UAE - Pax Americana Is Changing - Part 19B - Abu Dhabi's Energy Supply Potential.

Accounting for more than 95% of the UAE's total oil and gas exports outside the union's seven emirates, the Abu Dhabi National Oil Co. (ADNOC) is to raise its capacity to produce crude oil, condensates and gas liquids (excluding LNG) to well over 4.5 million b/d within the next ten years. By 2010-12, if world demand for liquefied natural gas remains strong, Abu Dhabi would more than double its LNG exports to about 12 million tons/year.

Plans for such expansions are being considered on the assumption that the world's current geo-political status quo will not have changed by then. However, planners in Abu Dhabi and other OPEC countries are worried by some indications of a shift to alternative sources of energy, and American isolationism likely to develop in the US as a consequence of its problems in Iraq (see news22cOilShockFundNov28-05). If such trends develop, small and potentially vulnerable states in this part of the world like Abu Dhabi would be more cautious and would limit expansions.

US isolation would affect the six-state Arab Gulf Co-operation Council states, of which the UAE is a key member, as this would change the geo-strategic priorities of Pax Americana. The GCC accounts for more than 45% of the world's conventional oil reserves and more than 20% of the world's production of conventional oil. An American shift to alternative sources of energy will affect conventional oil in a big way as world demand for it will decline, rather than rise, in the coming decades.

Visiting Abu Dhabi on Nov. 12, US Energy Secretary Samuel Bodman praised the UAE's "sound oil policy" and its major contribution to the stability of the global oil markets. The UAE Energy Minister Muhammad bin Dha'en al-Hamili received Bodman and the two discussed bilateral relations in the areas of oil and gas industry, with the US energy official urging the union and the other big GCC energy producers - Saudi Arabia, Kuwait and Qatar - to raise their oil production capacity to cope with rising world oil demand.

However, Bodman did say in Washington on Nov. 22 that a price of crude oil too high for too long will cause a world shift to alternative sources of energy and will concentrate on new technology to make these sources compete with conventional oil. He made a hint at this consequence on Nov. 12, when Bodman met with Hamili.

Speaking to reporters in Abu Dhabi on Nov. 12, Bodman also said: "It would be a useful thing if the GCC states could pull together and make a statement on expanding their production capacity. This kind of transparency would help the market". Bodman described the GCC states as reasonably transparent on their production plans but added that a statement or re-assurance by these states would increase consumer confidence that production would be available in the long term.

Minister Hamili on Nov. 22 was quoted as saying the union was raising its oil production capacity to more than 3.5m b/d in the "next few years", with its sustainable output rising by 200,000 b/d in 2006 to 2.7m b/d. This implies Abu Dhabi, the emirate which in an emergency already can produce up to 3m b/d of oil and condensate, but for a brief period. Dubai and the rest of the UAE can produce another 200,000 b/d of oil and condensate.

Hamili, an Abu Dhabian, was talking at the launch of the World Energy Outlook 2005 by the Paris-based IEA. He said: "On the production side, the UAE currently produces more than 2.5 million b/d [of crude oil - excluding condensates which are not counted in OPEC output quotas] and by the end of this year and early next year...200,000 b/d will be added to the capacity. Continued investments in upstream projects should expand the production capacity of the UAE to more than 3.5m b/d in the next few years. In the downstream sector, the UAE is planning to expand its refining and petrochemical sectors. A refinery is planned to be built at Fujairah with a capacity of 300,000 b/d of crude. Expansion is continuing in existing plants".

Talking reporters on the sidelines of an energy conference in Doha, Qatar, the CEO of ADNOC, Yousef Omair bin Yousef, on Nov. 21 said: The Emirates "plan to produce 4m b/d [of oil] in 2015". Bin Yousef, who is also secretary-general of Abu Dhabi's Supreme Petroleum Council (see Part 1 in fap4bbUAE-1-Oct31-05). Asked whether OPEC was doing enough to alleviate high world oil prices, he said: "It's not true that producers are trying to maximise oil prices. We are after a stable, reasonable price", adding that "$40-45/barrel" was a reasonable price for consumers and producers.

