The state oil company has fine-tuned a partnership approach with its biggest consumers in the upstream sector and has similar plans for downstream
Adnoc seeks more value creation as it transforms into an integrated company
Abu Dhabi National Oil Company’s strategic shift in developing its upstream segment and repositioning as a downstream entity this year brings it closer to its ambition to become an integrated international oil company.
“We are embedding efficiency, commerciality and innovation into every aspect of our business," said Dr Sultan Al Jaber, Adnoc Group chief executive on Wednesday at the Opec seminar in Vienna. "We will leave no stone unturned when it comes to optimising costs and no avenue unexplored in the search for value creation."
The UAE’s primary oil producer is undergoing transformation in a bid to cater to all of the energy sector's value chain. Last year, it began a shift in strategy by spinning off 10 per cent of its retail and distribution unit Adnoc Distribution, its first initial public offering.
It started this year with a timely consolidation of its upstream business offshore, by selling off around 40 per cent to companies from its consuming base. Second, it revealed a Dh165 billion investment plan to develop its downstream business, which includes the development of the world’s largest refining facility by 2025.
"Their IPO started last year and now they are thinking of bringing even partnerships into their downstream business model to [make] it a more world-class commercially driven business rather than an NOC type [business],” says Iman Nasseri, managing director, Middle East at consultancy Facts Global Energy.
Abu Dhabi’s transformation to a more integrated global player comes out of necessity, where the business-as-usual approach of selling barrels and profiting are no longer lucrative given the vagaries of the oil industry. Abu Dhabi accounts for 4.2 per cent of all oil produced globally, according to the latest BP Statistical Review of World Energy. However, regional players like top oil exporter Saudi Arabia have realised the need to become more competitive in the face of a surging US production, which now accounts for around 14.1 per cent of global consumption, ahead of Riyadh’s own 12.1 per cent. Such competition necessitates a new approach to securing marketshare and profiting from new product streams - that companies such as Saudi Aramco and Kuwait Oil Company have increasingly adopted.
Saudi Arabia in the first half of the year announced plans for a $5bn refining and petrochemicals facility adjacent to the existing Satorp in Jubail in partnership with France’s Total. It is also moving ahead with a plan to develop a $44bn refining and chemicals complex in the west coast of India, which Adnoc may join as a partner,.
Alan Gelder, global refining and oil marketing research head at Edinburgh-based energy consultancy Wood Mackenzie notes that while Adnoc may have come to the foreign downstream game later than its regional peers, the UAE company may be more successful in its scheme thanks to smart financing and collaboration. Overseas downstream acquisition by Gulf NOCs is not new. Kuwait has refining investments in Vietnam since 2008 and another in Oman’s Duqm region, which recently reached final investment decision.
"Between Aramco and the UAE, if they can be successful in partnering in that [Indian] west coast refinery, why would you not they try and repeat that elsewhere? The benefits of scale and strength [from Aramco] could be something that Adnoc can leverage and build on,” says Mr Gelder.
Adnoc’s recent upstream concession awards to companies such as Cepsa and OMV, which are owned by Mubadala Investment Company, could also translate into greater efficiencies when transitioning downstream, since the companies have long-established strong market base.
“If you look at Aramco, their main aspiration is to have refining capacity of 10 million bpd, that’s a huge number,” says Mr Gelder.
“Adnoc will be more akin to the Kuwaitis, which is less scale but through Mubadala, it does have interests in a number of international companies, so it’s not starting from zero. They work with Cepsa, Borealis, Nova, so they know how to do business in the region."
Adnoc also this year will look to grow through its newly set-up oil trading unit, a business segment that national oil companies from Oman, Iraq and Saudi Arabia have ventured into. It will also look to select preferred bidders for six hydrocarbon blocks that it offered through its first ever licensing round in April.
The oil company may have chosen the opportune moment to launch the round, notes Ellen Wald, author of “Saudi, Inc.” and president of Transversal Consulting. With the closing of the Iranian market to foreign investment, the UAE will remain an attractive destination for oil and gas companies scouting for cheap, risk-free barrels of oil in the Middle East.
“With oil prices rising and key agencies (along with some prominent energy hedge fund owners) forecasting that oil prices will rise precipitously in coming years if investment does not pick up, Adnoc may have picked exactly the right time to launch its first ever bidding,” says Ms Wald.
“Also, with companies exiting the Iranian energy sector, Adnoc may seem like the perfect alternative to the National Iranian Oil Company,” she adds.
Investment in upstream, which sagged following the low ebb in the oil markets over the last three years, has slowly begun to pick up, with Brent surging above $70 through the first half of the year. The UAE along with regional peers such as Kuwait is looking to spend. Last year, Abu Dhabi's Supreme Petroleum Council approved a spending package of Dh400bn billion over the next five years to be spent unlocking unconventional, sour gas caps in Abu Dhabi as well as acquiring and developing downstream assets at home and abroad.
The challenge facing Adnoc, however, will be the timing of when its downstream plans will come to fruition. There are several large-scale refining and petrochemicals projects, such as Saudi Arabia’s west-coast $20bn oil-to-chemicals scheme in Yanbu or its recent plans with Total all competing for financial closure around the same time.
Adnoc's announcement of its downstream scheme on May 13 in the presence of global banking leaders was a smart move to gain leverage ahead of regional competing projects.
“Could it be a situation where lots and lots of projects need financing all at the same time? Possibly,” says Mr Gelder.
“In which case they would need to manage that requirement on the banking market but I suspect that’ll be a nice problem for them to have rather than a huge constraint."