Long term oil concessions to expire and with them, old relationships

Some oil deals have lasted a human lifetime but are finally coming to an end.

One of the unintended outcomes of Abu Dhabi's 70-year-old oil concessions is that some of the income from the emirate's exports now goes towards maintaining a Portuguese museum housing a collection of art ranging from 3,000-year-old Mesopotamian low-reliefs to modern Lalique jewellery. The Calouste Gulbenkian Museum on the outskirts of Lisbon is a bequest of the oil entrepreneur of the same name, who became known as "Mr Five Per Cent" for his ability to cut himself into oil deals such as the Abu Dhabi concessions, signed from 1938.

Having amassed a huge oil fortune during his lifetime, Mr Gulbenkian left his oil company, Partex, and art collection to a charitable foundation that runs the museum. Abu Dhabi's oil concessions, unlike others in the region, have survived seven decades including a world war, independence and a wave of nationalisation, so some of the money still flows into the coffers of Partex today. The fact that these concessions have remained in place for so long has earned Abu Dhabi an enviable reputation in an industry with a very long memory. And today, the deals give the emirate unrivalled value for money, with just US$1 a barrel paid to its private sector partners, including ExxonMobil, Shell, BP and Occidental, that have a 40 per cent share in the concessions.

However, the 75-year concessions are due to expire within the next six to 10 years, and this is already causing problems for both sides. The approaching deadline means the foreign partners are reluctant to invest in new projects because there is not enough time to reap returns, so investment has failed to keep up with expectations and production capacity has stalled at about three million barrels daily.

To compensate for the lack of incentives, the Government has offered its partners some extra revenue in the form of accelerated depreciation of assets, which allows them to recoup investments more quickly. But this stopgap measure only puts off the day when the Supreme Petroleum Council, chaired by Sheikh Khalifa bin Zayed, President of the UAE and Ruler of Abu Dhabi, will review the governance structure of the emirate's economic mainstay.

The review happens to come at a very advantageous time from the Government's perspective. Oil production in the North Sea and the Gulf of Mexico has peaked, increasing the global hunger for new oil assets. Resource nationalism, as seen in Russia and Venezuela, has limited the number of investment opportunities, while growing global demand for energy has pushed prices to a record high. When the concessions expire, the Government would be within its rights to take back the pumping stations, pipelines and terminals at no charge and wave its foreign partners goodbye. But such a scenario is unlikely. Insiders expect the Government to renew alliances with multinationals to ensure access to the best technology and management expertise, particularly at a time when some of its older fields require the latest technology to maximise recovery of the remaining resources.

Historically, the involvement of the biggest names in Western oil and gas has also been seen as an important element of national security policy. But there will undoubtedly be changes. The concessions could shrink. The foreign faces could change. The role of Adnoc, the national oil company that now holds 60 per cent of the sector, could be modified. The council could decide to stay with fixed-fee concessions, adopt elements of the production sharing model favoured by the private sector, or try service contracts more prevalent in nationalised oil industries.

One problem with these traditional solutions is that they all end up creating the same problem that Abu Dhabi has today - namely, a misalignment of incentives between the owner of the asset, in this case the Government, and the operators, who are Adnoc and its foreign partners, especially when the end of the concession nears. If the emirate wants to maximise the value of its oil resources, some believe a new "life-of-field" concession would achieve the best outcome, particularly for the older fields. In the US, for example, some operators have achieved recovery rates as high as 80 per cent because they are also the owners of the asset, and therefore perfectly aligned. In the worst cases of misalignment, operators with expiring concessions have pushed production rates too far, violating the integrity of reserves and leaving large deposits with little prospect of ever being brought to the surface.

In the case of Abu Dhabi, with almost a century of reserves at current production rates, a "life-of-field" concession might not be appropriate for the largest, youngest fields, given that they might outlast the oil companies. And certainly it would go against the tide of resource nationalism now visible in Iraq, for example, where that government appears to be favouring fixed-term service contracts.

One thing is for sure, the ghost of Mr Gulbenkian will not keep his cut when these concessions expire. But from the art lovers' perspective all is not lost. Partex has branched out from its roots in Abu Dhabi and Oman in the past few years, and now has interests in Kazakhstan, Brazil and Algeria to keep the collection on show, Mesopotamian low-reliefs and all. @Email:[e-mail]