UAE fortifying energy future

Experts believe that the UAE authorities carefully chose 2015 to introduce the landmark decision of lifting subsidies, which was costing the state exchequer an eye-watering $29bn annually, anticipating the free fall of oil prices. Despite the deregulation, fuel prices are expected to remain low throughout this year, as global crude oil prices are expected to stay subdued, with the measure trading at around $40 a barrel.

It is estimated that the decline in oil prices has eroded $360bn off GCC revenues in 2015 alone. The UAE’s GCC peers having left with no option have followed suit in removing fuel price subsidies, with Kuwait being the only state not to do so thus far (although the government is already mulling raising fuel prices).

The UAE is also making giant strides towards achieving its ambitious goal of economic diversification. Revenues from the oil and gas sector currently accounts for just 34% of the GDP, and the government wants to further reduce that to a meagre 20% in the future, in order to solidify other key industries and reduce dependence on oil revenues to strike an economic balance.

“The UAE is looking to diversify its economy and move away from being reliant on energy for revenue. As compared to its neighbours, the UAE is one of the most diversified countries in the region. Dubai is a major trading, shipping, tourist and aviation hub. The UAE is also set to implement value added tax (VAT) in the coming years, as part of efforts to diversify revenue sources,” Muhamad Fadhil, regional manager for ICIS MENA, told Oil & Gas Middle East.

On the other hand, Abu Dhabi is also investing in securing the future of its oil and gas industry and has been off late using its diplomatic clout to forge solid business relationships with buyer countries; India for instance.

A trusted partner

Relations between the UAE and India started gathering steam when Indian Prime Minister Narendra Modi visited the UAE in August last year; a tour during which massive business deals were signed, most notable of which was the two parties deciding to set up a $75bn investment fund.

Agreements made during Modi’s visit further gained traction when His Highness Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces paid a return visit to New Delhi in February.

“India is a substantial and growing economy. With the slowdown of China it will be one of the major growth engines of the global economy. Besides the close regional ties (a large Indian population in the UAE; the economic footprint is also complimentary) I hope the alignment goes beyond the energy sector,” Dr. Bernhard Hartmann, Oliver Wyman’s Partner and Head of Energy Practice in the Middle East and Africa, told this publication.

Indian Oil Minister Dharmendra Pradhan mentioned that his country, which imports about 80% of its oil, was also on track to increase its oil imports from the UAE. “The UAE makes up for 8% of India’s oil imports. The total imports from UAE amount to 16.11mn metric tonnes for the current fiscal (year), of which the Indian public sector companies imported 10.2mn metric tonnes. In the next financial year, India will increase its imports from the UAE by another 2.5mn metric tonnes,” Pradhan told reporters after a meeting with Energy Minister Al Mazrouei, who was also a delegate at the industry event.

India is building underground storage facilities at Visakhapatnam in Andhra Pradesh state, and Mangalore and Padur in Karnataka state, with a capacity to store about 5.33mn tonnes of crude oil to guard against global price shocks and supply disruptions. The UAE has also offered two-thirds of the stored oil to India for free, which the Asian nation would be privy to use as a strategic reserve. Moreover, Indian oil and gas companies have also expressed significant interest in acquiring a stake in the Abu Dhabi Company for Onshore Oil Operations (ADCO) concession.

“India is on the verge of replacing Japan as Asia’s second largest consumer of oil and is one of the UAE’s many key trade partners – the third largest in February 2016. The country’s burgeoning demand could help crude prices recover over the long-term, benefitting producers like the UAE, which is also the largest single importer of Indian goods,” Dyala Sabbagh, COO & Partner at Gulf Intelligence, told this publication “The deepening UAE-India relationship is a mutually beneficial one and can only strengthen with deals such as the $75bn infrastructure agreement signed in August 2015.”

Buoyant oil and gas producer

The UAE – which according to consultancy firm Oliver Wyman sits on a huge reserve of 98.63bn barrels, of which 92bn barrels are in Abu Dhabi alone – has however not compromised on its oil production capabilities, and continues to be a dominant oil producer within the OPEC. The UAE currently produces around 2.9mn barrels per day (bpd), with the state-owned Abu Dhabi National Oil Company (ADNOC) accounting for most of it – 2.7mn bpd, which it plans to raise to 3.6mn bpd by 2018.

