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UAE buys success

The UAE is extending its footprint far beyond the Mideast Gulf, writes James Gavin

UNFAVOURABLE conditions on the credit markets and the fear of overpaying for assets in a high commodity-price cycle have kept many international oil companies (IOCs) away from the mergers and acquisitions (M&A) market this year.

Some of the slack has been taken up the Middle East's growing band of energy investment companies – many of them state-funded. The UAE is leading the way. In July, Abu Dhabi National Energy Corporation (Taqa) used up part of the $5bn it plans to spend this year on asset acquisition with the purchase of six North Sea fields from Shell and ExxonMobil.

Taqa's M&A drive

Taqa, 75%-owned by the Abu Dhabi state, aims to expand its asset base by 25% a year until 2012, by when it plans to have $60bn of assets under its ownership. By the end of 2008, it should be half way there.

Its M&A drive, Taqa chief executive Peter Barker-Homek tells Petroleum Economist, will provide the company with "a footprint where you can develop organic reserves or built up a real power-generation base".

Its spending strategy appears to be delivering good results for the company, which started life as a state-owned power provider and has steadily worked its way up the value chain. Last year, Taqa reported a 113% rise in net profit, to $272m, with one-fifth of the income generated by upstream activities.

The uplift from some of its new acquisitions is already evident. In the first quarter, it reported a more than six-fold rise in profits, after incorporating revenue from its $4.94bn buyout of Canada's Prime West Energy Trust last year.

And with oil prices so high, Taqa is confident it can achieve its ambitious 25% annual growth target, even without the effect of big acquisitions. That may be preferable: asset prices are high and integrating large acquisitions is not straightforward.

Taqa sees 50% production upside at its new North Sea assets. After spending $3bn, it says it will be able to increase production from 40,000 barrels a day (b/d) to 60,000 b/d.

The fit for Taqa and other adventurous medium-sized players is good, says Barker-Homek. "The majors have to replace 0.5bn barrels of reserves on an annual basis. BP needs to replace about 4m barrels of oil equivalent a year to simply maintain and grow production, but those assets don't exist in the North Sea anymore. What does exist is reserves of 100m-0.5bn – and Taqa only needs to replace 100m barrels reserves over a year."

Bold investment

Taqa has been the boldest of the Middle East's energy investors in recent years and remains the only state-owned investment arm to have transformed itself into an operating company. Yet it is now facing competition from a tight-knit group of cash-rich UAE investors, which, like Taqa, have the government's financial support.

Abu Dhabi's International Petroleum Investment (Ipic), a state-owned investment vehicle for overseas energy assets, wants to double its investment portfolio to $26bn within five years. Its geographical reach stretches from North Africa to Central Asia; its assets include a 17.6% stake in Austria's OMV, the dominant player in central Europe.

Ipic has also been steadily expanding its refining footprint. In June, it approved plans to build a new refinery in Morocco and has also sanctioned a 250,000 b/d greenfield refinery in Pakistan. In March, it signed a co-operation agreement with US independent Occidental Petroleum to participate in joint projects, including the new Fujairah refinery and various upstream ventures.

In addition, OMV and Ipic signed a memorandum of understanding in March to invest jointly in upstream energy projects in the Middle East, North Africa and Caspian regions. Ipic is also forming partnerships with other Mideast Gulf investment funds; in February, for example, Ipic and Qatar Investment Authority put $2bn into a jointly held fund for global acquisitions.

Abu Dhabi's first publicly listed oil company, Aabar Petroleum Investments, faces a less certain future, however – a sign that in the Middle East, the state is still the dominant player. Aabar launched itself into the international asset market in 2005, buying Singapore-based exploration and production firm Pearl Energy. But in April, Abu Dhabi-based, wholly state-owned Mubadala Development bought a 90% stake in Pearl Energy for $0.833bn, bringing a substantial oil-producing asset under state control.

Aabar has also sold off its Dalma Energy rigs unit, which it picked up in 2005. The result is that Aabar is now cash-rich – the company expects earn at least $100m from the sale of Pearl – but effectively devoid of large producing assets.

Taqa's assets at a glance


Holds UK and Netherlands North Sea assets with production averaging 23,700 boe/d at end-March, from reserves of 40m boe. In July, it agreed to buy a six-field package of UK North Sea assets with production of around 40,000 boe/d. North American upstream assets include coal-bed methane and tight gas plays in Canada and conventional oil exploration properties in the US's Williston basin, producing over 86,800 boe/d, from reserves of 461m boe.


