Business – UAE aims high while prices fall

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by Neil Ford

The United Arab Emirates has set a target of increasing national oil production by 25% by 2017. This is an ambitious goal but one that is achievable given new project development and the implementation of new enhanced oil recovery (EOR) techniques that enable greater output on fields that have already been brought on stream. Yet is this a good time to spend billions of dollars on expensive new ventures? The price of Brent crude has fallen by 30% over the past five months and there are real doubts about the health of the global economy.

Speaking at the Abu Dhabi International Petroleum Exhibition & Conference (ADIPEC) in November, Abdullah Nasser Al Suwaidi, the director general of Abu Dhabi National Oil Company (ADNOC), said that his country expects to boost its crude oil production capacity to 3.5m barrels a day (b/d) by 2017. While industry executives at the conference were united in insisting that short term price changes would not affect long term investment decisions, they will be anxiously watching the direction of the oil price over the next few months, plus GDP figures from the world’s biggest economies.

Too soon to say

Total’s president of exploration and production, Arnaud Breuillac, said, “None of our strategic projects will be influenced by the short term evolution of the market. For now there is no immediate impact.” The French company is heavily involved in a number of projects in the UAE, working alongside ADGAS and Dolphin Energy among other local partners. Breuillac said that it was too soon to say whether prices would remain depressed for a long period but suggested that $100/barrel was a good balance between consumer and supplier demands.

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A  representative of a Gulf oil company, who did not wish to be named, said: “Oil prices may stay low for the next few years. The global economy is a little shaky and some new fields should compensate for field exhaustion elsewhere. The most likely cause of a return to high prices is geopolitical instability, particularly in Iraq or Ukraine.” The unconventional hydrocarbons boom in North America has much to do with the recent price falls but OPEC has also contributed by maintaining quota levels.

Suhail bin Mohammed Faraj Fares Al Mazrouei, the UAE Minister of Energy, said at the conference: “We don’t see any potential threat of the shale oil usage as producers, given the high production cost of this fuel in comparison with that of the conventional oil.” This is true but shale oil projects in North America help to boost US energy security and also benefit from much lower transport costs to US consumers than Gulf oil. They therefore displace imports from other parts of the world, including the Gulf.

Projects on hold

As ever, there is a close correlation between levels of economic growth and energy consumption. China’s economy continues to perform very well by international standards but worse than for many years; growth has tailed off in India; while North America and Europe are experiencing lower growth than last year. At the same time, a large number of oil projects that had been put on hold around the world are now being brought on stream. This was evident at ADIPEC, where participants talked of growing staff shortages in key technical areas, as a result of competition for skilled human resources.

Some of that target will come from the Umm Lulu Field, which came on stream in October, 31km northwest of Abu Dhabi City. It has been developed by a consortium of Japan Oil Development Company (JODCO), a subsidiary of Inpex Corporation, also of Japan, BP, Total and ADNOC. Output, which will be ramped up to 105,000 b/d, will be piped via an existing pipeline to Zirku Island. However, the lion’s share of the production target will be provided by Abu Dhabi Company for Onshore Oil Operations (ADCO), which intends to increase its production from 1.4m b/d to 1.8m b/d by 2017.

New chapter

The step increase in production is to be achieved at the same time as the country’s oil industry begins a new chapter. Onshore production had previously been managed by ADCO, which has long been owned by ADNOC, BP, ExxonMobil, Partex Oil & Gas, Shell and Total. However, ADCO’s production agreement has now expired, prompting the government to offer 40 year concessions on the ADCO onshore fields, which collectively yield 1.5m b/d. Eleven companies were invited to bid and all of them did so. They include existing partners BP, ExxonMobil, Shell and Total, together with a number of potential new shareholders.

At ADIPEC, Ali Khalifa Al Shamsi, ADNOC’s strategy and coordination director, said: “If you are going to choose a partner, you must do all your homework, your due diligence, to make sure that the choice is right from the first time. We cannot make a wrong choice so we have to take time.” The successful bidders will be announced by early next year. Breuillac commented: “Total was born in the Middle East 90 years ago and we have been present in Abu Dhabi since 1939. We cannot imagine not being here, and so naturally we hope to continue building on that relationship and maintain our large asset base.”

Much of the new production will be consumed by the Ruwais oil refinery, which is in the process of being expanded. The facility’s production capacity is to be doubled to a massive 840,000 b/d by the end of this year, with diesel and fuel oil used to supply the Gulf region in the first instance and probably also European customers in the longer term. Yet it will be interesting to see whether some of the country’s production capacity is shut-in at some point as a result of OPEC quota restrictions, if the oil price continues to fall. The UAE government has ambitious spending plans that require oil income to fund them but it remains to be seen whether this is best achieved by maximising production or seeking to support the oil price.

 

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