Japan pushing to retain Abu Dhabi oil concessions: Fuel for Thought

More than half of Japan’s oil concessions offshore Abu Dhabi are set to expire in March 2018 and if they are not renewed in some form it could put Japan’s energy security at stake.

The UAE was Japan’s second largest crude supplier in 2016, supplying an average 807,436 b/d and accounting for almost 25% of Japan’s total crude imports, according to official data.

It is not surprising then that Japan is going all out to woo the UAE’s largest oil producing emirate where it has the largest oil concessions, in the hope of getting the offshore concessions awarded sooner than later.

Japan may have an edge over others due to an over 40-year long history of upstream involvement in Abu Dhabi, and because Japan is the largest buyer of Abu Dhabi crude accounting for roughly a third of their export demand. But the concessions are attractive and the competition for them is expected to be intense.

Tokyo expects to see competition from not only existing equity partners BP, Total and ExxonMobil, but also from US independents, South Korea, China and India.

Abu Dhabi’s Asia focus was illustrated in the awards of the lustrous onshore Adco concession which produces 1.6 million b/d. The previous Adco concession had no Asian companies involved, but now the Japanese, South Koreans and Chinese have ownership there. Japan’s state-backed Inpex was awarded a 5% stake.

Japan depends on imports to meet almost all of its oil and gas needs. It has set itself a target to raise its equity lifting volumes of oil and natural gas to 40% of total supply by 2030 from 27.2% in fiscal year 2015-16 (April-March).

The offshore concessions held by Japanese companies in Abu Dhabi—more than 60% of which are set to expire in March 2018—account for 40% of the country’s global equity-based oil liftings.

Abu Dhabi’s offshore concessions are dominated by the Upper Zakum, Lower Zakum and Umm Shaif oil fields, which produce more than 1 million b/d collectively.

Among expiring concessions, Adma-Opco’s Lower Zakum has an estimated capacity of 325,000 b/d while the Umm Shaif field can produce 325,000 b/d b/d. Each field has capacity expansions of 100,000 b/d underway.

Equity volumes at risk

In terms of import volumes, the expiring stakes account for roughly 5%, or less than 200,000 b/d, of Japan’s crude imports of around 3.37 million b/d. It is seen as critical to Japan’s energy security because of its accessibility as Abu Dhabi’s equity oil and because of its competitive production costs.

Among Japanese companies with stakes in Abu Dhabi’s offshore concessions, Inpex has the largest presence through its wholly-owned subsidiary Japan Oil Development Co.

Roughly half of Inpex’s around 520,000 b/d of oil equivalent net production comes from its concessions in Abu Dhabi, of which 20% is due to expire in March 2018, according to S&P Global Platts calculations.

Tokyo sees Inpex, in which the Ministry of Economy, Trade and Industry has an 18.94% stake, as Japan’s core upstream company for energy security.

High-profile visits by ministers, storage deal extensions and loans are all part of Japan’s efforts to retain these concessions.

In January, METI agreed to extend state-owned Abu Dhabi National Oil Co.’s 6.3-million-barrel crude oil storage lease at Kiire in Japan’s southwest.

A Japanese banking consortium last year signed an agreement to lend up to $3.3 billion to state-owned Abu Dhabi National Oil Co., aimed at providing support towards retaining stakes in the offshore oil concessions. This was the fourth of its kind from the consortium after three rounds of $3 billion loans each in 2007, 2010 and 2013.

State Minister of Economy, Trade and Industry Yosuke Takagi is the latest to visit the emirate in late March. His visit came just two months after METI Minister Hiroshige Seko’s visit in mid-January.

Japan was given a positive message during Seko’s visit when ADNOC, which holds a majority stake in the concessions, confirmed a basic agreement with Inpex to extend its concessions in two offshore oil fields—Satah and Umm al-Dalkh—by nearly 25 years to December 2042.

The two fields produce around 35,000 b/d of crude combined, which is blended into Upper Zakum crude. Although the fields represent only a small portion of expiring offshore oil concessions in Abu Dhabi, the agreement has been taken as a positive sign by Japan.

But as METI’s director of oil and gas division Yuki Sadamitsu told S&P Global Platts in January: “The signing is a very positive message from ADNOC and the UAE. But we shouldn’t be complacent.”