The oil and gas sector is transforming—digitalising, de-carbonising, and diversifying. Even with the scale of the world’s most profitable company, Saudi Aramco, the digital prowess of ADNOC Group, or the untapped resources of BAPCO, the region’s national oil companies (NOCs) seem to have come to the same realisation: They cannot do it alone.
Since he took the helm of ADNOC Group in 2016, Dr. Sultan Al Jaber has become a man of a thousand handshakes, and news of partnership agreements out of ADNOC seem to be an almost weekly occurrence.
“The oil and gas company of today can be a winner tomorrow, if it operates at a lower level of cost and a higher level of performance; if it brings digital into the core of its operations; if it embeds sustainability into its DNA; and if it rethinks how to leverage its partnerships, enable its people, and re-centre its customer relationships,” Al Jaber said in his speech at the Abu Dhabi International Petroleum Exhibition & Conference, detailing the mission that he coined “Oil & Gas 4.0”.
Partnerships have come into the spotlight in recent years, but NOCs have for decades called upon their international counterparts for technical support. For example, Shell has had a presence in the UAE for 80 years, is part of a joint venture with ADNOC Gas Processing, and operates across the value chain. Looking ahead, Shell’s country chair for the UAE, Ali Al Janabi, says on the sidelines of ADIPEC that the company will continue to address niche markets, like lubricants, and “will continue to focus on our strength, technical support. We provide a lot of technical support to ADNOC, whether in upstream, sour gas processing, or supporting with ADNOC Refining further downstream.”
These support networks are strong—NOCs have been operating for decades, with established workflows, partners, and ways of doing business. But the pace of digital transformation, the urgency of the energy transition, and the impact of a lower oil price have disrupted the status quo. The oil and gas sector has seen a flurry of changes, and the industry’s burning question no longer surrounds the merits of these business transformations, but the best ways to unlock their value.
“There is a paradigm shift in the transformative development of Middle East NOCs from national champions to global competitors,” says Vinod Raghothamarao, director of consulting for energy wide perspectives at IHS Markit. “The time has come for them to play major role in the global arena and establish themselves as international leaders in the upstream, midstream and downstream sectors. This has led them to embrace and adapt foreign partnership/investment.”
While most NOCs are trying to develop international partnerships by growing their presence in major oil consuming nations like India and China, they are also inviting the world into the Middle East—an invitation that has been eagerly accepted by many international oil companies (IOCs).
According to data from Rystad Energy, 2018 saw a record number of Middle East upstream deals between local and foreign operators, with a combined value of $9bn, which is slightly more than the total value of deals between 2013 and 2016. Aditya Saraswat, *senior analyst at Rystad Energy, says that as NOCs race to meet their set goals, they are turning to foreign partners. “The UAE’s 2030 goal, for example, is mostly dependent upon already producing assets, and ongoing concessions which were expiring in 2017 and 2018,” Saraswat says. “That is where we saw a surge in foreign deal values, where foreign companies took shares of ADNOC’s onshore concessions and exploration concessions onshore. That investment round secured the already producing assets.”
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ADNOC’s first competitive licensing bidding round saw concession stakes awarded to companies from across the globe, an important milestone. Like many other NOCs, while ADNOC has not been shy to partner, it has traditionally kept a firm grasp on the nation’s resources. But its journey to transform in a shifting energy landscape has resulted in new partnerships as well as a new approach to partnerships. “[ADNOC has] opened up to the IOCs because they think, and I agree, that it is a good way of making sure that on the one hand, they reduce their exposure to the risk element,” says Helge Beuthan, managing director for Abu Dhabi at Germany’s Wintershall DEA, when asked about the company’s partnership with ADNOC on the Ghasha concession. “On the other side, it brings added-value experience from others at the table.”
NOCs have generally leveraged international expertise by partnering with oilfield services companies or getting a limited scope of support from operators, which can solve many technical issues as operators branch out. As Middle Eastern oil and gas producers look to extract unconventional resources, they have chosen strategic partners to lower the cost of production—Halliburton’s research and development efforts into using local sand have yielded strong results for one unnamed operator. “This [local sand development] puts that country’s unconventional production in the exact same position as what is happening in the US, which should really reduce their costs by almost 30%,” says Ahmed Kenawi, Halliburton’s senior vice president for the Middle East and North Africa.
In the digital transformation space, vendors will develop and provide solutions to oil and gas companies, but it is ultimately the operators who will have to use the technology on a day-to-day basis. Abdul Nasser Al Mughairbi, ADNOC Group’s vice president of digital, says that the real challenge in digitalising involves changing the company’s governance, workflow, and getting employees to buy into the new way of doing business. “That is the hard part,” he says, chuckling during a press briefing at ADNOC Group’s headquarters. “Believe me, the technology is easy.”
When NOCs partner with other operators, however, they have a literal stake in the success of the project, and can contribute their expertise over a longer period of time. “Wintershall DEA has a lot of experience in some relevant areas,” says Beuthan. “We have sour gas experience with 40 years of production in Germany, we have drilled in sensitive environments. We showcase[d] our artificial island [at ADIPEC]. We work in extended reach drilling all over the world, and we have tight gas experience. We have drilled in shallow waters in the Netherlands. That is an overwhelming amount of expertise, an experience level that we would like to bring forward to make the project a success.”
