UAE Industries - Oil and Gas

Global oil consumption contracted in both 2008 and 2009, during the worst global recession in decades. As the economic crisis recedes, energy forecasters predict that oil demand will gradually recover, albeit more slowly than previously expected. The International Energy Agency forecasts global oil demand of 105 million bpd in 2030, up 24 per cent from 85 million bpd in 2008.

Most energy economists see OPEC’s contribution to world oil supply expanding as production declines from mature producing areas such as the North Sea. That bodes well for the plans of Abu Dhabi, which accounts for roughly 95 per cent of the UAE’s oil and gas output, to boost production capacity by roughly 30 per cent to 3.5 million bpd by 2019. It means the new capacity should be needed and will not sit idle.

The prospect of maintaining costly spare capacity was not something that troubled most oil exporters before 2009. Crude spiked to a record US$147 per barrel in July of 2008 partly because consumers worried that new oil supplies could not be developed fast enough to keep pace with rapidly rising demand. During 2009, however, OPEC spare capacity quadrupled to about 6 million bpd as oil demand slumped. Unusually, about a third of that idle capacity lay outside Saudi Arabia, the traditional OPEC swing producer.

The UAE idled approximately 20 per cent of its oil production capacity in 2009 in response to the deep cuts to OPEC production targets. That focused the nation’s attention on securing markets for its oil exports through diplomatic efforts to deepen political and trade ties with Asian oil consuming states, and investment in Asian petroleum refining and storage projects. The initiatives were undertaken amid signs that oil demand in the developed world was threatened by economic stagnation, while new international agreements to curb carbon emissions seemed likely to limit growth in global oil demand.

The UAE idled approximately 20 per cent of its oil production capacity in 2009 in response to the deep cuts to OPEC production targets. That focused the nation’s attention on securing markets for its oil exports through diplomatic efforts to deepen political and trade ties with Asian oil consuming states, and investment in Asian petroleum refining and storage projects. The initiatives were undertaken amid signs that oil demand in the developed world was threatened by economic stagnation, while new international agreements to curb carbon emissions seemed likely to limit growth in global oil demand.

In the short-term, the UAE also faces a domestic gas crisis which is threatening the reliability of its electricity supply. This has been exacerbated by compliance with OPEC oil cuts, as much gas is produced from the nation’s oil fields. Lower crude output means lower produced volumes of associated gas. Compounding the problem, Abu Dhabi, which was the first Gulf state to produce liquefied natural gas (LNG), has long-term contractual commitments to export gas.

In the longer term, the UAE is pursuing plans to diversify its domestic energy supply to include nuclear and solar power, which should lessen the pressure on its gas supplies. Further gas development, however, will be essential if population growth and industrial expansion continue as forecast.

The nation’s response to the rapidly changing energy milieu and its increasingly complex interface with environmental issues has been measured but multifaceted.

First, the UAE is pressing ahead with plans to expand oil and gas production capacity, but has extended the time frame for oil development while giving higher priority to gas projects. Second, government and industry have joined forces in initiatives to develop new oil markets. Third, several emirates have launched programmes to bolster energy efficiency and encourage energy conservation, reflecting the growing public awareness of the need to reduce carbon emissions. Some of these directly involve the oil and gas sector. Fourth, the nation is moving ahead with low carbon and clean energy developments, with close co-operation from oil and gas producers. Fifth, it is fostering international energy partnerships and participating in more overseas energy projects.

The UAE’s proved oil reserves stood at 97.8 billion barrels at the end of 2008, and its proved gas reserves at 227.1 trillion cubic feet. That is enough oil to last for more than a century and sufficient gas for more than 130 year of supply at recent production rates. Among other things, that means the Emirates’ gas shortage is not due to a lack of gas reserves, but to insufficient development.

A landmark event in 2009 was therefore the launch of a joint venture between the Abu Dhabi National Oil Company (ADNOC) and the US oil company ConocoPhillips to develop the Shah gas field in the southwest of Abu Dhabi at an estimated cost of US$10 billion (Dh37 billion). The project will not only provide about 500 million scfd of sales gas, but will also advance the emirate’s capability to exploit challenging gas deposits.

The Shah reservoir contains so-called ultra-sour gas, consisting of about 30 per cent hydrogen sulphide. The deadly gas could endanger humans and livestock if allowed to leak into the atmosphere and could damage the environment. Gas fields with similar hydrogen sulphide concentrations have been developed elsewhere in the world, but not often. ConocoPhillips, however, is a world leader in the safe exploitation of such reservoirs and will help ADNOC develop similar expertise.

As a spin-off from the Shah project, Abu Dhabi will become the leading regional exporter of sulphur, which is used to make fertilisers, rubber and sulphuric acid. The emirate is considering whether to develop the world’s longest liquid sulphur pipeline or a railway to transport sulphur from the Shah field.

