Abu Dhabi’s driving ambition and upstream project pipeline is helping the UAE maintain its position as an oil & gas hub of choice
The UAE’s position as a regional hub for upstream companies is coming under greater threat from business initiatives and opportunities elsewhere in the Gulf, but thanks to a fairly open market and its unrivalled attributes as a logistical and commercial hub, it still retains its lustre as the location of choice for firms with regional aspirations.
Of course, the resource wealth and opportunity landscape within the UAE is not to be scoffed at, and the dominance of the energy sector cannot be overstated, though unlike some of its neighbours, the UAE has had impressive success in encouraging important non-oil sectors, thanks to decades of commercial, industrial and tourism development drives, which has seen it surpass all of its fellow Gulf economies in most spheres.
The UAE saw out 2011 as the world’s eighth largest oil producer, churning out an average volume of 2.813 million barrels per day, and came out fourth in the top global exporters league (see picture 2), exporting around 81% of its total production.
In a tricky year for Iran’s upstream sector, and faced with a dwindling number of markets it has legitimate access to in 2012, it would have been hugely likely the UAE would have claimed the third spot on the podium of top global exporters this year, were it not for Iraq’s rampant rise up the table.
Although it closed out 2011 down in ninth position, Iraq’s new export terminals and partnerships with IOCs, all of which are contractually bound to ramp up production, will likely see it leapfrog the UAE into the top three leaving the country in a solid fourth again this year.
The upstream sector in the other six Emirates is dwarfed by the scale, ambition, and future production plans in Abu Dhabi, the largest Emirate by size, and home to around 95% of the nation’s oil, and 92% of its gas.
Japan remains the country’s main oil customer, accounting for almost 40% of all shipments, though significant sales to South Korea and Thailand, as well as spot cargo sales to many others spread the revenue sources throughout Asia.
In terms of energy for export, the country’s principal investments and capacity increases will come from oil, as skyrocketing domestic energy use means that the bulk of gas developments are being funded to meet rising in-country demand.
The country has had to become a net gas importer of late, bringing in LNG and gas through the cross-border Dolphin Energy pipeline.
Its need for gas imports will likely decline when the Shah gas project, being overseen by Al Hosn Gas Development Company (with Oxy as lead IOC partner) comes onstream in 2014. The giant Bab field in Abu Dhabi, also sour and technically challenging, is expected to be green-lit in the coming few years.
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Oil E&P review
Much oil production in the UAE is from the Zakum oil system, a collection of fields which together make up the third largest oil zone in the world. The Upper Zakum field is run by ZADCO, 60% owned by ADNOC with the Japanese Oil Development Co. and ExxonMobil holding the remaining stakes.
The largest onshore oil fields are operated by ADCO. ADCO operates the Bu Hasa oil field, which produces as much as 600,000 barrels per day, as well as the Murban Bab, Sahil, Asab, and Shah oil fields, contributing another 705,000 bpd of light, sweet crude.
The Qusahwira and Bab fields are under develeopment by ADCO, adding 250,000 bpd by 2014. ADCO will also redevelop Bida al-Qemzan, adding 20,000 bpd to its current production of 225,000 bpd by Q3 2012.
These projects are components of a plan to boost ADCO’s aggregate production to 1.8 million bpd from its current 1.4 million bpd by 2017.
ADMA-OPCO operates the main offshore assets in Abu Dhabi, which have been in redevelopment to maximise output. The Umm Shaif and Lower Zakum offshore oil fields have a capacity of 520,000 bpd combined, although after an expansion at each they will have a production capacity of 425,000 bpd and 300,000 bpd, respectively.
Two new oil fields have also come into development: Nasr and Umm al-Lulu. These will add a further 170,000 bpd capacity by 2018, and are providing the local EPC and fabrication markets with a slew of new work.
Dubai and Sharjah produce relatively minor amounts of crude oil. Despite causing something of a global stir with an announcement in 2010 that the Dubai had struck upon a major discovery, no further details have since come to light.
Dubai is widely thought to produce around 100,000 barrels per day from four separate fields, the older and more abundant Fateh and Southwest Fateh oil fields, with extra production from the Falah and Rashid fields.
Sharjah’s only significant oil field is the Mubarak field, which produces 60,000 bpd.
Sharjah-based Crescent Petroleum operated this field for 35 years before handing control to the government back in December 2009.
OilField Service Insight
Arend Snaas, vice president of Middle East and North Africa South and Gulf States at Weatherford, told Oil & Gas Middle East at a recent SPE conference in Doha that the UAE is the ideal spot to manage a wide geographical remit from, and has exciting business opportunities for oilfield service companies.
