The UAE’s foresight, since gaining independence in 1971, to explore economic realms that both support and diversify the country’s hydrocarbon-based economy, is paying off. Oil in the UAE, OPEC’s third-biggest producer, only accounted for 30% of the country’s total $1.47tn GDP last year.
Large buffers and foreign assets have reduced the UAE’s exposure to fluctuating oil prices, and ratings agency Standard and Poor’s reaffirmed the AA/A-1+ sovereign credit rating for Abu Dhabi with a stable outlook in August.
Consequently, global headlines detailing the UAE’s energy economics are far more bullish than most. State-owned ADNOC, which accounts for almost all of the UAE’s oil output revenues, plans to boost its oil producing capacity of 3.15 million bpd by 11%, to 3.5 million bpd, by 2018, with current production at 3 million bpd.
Since February, Sultan Al Jaber, ADNOC’s chief executive, has spearheaded change. Costs and bureaucracy have been streamlined and nearly 10% of the company’s 55,000-strong workforce will be cut from the payroll by December.
“The UAE has an ambitious plan to continue transforming the energy sector and to deliver on the energy goals of the UAE Vision 2021. Low oil prices have not affected our determination to achieve our domestic goals and enhance our many relationships with energy partners around the world,” HE Dr Matar Al Neyadi, undersecretary at the UAE Ministry of Energy, tells Oil & Gas Middle East.
South Korea’s GS Energy, Japan’s Inpex Corp, and France’s Total have won contracts to develop the country’s oilfields under an Abu Dhabi Company for Onshore Oil Operations (ADCO) concession, after a deal with Western majors dating back to the 1970s expired in January 2014. ADNOC holds 60% of ADCO, with 10% for Total, 5% for Inpex, and 3% for GS Energy. Offers are still open for the remaining 22%, which would provide a welcome cash boost for Abu Dhabi.
Despite having the world’s seventh largest gas reserves, the UAE’s shortage continues. This is due to a rising population (currently 9.3 million), rapid industrialisation, and the injection of most of Abu Dhabi’s gas into oil projects to help maintain production levels.
The 230-mile undersea Dolphin pipeline has supplied gas to the UAE from Qatar’s North Field, the world’s biggest known gas deposit, since 2007. Other supply has been imported by floating storage units. Abu Dhabi Gas Industries Limited (GASCO), a joint venture between ADNOC, Shell, and Total, received its first floating storage vessel to import LNG in August.
ADNOC’s decision to stall the first onshore LNG facility at the Port of Fujairah has deepened concerns over the longevity of the country’s gas security, however.
“The start-up of ADNOC’s LNG import terminal is an important step in adding new gas supplies to the Abu Dhabi market, and providing greater flexibility at a time of low global LNG prices. Continuing subsidy reform, and the start-up of the UAE’s nuclear power programme, will be vital to controlling gas demand, while new gas production projects have to be expedited, even at a time of constrained budgets,” Robin Mills, chief executive officer of Dubai-based Qamar Energy, tells Oil & Gas Middle East.
Fresh thinking
Commercialising ideas that boost operational efficiency to market as innovations is a vital step in the UAE’s bid to reduce costs, with ADNOC’s spotlight increasingly focussed on ramping up managers’ technical expertise on enhanced oil recovery (EOR). The UAE’s growing research and development (R&D) ecosystem will sharpen the country’s competitive edge in the global oil export market, especially against newcomers Iran, and the US.
ADNOC has invested $100mn into creating a research centre at the Petroleum Institute (PI), with PI offering Emiratis PhDs from early 2017 to support the government’s push to create a competitive knowledge-based economy, as per the Vision 2021. The PhDs cover petroleum engineering, mechanical engineering, electrical engineering, chemical engineering, and petroleum geosciences.
According to Dr Thomas Hochstettler, president at PI, the students will examine “cutting-edge technology across the spectrum of the PhD programmes”, to ensure that they are not “engaged in dead-end technology”. He also explains that they will study “the areas of growth that will be most readily transferable into productive activity in the oil and gas fields”.
ADNOC is also working with German company Wintershall to create a roadmap for the development of chemical EOR (cEOR) following a memorandum of understanding (MoU) in late-2015.
Global crossroads
The UAE is leveraging its position at the heart of flourishing East-West trade routes, which include two of the world’s top three oil consumers – China and India – as well as strong appetite in Asia, the Middle East, East Africa, and Europe.
“The world-class infrastructure that has been supported by local and international investors has transformed the UAE into a new centre of gravity in terms of energy trade and transportation – the UAE has unequivocally emerged as a vital and global trading hub,” Riyan Qirbi, general manager at World Fuel Services Trading DMCC, tells Oil & Gas Middle East.
