A slimmer, fitter Adnoc
With an eye on new paths being followed by NOCs in the neighbourhood, Abu Dhabi is injecting new energy into the firm
Things are changing at the Abu Dhabi National Oil Company (Adnoc). The top floor of its towering new office on the Corniche has been transformed into a Google-type open space. Adnoc, long staid and unambitious, has embarked on the difficult path of transformation into a modern, capable national oil company, a change essential for its host emirate and country.
Adnoc has long been unusual amongst its peers. Firstly, given the UAE's federal structure, it doesn't operate fields across the whole country. It operates under the aegis of the Supreme Petroleum Council (SPC), not the federal Ministry of Energy, though the minister, Suhail al-Mazrouei, represents the UAE in Opec.
Secondly, it never went through the process of full nationalisation that its counterparts in Saudi Arabia, Qatar, Kuwait, Iran and Iraq did. Instead, during 1973-74, it acquired majority stakes in all the major producing assets in the emirate of Abu Dhabi, but retained Shell, ExxonMobil, BP, Total, Inpex and others as partners.
The company, therefore, hasn't operated its upstream assets directly, but only via joint-venture companies with IOCs; and the same goes for its liquefied natural gas-export and gas-processing activities and much of its petrochemicals. But it does have a practical monopoly on retail petrol stations within Abu Dhabi. Unlike Saudi Aramco or Kuwait Petroleum Corporation, it hasn't expanded internationally to secure market share and add value, other than oil storage deals with Japan, South Korea and, lately, India.
Adnoc is pursuing personnel, organisational, cultural and strategic changes
Generally, Adnoc has been a slow-moving, traditional company. It's not known for its own operational capabilities, or development and deployment of proprietary technology as Aramco is. The cumbersome structure of its IOC partnerships, and a risk-averse culture, have led historically to long, drawn-out project timelines, and limited skills transfer to Emirati nationals. Marketing of its oil has been conservative, largely confined to following Aramco's lead.
Its production comes mostly from a group of supergiant fields: Asab, Bab and Bu Hasa onshore, each with more than 8bn barrels of ultimate recovery; Lower Zakum and Umm Shaif offshore, with 6-8bn barrels each; and the biggest of all, Upper Zakum, with more than 15bn barrels ultimately recoverable. Alongside these, a number of smaller but still sizeable fields contribute, and have increasingly been brought into production in recent years. Abu Dhabi's reservoirs yield mostly light, sour oil from Cretaceous carbonates, and sour gas from the Jurassic and, offshore, Permo-Triassic Khuff carbonates.
Total production of 3.15m barrels a day of crude oil (currently about 2.9m b/d in compliance with the Opec cuts) is supplemented by about 1m b/d of condensate and NGLs, though these figures include the share of its IOC partners. Apart from domestic use, most of this output is exported to Asia, including through the strategic Habshan-Fujairah Abu Dhabi Crude Oil Pipeline (Adcop). With up to 1.8m b/d of capacity, this line reaches the Indian Ocean directly, bypassing the Strait of Hormuz. It sells three grades: Murban and Das (both light sour); and Upper Zakum, a medium heavy crude.
Adnoc's production has been steadily increasing since 2000, except when interrupted by Opec cuts in 2002, 2009 and 2017. The company plans to achieve 3.5m b/d of capacity this year. Though it will reach its target late, continuing adherence to the Opec cuts will camouflage this.
This expansion mostly rests on growth from Upper Zakum, using artificial islands and extended-reach wells, from 0.67m to about 0.75m b/d this year and 1m b/d by 2024; development of some mid-size offshore fields to add 345,000 b/d by 2020; and another 200,000 b/d from the main onshore concession. It's also injecting carbon dioxide for enhanced oil recovery in the world's largest carbon capture project on an industrial facility, the Emirates Steel plant. Such projects make Abu Dhabi likely to be the third-largest contributor to Opec growth in the early 2020s, after Iraq and Iran, and depending on Saudi Aramco's plans.
Abu Dhabi's gas resources aren't on the same scale as its oil, but Adnoc still produces some 9.6bn cubic feet a day of raw gas. Large quantities of gas are reinjected for enhanced oil and condensate recovery. Apart from domestic use, Adnoc sells gas to Dubai and exports about 5.5m tonnes a year of LNG, mostly to Japan, while also importing LNG on behalf of the Abu Dhabi Water and Electricity Company.
The company has struggled to keep up with fast-growing domestic demand, which led to shortages in 2008 and the firing of long-time chief executive Omair bin Yousef. New gas resources, mostly sour, are being developed, including the Shah venture with Occidental, and recent plans to invest $20bn to produce 1.2bn cf/d of very sour gas offshore. But domestic gas prices, set by government, remain low, and unattractive commercial terms led Shell to pull out of the Bab sour gas development in 2016.