“I currently take care of the geography which we treat as the Gulf. That encompasses the UAE, Bahrain, Qatar, Kuwait, Saudi Arabia, but I also work closely with Lebanon and Jordan. The UAE is a conducive place to carry out business for the Gulf region. It has fantastic infrastructure, good visionary leadership by the Royal families, both in Abu Dhabi and in Dubai, and great connections,” he says.
“The UAE is a competitive landscape – For all the reasons that make it attractive for us, it’s also an attractive destination for competitors too. Plus, with multiple decades of oilfield services, what has happened is that over time there has been a great deal of knowledge transfer and that leads to a lot of homegrown companies and that is good for the sector and good for the UAE in general.”
Weatherford has a significant presence and has been building up its local core through a series of multi-million dollar investments in the country, principally split between Dubai and Abu Dhabi.
“Business in the Gulf is a lot about striking a strategic balance about where you invest
and where, and how you can maximize the investments you have made already. For us, that has meant opening two big facilities in Abu Dhabi – a large manufacturing facility and a training and development centre, as well as commercial offices on Hamdan Street in the city centre.
In Dubai we have permanent facilities in Jebel Ali and Dubai Investments Park, so Weatherford certainly hasd a sizeable presence in the UAE.
Snaas says the types of work in demand varies quite widely, even around the Gulf. In Kuwait and Saudi Arabia he says Weatherford has a very busy drilling contingent right now, whereas in the UAE it tends to be the more technology and science-led work which is most active.
“Weatherford Laboratories is doing well in the UAE. We have a comprehensive facility in the ICAD area of Abu Dhabi. We opened that last year and we have had complementary reviews from the NOC divisions who have visited us there, including ADCO, ADMA, and ZADCO.
We have an ongoing contract with ADCO which includes conventional core analysis, which includes the geological description of the core, porosity measurements – then we can go to more added value services where we do much more specialized, detailed core analysis. We’ve opened up a geochemistry section and a special fluids section just for this purpose,” he says.
Snaas says that in the UAE, the ADNOC group of companies, by sheer weight and size of operations, take the majority of Weatherford’s business in the country, but the company also has a steady flow of work from the Dubai Petroleum Establishment and Crescent Petroleum in Sharjah.
“Because the UAE has a well developed home-grown OFS sector, we recognized that we had to improve and increase face time with our customers. We are making a concerted effort right now in the UAE to impress upon customers and potential customers the technology, experitise and products we have which would be suitable for the challenges they are facing, and be good value over all to their businesses,”
Snaas says.
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Future Business
Snaas say that staying relevant and communicating the benefits of its cutting edge solutions in terms of real value to consumers in the region is a challenge the company is relishing.
“For a big company like Weatherford, in an industry which in some ways has become a bit commoditised, we have to stay relevant and stay ahead of the competition, which means a lot of research and development – We are constantly striving to demonstrate to our customers that our technology and services are great value to them,” he says.
“Although we are technologically savvy, it has not always been the case that the national oil companies have been receptive to the most advanced solutions – in some cases it was just not necessary – but there is a shift taking place.
Some NOCs are now absolutely taking the lead on that, whereas in the past it would have most likely been the IOCs,” says Snaas. Something which is proving very popular in this regard is real-time well and field management.
Snaas says that Weatherford’s operations centre in the UAE collates information in real time from well heads which can be fed to the customer so they can see exactly what the production status is, and also adjust it.
“That is a very successful project and one we are proud of. Initially it is running across 50 wells, but it is also scalable, and we hope a larger roll out will follow,” he says.
The customer base has in recent decades shifted heavily towards more NOC direct involvement, and Snaas says he has witnessed transformational change in the Nationals, particularly here in the Middle East.
“National oil companies have evolved tremendously. They are savvy enough themselves that for a lot of projects which in the past they may have had to partner with an IOC, today they can manage these perfectly well on their own.
The operations of NOCs and IOCs have, if anything converged, so by placing a renewed focus on working closely with NOCs globally we aren’t neglecting our IOC clients, its not like backing one horse in a two horse race, they have just become a lot more similar in recent years,” he observes.
The climate for work in the oilfield service sector is extremely healthy, and Snaas says the year is shaping up to deliver double digit growth across all the main business lines.
“2012 has been, and promises to continue to be, a very busy upstream year in the Gulf.
A lot of that is driven by Saudi Arabia, but also the projects in the UAE – particularly around the Shah project. We are concentrating on working out where our products have a natural fit and can bring value to help the NOCs in their business today,” he concludes.
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ADCOP ready to go (at last)
After severe delays, IPIC’s ADCOP pipeline, which will convey up to 1.8 million barrels of Abu Dhabi’s onshore crude from Habshan to a terminal in Fujairah a day, bypassing the Strait of Hormuz, is filled and almost ready to go.