ABU DHABI

Abu Dhabi is pivotal in boosting the UAE’s overall oil and gas production capacity, as it contains about 94 per cent of the nation’s oil reserves and more than 90 per cent of its gas reserves.
Major projects require planning consent and budgetary approval from the emirate’s Supreme Petroleum Council (SPC). The body is chaired by HH Sheikh Khalifa bin Zayed Al Nahyan, President of the UAE and Supreme Commander of the Armed Forces, indicating the central importance of the emirate’s oil and gas sector to the entire UAE economy. The SPC directs energy policy for Abu Dhabi and functions as a board of directors for ADNOC, which is charged with proposing oil and gas projects to the Council and implementing its directives.

ADNOC’s operating units, which are structured as joint ventures with foreign oil companies, are proceeding with a full slate of major oil and gas developments in addition to the Shah gas project, discussed above. They include four more projects to expand gas production and six aimed at oil development.

The first of these is a Dh40 billion (US$10.9 billion) effort to integrate gas production from two of Abu Dhabi’s main offshore and onshore oil fields, unlocking an additional 1 billion scfd of gas supply. Abu Dhabi Gas Industries (Gasco), one of the ADNOC subsidiaries responsible for handling the emirate’s gas, awarded the four main engineering, procurement and construction contracts for the project in November of 2009.
Two more projects are planned to exploit sour gas fields, one onshore and one offshore. The remaining gas project involves a new partnership between ADNOC and the Anglo-Dutch group Royal Dutch Shell to search for gas deposits deep below the sea floor.

In oil development, the Abu Dhabi Company for Onshore Operations (Adco) awarded US$3.5 billion (Dh12.9 billion) of contracts in 2009 for an integrated project to increase crude output from Abu Dhabi’s Sahil, Asab and Shah oil fields by a combined 60,000 bpd to 455,000 bpd by 2016. It also awarded an US$805 million (Dh3 billion) contract to raise production from the Bab oil field, which was the first onshore oil deposit developed in the emirate. In total, Adco plans to increase oil production capacity by 400,000 bpd to 1.8 million bpd by 2017.
Offshore, the Abu Dhabi Marine Operations Company (Adma-Opco) is moving ahead with a ten-year plan to increase output from two major Gulf oil fields, Umm Shaif and Lower Zakum, to 1 million bpd by 2019 from about 600,000 bpd in 2009. The unit also plans to develop three smaller fields that are expected to yield another 76,000 bpd of crude oil. This is the first step in a plan to tap several small fields that were passed over when Abu Dhabi’s main oil fields were developed.
The Zakum Development Company (Zadco), another ADNOC offshore oil subsidiary, is proceeding with a project to increase output from the Upper Zakum field by about 50 per cent to 750,000 bpd following the 2009 completion of a reservoir study. In November of that year, it awarded a contract for dredging work required to build four artificial islands to support drilling rigs for the project. ADNOC’s partner in the development is the US oil major ExxonMobil.

Finally, ADNOC has awarded a new oil concession to the US oil company Occidental Petroleum to develop two small fields close to the UAE capital. Starting in 2010, Occidental plans to invest US$500 million to produce 20,000 bpd from the fields. The crude will be sent to Abu Dhabi’s Umm an-Nar refinery, the smaller of the emirate’s two petroleum refineries, to meet growing domestic needs for petrol and other oil products.
ADNOC’s oil refining company, Takreer, also made steady progress in 2009 with long-standing plans to expand Abu Dhabi’s petroleum processing capacity to 885,000 bpd from 485,000 bpd by building a new refinery and integrating operations at its existing facilities.
In November of 2009, it awarded the first contracts for the US$10 billion (Dh37 billion) Ruwais refinery project, which will serve as the foundation for the emirate’s diversification into petrochemicals. The two contracts to build key equipment for the 417,000 bpd refinery, which is expected to start production in 2013, were worth a total of US$5.2 billion (Dh19.1 billion). The decision to proceed with the project during a sustained downturn in refining margins is part of a strategic move to capture a greater share of the global market for refined oil products when the economy recovers.
Related to this venture, ADNOC’s fertiliser arm, Fertil, has announced plans to spend US$1.2 billion to build a new plant at Ruwais, located about 200 kilometres west of the UAE capital on Abu Dhabi’s coast. In July of 2009, the Vienna-based plastics maker Borouge, a joint venture between ADNOC and the Austrian oil company OMV, awarded a US$1 billion contract under a programme to expand facilities at Ruwais.