Adnoc can also refine about 0.967m b/d from the recently-expanded Ruwais complex in the west, which suffered a serious fire in 2017, and the small, older Umm al-Nar refinery near Abu Dhabi city. Refining capacity is intended to rise to about 1.6m b/d by 2025. And it produces polyolefins, fertilisers and industrial gases at Ruwais, in joint ventures with OMV and Total, with new plans to grow petrochemical output from 4.5m t/y in 2016 to 11.4m t/y in 2025. This would overtake Kuwait's 8.8m t/y, but remains far behind Saudi Arabia's 99.1m t/ty and Iran's 62m t/y, targeted to grow to 110-120m t/y.
Again, like other traditional NOCs, Adnoc retains a group of service subsidiaries: national drilling company, marine services, and a tanker fleet for crude, products and LNG.
The need for Adnoc's transformation has been driven by four factors. Lower oil prices have sparked the realisation that Abu Dhabi's crown jewel needs to be more efficient and faster-moving, as competitors such as Aramco deploy new strategies and become more competitive. Secondly, the company has to be part of driving the country's transformation into a diversified and more resilient economy, building on its strengths. Adnoc's inability to deliver enough gas despite its large domestic resources has been a hindrance to growth.
Thirdly, the expiry of the main producing concessions during 2014-18 has given a window of opportunity to restructure and bring in new partners. BP and Total returned to the onshore concession and were joined by CNPC and CEFC of China, Inpex and GS of South Korea, but Shell and ExxonMobil, partners since 1939, dropped out. Abu Dhabi Marine Areas (Adma), the main offshore concession, containing BP, Total and Inpex alongside Adnoc, expires in March, and will probably be split into two or more parts, with CNPC, Shell, Rosneft and Statoil possible additional bidders. Upper Zakum, with ExxonMobil and Inpex, was extended to 2041. The SPC has also awarded new ventures for under-developed acreage to Knoc of South Korea and CNPC.
And fourthly, after the stroke suffered by Abu Dhabi ruler Shaikh Khalifa in 2014, his energetic half-brother, Crown Prince Mohammed bin Zayed, has achieved more control over the oil sector. This has injected some of the style associated with his own vehicle, Mubadala, a large strategic sovereign wealth investor with substantial energy interests. His hard-charging protégé Sultan al-Jaber, chief executive and then chairman of Masdar, Mubadala's clean-energy subsidiary, became Adnoc chief executive in February 2016 and has instituted his signature shake-up. Mubadala merged with another state entity, the International Petroleum Investment Company last year, and this gives it indirect stakes in several Adnoc joint ventures, via ownership of Spanish refiner CEPSA (100%), Japan's Cosmo Oil (20.8%) and Austria's OMV (24.9%).
Trimming excess fat
Adnoc is pursuing personnel, organisational, cultural and strategic changes. A new bench of chief executives and subordinates has been appointed to the main subsidiaries, though the company itself concedes there's still some "dead wood". It cut some 5,000 of 55,000 employees in 2016. Rationalisation is seeing the offshore services units combined into one, and the two main offshore operators—the old Zakum Development Company (Zadco) and Adma—being merged into the new Adnoc Offshore. Culturally, the company is trying to become more commercially-minded.
The most notable sign of this has been the initial public offering of 10% of Adnoc Distribution, the company's fuel retail arm, which monopolises the Abu Dhabi market and has a strong presence in the other emirates, except Dubai. Since fuel prices in the country were linked to international levels, petrol and diesel retail has become a predictably-profitable business. It was listed on the Abu Dhabi exchange in December, and valued at $8.5bn.
Adnoc plans to achieve 3.5m b/d of capacity this year
Adnoc has been able to steal a march on its larger IPO rival, Saudi Aramco, by following a simpler path—a local listing of a non-strategic unit. It has begun issuing bonds to optimise its capital structure, with a $3bn issue in November by Adcop. It's considering launching a trading unit, and is consulting with buyers on whether it should change its crude pricing methodology. The company is also looking at joint ventures for its drilling unit and pieces of infrastructure, such as pipelines, and in general is seeking partners who add something beyond money—such as access to technology or markets.
Its $109bn five-year budget compares roughly to Chevron, which invests about $18bn a year with about 60% of Adnoc's production. For the first time, Adnoc is seeking significant investments in international downstream, although it's not clear how that might dovetail with Mubadala's large existing portfolio.
The company's new 2030 strategy isn't radical, but covers the efficiency, restructuring and expansion plans outlined above. As it advances with its complicated transformation task, it may become bolder. Still the prime motor of the emirate's economy, it's no longer a hindrance to progress, but has much more to do to be an international lead.
Robin M. Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis