parent company of 21 subsidiaries – operating units and institutions that largely function independently with an insular management structure. Like other state-run companies, the subsidiaries provide employment for nationals but lack a more commercial-oriented focus on profitability.
International oil companies have slashed hundreds of billions of dollars by cancelling or delaying project plans, laying off staff, and reducing other operational costs in the wake of lower oil prices. By contrast, state oil companies in wealthier Gulf Cooperation Council countries, such as Saudi Arabia, Kuwait, and the UAE, are only just beginning to make strategic changes to adapt to the lower oil price environment. UAE oil revenue is forecast to fall to $48.2 billion this year compared with $70 billion in 2015 and $113.8 billion in 2014, according to Samba. Structural changes from the top of the ladder down to the foundation of ADNOC would appear to be needed to make the company sustainable in a $50 per barrel (bbl) oil world.
Jaber immediately set out to develop a new vision for the company based on improved efficiencies, adoption of best industry practices, and focus on increased profitability. “We are improving operational efficiency, optimizing resources and adapting the mindset of our people to focus on our strategic objectives and on maintaining our competitive edge,” Jaber said in a recent interview with The National.
Since late March he has appointed four new directors to the executive team and new chief executives at six of the parent company’s 18 operating subsidiaries, including ADCO (Abu Dhabi Company for Onshore Petroleum Operations) and Adma-Opco (Abu Dhabi Marine Operating Company), the joint ventures responsible for most of the emirate’s oil production. The appointments are aimed at supporting the company’s new strategic pillars – performance, profitability, efficiency, and people. Under the revamped corporate structure, the top executives are charged with operating as “active asset managers,” responsible for achieving specific operational and financial targets. The management changes elevate a new generation of younger technocrats, filling posts previously held mostly by executives at or past retirement age.
In its bid to streamline and manage costs better, ADNOC has adopted a “mega tender” approach to procuring supplies to achieve economies of scale. The pilot tender halved the cost of a major steel purchase by combining orders from its various operating companies and future supply needs will now be coordinated and consolidated. The tender approach is also adding a much-needed level of transparency to ADNOC’s operations.
At the same time, ADNOC plans to cut its workforce by 5,000 in 2016, with several thousand positions already made redundant, almost exclusively expat workers. By industry standards, the company has a relatively bloated workforce at just under 60,000. Saudi Aramco has a similar staff level at 60,000 but the company produced around 10.2 million barrels per day (mb/d) on average in 2015 compared with UAE output of 2.88 mb/d. ExxonMobil’s workforce is about 20 percent higher at over 75,000 but the international oil company’s production of 5.3 mb/d was almost twice the level of ADNOC.
A New Energy Hierarchy
Underscoring the new energy era, in late March Crown Prince Sheikh Mohamed bin Zayed al-Nahyan (MbZ) managed the reshuffling of the Abu Dhabi Supreme Petroleum Council (SPC), the overseer of the country’s oil policy. As expected, the new ADNOC chief executive was appointed to the 13-member board where President Sheikh Khalifa bin Zayed al-Nahyan is chairman and MbZ remains vice chairman. Indeed, Jaber has a close working relationship with MbZ and is part of the new generation of rising technocrats. Sheikh Hazza bin Zayed al-Nahyan, who serves as vice chairman of Abu Dhabi Executive Council (the implementation body of the Emirate’s government), was also appointed to the SPC.
A reorganization of the UAE’s federal government in February was the most significant structural change in the country’s history, and included the appointment of eight new ministers, of whom five were women, with an average age of 38 years old. The number of ministries was downsized in part reflecting new austerity measures against the backdrop of sharply lower oil revenue.
The significant leadership changes in the government and the energy sector appear to reflect the more prominent and public role of MbZ. He “has cemented his position as the de facto head of state after years of exercising discreet political influence, often from behind the scenes. It also signaled that he has become far less reticent about acting as such in the continuing absence of his older half-brother, UAE President Sheikh Khalifa bin Zayed, who has not been seen in public since suffering a stroke in January 2014,” according to Kristian Coates Ulrichsen on the Baker Institute Blog.
The new energy hierarchy at SPC and management team at ADNOC have urgent issues to tackle. ADNOC has the challenge of increasing oil production capacity while reducing operating costs by 25 percent. In a bid to reduce costs, the company is currently reworking plans to bring capital and operating expenditures in line with drilling and production schedules on a company-wide basis in a bid to optimize resources and improve efficiencies. An updated operating and production strategy is expected to be completed within the next few months. ADNOC’s plan to raise oil production capacity to 3.5 mb/d by 2017 is already years behind schedule and that target now does not look feasible before 2020.
