IHS Global Insight Perspective | |
Significance | ADNOC has outlined many of the same investment targets before, but recent contract awards speak of a greater commitment to realising domestic capacity expansion, with a headline target of 3.5 million b/d oil capacity for the end of the decade, from around 2.8 million b/d today, with spending also laid out for gas and petrochemicals. |
Implications | Providing investor incentives and clarity will be a key element to success, with a number of major projects still to attract foreign partners, notably Shah and Bab sour gas. Meanwhile, uncertainty persists on the fate of the two main oil concessions onshore and offshore where licences are due to elapse in 2014 and 2018, with limited time available for recouping new investment costs. |
Outlook | This is a counter-cyclical push by Abu Dhabi, which was virtually inactive during the last oil cycle but is now investing ahead of any significant global demand growth to help cement its position in the oil market and also support the domestic demand balance, which remains particularly acute for gas. |
Let's Try That Again
Abu Dhabi National Oil Co. (ADNOC) has confirmed a capital expenditure programme of US$60 billion over the next 10-year period, to cover its share of spending in oil, gas, and petrochemical projects, according to comments from chief executive, Yousef Omair bin Yousef.
The major expenditure outlined—and indeed many of the projects identified—are nothing new for the state player, except that this time around there are more signs of a focus on realisation, with contract awards, tenders, and negotiations already in hand for a number of projects. These include the renewal of talks on private participation in the Shah sour gas scheme, which was notably abandoned by project partner ConocoPhillips earlier this year, leaving ADNOC alone with a technically challenging US$10–12-billion programme that will supply up to 540 mmcf/d of gas for the energy-hungry domestic market. To its credit, ADNOC has since moved forward with over US$5.6 billion of tender awards, including three contracts for Saipem, one to Samsung, another to a partnership of Tecnicas Reunidas and Punj Lloyd, and a project management award to Fluor Corp., with a target to produce first gas by mid-2014 (see United Arab Emirates: 13 July 2010: Costs Cut Further As Abu Dhabi Signs More Shah Sour Gas Contracts Worth US$3.6 Bil.). ADNOC has said that it will still go it alone on the project if necessary, but would prefer external input; talks are confirmed with Shell, ExxonMobil, and Occidental and there is room for others too, according to comments this week. Shah is one of the two sour gas initiatives tendered in 2007, and the 1.3-bcf/d Bab is also set to be retendered in due course, with Total again positioning itself as a front-runner.
In the oil sector, ADNOC has outlined a further US$5 billion of its capital expenditure, on top of the US$5 billion already spent, in efforts to realise its much-delayed 3.5-million-b/d target, where it hopes to sustain production for some time. That same (or near on) upstream capacity target has been a rather movable feast in recent years—first tabled for 2009, then 2012, then recently 2018–19, and now apparently back to end-2016—but the important point is that relevant awards are now taking place and tenders taken to the market. Onshore, where Bab, Qusahwira, and Bida al-Qemzan are the focal points, the first "building block" is a 213,000-b/d boost planned for 2012, with a further 200,000-b/d increment for 2016–17, according to the chief executive of the Abu Dhabi Company for Onshore Oil Operations (ADCO), Abdul Munim Saif Al Kindy (see United Arab Emirates: 28 October 2010: Abu Dhabi's ADNOC on Track to Add 213,000 b/d of Crude Capacity by 2012, Launch Second Phase). He recently estimated the average cost of production for the additional capacity at US$6–7/b, and up to US$30/b for the smaller, more capital-intensive fields, which will become an increasing share of the emirate's production on account of declines at larger fields. ADCO, which involves a partnership of ADNOC alongside BP, Total, Shell, and ExxonMobil as well as Partex, will thereby see its output rise to 1.8 million b/d from the current 1.4 million b/d.