The Port of Fujairah, which lies south of the Strait of Hormuz, has rapidly expanded to become the world’s second-largest bunkering hub since operations began in 1983. As a rough comparison, Singapore is the world’s largest bunkering hub and was established as a free port in 1819. The Port of Fujairah also plans to increase storage capacity by 55%, to 14 million cubic metres, by 2020, along with the recent launch of a very long crude carrier (VLCC).
The impact of low oil prices has often emerged in the UAE’s energy sector, as illustrated by Dubai-based ports operator DP World’s decision to delay the addition of 1.5 million twenty-foot equivalent units (TEU) of capacity to Terminal 3 at the Jebel Ali Port until 2017. The expansion of Terminal 4 will also slow.
As part of the Gulf’s refining boom, ADNOC’s expansion at the Ruwais refinery doubled capacity and made it one of the world’s largest such facilities at 800,000 bpd. Meanwhile, Dubai-based Emirates National Oil Company (ENOC) has awarded the EPC contract, the first of three packages of a $1bn-plus project that will increase the capacity of its Jebel Ali refinery by 50%, to 210,000 bpd, by as soon as 2020.
The close proximity of the port – and of the wider UAE – to India has enhanced the countries’ trade alliance. The UAE’s investments in India rose to $1bn during the last year, with a total $4.3bn from 2000 until March this year.
India has been earmarked by the International Energy Agency (IEA) as the fastest-growing crude consumer up to 2040, with a demand of 6 million bpd. Consequently, New Delhi is ramping up both domestic infrastructure and supply contracts.
More than 10 companies from the UAE are expected to bid for the development of small oil and gas fields in India. The development of 67 such sites will potentially lead to the production of 625 million barrels of oil. In a move that reflects the global storage panic amid the glut of supply, the UAE made the unprecedented move of giving India free oil in exchange for using its maiden strategic petroleum reserve (SPR) facilities.
Unsurprisingly, the number of mergers and acquisitions (M&As) have increased since oil prices plummeted in mid-2014. This is evidenced by the merger currently in process between Abu Dhabi’s two largest sovereign investment funds – ubadala Development and International Petroleum Investment Co (IPIC). The UAE’s deputy prime minister, Sheikh Mansour bin Zayed Al Nahyan, and Oil Minister, Suhail Al Mazroui, will be part of the committee that is responsible for shepherding the deal.
“For someone who takes a long-term view, it is an attractive time to invest in the industry,” Khaldoon Mubarak, the chief executive officer of Mubadala Development, said to Gulf News. “We, as Mubadala, are players in this industry. We will continue to invest in this industry, particularly in such a time where we find valuations at a low and attractive range.”
The entrepreneurial spirit of small and medium enterprises (SMEs) is vital for the UAE’s plan to increase R&D and innovation in the energy sector. Changes must be made, however, to avoid another expensive exodus of talent, as seen in 2015. SMEs facing financial difficulty fled the UAE last year with their total debt exceeding $1bn.
In response to efforts by industry bodies, including the UAE Banks Federation (UBF), the UAE cabinet approved a draft law on bankruptcy that enables companies in difficulty to restructure, which will likely improve SMEs’ access to funding and their ability to bring coveted cost-saving technologies to the energy market.
Green exploration
In the last two years, green energy has become fully integrated into the fabric of the UAE’s energy sector, and the government is championing R&D into innovative EOR solutions, such as those seen across the border in Oman. Oman’s $600mn Miraah project will deliver the largest peak energy output – 1,021 megawatts – of any solar plant in the world, by harnessing the sun’s energy to produce steam that can be injected into an oil reservoir.
“Translating R&D into innovative energy solutions is at the heart of the UAE’s push to both diversify its energy system and to become a leading knowledge-based economy. In order to achieve such innovation, the Masdar Institute and other leading research institutions are engaging in international partnerships to pursue application-inspired research with both global and local importance,” Steven Griffiths, vice president for research at the Masdar Institute, tells Oil & Gas Middle East.
The benefit of international R&D partnerships has most recently been illustrated by the photovoltaic solar ‘step-cell’, which has been developed in a collaboration by the Masdar Institute and Massachusetts Institute of Technology (MIT) in the US. The step-cell combines two different layers of sunlight-absorbing material to harvest a broader range of the sun’s energy.
“This new solar cell has the potential to achieve efficiency of more than 40% at low manufacturing costs, therefore enabling application to multiple sectors, such as energy, transportation and space,” Griffiths explains.
The UAE is aiming to generate 25 to 30% of its power from clean energy by 2030, which has the potential to save the government between $1bn and $3.7bn. The government has also generated additional funds by reducing diesel and gasoline subsidies from August last year, with more cuts to follow across the product range. Energy subsidies alone cost the UAE $29bn last year, according to the International Monetary Fund (IMF).
The modern transformation of the UAE’s energy sector will see one of the world’s biggest oil producers also become a creative problem-solver with the capacity to straddle two conflicting worlds – hydrocarbon and clean energy. The UAE’s knack for diversification shines through once again.