In the UAE, only Abu Dhabi adheres to OPEC quota limitations, although quotas have been suspended since September, when OPEC decided to raise total output to 30m b/d. OPEC is scheduled to hold its next ministerial conference in Kuwait on Dec. 12 and some states - such as Venezuela (see APS Review's omt22VenzWhoNov28-05) and Iran - have indicated their intent to press for a cut in the group's quotas for the first quarter of 2006. But Saudi Arabia and its allies, including Abu Dhabi, are not likely to back such a move in view of the coming winter in the Northern Hemisphere, the world's biggest market for heating oil.

Abu Dhabi's current output including condensates is 2.7m b/d and total UAE production of petroleum liquids (excluding LNG) is averaging 2.9m b/d. Abu Dhabi's oil production is about 2.5m b/d. Several of Abu Dhabi's oil and gas fields are being expanded, so that the petroleum liquids' capacity (excluding LNG) would exceed 3.5m b/d by 2008. ADNOC says this capacity will be sustainable for up to 25 years, rather than for 12 months.

Abu Dhabi is by far the wealthiest Middle East state in per capita terms and financially. It has been one of the most attractive places in the world for foreign investors. Alert to any new opening or additional incentives offered in the neighbouring countries, the local government will always try to be competitive, if not the very best. Local and foreign investors will always be happy operating in this emirate.

True to tradition since late 1971, the UAE marked its 33rd anniversary on Dec. 2, 2004 as the only successful union in the Arab World. But this time it was a sad occasion as the founder of this union, Abu Dhabi ruler Shaikh Zayed bin Sultan al-Nahyan, died on Nov. 2, 2004 - one month before he was to celebrate his 33rd anniversary as UAE president. Shaikh Zayed was succeeded as Abu Dhabi ruler and UAE president on Nov. 3 by his first son and crown prince, Khalifa bin Zayed; and his third son, Mohammed bin Zayed, became the crown prince of Abu Dhabi.

By far the largest and wealthiest among the seven UAE emirates, Abu Dhabi prides itself on leading this union. The whole of the UAE is 84,000 sq km, and Abu Dhabi is 77,700 sq km. Total population in the UAE, including the expatriates, is over 4m (up from 2.39m in early 1997). Each of Abu Dhabi and Dubai accounts for over 1m. Excluding the expatriates, Abu Dhabi's GDP per capita is the highest in the world. All the sectors in Abu Dhabi are expanding to cope with a steady economic growth expected in this decade and a further improvement in social conditions. Below are the main features of its energy sector.

Abu Dhabi has the long-term sustainable capacity to produce 2.7m b/d of crude oil and condensate, up from 2.45m b/d at end-1996 and 1.9m b/d in 1990/91. The capacity will be expanded to over 3.4m b/d by 2007. The geology and resources of Abu Dhabi, compared to its size, are the envy of all the countries in the world. Its proven oil reserves are put officially at 92 bn barrels, and there are more than 200 bn barrels of oil in place yet to be appraised for development. Its proven recoverable reserves of natural gas are 190 TCF (about 5.7 TCM), with more to be found and proven in future. To compare, recoverable oil reserves in the whole of the UAE are below 98 bn barrels, and proven reserves of natural gas are almost 205 TCF.

Six major fields in Abu Dhabi, three onshore and three offshore, account for the bulk of the emirate's oil, condensate and gas production; and the oil is of high quality. Most of Abu Dhabi's oil and gas fields are being expanded. However, the fields have matured and require expensive EOR systems based mainly on gas injection. Unlike its bigger GCC neighbours and other OPEC members, Abu Dhabi has foreign partners sharing its burden in funding EOR projects and capacity expansions. They provide the best technology available.

The natural gas sector is expanding rapidly. Abu Dhabi's onshore gas production is shortly to average 5,000 million cubic feet (MCF) a day, up from 3,000 MCF in early 2005, with more than 25% of this reinjected into the oilfields. Offshore production is partly reinjected and mostly used for LNG/LPG exports.

Abu Dhabi is to import gas from Qatar from 2006, as local demand is projected to rise rapidly in the coming years in view of big expansions in the power/water and industrial sectors (see Part 1).

The capacity to produce condensates has risen from 40,000 b/d in early 1994 to more than 300,000 b/d and should exceed 440,000 b/d by 2008. Condensates, NGLs and LPGs are excluded from the OPEC quota system. ADNOC has had difficulty in marketing its condensates, partly because of the liquids' bad quality and partly because of differences with potential clients over pricing. Most of the condensates now are being refined locally.