UAE Energy Minister Mohamed Bin Dhaen al-Hamli confirmed on 3 May that the pipeline was finished and after final testing will be tested and fit to export crude in November. The pipeline is initially expected to carry 1.4 million bpd, and was originally scheduled for commissioning before 2011.
The $3.3 billion project comprised a single 48 inch diameter 370km pipeline, main and intermediate pumping stations, a main oil terminal with 8 million barrels of storage, and offshore loading facilities including three single point mooring systems.
The FEED was provided by WorleyParsons, while ILF Consulting Engineers provided PMC services.
Despite offering commercial value by saving VLCCs insurance premiums and transit time, and strategic value in re-routing up to 70% of Abu Dhabi’s crude exports away from waters potentially subject to disruption by Iran, the project came in late.
Much of the blame for the delays has been attributed to China Petroleum Engineering & Construction Corporation, the EPC contractor. After numerous defects delaying commissioning were discovered and remedied it then emerged that ADCO had not been consulted on the pipeline, a major oversight.
The UAE’s cordial relations with South Korea
In March, the countries deepened their strategic ties when Korean companies took the historic step in taking a 40% stake in new field concessions in Abu Dhabi covering 10% of the emirate’s landmass.
The Korean National Oil Company (KNOC) has taken a 34% stake in three exploration blocks, with the country’s oil firm GS Energy taking a further 6%. In return, South Korea is obligated to stump up $2 billion of the $5 billion investment required to develop the field. Abu Dhabi, via national oil company ADNOC, retains a 60% stake and will put up the rest of the required investment.
“We now have our own fields in the Middle East,” said Lee Myung-bak, South Korea’s president, remarking on South Korea’s first equity stake in the region’s oil. Abu Dhabi promised the deal to South Korea in the second half of 2011.
The 11,560 square kilometre concession up for development includes Tafula, Abu Dhabi’s largest undeveloped field, and prospects close to the Zakum field. South Korea has announced the fields hold receoverable resources of around 570 million barrels.
Field development is slated to begin almost immediately, with production – which could reach 43,000 bpd – planned in 2014. The contract marks a new high in political relations between the countries and caps a huge PR campaign by South Korea that its national oil services offering is ready to move beyond its core EPC offering in the region and be rewarded for its industrial ties with secure oil supplies.
The move further consolidates South Korea’s oil ties to the Gulf region, following a 20 year, 669,000 barrels per day oil supply deal with Saudi Aramco in February 2012, and a commitment to wean itself off Iranian crude by reaching out to other GCC member counties.
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Onshore operations could see giant shake-up in 2014
In addition to a mammoth revamp of its offshore facilities, Abu Dhabi’s oil sector will see significant changes when ADCO’s onshore oil field concessions are put out to tender next year.
ADNOC is currently drawing up the bidding process, having confirmed that competitive tenders will be taken for the ADCO fields.
Top of ADCO’s list of concerns will be ensuring foreign oil companies make the maximum commitment to investing money and know-how into the fields. Shell, BP, ExxonMobil and Total all work together under the current ADCO contract, holding 9.5% stakes, across the Bab, SAS (Sahil, Asab and Shah), NEB (Al Dabbi’ya, Rumaitha and Shanayel), Bu Hasa, Huwaila, Bida Al-Qemzan fields.
The oil companies receive $1 per barrel produced in revenue from ADCO, a rate last reviewed in the 1980s, when oil prices and the operating costs of running oil fields were significantly lower than they are now. In addition, the companies charge Abu Dhabi for the use of their expertise, the provision of reports and ancillary services.
Analysts say that the current structure disincentivises these companies sharing proprietary oil field technology, and ADNOC may break up the concession into several parts, with each to be led by a supermajor.
The remuneration structure of the contract may also be subject to change, with oil companies hoping for a greater reward in exchange for making the huge investments required to sustain production at some of the region’s oldest fields.
“It’s really up to Abu Dhabi to really determine who they think would be the best ones to work with that can bring the value adds, that can bring technology and help Abu Dhabi in the best way to maximise the development of their oil and gas resources,” Morten Mauritzen, the president of ExxonMobil’s UAE subsidiary, told the National.
“Whatever mechanisms they want to use for a fiscal system – whether it’s a certain number of dollars per barrel or a tax royalty regime – it needs to be within a framework that ensures there is a long-term predictability and alignment of all the stakeholders.”
With the prospect of CO2 injection being rolled out at the Bab field by 2016 under a milestone project headed by Masdar, and other advanced tertiary recovery techniques likely to be required in the next contract period, the ability to demonstrate technical expertise on a large scale will be vital.
Second-tier interests could include awards for Korean firms such as KNPC, in keeping with deepening ties between the UAE and South Korea.
There could also be opportunities for smaller companies at the more marginal fields which still have exploration potential, with Maersk Oil rumoured as a potential contender after its pioneering work at Qatar’s Al Shaheen field.