Beuthan noted that every partner in the Ghasha concession brings some expertise to the table, and that is the exact nature of strategic partnerships. Italian operator Eni holds a 25% stake in the concession, with other partners: Germany’s Wintershall DEA (10% stake), Russia’s Lukoil (5%), and Austria’s OMV (5%). Every upstream company can produce hydrocarbons, but the ones that address areas of opportunity can help NOCs push ahead with parts of their transformation. “The technology in our proposal [for Ghasha], in terms of [carbon capture, utilisation, and storage (CCUS)], for example, had ADNOC absolutely interested,” says Eni CEO Claudio Descalzi. “This CCUS will be applied in all the gas development, so we capture CO2 instead of venting, store the CO2, and then use it to increase the recovery factor for ADNOC.”
Eni stole headlines when it made a series of licensing agreements across the Gulf, partnering with operators in Bahrain, Oman, and two emirates in the UAE in the space of a week. While industry transformations, like the shift to natural gas, have pushed NOCs to seek new partners, these trends also present opportunities for IOCs. “We still have plenty of opportunity and aspiration in gas, because it is new,” Descalzi says. “Before, NOCs were focused on oil. Now the strategy is wider and is covering gas, as a future for the transition in their low carbon activities.”
Decarbonisation presents opportunities to IOCs, which have typically responded more quickly to climate change concerns. “In terms of the outlook for our gas strategy, as the world looks to increase its share of renewables into the energy mix, you will find that gas is a complementary fuel with the intermittent nature of renewables, and we will certainly look to play our part in the solution,” says Moutaz Al Riyami, gas director at Petroleum Development Oman, which has an upcoming series of large-scale gas projects. The move to produce gas, as a lower-carbon fuel, is common among NOCs, and IOCs with a wealth of experience are taking advantage of this shift.
“The opening up of foreign partnership and investment across the value chain by Middle East NOCs offers new investment opportunities and avenues for foreign companies,” Raghothamarao comments. “The foreign companies in the energy sector, as well as energy and infrastructure-focused private equity investors, are able to diversify their investment risk portfolio, while also playing a part in the transformation of the Middle East’s NOCs.”
As the region opens up, fields once deemed unviable could cycle back into exploration efforts—Descalzi says that some of Eni’s major fields, including Egypt’s giant offshore gas field Zohr, were relinquished by other companies. Advances in exploration technology allowed Eni to revisit those lost opportunities. UAE emirate Sharjah, for example, has a complicated geology which has obstructed exploration efforts in the past. However, with technological advancements, Eni and Sharjah National Oil Company are revisiting its potential.
IOCs are searching for strategic partnerships, just like NOCs. Transformation is an opportunity for both parties, Descalzi says. “New technology became the main driver of our expansion, because ADNOC is seeking new tools that can be put into our energy system, from the circular economy, to renewables, to CCUS,” he says, noting that he wants Eni to participate in ADNOC’s second bidding round. “We have a huge amount of activity in the Middle East,” Descalzi says.
While the region has opened up, boundaries still exist, although they may no longer be geographic in nature. They are set by each NOC’s only stakeholder—the government. For example, operators in the Gulf are balancing two seemingly opposing forces: Increasing foreign participation in the oil and gas sector while bolstering the local supply chain and talent pool. Saudi Arabia’s In-Kingdom Value Add (IKTVA) forum in 2018 saw deals worth $27.5bn signed between Saudi Aramco and partners in the oilfield services and engineering verticals. The majority were international companies that had developed their Saudi supply chain and facilities to feed money back into the Saudi economy.
Raghothamarao pinpoints localisation as one hurdle in the region’s changing approach to partnerships. “The key challenges in the partnership will be the momentum to sustain the partnership through troughs and peaks of the market dynamics, low oil prices and derive the intended benefits across the investment value chain,” he adds. Low oil prices are, however, one strong incentive for NOCs to bring in partners from outside of the government. In Saudi Aramco’s case, that has not meant partnering with IOCs, but launching an initial public offering.
The crash from oil prices of $100 per barrel down to current levels of around $60 per barrel (as of writing) meant that every oil producer took a big dip in earnings. “Still, moving forward to balance the market, Saudi Arabia will have to reduce production,” Saraswat says. “That means reducing their earnings even more.” Listing even a small percentage of the company on the local exchange would provide liquidity to the Saudi government, allowing it to invest in other programmes—Crown Prince Mohammad bin Salman is spearheading the country’s economic diversification initiative, as 2030 approaches.
In a way, diversification is the true theme of the industry’s transformation—diversifying its set of tools to leverage digital, its energy mix to increase profit and decrease carbon emissions, and its pool of partners to open up new possibilities. The transformation of NOCs has helped draw their international counterparts into the region, and, in turn, partnerships with IOCs are allowing NOCs to accelerate that transformation in a shifting energy landscape.
As the region boldly opens up to transformation, this self-sustaining cycle of change could take NOCs even farther than they hoped.
*The print edition of this article contained a typo in Aditya Saraswat’s title. The correct title is written above.