Holds 0.5bn cm of gas-storage capacity in the Netherlands, with another 3.2bn cm under development, and also has a smaller 200m cm storage facility and an interest in the Alliance natural gas pipeline in Canada.

Power generation

Holds 7.437 GW of generating capacity in the UAE, as well as 0.59bn gallons a day of water desalination capacity. Overseas, generating capacity stands at 2.08 GW, with operations in Ghana, India, Saudi Arabia and Morocco.


Further muscle for Mubadala

It has also seen some of its leaders jump ship. Chief executive David Woodward resigned in May to take over as chief operating officer at Mubadala. Aabar's vice-president of operations, Chris Gibson-Robinson, and vice-president for new ventures, Richard Lorentz, have also resigned.

The Pearl sale effectively ended Aabar's upstream oil operations, but officials say the company could still return with new investments. In July, it said it was considering issuing convertible bonds to secure funding for a new investment programme.

But it seems unlikely that it will remain independent. Mubadala is thought to be interested in acquiring an unspecified stake in Aabar, which it could use as a vehicle for making further upstream investments; in a July statement, Aabar confirmed the interest of "an Abu Dhabi based corporation that is wholly owned by the state".

If Mubadala does take a stake in Aaabar, it will add further muscle to what is already one of the region's fastest expanding state-owned investment companies, with interests in energy, real estate and industry.

Other energy assets will no doubt be in Mubadala's sights. The only significant challenge it is likely to face is competition for assets from the growing cast list of Mideast, state-sponsored energy investment companies.

Sour gas – sweetening a bitter pill

THIS SUMMER, the US'S ConocoPhillips won a contract to develop the sour-gas reserves at Abu Dhabi's offshore Shah field, placing the region centre stage in the commercialisation of sour-gas projects.

Sour gas – defined as any that is more than 1% hydrogen sulphide – is highly toxic and extremely corrosive, requiring sophisticated materials, such as specialised steel, to protect pipelines and drilling equipment.

ConocoPhillips, which beat off competition from ExxonMobil, Occidental Petroleum and Shell, will take a 40% interest in a development that is likely to cost $10bn – indicative of the level of cost inflation that is afflicting technically complex projects in the Mideast Gulf. By comparison, last year, $10bn was the estimated combined cost of developing both Shah and another UAE sour-gas field, Bab.

But the very large reserves of untapped sour gas sitting offshore appear to make it worthwhile. The UAE holds 214 trillion cubic feet (cf) of gas reserves, but nearly half of that is sour. The country is facing shortages of gas for domestic use and needs to make better use of its assets.

According to a study commissioned by Adnoc, ConocoPhillips' state-owned partner in the project, it is feasible to tap sour gas from three fields: Hail, with a planned output of 0.5bn cf/d; Shah, which is also expected to produce at 0.5m cf/d; and Bab, which could yield at least 2.3bn cf/d.

Shah's gas has a hydrogen sulphide content of about 30% making it far more difficult to process than conventional gas. The costs are prohibitively high. Reports suggest the cost of sour gas could be three times that of Dolphin gas piped from Qatar: bids for Shah were estimated to be based on production costs as high as $5/m Btu, compared with the lowly $1.30/m Btu on the Dolphin scheme.

Technical and cost hurdles

The technical and cost hurdles explain the delay in developing reserves that have been known about for decades. Even now, the commercial case is far from assured. Yet this is unlikely to deter international oil companies, which see sour gas as a way into the Middle East upstream and, potentially, as a training ground for developing sour-gas projects elsewhere in the world. Total and others are said to be interested in bidding for the Hail play.

Furthermore, cost pressures should subside as producers develop new outlets for by-products such as condensates and sulphur. Several companies have built up some experience in this area; Abu Dhabi Oil Company is reinjecting sour and acid gas into reservoirs in the Umm al-Anbar and Niwat al-Ghalan offshore fields.

In 2007, National Iranian Oil Company brought the Amak project on stream, which develops sour gas from the Bangestan reservoirs. Sour gas is also extracted from offshore by South Pars Gas Complex.

In Saudi Arabia, a new grassroots gas-processing plant will handle up to 1bn cf/d of sour gas associated with the development of the Abu Hadriyah, Fadhili and Khursaniyah oilfields. While, in central Oman, BP is developing gas from the 2,800 square km Khazzan and Makarem contract area, which holds sour gas in low-permeability formations.

Although the returns may not be witnessed on corporate balance sheets for quite a few years, sour gas is now seen as one of the world's long-term energy plays – and one that will keep IOCs in one of the few untapped areas of the Middle East a while longer.



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