Western firms risk being left out as emirate looks to Asia for new industry partners
New York Times 31 October 2014
Abu Dhabi, the largest and wealthiest member among the seven states in the United Arab Emirates (UAE), is shaking up its oil industry. It has allowed the expiration of some long-standing concessions to major Western oil companies and is considering replacing at least some of them with partners from Asia and elsewhere.
For more than seven decades, the Abu Dhabi National Oil Company (Adnoc) shared the operation of Abu Dhabi’s oil fields, the biggest onshore producers in the UAE, with companies including ExxonMobil, Royal Dutch Shell, Total and BP, under the umbrella of the Abu Dhabi Company for Onshore Oil Operations.
The concessions, for 75 years, expired in January, but Abu Dhabi has yet to say which of the Western companies will have their rights renewed. There are also likely to be new entrants, possibly including Statoil, the Norwegian oil and natural gas company; less technologically skilled companies from emerging markets such as China and South Korea might join it, according to Adnoc officials.
The potential inclusion of new partners reflects the changing economic realities in Persian Gulf nations. With oil production in the United States surging thanks to the boom in oil extraction from shale rock and with demand for oil in Europe stagnant, the big oil producers are sending their crude eastward.
The Gulf countries are also moving from long-standing reliance on technology and expertise from the US and Europe towards new business partners in Asia and elsewhere.
Behind the change is a seismic shift in the oil market. China overtook the US as the world’s largest oil importer last year, while South Korea is also one of the world’s top five crude importers. Gulf countries are now thinking that it is in their interest to build partnerships with these countries through their oil companies.
Analysts say that Asian countries have helped their case by largely staying out of the politics of the region while Western countries have a long history of involvement, including criticism of regional governments’ human rights records. Staying out of politics is appreciated by Gulf nations, which have become increasingly sensitive since the onset of the Arab Spring, in late 2010, and the ensuing disorder that has spread throughout North Africa and the Middle East.
“The idea of Asian countries’ being given strategic stakes in the UAE oil sector is important, but it is easy to overstate in the sense that relations are largely commercial rather than political,” said Ben Simpfendorfer, managing director of Silk Road Associates, a Hong Kong consulting firm that advises companies on developing business strategies in Asia and the Middle East. “It’s more a rebalancing of a historical over-reliance on the West.”
The oil fields awaiting new concessions produce about 1.5 million barrels of oil a day, more than half of Abu Dhabi’s total output, now about 2.8 million barrels per day. When it decides on the new concessions, Adnoc is expected to include companies with advanced technical knowledge to help meet its target output of 1.8 million barrels a day from the onshore fields by 2017.
In recent years, Western companies have been left on the sidelines on some significant deals in the UAE. For instance, it awarded a US$20 billion nuclear power plant deal to a South Korean-led consortium and a US$4 billion, cross-country oil pipeline project to Chinese contractors.
The Western companies have already seen their position in the local oil industry slip in recent years as new fields went to the Korea National Oil Corporation and the China National Petroleum Corporation.
Western companies appear almost certain to lose some of their hold in the UAE as rivals from other regions are willing to give more competitive terms to gain entrance to a potentially lucrative market.
On the nuclear project, for instance, the South Korean group undercut rival offers from France. Companies are expected to make business proposals to Abu Dhabi this autumn, with final awards to be made this year so that the new consortiums can begin work at the start of 2015. But the process may be slow, because awards were initially expected well before the concessions expired in January.
Western companies may struggle to achieve what they think are good deals in Abu Dhabi. Fees paid by Abu Dhabi have historically been very low. Under the expired concessions, companies received just US$1 per barrel of oil produced. Companies are trying to obtain improved terms.
In another disappointment, the structure of the consortiums - 60 per cent owned by Abu Dhabi and 40 per cent for international investors jointly operating the fields - is expected to stay the same. Previously, there was talk of splitting the concessions so that each company could operate one unit and might be willing to provide newer technology as a result.
Some Western companies may no longer be willing to work under these conditions. ExxonMobil, which has said all along that it would prefer to operate the fields alone rather than share its technology with rivals, has reportedly withdrawn from the bidding process.
Trusted Western companies are likely to remain in the picture, not least because oil is used as a political tool in Gulf nations’ foreign policy, said Gregory Gause, a professor of international affairs at the Bush School of Government and Public Service, at Texas A&M University.
“The UAE continues to have very close military and political relations with the US, France and Britain, much closer than with Russia or China,” he said. “If political-military issues are guiding the decision, I would assume Western firms would have the upper hand.”