Through its 15 subsidiary companies, ADNOC produces oil from major fields in Abu Dhabi including the Upper Zakum, with the gas production led by Al Hosn Gas.

“Abu Dhabi is blessed with a highly-attractive geology and has large-scale oil and gas reservoirs that can be produced at a relatively low cost. Such attractive reserves paired with the high degree of political stability in the UAE allow ADNOC to sustain – and even further grow – its oil and gas output in the years to come,” Bjoern Ewers, partner and managing director at the Boston Consulting Group – Middle East, says.

“We are seeing strong signs of ADNOC’s ability to push production further: recent examples offshore include the ongoing efforts by ZADCO to increase the production rate from Upper Zakum from 550,000 bpd to 750,000 bpd. In parallel, ADMA-OPCO is also developing new fields like Umm Lulu, Nasr, and SARB – which, together, are expected to deliver more than 250,000 bpd over the coming years,” Ewers added.

“Also, onshore, ADCO – which is part of ADNOC and is the UAE’s largest oil producing operating company – plans to increase its production from 1.6mn bpd to 1.8mn bpd. In addition to having attractive, large-scale reserves, ADNOC also already partners with world-leading international oil companies, ensuring direct access to global best practices and technologies when required. Thanks to all these factors put together, ADNOC is very strongly positioned to further sustain and grow its oil and gas production in the future.”

Fadhil of ICIS MENA agrees saying, “The UAE will continue to work hand in hand with its international partners not just in a low crude price environment but also in the long run. This will help ensure best practices are in place and both sides can leverage on any potential for synergy.”

When it comes to natural gas, the UAE imports most of it from Qatar, and is reportedly also in talks with Iran to import some in future. The country is reliant on the Dolphin Gas project (the cross-border refined gas transmission project between Qatar, the UAE and Oman) to meet its domestic consumption needs, although ADNOC’s Bab and Shah gas fields remain key assets for gas production. If experts are to be believed, the nation’s dependence on gas imports might soon reduce thanks to some of the measures being taken.

“The UAE is taking significant steps to further increase its domestic gas production. ADNOC’s gas-focussed exploration efforts, the expansion of the Integrated Gas Development programme, Dubai’s recent drilling efforts in the Pre-Khuff as well as other similar activities – including the development of gas production in Sharjah’s Zora field – are strong indications that the country is very seriously working to increase its domestic gas production,” Ewers says.

“Looking ahead, however, the country’s rapid economic development and robust population growth will most likely further enhance and influence the demand for gas. Thus, the UAE will continue to consider other gas import options that extend beyond pipeline gas from Qatar. Other potential alternatives include importing Liquefied Natural Gas (LNG) via a floating vessel. Dubai’s DUSUP has had a floating LNG regasification facility for years and now ADNOC in Abu Dhabi is planning to do the same later this year,” he mentions.

“Looking at the supply-demand balance of gas in the UAE in the coming years, the country will continue to rely on a mix of gas-supply options even in the mid-term. This is despite the fact that ENEC’s (Emirates Nuclear Energy Corporation) nuclear power supply – planned to become operational starting 2017 – will provide some relief to the growing gas demand, which is required to fuel domestic electricity production,” he opines.

Despite not being a party to the preliminary production freeze deal reached between OPEC members Saudi Arabia, Qatar, Venezuela and the largest non-OPEC member Russia, the UAE has shown immense maturity in declaring it will support the deal, provided all OPEC members and Russia comply. It remains to be seen what gets decided at the planned meeting between OPEC and non-OPEC oil producers, which Qatar is hosting in April.

It is widely believed that the UAE, being a responsible OPEC member, will agree to respect the pact (if at all reached) to hold output at an agreed level. However, before committing to any such deal, analysts feel that the parties involved in it must themselves be convinced that their agreement will help in boosting global crude oil prices.

Mazrouei in the past has himself indicated that the UAE has a similar approach, saying, “OPEC tried to hold meetings, but everyone said it wasn’t their problem and that it was someone else’s problem. And that left the supply-demand balance to the market, which was a wise thing to do. If people artificially do something to the market, it’s not going to last. And then the market will expect them to come again if something happens and do it again.”