Adnoc steps off the gas
Gas is currently the main casualty of Abu Dhabi’s more cautious approach. But that may be only in the short-term
Abu Dhabi responded bullishly when its Mid-East Gulf ally Saudi Arabia failed to broker a new Opec+ agreement with Russia in early March and announced a move to unconstrained production. State-owned Adnoc vowed to ramp up production within weeks to a newly possible 4mn-bl/d maximum and to quicken efforts to boost capacity by another 25pc, hitherto targeted for 2030.
But these output goals were originally adopted in November 2018 when the oil price was well over double the depths it is now plumbing. Current financial realities impose precisely the opposite imperative for producers worldwide—to slash capex and rein-in expansion ambitions.
The Emirati parastatal heavyweight is not immune—accepting production cuts as a chastened Opec+ reconvened in April. But the impact on future production has thus far seen less of a hit to Adnoc’s oilfield expansion plans than its offshore sour gas ambitions.
In mid-April, UK services firm Petrofac saw its $1.65bn main engineering, procurement and construction (EPC) contracts, awarded less than two months earlier, for he Dalma field project cancelled. Dalma had been slated to flow c.350mn ft³/d by 2022 and is the furthest advanced scheme in a high-profile strategic drive to exploit trillions of ft³ of sour gas reserves off the emirate's north-west coast, aimed at restoring Abu Dhabi to net gas exporter status by the second half of the decade. Adnoc says the decision was taken "with our partners" in line with intent "to responsibly progress our projects while optimising costs".
The current crisis has had the worst of its demand impact front-loaded and there is thus the potential for a V-shaped recovery
The mention of third parties serves as reminder that, while Adnoc is a vehicle for the geopolitical and economic imperatives of its state owner, it is more exposed to wider commercial and corporate drivers that, say, its Gulf counterpart Saudi Aramco. The Ghasha ultra-sour gas concession—in which Dalma lies—is jointly held by Adnoc and four IOC shareholders, of which Italy’s Eni is the largest.
And the Italian firm swiftly responded to slumping prices by announcing its intention to cut planned 2020 and 2021 capex by 25pc and 30-35pc respectively, with the axe to fall mainly on upstream and on “new project developments scheduled to start in the short term”. This augurs ill for the development of the wider Ghasha and Hail fields, which were earmarked to produce 1bn ft³/d by 2025.
Eni's 2020-23 strategy, as presented in late February, had FID pencilled-in this year on the estimated $10bn scheme. But signs of a delay have already emerged, with the commercial deadline for EPC bids twice postponed and still pending.
Plans to tap Abu Dhabi's sour gas reserves date back more than two decades and Adnoc's lack of in-house expertise obliges an IOC partner. But their high development costs leave these fields particularly sensitive to changing financial dynamics
The maiden project, covering development on the onshore Shah field and eventually commissioned in 2015, was delayed for several years after the original foreign partner withdrew amid wider cost-cutting. And 2014’s oil price crash prompted Shell into a late exit from a similar scheme, yet to be revived, at the giant Bab field.
A key question for Abu Dhabi gas progress is how prolonged the price slump will be. Some market commentators argue that the recovery from the 2014 crash as prolonged due to ongoing downside risk, particularly on the demand side. In contrast, the current crisis has had the worst of its demand impact front-loaded and there is thus the potential for a V-shaped recovery—particularly if demand returns while the supply side is still going through a painful retrenchment.
This is, admittedly, just one view, and disputed by other analysts. But Abu Dhabi’s gas projects should also benefit from the government, and, by extension, Adnoc, considering gas development an overriding strategic priority.
They are intended, unlike oil output growth, not simply to bolster revenues but to regain energy security lost through the increasing reliance on imports. The urgency of this strategic aim has grown over the past three years as the UAE has quietly continued to receive nearly a third of its gas needs by pipeline from Qatar—despite having helped spearhead an ongoing economic blockade of its gas-rich Gulf neighbour.