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Abu Dhabi changing its oil concession strategy
Western firms risk being left out as emirate looks to Asia for new industry partners
New York Times
31 October 2014
Abu Dhabi, the largest and wealthiest member among the seven states in the United Arab Emirates (UAE), is shaking up its oil industry. It has allowed the expiration of some long-standing concessions to major Western oil companies and is considering replacing at least some of them with partners from Asia and elsewhere.
For more than seven decades, the Abu Dhabi National Oil Company (Adnoc) shared the operation of Abu Dhabi’s oil fields, the biggest onshore producers in the UAE, with companies including ExxonMobil, Royal Dutch Shell, Total and BP, under the umbrella of the Abu Dhabi Company for Onshore Oil Operations.
The concessions, for 75 years, expired in January, but Abu Dhabi has yet to say which of the Western companies will have their rights renewed. There are also likely to be new entrants, possibly including Statoil, the Norwegian oil and natural gas company; less technologically skilled companies from emerging markets such as China and South Korea might join it, according to Adnoc officials.
The potential inclusion of new partners reflects the changing economic realities in Persian Gulf nations. With oil production in the United States surging thanks to the boom in oil extraction from shale rock and with demand for oil in Europe stagnant, the big oil producers are sending their crude eastward.
The Gulf countries are also moving from long-standing reliance on technology and expertise from the US and Europe towards new business partners in Asia and elsewhere.
Behind the change is a seismic shift in the oil market. China overtook the US as the world’s largest oil importer last year, while South Korea is also one of the world’s top five crude importers. Gulf countries are now thinking that it is in their interest to build partnerships with these countries through their oil companies.
Analysts say that Asian countries have helped their case by largely staying out of the politics of the region while Western countries have a long history of involvement, including criticism of regional governments’ human rights records. Staying out of politics is appreciated by Gulf nations, which have become increasingly sensitive since the onset of the Arab Spring, in late 2010, and the ensuing disorder that has spread throughout North Africa and the Middle East.
“The idea of Asian countries’ being given strategic stakes in the UAE oil sector is important, but it is easy to overstate in the sense that relations are largely commercial rather than political,” said Ben Simpfendorfer, managing director of Silk Road Associates, a Hong Kong consulting firm that advises companies on developing business strategies in Asia and the Middle East. “It’s more a rebalancing of a historical over-reliance on the West.”
The oil fields awaiting new concessions produce about 1.5 million barrels of oil a day, more than half of Abu Dhabi’s total output, now about 2.8 million barrels per day. When it decides on the new concessions, Adnoc is expected to include companies with advanced technical knowledge to help meet its target output of 1.8 million barrels a day from the onshore fields by 2017.
In recent years, Western companies have been left on the sidelines on some significant deals in the UAE. For instance, it awarded a US$20 billion nuclear power plant deal to a South Korean-led consortium and a US$4 billion, cross-country oil pipeline project to Chinese contractors.
The Western companies have already seen their position in the local oil industry slip in recent years as new fields went to the Korea National Oil Corporation and the China National Petroleum Corporation.
Western companies appear almost certain to lose some of their hold in the UAE as rivals from other regions are willing to give more competitive terms to gain entrance to a potentially lucrative market.
On the nuclear project, for instance, the South Korean group undercut rival offers from France. Companies are expected to make business proposals to Abu Dhabi this autumn, with final awards to be made this year so that the new consortiums can begin work at the start of 2015. But the process may be slow, because awards were initially expected well before the concessions expired in January.
Western companies may struggle to achieve what they think are good deals in Abu Dhabi. Fees paid by Abu Dhabi have historically been very low. Under the expired concessions, companies received just US$1 per barrel of oil produced. Companies are trying to obtain improved terms.
In another disappointment, the structure of the consortiums - 60 per cent owned by Abu Dhabi and 40 per cent for international investors jointly operating the fields - is expected to stay the same. Previously, there was talk of splitting the concessions so that each company could operate one unit and might be willing to provide newer technology as a result.
Some Western companies may no longer be willing to work under these conditions. ExxonMobil, which has said all along that it would prefer to operate the fields alone rather than share its technology with rivals, has reportedly withdrawn from the bidding process.
Trusted Western companies are likely to remain in the picture, not least because oil is used as a political tool in Gulf nations’ foreign policy, said Gregory Gause, a professor of international affairs at the Bush School of Government and Public Service, at Texas A&M University.
“The UAE continues to have very close military and political relations with the US, France and Britain, much closer than with Russia or China,” he said. “If political-military issues are guiding the decision, I would assume Western firms would have the upper hand.”
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