As Abu Dhabi Sizes Up Oil Partners, Western Firms Risk Being Left Out

http://www.nytimes.com/2014/10/30/business/energy-environment/abu-dhabi-oil-industry-partners.html

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DUBAI, United Arab Emirates — Abu Dhabi, the largest and wealthiest member among the seven states in the United Arab Emirates, is shaking up its oil industry. It has allowed the expiration of some longstanding concessions to major Western oil companies and is considering replacing at least some of them with partners from Asia and elsewhere.

For more than seven decades, the Abu Dhabi National Oil Company, also known as Adnoc, shared the operation of Abu Dhabi’s oil fields, the biggest onshore producers in the United Arab Emirates, with companies including Exxon Mobil, Royal Dutch Shell, Total and BP, under the umbrella of the Abu Dhabi Company for Onshore Oil Operations.

The concessions, for 75 years, expired in January, but Abu Dhabi has yet to say which of the Western companies will have their rights renewed. There are also likely to be new entrants, possibly including Statoil, the Norwegian oil and natural gas company; less technologically skilled companies from emerging markets like China and South Korea, might join it, according to Adnoc officials.

The potential inclusion of new partners reflects the changing economic realities in Persian Gulf nations. With oil production in the United States surging thanks to the boom in oil extraction from shale rock and with demand for oil in Europe stagnant, the big oil producers are sending their crude eastward. The Gulf countries are also moving from longstanding reliance on technology and expertise from the United States and Europe toward new business partners in Asia and elsewhere.

Behind the change is a seismic shift in the oil market. China overtook the United States as the world’s largest oil importer last year, while South Korea is also one of the world’s top five crude importers. Gulf countries, including the United Arab Emirates, are now think that it is in their interest to build partnerships with these countries through their oil companies.

Analysts say that Asian countries have helped their case by largely staying out of the politics of the region while Western countries have a long history of involvement, including criticism of regional governments’ human rights records. Staying out of politics is appreciated by Gulf nations, which have become increasingly sensitive since the onset of the Arab Spring, in late 2010, and the ensuing disorder that has spread throughout North Afrcia and the Middle East.

“The idea of Asian countries’ being given strategic stakes in the U.A.E. oil sector is important, but it is easy to overstate in the sense that relations are largely commercial rather than political,” said Ben Simpfendorfer, managing director of Silk Road Associates, a Hong Kong consulting firm that advises companies on developing business strategies in Asia and the Middle East. “It’s more a rebalancing of a historical overreliance on the West.”

The oil fields awaiting new concessions produce about 1.5 million barrels of oil a day, more than half of Abu Dhabi’s total output, now about 2.8 million barrels per day. When it decides on the new concessions, Adnoc is expected to include companies with advanced technical knowledge to help meet its target output of 1.8 million barrels a day from the onshore fields by 2017.

In recent years, Western companies have been left on the sidelines on some significant deals in the United Arab Emirates. For instance, it awarded a $20 billion nuclear power plant deal to a South Korean-led consortium and a $4 billion, cross-country oil pipeline project to Chinese contractors. The Western companies have already seen their position in the local oil industry slip in recent years as new fields went to the Korea National Oil Corporation and the China National Petroleum Corporation.

Western companies appear almost certain to lose some of their hold in the United Arab Emirates as rivals from other regions are willing to give more competitive terms to gain entrance to a potentially lucrative market. On the nuclear project, for instance, the South Korean group undercut rival offers from France.

Companies are expected to make business proposals to Abu Dhabi this autumn, with final awards to be made this year so that the new consortiums can begin work at the start of 2015. But the process may be slow, because awards were initially expected well before the concessions expired in January.

Western companies may struggle to achieve what they think are good deals in Abu Dhabi. Fees paid by Abu Dhabi have historically been very low. Under the expired concessions, companies received just $1 per barrel of oil produced. Companies are trying to obtain improved terms.

In another disappointment, the structure of the consortiums — 60 percent owned by Abu Dhabi and 40 percent for international investors jointly operating the fields — is expected to stay the same. Previously, there was talk of splitting the concessions so that each company could operate one unit and might be willing to provide newer technology as a result.

Some Western companies may no longer to be willing to work under these conditions. Exxon Mobil, which has said all along that it would prefer to operate the fields alone rather than share its technology with rivals, has reportedly withdrawn from the bidding process. Asked about this, the company said on Oct. 11, “It is Exxon Mobil’s longstanding practice not to comment on commercial matters.”

In January, the company negotiated a 15-year extension on a different contract, at an Abu Dhabi offshore oil field, Upper Zakum, through 2041.

“Exxon has already renewed Upper Zakum, at improved terms, so it doesn’t need two footholds in large, low-return projects,” said Robin Mills, head of consulting at Manaar Energy, a Dubai consulting firm that offers strategic advice on energy projects. “Assuming Exxon is out, Abu Dhabi would most likely keep Shell and Total in. They have to keep at least some of the old partners for their technical expertise and deep knowledge of the field, and they trust them.”

With Exxon Mobil extending its presence in Upper Zakum, one of the world’s biggest fields, and Total and Shell expected to win renewals in the onshore Adnoc consortium, the old partners still enjoy a solid position. Any new entrants would most likely take a minority non-operating stake, Mr. Mills said.

While the United Arab Emirates’ oil sector may not be the most lucrative, it has its attractions. It is one of the few Middle Eastern nations to allow foreign companies the right to develop oil fields, volumes are easy to produce, and the fields represent a sizable source of reserves in a world where oil is becoming harder to find, which may explain why companies are continuing to show interest, according to Oswald Clint, senior analyst at Sanford C. Bernstein & Co.

Losing the United Arab Emirates’ fields could have a big impact on a company’s bottom line. Total’s profit, for example, dropped 12 percent last quarter after a decline in oil output, largely because of the loss of Abu Dhabi barrels.

The company has a 50 percent chance of winning a 10 percent stake in the new concession, Total’s chief financial officer, Patrick de La Chevardière, said in July.

Trusted Western companies are likely to remain in the picture, not least because oil is used as a political tool in Gulf nations’ foreign policy, said F. Gregory Gause III, a professor of international affairs at the Bush School of Government and Public Service, at Texas A&M University. “The U.A.E. continues to have very close military and political relations with the U.S., France and Britain, much closer than with Russia or China,” he said. “If political-military issues are guiding the decision, I would assume Western firms would have the upper hand.”