DUBAI

Dubai’s oil production, which once accounted for about half the emirate’s GDP, has fallen dramatically from its 1991 peak of 410,000 bpd. By 2007 it had dropped to 80,000 bpd. As a result, the second largest UAE emirate has swung from being a net oil exporter to importing most of its petroleum requirements.
While it continues to pump gas from offshore fields, Dubai also consumes more of that fuel than it produces, and is increasingly dependent on imports to make up the difference. The emirate already purchases several hundred cubic feet per day of gas from Dolphin Energy, an Abu Dhabi company that imports gas by pipeline from Qatar. In 2011, after completing the construction of a receiving terminal, Dubai will start importing 650,000 tonnes per year of LNG under a contract with Qatar Petroleum and Shell.

Dubai remains deeply involved in the petroleum sector, however, as a hub for oil trading and energy services. The port of Jebel Ali, located about 35 kilometres south-west of the city of Dubai, handles a large part of the UAE’s trade in refined petroleum products and can accommodate tankers of up to 80,000 tonnes capacity.
In 2008, the Dubai Multi Commodities Centre (DMCC) signed a framework agreement with investors for a US$200 million project to build an oil storage terminal at Jebel Ali, with the aim of enhancing Dubai’s role as a regional oil products trading hub and of supporting the emirate’s burgeoning civil aviation sector.
A condensates refinery at Jebel Ali, processing liquids from gas production, is being expanded to 120,000 bpd of capacity from 48,000 bpd. The refinery is one of two operated by the Dubai Government-owned Emirates National Oil Company (ENOC). Both process feedstock imported from Qatar, Abu Dhabi and Iran.
The Dubai Mercantile Exchange (DME), launched in 2006, was the first commodities exchange to offer a futures contract for a benchmark Middle Eastern crude. As of November 2009, trading in the exchange’s DME Oman Crude Oil Futures Contract had increased by 58 per cent for the year, strengthening its prospects for becoming a leading benchmark in global oil trade. Trading volumes benefited from the contract’s listing in February of that year on the CME commodities exchange in the US. Both the DME and the DMCC also offer futures trading in fuel oil.

A number of international oil companies maintain regional offices in Dubai, as do major companies providing services to the energy sector. In 2007, the US oil field services company Halliburton established its regional headquarters in Dubai. The following year, Mubadala Development, the Abu Dhabi government-owned industrial conglomerate, and the British energy services firm Petrofac set up a joint venture headquartered in Dubai.
Recognising the emirate’s challenges as it seeks to meet rising energy demand with diminished resources, HH Sheikh Mohammed bin Rashid Al Maktoum, the Vice President of the UAE and Ruler of Dubai, in June of 2009 created two new bodies to oversee long-term energy policy: an Energy Higher Council to address demand issues and a Department of Petroleum Affairs to look at supply.


THE NORTHERN EMIRATES

Four of the UAE’s other five emirates also have minor amounts of oil and gas production.
Crescent Petroleum, a private Sharjah company, produced oil from the Mubarak field in the Gulf, near Abu Musa Island until the end of 2009, when it determined that the field had reached the end of its productive life and returned the concession to the Government of Sharjah.
Crescent and Dana Gas, a Sharjah affiliate, are also developing the Zora gas field, located in territorial waters shared by Sharjah and Ajman. Production of 50 million to 60 million scfd is expected to start in 2012. Dana and Emarat, a Dubai marketer of petroleum products, have jointly developed a common-user gas pipeline to serve Sharjah customers.
In June 2010, Cresent announced an agreement with the Russian state-controlled Rosneft to explore for gas under a new Sharjah concession covering the emirate’s onshore area. The companies are drilling their first well at Al Madam.
On 9 November 2010, HH Sheikh Sultan Bin Mohammed Al Qasimi, the Ruler of Sharjah, established the Sharjah National Oil Company to operate the emirate's hydrocarbon interests on a commercial and invest in firms and facilities operating in the oil and gas sector.

Gas production from the Atlantis field offshore Umm al-Qaiwan began in 2008. A unit of China’s Sinochem is developing the deposit and sending as much as 92 million scfd of liquids-rich gas through an under-sea pipeline to a Ra’s al-Khaimah processing plant operated by the Government-owned Ras Al Khaimah Gas Commission, or RAK Gas.

RAK Petroleum, a private-sector Ra’s al-Khaimah company, holds interests in oil and gas concessions in Sharjah, the Sultanate of Oman and its home emirate. In June 2010, the company reported that the Bukha field in Omani territorial waters off the Musandam peninsula had been returned to production after being shut down for several months. As a result, it said, the Bukha and nearby West Bukha fields were producing at record combined levels of 10,000 barrels per day of oil and 40 million scfd of gas.
Fujairah does not produce oil or gas, but the world’s second largest bunkering port is located on its coast. The port of Fujairah, on the Arabian Sea, handles about 1 million tonnes per month of marine transportation fuel and other oil products. The arrival in 2008 of gas imports through the Dolphin Energy pipeline from Qatar has facilitated power and water development in the emirate and stimulated local industry.

