Expect Abu Dhabi to keep looking east for strategic oil partners

The technical skills of the various Asian companies should not be underestimated … but the breadth and depth of their experience still does not compare to that of the western super-majors.

After a long wait, the future shape of Abu Dhabi's oil concessions is emerging. And in line with global energy trends, it marks a sharp turn towards Asia.

On April 27, it was announced that Japan’s Inpex had been awarded 5 per cent in Abu Dhabi’s Adco oil concession, which covers most of the emirate’s onshore fields. On May 9, GS Energy of South Korea took a further 3 per cent. Total of France had earlier secured 10 per cent, leaving a possible 22 per cent still up for grabs, with Adnoc holding a 60 per cent controlling stake.

Jodco, an Inpex subsidiary, already holds a stake in the Adma and Zadco concessions – the latter expires in 2018 – while other Japanese companies hold some small fields. Korea National Oil Company and China National Petroleum Corporation are exploring other fields under deals awarded in 2012 and 2014. The awards to Inpex and GS mark a further advance of Asian players in the emirate.

Adco has about 100 billion barrels of oil in place in its fields, and ambitions to recover 70 per cent of the oil. It is the largest oilfield asset to come up for auction for many years, bigger than the giant Iraqi fields that were assigned to international companies in 2009 and 2010, or than any single project a sanctions-free Iran is likely to offer. And it offers low-cost reserves in a politically stable country, albeit under stringent fiscal terms.

Over the 40-year life of the renewed Adco concession, according to my calculations it will generate some $1.5 trillion or more in revenues after costs, of which more than $1.4tn will accrue to the government of Abu Dhabi. In this context, a signature bonus of $1.1 billion, as Inpex paid, is trivial. What is key is to secure the best companies that can minimise costs, maximise the amount of oil recovered, and secure markets for it.

This is where Abu Dhabi faces a difficult decision with the remaining available stake. Having only Total of the super-major oil companies is undesirable, as it would give too much influence to a single company. But equally the emirate would not want to backtrack on its fiscal demands to accommodate BP or Shell, which are considering matching Total’s reported $2.2bn bid for 10 per cent of Adco.

For their part, the companies would remember previous bad decisions to exit major Middle East projects: BP sold part of its stake in Adma to Jodco in 1972, Shell left Qatar in 1982 and had to exert great efforts ultimately to return, while BP pulled out of the Qatargas liquefied natural consortium in 1992 – and has never come back. But Shell in particular would also recall the great expense, under very unfavourable terms, to enter Saudi Arabia's Rub' Al Khali to explore for gas, which has yielded nothing commercial.

The technical skills of the various Asian companies should not be underestimated – Inpex in particular operates some major projects such as the massive Ichthys LNG venture in Australia. But the breadth and depth of their experience still does not compare to that of the western super-majors, particularly in technically more challenging projects, or – with the exception of the Chinese – in wringing the last drops from mature fields.

With Japan and South Korea its largest oil customers, and China catching up, it is inevitable that Abu Dhabi, like its Middle East neighbours, will increasingly look East for strategic partners. Such companies are willing to pay highly for access to resources, and emerging Asian countries are the only global bright spot for commodity demand.

Yet traditional western partners still offer top-class technical skills and security guarantees. Asian entrants may also have to deepen political and military engagement to safeguard their new assets. With 40-year concessions on offer, all sides have to make irreversible choices now, for the radically different world of 2055.

Robin Mills is head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis

Follow The National's Business section on Twitter