UAE industry forecast

Dubai Petroleum Company (DPC) is the main upstream operator in Dubai, representing a JV between the government and US-based ConocoPhillips. The state-owned Dubai Natural Gas Company (DUGAS) is responsible for processing natural gas produced in Dubai’s offshore oil fields as well as the gas piped from Sharjah. The second main producer is Abu Dhabi Marine Operating Company (ADMA-OPCO).

IOCs from Japan, France, the UK and others own up to 40% of the energy sector in Abu Dhabi, the only Gulf oil producer to have retained foreign partners on a production sharing basis. ADNOC holds the majority stake in all upstream oil ventures and is currently planning a limited further opening of oil production to foreign firms. The initial asset sale involved 28% of the offshore Upper Zakum field, to US major ExxonMobil.

The US group in 2007 ironed out the details on Abu Dhabi’s Upper Zakum deal, allowing it to begin work on the giant field. Upper Zakum has been in production for years, but Abu Dhabi wants ExxonMobil to extend its life and boost recovery rates.

The company hopes ultimately to raise production from the 550 000 bpd field to 1.2 million bpd by 2010, reaching 750 000 bpd in 2008. It won the stake back in 2004 in a hotly-contested round which saw the likes of Chevron, BP and Total in the running.

For Abu Dhabi itself, the Upper Zakum project is key to its capacity expansion plans, with ADNOC planning to spend US $10 billion over the next few years to boost oil production capacity by 1.25 million bpd.

Oil and gas reserves

BMI’s view is that the UAE’s proven oil reserves will slip gradually over the period to 2012, dropping to 93.6 billion bbl. Exploration and development activity is now on the rise, but may not be sufficient to maintain the current reserves position while delivering rising output. However, we see scope for some expansion of gas reserves, perhaps to 6 220 bcm over the next five years.

Oil supply & demand

UAE crude supply rose to 2.67 million bpd in June 2008 from 2.66 million bpd the month before. Sustainable capacity is estimated at 2.85 million bpd, and there is unlikely to be significant output expansion over the very near term.

Growth in the UAE comes from Abu Dhabi, where investment at onshore fields feeding the Murban crude stream is bearing fruit. Murban’s capacity, which stood at 1.2 million bpd in 2005, is expected to average 1.58 million bpd in 2008. Longer-term expansion from Abu Dhabi is likely to shift offshore, to the Upper Zakum and Umm Shaif fields. The impact of these projects is likely to be felt only at the end of the forecast period.
 

Several projects to upgrade infrastructure at existing oil fields are on the cards or under way.

There is a US $300 million project to increase the capacity of the onshore Bu Hasa field. The goal is to increase capacity to 480 000 bpd. A gas re-injection project is also planned for the onshore Bab field, which is expected to increase capacity to 350 000 bpd.

Upgrades planned for the onshore Asab field should boost capacity from 280 000 bpd to 310 000 bpd. These projects are part of an overall goal of raising the UAE’s production capacity to 3.5 million bpd by 2010, a target that is considered achievable. ADNOC will spend US $10 billion on field developments, according to media sources in June 2008.

The offshore oil and gas production unit of ADNOC is aiming to boost oil production by two-thirds to 1 million bpd by 2019. Abu Dhabi Marine Operating Company (ADMOC), in which Total, BP and Japan’s Inpex Corporation are shareholders, will raise oil output by 50% ‘within the next few years’, said Ali al-Jarwan, general manager of ADNOC in the company’s house magazine.

Earlier plans to boost capacity to 4 million bpd by 2010 now look extremely optimistic. ADNOC brought in ExxonMobil in June 2004 as a strategic partner in the development of the Upper Zakum field, with a 28% ownership stake.

ExxonMobil is set to undertake a programme of upgrades to the Upper Zakum field to raise its capacity from the current 550 000 bpd to 750 000 bpd by 2008, and to 1.2 million bpd by 2010.

Actual crude production could reach 3.30 million bpd by 2012. We are assuming total 2008 production averaging 2.97 million bpd (including gas liquids), providing exports of 2.52 million bpd.

Gas supply & demand

Over the last decade, gas consumption in Abu Dhabi has doubled. The development of gas fields also results in increased production and exports of condensates, which are not subject to OPEC production quotas.