With the completion of the strategic crude oil pipeline from Abu Dhabi, Fujairah is expected to undergo further expansion. Abu Dhabi’s IPIC, which owns and operates the pipeline, is developing an oil refinery and storage facilities at the Fujairah port.
In October 2010, HH Sheikh Hamad Bin Mohammed Al Sharqi, the Ruler of Fujairah, opened a naval base on the emirate’s coast to protect the new oil route.
In November 2010, Abu Dhabi’s Dolphin Energy consortium completed the construction of a gas pipeline from Taweelah on Abu Dhabi’s Gulf coast to Fujairah, where it will deliver gas to two large power plants in the northern emirate operated by Dolphin’s largest customer, the Abu Dhabi Water and Electricity Company.


INTERNATIONAL DEVELOPMENT

As the UAE’s oil and gas sector has developed sophistication, it has spawned a number of public and private sector companies that pursue energy development abroad.

In Abu Dhabi, three government-controlled entities, Mubadala Development, the Abu Dhabi National Energy Company, or Taqa, and IPIC, are the main vehicles for such enterprise. In 2009, Mubadala’s oil and gas output stood at roughly 350,000 barrels of oil equivalent per day (boepd), while Taqa produced about 112,000 boepd. IPIC’s investments have been mainly in petroleum refining and petrochemicals.
Mubadala produces oil in Oman and gas in several Southeast Asian countries. As the controlling shareholder of Dolphin Energy, a joint venture with Occidental Petroleum and the French energy group Total, Mubadala also produces gas and condensates in Qatar. Since 2008, Dolphin has been sending up to 2 billion cubic feet per day of gas through an undersea pipeline to Taweelah in Abu Dhabi for distribution through an overland pipeline system to customers in the UAE and Oman. Mubadala is in another joint venture with ConocoPhillips to explore for oil and gas in the Caspian Sea off the coast of Kazakhstan. In November of 2009, Mubadala and Occidental Petroleum finalised an agreement with the National Oil and Gas Authority of Bahrain to raise output from the Kingdom of Bahrain’s only onshore oil field.

Taqa produces most of its oil from the UK North Sea, while its gas production is concentrated in Western Canada and the Dutch North Sea. It also owns interests in pipelines, production platforms and gas storage facilities in those areas, and is leading a project in the Netherlands to develop a major gas storage and marketing hub for western Europe. In addition, Taqa has a substantial international and domestic portfolio of power generation assets.

IPIC has acquired in a wide portfolio oil and petrochemicals interests in North America, Europe and Asia. It is a major shareholder and strategic partner of Austria’s OMV, and holds an indirect interest in a large LNG development in Papua New Guinea.
The Dubai Government’s ENOC also invests overseas, mainly through its 52 per cent interest in Dragon Oil, which produces oil and gas in Turkmenistan. Al Thani Corporation, a private-sector Dubai company, is exploring for oil and gas in several African countries including Sudan, Egypt and Libya.
The Sharjah affiliates Crescent Petroleum and Dana Gas have a gas joint venture in Iraqi Kurdistan. Dana also produces oil and gas in Egypt.

RAK Petroleum is involved in oil and gas exploration and production in Oman, and has acquired a minor interest in Heritage Oil, a Canadian company with a big oil discovery in Kurdistan.


FUTURE DEVELOPMENT

Environmental mitigation, especially as international concern mounts over global warming, presents a substantial challenge to the global oil and gas industry, which is under pressure to find ways to cut its carbon emissions. The UAE’s oil and gas sector has accepted the challenge, and is already making progress with a number of initiatives.
As an example, ADNOC is well on the way to eliminating gas flaring. By reducing the wasteful burning of gas at production facilities and oil refineries through better management, the company is not only cutting carbon dioxide emissions, but is also conserving a valuable energy resource.
ADNOC is also a partner in an ambitious scheme to develop a carbon capture and storage network for the UAE. The plan is to capture carbon dioxide emissions from major Abu Dhabi industrial installations and pipe the gas to oil fields for use in enhanced oil recovery projects. Eventually, the carbon dioxide would be permanently stored underground in the depleted reservoirs.

Within the next few years, Abu Dhabi will also face decisions related to the expiry in 2014 and 2018 of long-term concessions covering production from most of its biggest oil fields. While details of the negotiations have not been made public, senior government and ADNOC officials have indicated that they value Abu Dhabi’s partnerships with international energy firms and wish to continue such alliances.

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