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Asian advance challenges IOCs in the Gulf

Concession renewals in Abu Dhabi will test corporate appetites, as Middle Eastern governments hold out for more from their foreign partners

At first glance, Japan’s decision to extend $3 billion in loans to an already stupendously wealthy Gulf state appears generous. But that’s not how Tokyo sees it. The loan agreement finalised on 12 February between Japan Bank for International Cooperation (JBIC) and Abu Dhabi National Oil Corporation (Adnoc) is a strategic pitch to firm up Tokyo’s long-term oil supply arrangements with a key Gulf producer. 

The quid pro quo is that Japanese companies will be assured crude supplies from Adnoc on a long-term basis. But the spin-offs go beyond the steady supply of crude. The deal could also help Japan Oil Development Company (Jodco) retain its portion of the Adma-Opco offshore concession, due for renewal in 2018.  

The Japanese have been judiciously nurturing commercial relations with Abu Dhabi over recent years. It extended similar loans in 2007 and 2011, and in 2010, with JBIC again to the fore, invested in a green-focused investment fund run by Masdar, which is trying to develop a carbon-neutral city in the Abu Dhabi desert.

The seamlessness of Japan’s dealings with Abu Dhabi is a sharp contrast with the friction that has marked British supermajor BP’s relationship with the Emirate. BP is keen to continue its investment in the onshore Adco Block in Abu Dhabi, where it works alongside ExxonMobil, Shell and Total, once the concession expires in 2014. But BP was initially left off a list of eligible bidders for the contract. 

BP’s difficult experience serves as a cautionary tale for western international oil companies (IOCs), who risk being squeezed out by Asian national oil companies (NOCs).

Whereas Asian governments have acted to ensure their oil companies retain skin in the game, western IOCs are not automatically guaranteed the same sort of high-level backing. In the end, UK prime minister David Cameron likely helped BP’s cause with a November visit to the emirate.

But IOCs have more pressing issues to be considered. The long-term energy relationships developing between the Middle East and Asia, chiming with the growing social and economic requirements of the oil-rich Gulf states – job creation, economic diversification and demand security – have handed Asian NOCs a natural advantage over their Western competitors. 

The Gulf producers’ growing anxiety over security of demand has been instrumental in creating this more accommodating environment for Asian companies. The growth of unconventional oil and gas production in North America is accelerating a trend that has seen an increasing amount of Gulf oil go east. For resource-holders like Abu Dhabi, linking concession renewals to its main oil and gas buyers is good customer relations.   

The domestic agenda is no less important. Gulf producers need to create jobs, and create them quickly. Saudi Aramco’s chief executive Khalid al-Falih was the first to articulate this, calling in 2011 for a new paradigm for cooperation between resource holders and oil companies. This would, he said, require the latter to invest in national development and job creation programmes to a much deeper extent than that provided for in the more traditional corporate social responsibility programmes. In the future, IOCs, service companies and engineering, procurement and construction contractors alike, in Falih’s view, will have to accept sharing greater responsibility for national development. 

“Because of the scale of investments needed in the region, the opportunities on a stand-alone basis are not sufficiently attractive for the IOCs. It will be more of an opportunity for the Asian oil companies,” says Valerie Marcel, associate fellow at Chatham House’s Energy programme.

Abu Dhabi provides an example of this. As well as the JBIC loan, Japan’s government will also provide technical cooperation across a number of areas, including  renewable energy and human resource development. 

The additional investments sought by Middle East producers range from related industries such as petrochemicals and plastics conversion to technology and research hubs, as well as infrastructure development. 

However, lacking the savvy of its more experienced Gulf peers, Iraq’s Ministry of Oil has struggled to make the most of the majors’ capabilities. “If Baghdad had been able to leverage access to the upstream by attracting the investment in infrastructure which it critically needs, the outcome would be more beneficial to Iraq,” says Marcel. “They are becoming increasingly dependent on Chinese NOCs as they are the only ones that can actually take up these huge projects at such low remuneration rates.”

Partnership

Gulf governments, in contrast, have a keener appreciation of their foreign partners. The rulers understand which way the winds are blowing, says Justin Dargin, a Gulf energy specialist at the University of Oxford’s School of Environment and Geography. “They know that the future drivers of energy demand are in the Asian market. They see year-on-year average growth of about 7-8% in most Asian economies. But, there is a second influence which relates to structural changes due to the international sanctions on Iran. The Western sanctions on Iran are driving the major Asian economies much closer to the Gulf Arab resource holders,” he says.

With majors facing concession renewal negotiations in both the UAE and Qatar, this is a pivotal moment for those IOCs mulling their future in the region. 

While life is a little more unpredictable, IOCs still have a number of advantages. Soft power is still important. “Asian NOCs are new guests to the party and if you talk to Gulf energy officials they feel comfortable on a personal basis with westerners, they educate their children in the US and UK. These cultural bridges go a long way to building soft power that benefits western IOCs,” says Dargin.

Western IOCs also have a deeper technological base and possess broader managerial know-how than the Chinese NOCs, who have only recently expanded beyond Asia.

Abu Dhabi will prove an interesting test case. The industry will be watching to see if Adnoc gives Asian NOCs a shot at winning the IOC-held oil concessions coming up for renewal in the next few years. Beijing’s dispatch of a heavyweight political delegation to Abu Dhabi in January, to make its case for Chinese participation in the Adco concession, shows how high the stakes are. “Abu Dhabi’s leaders will consider it is as a sort of trial period to reinforce these emergent relationships. One of the reasons that Abu Dhabi shortlisted  China National Petroleum Corporation for the Adco concession was because of Abu Dhabi’s desire to build stronger state-to-state relationships with China,” says Dargin.

Western IOCs, which lack the financial firepower Asian NOCs get from the likes of JBIC, may soon have to find new ways of keeping their feet under the table – if, that is, they still feel it is a price worth paying.

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