Dubai’s gas consumption has been growing by nearly 10% annually, due to the expansion of the emirate’s industrial sector, a switch to gas by its power stations, and the need for an enhanced oil recovery (EOR) system based on gas injection for its mature oilfields.

Overall UAE gas consumption is forecast to reach 62.9 bcm by 2012. Production of gas is on the rise, with 85bcm achievable by 2012 – providing exports of 22.1bcm.

The Thamama formation in Abu Dhabi is the third phase of the Onshore Gas Development (OGD) to bring 12.4bcm of gas from the Thamama F reservoir at the Bab field by 2008. Shell and ExxonMobil are also involved in technical studies for gas development at Shah and Bu Hasa respectively.

According to French oil company Total, UAE’s sour gas reserves, which national operator ADNOC plans to develop in a JV with IOCs, are only estimated to produce 10.2bcm per annum, a third of the original estimate of 31bcm.

Although some of the largest IOCs, including BP, ConocoPhillips and Total, have confirmed their interest in bidding for the project, it remains to be seen whether their enthusiasm will diminish due to the apparently much lower production levels.

In May 2007, ADNOC’s onshore division Manager Mohamed Bin Juma confirmed Total’s prediction, stating that production could lie anywhere between 5.1bcm and over 10.2bcm per annum.

The project is still expected to cost about US $10 billion. ADNOC has asked IOCs to make bids based on different production plateau rates, as costs will depend on how much gas is produced. According to an ADNOC official, the contract will be awarded in Q3 08, following a series of delays.

In February 2006, the UAE’s Dolphin Energy said that it plans to buy additional gas from Qatar to fill the Gulf’s first cross-border gas pipeline project. Dolphin in 2007 apparently sought to purchase an additional 12.4bcm per annum of Qatari gas to feed a new gas pipeline grid connecting the Gulf States.

The gas would then be exported by pipeline to neighbouring countries and should eventually be linked with a future GCC wide gas network. The GCC states are already in the process of linking their power generation networks to help cope with rising demand for electricity throughout the region.

However, Dolphin’s desire to boost by 60% the volume of gas that will flow through its US $3.5 billion underwater pipeline from Qatar, starting in 2007, may hinge on Qatar’s giving it preferential treatment over other waiting customers.

In November 2006, Qatar had said that it could not take on any new customers before 2007 because of capacity constraints. There are now suggestions that spare volumes of gas will not be available until beyond 2012.

Dolphin has awarded Russia’s Stroytransgaz a US $418 million construction contract to build the Taweelah-Fujairah gas pipeline. Six companies had originally bid for the contract, of which three were shortlisted – Stroytransgaz, Greece’s Consolidated Contractors International, and Italy’s Saipem. According to Dolphin, construction at the pipeline will begin during Q3 08. Dolphin expects the pipeline will be commissioned in 2010.

Four major IOCs have now submitted bids to develop the Shah sour gas field. ConocoPhillips, ExxonMobil, Occidental and Shell have all made offers to ADNOC in the hope of being awarded a 40% stake in one of the largest projects open to foreign investment.

The gas in the Shah field has a content of around 30% hydrogen sulphide, which is highly toxic, making production much more testing and expensive than conventional gas development. Despite this, as technology has improved over recent years and oil and gas prices have risen, the exploitation of sour gas reserves has become profitable.

The latest tender for the Shah field follows the cancellation of an earlier tender in July 2007 for both the Shah and Bab fields, after a period of escalating cost projections and a downgrading of the potential output volumes from the project.

ConocoPhillips signed a landmark deal to develop the Shah field, holding a 40% share while Abu Dhabi Gas Industries Co (Gasco) retains the remaining 60%, according to an ADNOC statement.

The two companies will share development costs and although ADNOC did not reveal the value of the agreement, it is expected that the project will cost at least US $10 billion.

While no further details have been released, the deal is expected to allow Conoco to book new reserves from the Shah field, in line with similar deals between ADNOC and other majors such as ExxonMobil and BP.

Crescent Petroleum, based in the UAE, has said that it is optimistic that it will finalise a gas import deal with Iran, despite opposition from Mohammad-Reza Rahimi, Iran’s vice president for parliamentary affairs. Crescent Petroleum and Iran have been negotiating terms over gas supplies from Iran to UAE since 2006.

