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Abu Dhabi, UAEFriday 16 November 2018

Oil and gas could lead the way forward once again for Abu Dhabi's economic diversification efforts

A revolution in the industry means profitability and opportunity have become motivating forces in new partnerships leading to a boom and a fresh wave of investment across all industries

Abdulmunim Al Kindy, head of upstream for Adnoc, which has struck a landmark deal with Baker Hughes. Silvia Razgova / The National
Abdulmunim Al Kindy, head of upstream for Adnoc, which has struck a landmark deal with Baker Hughes. Silvia Razgova / The National

In the early days of oil exploration in Abu Dhabi, nearly two decades before it was discovered in commercial quantities, the leadership of the emirate made preparations for the expected windfall it would bring. Jobs were created, agreements were made for a school to be built and extra rations of coffee, flour and daily staples were distributed to families to ensure that the wealth trickled down to society at large.

More than 80 years on, the emirate has stuck steadfast to this principle while also working to ensure that once the oil stops flowing – through decades-long programmes of economic diversification – that people won’t be left without the financial security they have become accustomed to.

These initiatives that have spurred the development of local sectors for property, aviation, industry, health, education and more have been paid for, both directly and indirectly, by the gains from the sale of crude oil. The idea has always been that eventually the non-oil economy will become self-sustaining, growing in size and overtaking the oil and gas sector itself.

This has not been a linear trajectory; there have been bumps and bruises on the way. We have also now come to the point where the momentum of these efforts seems to have slowed. The financial crisis in 2009 and then the collapse in oil prices after 2014 peaks triggered successive periods of relative austerity and much-needed reforms.

What then will energise the drive towards economic diversification and its targeted fruition date of 2030? We have, in Abu Dhabi, been absent a main driver of growth for some time. Dubai has Expo 2020 which will have some positive impact for Abu Dhabi and the wider UAE, but what else? Tourism and culture? Louvre Abu Dhabi and other attractions will draw visitors but aviation and tourism aren't enough on their own to help support more government stimulus initiatives like Ghadan 21.

And so we find ourselves in the ironic situation of once again looking to oil for a necessary kickstart of the engine of diversification. This is because we are on the cusp of another boom. What’s more, few people realise it. Mired as we have been in the gloom of the last two years, the outlook has been clouded by the precarious geopolitics of the region more than anything else. Fundamentals have been stronger than we think, though. The necessary work has kept going, particularly in the energy sector, which had become somewhat complacent as the world’s eighth biggest producer, and not focused, until now, on becoming the most efficient.

All that has changed. The oil will continue to flow, the money will continue to come, but each in larger quantities than before. This extra resource will then trickle down, as it always has, but fuelling a new era of activity, coupled with the reforms of recent years, will catapult the UAE towards the heights promised by the country’s leadership.

How will this happen? Abu Dhabi’s oil and gas industry has been undergoing a transformation over the last two years, sometimes painful, often exciting. The state producer Adnoc has led the charge, focused as it is on becoming a truly dynamic company. Profitability and opportunity have become motivating forces within the group. This year alone, the renewal programme of key offshore concessions has yielded about $8 billion in fees. In the last two years, since Dr Sultan Al Jaber became Adnoc Group chief executive, onshore concessions have brought in more than $5 billion. However, these numbers are just for openers. The effect of the streamlining of how Adnoc produces its oil and gas will be the most profound stage of this transformation.

The Baker Hughes partnership announced last week is the greatest example of the next step in the process. Its 5 per cent stake in the Adnoc Drilling subsidiary will result in a revolution in the emirate over the next five years and the subsequent windfall of cash from the higher margins obtained from the sale of more oil, gas and related products will help build the growing downstream segment of the sector and also make the UAE one of the most cost-effective producers in the world. There will be less anxiety about where the price of Brent Crude is settling. Adnoc Drilling will go toe-to-toe with competitors abroad, bringing in new revenue streams.

Oil and gas once led the way forward for the whole economy, in every sense, and will do so again. Not just in terms of investment; following in its strategic example could be other industries. What could happen if the telecoms, banking and property sectors became truly competitive? Right now they are profitable in a comfortable home market. This makes it more difficult and less enticing to try to compete outside the UAE. Few homegrown UAE brands have matched domestic success internationally and those that have, did so through leveraging the dominance of their base to good effect. Imagine if more of the biggest names in the UAE could stand tall in Europe, Asia and the Americas.

The impact of their resulting higher levels of performance and customer service on the quality of life for the people in the UAE would be immense. The next economic boom in the UAE could be as much about that, as the bottom line or the rapid creation of wealth seen in previous high-growth periods.

Mustafa Alrawi is an assistant editor-in-chief for The National