x Abu Dhabi, UAEThursday 18 January 2018

Abu Dhabi faces big decisions over new oil and gas licences

The Gulf oil community has recently focused on Iraq where the awarding of contracts for huge oil projects has excited geologists and chief executives alike.

The eyes of the Gulf oil community have been fixed recently on Iraq where the awarding of contracts for huge oil projects has excited geologists and chief executives alike.

But the same cast of characters are keenly interested in new licences in another country almost as rich in oil, much safer and more stable and with good infrastructure and business environment.

The prize in this case? The renewal of the major concessions in Abu Dhabi - the hot, if sometimes unspoken, topic of the Abu Dhabi International Petroleum Exhibition and Conference, which opened yesterday.

Almost uniquely in the Middle East, the holders of the original concessions, dating back as far as 1939, are still players in Abu Dhabi- leading international oil companies such as Shell, ExxonMobil, Total, BP, Japan's Inpex, and the inheritor of the interests of the late, famous Armenian dealmaker Calouste Gulbenkian, Portugal's Partex.

When other OPEC countries nationalised their petroleum industries in the 1970s, Abu Dhabi took a more moderate course. The Abu Dhabi National Oil Company (ADNOC) increased its equity share to 60 per cent and tightened terms so its partners took home just US$1 (Dh3.67) a barrel they produced.

But Abu Dhabi recognised the expertise of these foreign companies more than repaid their modest reward.

The three main entities in the emirate are the Abu Dhabi Company for Onshore Oil Operations (ADCO); and two players offshore, Abu Dhabi Marine Operating Company (ADMA-OPCO) and Zakum Development Company (ZADCO). ADCO's licence expires in 2014 and ADMA-OPCO and ZADCO's in 2018.

Since major oil developments can produce for two decades or more, it is a matter of urgency to sort out new arrangements beyond licence expiry.

Abu Dhabi has to balance four needs. First, of course, is getting the best financial reward for its citizens from its huge oil wealth. Contenders in the Iraqi auctions were willing to bid very aggressively and it should be no different in the emirate.

Second is the need for greater investment as Abu Dhabi progresses towards its target of raising output to 3.5 million from 2.75 million barrels of oil a day. The tough terms of the existing concessions, the sometimes convoluted decision making imposed by the shareholder structure and the imminent concession expiry have slowed development.

In particular, new gas developments must accelerate, helped by partners able to handle sour gas containing the toxic hydrogen sulphide. Total has pushed its case for working on the Bab field to the east of the capital.

And the country hardly conducts any exploration, despite considerable potential remaining. Increasing oil reserves may not be urgent but it gives Abu Dhabi a valuable option in the case of a renewed period of high prices. It can also serve to deter OPEC competitors, notably Iraq, from over-rapid expansion. And it assures the long-term future of this bedrock of the domestic economy.

Third, these giant fields merit the world's best technology for improving efficiency and increasing the percentage of oil and gas that can be extracted. Average global recovery is about 33 per cent but Saudi Arabia targets between 60 and 70 per cent, and Abu Dhabi, with comparable geology, should have similar long-term aspirations.

New marginal and difficult fields may cost more than $10 a barrel to develop, so picking the best operator could save billions.

Along with this goes expanding opportunities for talented national employees and considering the role of ADNOC - should it expand its operating capabilities, or should it be responsible more for monitoring and regulation?

And in a carbon-constrained world, new technologies such as carbon dioxide injection to improve oil recovery while reducing greenhouse gas emissions should be a priority. Companies such as BP, Shell and Occidental have particular expertise.

Continuity is paramount. Facilities have to continue operating without a hitch and the ambitious expansion plans at ADCO and ZADCO have to proceed without delay.

To achieve these aims, Abu Dhabi has two main options. It could simply renew the existing concessions, perhaps on more flexible terms and with some new partners, or it could dissolve the consortiums and allocate fields individually.

Breaking up the cosy oligopoly of the past could inject some dynamism and new ideas. New entrants could be traditional western international oil companies, such as Austria's OMV, owned 20 per cent by Abu Dhabi's International Petroleum Investment Corporation.

The renowned offshore operator Statoil from Norway and Germany's Wintershall have also publicly stated interest. They could be aggressive independents such as Occidental, which has already been awarded some small undeveloped fields.

Or, they could be national oil companies chosen to cement relations with key customers such as China or Japan, or competitors such as Russia's Rosneft, which is already drilling in Sharjah.

There is also the option of widening the circle to indigenous companies. Mubadala Development, a strategic investment company owned by the Abu Dhabi Government, has a strong relationship with Occidental through partnerships in Qatar, Oman and Bahrain.

Unlike Iraq, which held public auctions, Abu Dhabi seems to prefer negotiating in private with the candidates. If this is the route chosen for the ADCO and ADMA renewals, the emirate needs to be careful not to get bogged down in endless negotiations, as Kuwait and Saudi Arabia have done in recent years.

Especially on gas, it cannot afford delay, or to have further withdrawals from projects after bidders over-commit, as with ConocoPhillips in April.

The aim is not to wring the last fils out of the contenders. Attracting the best partners, under terms that allow them to perform effectively, is the key to Abu Dhabi's petroleum future.

Robin M Mills is an energy economist based in Dubai and the author of The Myth of the Oil Crisis