Many reasons for cautious process on Abu Dhabi’s onshore oil concessions
This time last year the air was thick with speculation about Abu Dhabi’s coveted onshore oil concessions, the award of which is worth billions to the international oil companies that secure them and is of prime importance to the people of the emirate.
The 15 onshore oilfields – collectively know as the Abu Dhabi Company for Onshore Oil Operations, or Adco – account for more than half of the country’s oil output, though that is projected to be overtaken by offshore production within a few years.
Even a year ago, the question was why had it taken the Supreme Petroleum Council and its technical advisers so long to evaluate and decide upon the proposals it had received?
The previous concession had run out at the end of the prior year and all of the interested parties – which included four of the previous concession-holders, excluding Exxon Mobil – had made multiple presentations, as had a number of prospective new partners.
Anticipation was building that Abu Dhabi National Oil Company (Adnoc) would announce the decision at the big international oil gathering in the capital – Adipec – next month. But Adnoc did not announce the first major concession – granted to Total of France – until the following January, and then two others – to Japanese and South Korean interests – over the next five months.
Now, a year later and with Adipec on the horizon again next month, and with still more than half of the 40 per cent of Adco’s foreign stake unallocated, oil industry executives again are starting to murmur – “What’s up with the Adco concessions?”
The delay should not be surprising given the two big challenges the Abu Dhabi oil decision-makers must face.
One is that they must evaluate the partnerships for the next two generations in lieu of a changing global economy. Much of the talk since the concessions expired has been of the “shift to the east” – the growth of Asia’s developing economies, particularly China, which has meant more than 90 per cent of Abu Dhabi crude now is absorbed by Asia’s refiners.
Adnoc’s loyal, long-term contractual buyers were recognised by the Adco parcels allocated to Japan’s Inpex (5 per cent) and South Korea’s GS Energy, backed by Korea National Oil Corp (3 per cent). Japan bought 30 per cent of Abu Dhabi’s crude oil output last year, with South Korea buying 12 per cent.
It has been expected that one of China’s state oil companies would also get a piece given its growing importance.
But the events of the past year or so must be giving Adnoc some pause.
It is not that Asia will not continue to be the main engine of oil demand growth for the next few decades, but that since the old concession expired the state company has learnt that the lack of flexibility in its marketing system meant that it had to rely on the big international oil companies for help when market conditions turned rough.
More importantly, perhaps, they will have seen that China is determined to keep its own flexibility – as shown by deals with Russia and others, which have eaten into Arabian Gulf suppliers’ market share – as well as by its recent efforts to exert control over the pricing of Gulf crudes.
China’s state companies for several months have been dominant buyers and sellers of Gulf grades, and a new oil futures market in Shanghai – which is planned to launch before the end of the year – will provide another tool to exert control. The other main factor that the Abu Dhabi oil authorities have been wrestling with is the sector’s fast-changing technology.
The oil industry in Abu Dhabi is only about two generations old and there has been a concerted effort to educate and build indigenous talent capable of running the industry in a manner that will extract maximum benefit for the country.
Even if the international oil companies have had a relatively good relationship with the country over the decades, there is still residual wariness because of the industry’s historical swashbuckling – some would say piratical – reputation over the years.
The need for highly technical education to evaluate the merits of oil development proposals has become more acute than ever. Abu Dhabi’s authorities have set an extremely high target recovery rate for Adco – 70 per cent – which can only be achieved by using the most cutting-edge technologies to manage large reservoirs.
As one independent scientist advising the government puts it, the oil industry is not above exaggerating its ability to apply technological know-how that worked somewhere else in the world to the local fields. And it is fair to say that Adnoc has hitherto not invested enough in its own research talent to confidently evaluate those bids.
So, with these big commercial and technological challenges to come to grips with, another Adipec may go by without the final pieces of Adco falling into place.
This continues our series of weekly analysis articles by a rotating group of The National’s beat reporters. Anthony McAuley covers energy
Updated: October 1, 2015 04:00 AM