“When a company faces challenging times,” says a senior Adnoc executive, “it can build a wall or a bridge. Adnoc has chosen the bridge.”
From its newly-opened offices, a panoramic view over the corniche is a reminder of how much the Abu Dhabi state oil major matters to the emirate. Its strategic transformation is a response to lower oil prices, to the choices of its competitors and to the need for it to continue driving the national economy.
The company has come out with a spate of initiatives in recent months: mergers of its offshore operating units in October, the award of shares in its onshore subsidiary Adco to two Chinese companies in February, and discussions for strategic drilling and petrochemical partnerships in July. Last Monday it announced that it would split its offshore Adma concession into two or more parts when re-awarding it next year, and is talking to more than a dozen potential partners.
Also reported,although not confirmed by the company, is the prospect of an IPO of its fuel retail arm, Adnoc Distribution, on the Abu Dhabi stock exchange. But Adnoc has stressed strongly that, unlike Saudi Aramco, it is not planning an IPO of the parent company or of its upstream (oil and gas-producing) units.
The company’s financial management is also changing, with Adnoc said to be in discussions for a US$4 billion to 5bn loan and a $3bn project bond. Money, while always welcome, is not the key incentive either for the debt-raising or the IPOs. Instead, the aims are to optimise the capital structure, and attract new partners who bring finance, markets and new skills.
Adnoc, for long a traditional, staid and cautiously-moving national oil institution, has entered an unprecedented transformation. Along with the headline-grabbing announcements, the internal corporate culture is being reshaped to be more efficient, faster and commercially minded.
Such moves are essential. Oil prices are likely to remain around today’s levels for an extended period, in the absence of a geopolitical upset. Adnoc has quite ambitious plans to grow production capacity from the current 3.1 to 3.5 million barrels per day by next year. But production may be constrained for a while by adherence to Opec limits.
If volumes and price are not growing, the company needs to wring more value out of every barrel. Efficiency and cost-cutting, while vital, go only so far. As other national oil firms are belatedly discovering, it has to create value from integrating refining and petrochemicals, from oil storage and trading, and from retailing fuels.
Adnoc’s competitors are not standing still. As noted, Aramco is looking to list 5 percent of its stock on an international exchange, though it remains undecided on some key details. Kuwait Petroleum Corporation is considering selling some shares in subsidiaries. Oman is divesting shares in drilling, petrochemicals and refining, and oil minister Mohammed Al Rumhy unashamedly says that cash is a key motive.
As Aramco does, Adnoc should see international oil companies as peers and competitors, too. Shell, BP, Total and others recently reported strong results as cost-cutting drives bore fruit. Shale oil producers are driving up productivity with new technology.
Adnoc itself is open-minded to who its new partners may be. Traditional oil companies, traders, firms from key customers such as China, Japan and South Korea, financial institutions and pension funds are all possible players in different parts of the business. Supporting infrastructure, such as gas pipelines, has proved in the US a popular area for specialist investors seeking long-term, steady returns. Most importantly, in keeping with the bridge-building strategy, is that Adnoc is not dogmatic about who its partners should be, and is open to new and creative possibilities.
Some significant questions remain. While other national oil companies have spent heavily on acquiring overseas refineries and retail networks such as Kuwait’s Q8, believing this helps them gain market share, Adnoc has not. Other than some strategic storage in India and Japan, Adnoc has avoided such capital-intensive, inflexible investments. But what will be the future role of Adnoc International, set up with $1bn of capital in December 2015?
And how can the emirate’s other energy investments best support Adnoc’s strategy? Mubadala has a successful overseas oil and gas production business, and Ipic, which merged with it in January, owns international refining and petrochemical plants. About $38bn of the merged group’s assets are in petroleum. It owns 64 per cent of Borealis, which works with Adnoc in the Borouge petrochemical complex, and 24.9 per cent of the Austrian oil company OMV, another partner with Adnoc in exploration and production in Abu Dhabi. Meanwhile, the future of the heavily-indebted Taqa’s oil and gasfields in Kurdistan, the North Sea and Canada is unclear.
Choosing a few from the galaxy of potential partners is a tricky blend of financial, technical and political criteria. The new Adnoc strategy is distinct from its neighbours’, for good practical and historic reasons. The definite new atmosphere of dynamism around Adnoc headquarters is encouraging – the country needs its prime engine to be firing on all cylinders.
Robin M Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis