Analysis The production of oil in Abu Dhabi has always been a group effort.
Emirate must decide whether oil partners are worth keeping
The production of oil in Abu Dhabi has always been a group effort. International oil companies such as Shell and ExxonMobil deploy engineers in the emirate's oil fields and help build the pipes and wells that generate the country's wealth, in return for minority ownership stakes in subsidiaries of the Abu Dhabi National Oil Company (ADNOC). But the Government faces a momentous decision as the expiry of concessions that form the basis of those partnerships nears: should it stick with modified agreements or abandon the international partners altogether?
The emirate's OPEC representative, Ali al Yabhouni, suggested recently that the Government may take the former approach when he told an oil conference in the capital that "we will continue to work closely with international partners". Mr al Yabhouni said partnerships "served the national interest", but also noted that "our requirements and needs are different from 30 to 40 years ago". Abu Dhabi is unique among Gulf producers for having retained original equity partnerships with foreign oil companies, even when neighbours were taking direct control of resources.
Under the agreements, a group of six firms from the US, Europe and Japan control 40 per cent of two of ADNOC's most important divisions, but those concessions expire in 2014 and 2018. ADNOC was unlikely to end its partnerships with international firms when the concessions come up for renewal, in part because it faces complex technical challenges and a shortage of manpower, said Valerie Marcel, an analyst at the British think tank Chatham House who studied ADNOC closely in her 2006 book, Oil Titans.
"Those partnerships are important to them, they underpin diplomatic relationships at a higher level; they have worked for Abu Dhabi." ADNOC's partners offered technical expertise, she said, and helped market the crude abroad. "They probably want to look at new partners and new types of partnerships," Ms Marcel said of the Government. "That to me is not fundamentally changing the rules of the game, and more like adjusting the terms and the arrangements."
But international oil companies would still need to make their case to the Government, Ms Marcel said, as critics across the world argued they were becoming increasingly irrelevant. As national oil companies around the world develop, international firms are not going to be needed as much, she said. "I think they're going to be faced with a very tough job of convincing national oil companies that they really add value."
The influence of the international oil giants that once controlled most of the world's oil reserves steadily shrank after 1970, as governments across the developing world nationalised the oil industry and reasserted their right to own and develop their own natural resources. Today, international energy firms have full access to only 6 per cent of world reserves, according to the US Energy Information Agency.
As some national oil companies, such as Statoil Hydro of Norway and Petrobras of Brazil, began to acquire assets abroad and behave more like the traditional international firms, many analysts predicted the curtain was coming down on the old model of the multinational oil company. But executives at international oil firms, and even officials at national oil companies, suggest the oil majors still have an important role to play.
At a recent oil conference in Abu Dhabi, Shokri Ghanem, the top oil official in Libya, suggested the process had come full circle and new partnerships were possible between national firms and the majors as oil producing countries confronted an investment challenge. "Slowly but surely those artificial rules separating IOCs (international oil companies) and NOCs (national oil companies) are disappearing," Mr Ghanem said. "The world will witness some mergers and acquisitions between IOCs and NOCs."
Mr Ghanem, whose country was among the most recent producers to open up to co-operation with western oil companies, said the recent fall in oil prices and resulting delays by national firms in starting projects showed the value of having international oil companies that have independent sources of capital. "Rather than being like international companies ? NOCs have to integrate in the local economy; they have to accept the economic priorities," he said. "For NOCs who depend on their budget from the government, the government cuts their budgets."
International firms such as Royal Dutch Shell and ExxonMobil, Mr Ghanem said, could call on huge sums of capital to develop a project for several years before oil or gas started flowing. But the greatest threat to national firms was that governments would reduce their exploration and production budgets, even as oil reserves across the world become more difficult and expensive to tap. "It's easier for the IOCs than it is for the NOCs," says Guy Hollingsworth, Chevron's president for exploration and production in Eurasia, Europe and the Middle East. "The NOCs have social issues they are funding."
In Nigeria, for instance, international oil companies have for years made up investment shortfalls by the Nigerian National Petroleum Corporation (NNPC) to sustain the country's creaking oil infrastructure. In the Gulf, the availability of capital is less a challenge than technical expertise, Ms Marcel said. ADNOC has turned to the US firm ConocoPhillips to help it develop the tricky Shah sour gas reserves, while Saudi Aramco is counting on several consortiums of international oil companies to find gas in remote parts of the Rub al Khali.
But analysts say Iran has faced major delays in developing offshore gas reserves because western companies, under pressure from their governments, have been reluctant to invest in projects. In Kuwait, the oil industry will need to use international expertise to help it develop deep gas reserves, says Sami al Rushaid, the chairman of Kuwait Oil Company. "The development of the gas is really essential and critical, and that's where we need the assistance of the IOCs and the service companies," Mr al Rashaid says. "For the NOCs that are pursuing their expansion, or are trying to go for the more difficult oil, they still require the IOCs' partnership."
Outside the region the expertise of foreign partners becomes even more important, as leaders contemplate drilling for oil in the deepest parts of the ocean or under the Arctic ice. Sceptics of international oil companies point out that national companies can engage oil services firms such as Schlumberger and Halliburton to develop challenging fields, but the oil majors say they are the only ones who can bring the technology together with capital on a large scale.
"We help integrate partner aspirations and steer projects through challenging political dynamics," Mr Hollingsworth says. "The sum total of IOC benefits insures this: we're integrators. We know how to bring everything together and make it work." Likening energy developments to the construction of a house, Jeroen van der Veer, the departing chief executive of Shell, argues that each type of firm has a role to play.
"The point is, the roles of governments, NOCs, service companies and IOCs are not opposite to each other; they are complementary," Mr van der Veer says. Regarding the looming expiry of Shell's 9.5 per cent stake in the Abu Dhabi Company for Onshore Oil Operations, Mr van der Veer must be hoping Government officials share his view. firstname.lastname@example.org