According to Hamid Zaheri, Crescent’s general manager in Iran, the two sides continue to disagree over the price and volume of gas exports. Crescent has been looking to buy gas from Iran’s offshore Salman field since 2006. The company had expected first gas deliveries of 6.2bcm annually in mid-2006.

LNG

Abu Dhabi Gas Liquefaction Company (Adgas) – a JV between ADNOC, Japan’s Mitsui, and oil majors BP and Total – in November 2005 invited contractors to submit technical and commercial bids for a feasibility study contract to suggest options for replacing two of its ageing LNG trains at Das Island with one ‘mega-train’.

Companies invited to bid included the UK’s Costain Oil, Gas & Process, Australia’s WorleyParsons, US companies Foster Wheeler and Fluor, as well as Japan’s Chiyoda Corporation. For its new ‘mega-train’, Adgas is looking for a base capacity option of 5-8 million tonnes per annum.

Dubai has announced that the construction of its US $1 billion LNG storage facility will begin in early 2008. The Dubai Multi Commodities Centre (DMCC) hopes that the facility, which will be located at Techno Park in Dubai, will be used to launch an LNG derivatives market.

This is the first project of its kind in the world. The project is operated by a JV between DMCC and LNG Impel, which was formed in May 2006. DMCC, as an equity-providing owner, will only hold a 10% stake in the project. Impel will own around 20-30%, with customers having the right to buy
equity stakes.

The project is expected to eventually have a storage capacity of between 1.1bcm and 1.8bcm, depending on how many customers the facility will have. No regasification facilities have been planned.

DMCC will select about 10 companies, which will use the facilities on a long-term basis. In November 2006, the project attracted its first five customers, which allows the initial construction of 11 tanks, each holding 200 000 m3. The three-stage project is set to be completed by 2013.

Shell has signed a 15-year agreement with Dubai, under which it will sell Dubai 1.5mn tpa of LNG in the peak demand summer period from 2010. According to Shell, much of the LNG will be sourced from Qatar, while some volumes will come from elsewhere in Shell’s global gas portfolio.

Refining and products trade

The UAE has two refineries operated by ADNOC. The Ruwais refinery originally had capacity of 120 000 bpd. An upgrade project to expand capacity to 500 000 bpd was completed in 2005, including refits of existing units and expansion of units for production of unleaded gasoline and low-sulphur fuel oil.

The plant produces light products mainly for export to Japan and elsewhere in Asia. Fuel oil from Ruwais is sold as bunkers by ADNOC and also used for domestic electric power generation. The Umm al-Nar refinery, also owned by ADNOC, has a capacity of 88 000 bpd. Since its construction in 1976, the Umm al-Nar plant has undergone de-bottlenecking as well as a recent expansion.

Abu Dhabi’s investment arm IPIC and ConocoPhillips signed a deal in 2006 for a new refinery with 500 000 bpd capability. Conoco pulled out in 2007 citing rising costs and IPIC announced in March 2008 that the plant’s capacity would be reduced to less than 200 000 bpd.

Quality Energy Petro Holding International, which is owned by a member of Abu Dhabi’s al-Otaiba family, plans to build a US $13 billion oil refinery in the UAE and seek Iranian crude as feedstock.

This would dramatically increase the refining capacity of the emirates, as well as strengthening links with Iran. Quality Energy intends to build a 500 000 bpd complex with the government of Russia’s Chelyabinsk region, in which the company plans to invest US $100 billion between now and 2012, according to Chairman Adil al-Otaiba.

He explained that the Chelyabinsk government is negotiating with Iranian authorities to provide the crude for the UAE plant. Quality Energy is in talks with the rulers of one of the UAE’s northern emirates about building the plant, he said, without giving a date for the start of construction or a final location. This suggests that plans are at a very early stage and may not come to fruition, given the complex multi-party nature of the proposal.

Revenue/Import Costs

The BMI base case assumption sees the OPEC basket oil price average US $96/bbl in 2009, then averaging US $90/bbl in 2010-12. These assumptions imply crude export revenues of US $96.52 billion in 2008, easing to US $90.85 billion by 2012.

As domestic gas production is expected to provide exports of 22.1 bcm by 2012, there will be additional revenues of US $6.78 billion, taking the end-period total for hydrocarbons exports to US $97.63 billion.