Offshore, the Abu Dhabi Marine Operating Company (ADMA-OPCO) consortium, including ADNOC, BP, Total and Japan Oil Development Co. (JODCO), is preparing to receive bids for over US$500-million-worth of contracts for the Umm al-Lulu and Nasr field developments, according to industry publication Upstream. Technical bids for Umm al-Lulu and Nar are due to be submitted this month, followed by commercial bids in December, with production from the two fields set to reach 150,000 b/d. That will support ADMA-OPCO's target to increase output to 1 million b/d from around 600,000 b/d today, with important contributions to be made from existing producers, Lower Zakum and Umm Shaif supported by enhanced oil recovery. In this regard, ADNOC recently awarded a 1.287-billion-dirham (US$350-million) engineering, procurement and construction (EPC) contract to McDermott International (McDermott) to upgrade Zakum field's water injection system (see United Arab Emirates: 16 August 2010: McDermott Signs US$350-Mil. Lower Zakum Field Water Injection Upgrade Contract in Abu Dhabi). Total offshore output is being targeted at 1.75 million b/d from around 1.1 million b/d, with contributions coming from the Upper Zakum field run by the Zakum Development Company (ZADCO, comprising ADNOC, ExxonMobil, and JOGMEC). The field was awarded earlier in the decade, but limited progress has been registered to date, understood to relate to greater-than-expected complexity of the reservoir, higher-than-expected costs, and the availability of associated gas for reinjection purposes.
How to Spend It: Key Abu Dhabi Capacity Additions | ||
Focus | Partners | Spending |
Oil Capacity Expansion | ADMA-OPCO, ADCO and ZADCO | ADNOC: US$5 bil. to 2015 (US$5 bil. already spent) |
Gas Expansion | Under discussion | Shah and Bab (US$10–12 bil. apiece) |
ADGAS, GASCO (ADNOC, Shell, Total, and Partex) | Integrated gas development (IGD) project: under way for 2013 at a cost of US$11 bil. using gas from ADMA-OPCO fields, Umm Shaif, and Lower Zakum | |
Petrochemicals | ADNOC-Borealis | US$4.2–4.5 bil. for Borouge 3 |
Associated gas extraction has perhaps been the main success of the last decade in the United Arab Emirates. The latest project using gas from Umm Shaif and Lower Zakum is due for completion in 2013 at an estimated cost of US$11 billion, with capacity to produce some 900 mmcf/d of sales gas and 12,000 tonnes/day of natural gas liquids (NGL).
Outlook and Implications
While targets for capacity or spending are not a new thing for ADNOC—as shown by the frequent appearance of the 3.5-million-b/d-capacity figure—there does seem to be a new desire for implementation from the Abu Dhabi state player and its partners, particularly where oil is concerned. This has been supported by the recent breathing space in international project costs after the inflationary pressures of the 2006–08 period when limited inroads were made in the emirate's expansion plans involving many of the same fields. While some of those project delays have stemmed from issues with partners, notably ConocoPhillips's withdrawal from Shah gas on the basis of a change in its corporate strategy, contract uncertainty and relatively low returns have been another element, only partially redressed in the latest drive. Of continued concern is the lack of clarity still on the fate of the ADMA-OPCO and ADCO consortia arrangements, which are due to expire in 2018 and 2014, respectively, although the ZADCO lease at least has a longer run ahead of it (to 2026). A temporary agreement was reportedly reached with ADCO for an accelerated cost recovery mechanism, which will be paid back in full by 2014 when the concession is set to expire, but it is unclear if this has also been agreed for the offshore players, who also look set to run up against contract expiry even on the most generous timeframe outlined of 2016. For outsiders, this uncertainty represents a potential opportunity in the form of a rare entry point into Gulf legacy fields, with Statoil the latest player to express an interest in expiring leases. Without early clarity though, there is a chance that project realisation on the onshore and offshore oil expansion programmes may come to an abrupt halt as the partners wrestle with limited returns and limited incentives. Illustrative of some of the issues, ExxonMobil has this week called for the ability to withhold information from its partners in the ADCO and ZADCO consortia, in order to prevent the "leakage of propriety technology" inherent in the existing working arrangements.
Regardless of some of the challenges, it is clear from recent awards that at least some of these new projects are likely to be realised, resulting in a boost to Abu Dhabi's oil capacity. At the tail end of a global recession with over 5 million b/d of OPEC oil held back, some may question the timing of this initiative, which coincides with limited growth from other regional producers outside the dynamic, but troubled, Iraq. The motivation seems to stem from a desire to maintain Abu Dhabi's status as a key oil producer—and to unlock new (and almost by default, more complex) resources as cheaply as possible to start the process of supplementing, and potentially displacing, the maturing fields before depletion starts to seriously eat into its availability, status, and revenues. That the world market is only just recovering from recession is not necessarily a bad thing given the contract and development periods involved and the likelihood of demand recovery in time; ADNOC is potentially well positioned to take advantage of relatively lower costs at this stage rather than when recovery begins in earnest.