The delays in raising production capacity in part stem from the protracted negotiations to award final contracts for onshore concessions that expired at the end of 2013. Leading up to the contract end date, companies curtailed investments in expansion plans since they would not be able to recover their upfront costs if their bids failed. In the event, legacy partners Shell and BP balked at the steep upfront signing fees totaling $8 billion that ADNOC set for the bidding rounds due to cash flow constraints and lower oil prices. ExxonMobil bowed out early, saying it would focus on its commitment to the emirate’s offshore Upper Zakum development. Shell and BP found the deal too pricey and submitted bids considered too low by ADNOC, with France’s Total the only major international oil company to agree to pay $2.2 billion for a 10 percent stake in the consortium. Japan’s Inpex signed on for 5 percent and South Korea’s GS Energy, 3 percent. The onshore concession is run by ADCO, of which ADNOC holds a 60 percent stake. Previously, ExxonMobil, Shell, Total, and BP each held 9.5 percent and Portugal’s Partex held 2 percent for a total 40 percent since the 1970s.
The new 40-year production-sharing concession covers the development of 15 onshore oil fields, which account for more than half the country’s output. The proposed contract raises the per barrel fee to $2.85/bbl, compared to $1/bbl under the old contract, but some believe the profit margins are still too modest given the massive upfront payment required. After years of negotiations, Abu Dhabi has only awarded 18 percent of a planned 40 percent share stake. ADCO would prefer that Shell and/or BP return since they know the technically challenging fields and have the enhanced oil recovery expertise.
After a two and a half year stalemate with BP and Shell, however, ADNOC needs to move forward by selecting other companies to join the concession so the company can finally receive a much needed cash injection and put its capacity expansion plans back on track. In early April, Jaber said “the door is still open to discuss the participation of other international players in the remaining 22 percent share in ADCO.”
Early on ADNOC said that Asian bidders were welcome given the oil market’s pivot east, and in April India stepped up to the plate. A consortium of four Indian energy companies – Indian Oil Corp, Oil India, ONGC Videsh Ltd, and Bharat Petroleum – submitted a bid for the 22 percent remaining share of the concession. ADNOC is reportedly still reviewing the offer. India imported around 325,000 barrels per day (kb/d) of crude from the UAE in 2015. The UAE and India have strengthened ties in the past year, with MbZ making a state visit in February. The Indian firms however may not be a good fit because of the advanced technology and deep experience required for the fields. Abu Dhabi needs to switch from using associated gas for maintaining field pressure to carbon dioxide or another method given high demand for gas. ADCO now produces around 1.6 mb/d and the official target is to reach 1.8 mb/d by 2018, which is unlikely due to delays over the past few years.
Plans to raise crude oil capacity from around 3 mb/d to 3.5 mb/d have slipped to a 2020 time frame, with the bulk of the growth coming from offshore fields. ADNOC’s offshore company, Adma-Opco, plans to spend $25 billion to develop and increase production at four major offshore fields, which would raise output from around 1.25 mb/d to 1.75 mb/d. Production increases at the Upper Zakum field appear on track to reach full capacity of 750 kb/d by 2018, and will be sustained for 25 years, according to ExxonMobil. However, the timeline of 2018-19 for production increases of a combined 275 kb/d from the Umm Lulu, Nasr, and Satah Al Razboot fields, which are in the early stages of development, look certain to be delayed given costly, complex technological solutions needed for enhanced oil recovery and the drive to reduce costs. The delay in raising production capacity may be worth the wait if Adma-Opco is able to achieve significant cost savings over the life of the projects.
Jaber’s enterprising, market-oriented vision is taking hold, and has installed a next generation management team charged with implementing his strategic pillars. The latest management reshuffle is just the start of a broad restructuring of ADNOC aimed at consolidating some of its subsidiaries and operating companies, streamlining the inefficient bureaucracy, and fostering a corporate culture focused on the bottom line. However, implementing a new strategy down the chain that links some 55,000 employees will be an onerous undertaking. Equally, changing the company culture to a more market-oriented corporate structure will take time. And while Jaber’s bold initiatives may rankle some of the old guard at ADNOC crucially, he appears to enjoy the full political support of MbZ and the SPC.
A leaner, more efficient ADNOC is already emerging after just a few months with Jaber at the helm. Given Jaber’s transparent management approach to date, updates on progress in implementing the new strategy are expected over the next few months.
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