Production of LNG on Das island has more than doubled. From 2.6m t/y, the nominal capacity in late 1994 reached 4.9m t/y with the addition of a third train. But the actual production of LNG in the past ten years has averaged about 5.3m t/y and the three trains now can produce up to 6m t/y. The Das island LNG complex also produces 1.7m t/y of LPG, 535,000 t/y of pentane and 338,000 t/y of sulphur. An expansion underway should raise LPG output to 2.7m t/y by end-2005 or in early 2006. With Tokyo Electric (Tepco) of Japan buying most of the LNG under a 25-year contract and taking a major part of the LPG output, the surplus of both LNG and LPG is being sold on spot basis.

The Das joint venture, ADGAS, is owned 70% by ADNOC. The rest of the ADGAS shares are held by BP, the Mitsui group and Total. ADNOC's share was raised from 51% in June 1997. The foreign partners' participation in ADGAS was in July 1997 renewed until 2019.

The capacity of Abu Dhabi to produce LPG from onshore and offshore associated gas and from the LNG complex on Das island has risen to more than 8m t/y, from 3.93m t/y in 1994. The total capacity should reach 12m t/y by end-2007. The Abu Dhabi Gas Processing Co. (Atheer) was in 2001 merged with Abu Dhabi Gas Industries Co. (GASCO) - with ADNOC now holding 68% and its partners being Shell (15%), Total (15%) and Partex (2%). In charge of the gas sector, Gasco has expanded its capacity to 6m t/y of ethane, LPG and NGLs. GASCO at Ruwais also has the capacity to produce up to 2.12m t/y of pentane-plus, which is expected to expand as well.

ADNOC's refining sector has been expanded from 205,000 b/d to 485,000 b/d. The Umm Al Nar refinery has a capacity of 85,000 b/d. The 120,000 b/d refinery at Ruwais now has two condensate units on stream which have boosted its capacity by 280,000 b/d. ADNOC's unit in charge of refining is called Takreer.

The Supreme Petroleum Council (SPC), the top decision maker for the hydrocarbon sector, and ADNOC have revived plans for a further expansion of the Ruwais refinery with a $500m unit to produce unleaded gasoline.

ADNOC and Borealis of Copenhagen have a petrochemicals JV, called Abu Dhabi Polymers Co. (Borouge) with a complex at Ruwais - an expanding industrial zone 250 km east of Abu Dhabi city - on stream since January 2002. This consists of an ethane-based ethylene plant with a capacity of 600,000 t/y and two polyethylene (PE) units of 225,000 t/y each. Borouge is owned 60% by ADNOC and 40% by Borealis.

Borouge's PE production units are being expanded by 130,000 t/y under a Phase-II project. Phase-III, to be on stream in late 2009 or early 2010, is to consist of a 1.4m t/y ethylene cracker based on ethane, plus units to produce 540,000 t/y of PE and 800,000 t/y of polypropylene (PP).

Borealis, the biggest producer of polyolefins in Europe, is now owned 65% by International Petroleum Investment Co. (IPIC), a 50-50 JV of ADNOC and the Abu Dhabi Investment Authority (ADIA), and 35% by OeMV. IPIC holds 19.6% in OeMV, the biggest oil and industrial company in Austria.

ADNOC and Takreer are considering a worldscale aromatics complex to be built at Ruwais. The SPC has also been considering another petrochemical venture to be built at Ruwais, to have the capacity to produce 520,000 t/y of ethylene di-chloride and 420,000 t/y of caustic soda (chemicals used in the salt industry). The plant will produce chlorine and salt for domestic consumption and hydrogen for the oil refining complex at Ruwais.

The capacity of the fertiliser producing complex at Ruwais, a JV between ADNOC and Total called Fertil, is being doubled. Fertil is also to have a 50,000 t/y melamine plant.

The Abu Dhabi Water and Electricity Authority (ADWEA) has 40% Sohar Aluminium Co. (SAC) in Oman, which is to have an aluminium smelter built in the Sohar industrial zone with a single potline to have a capacity of 326,000 t/y and a captive power plant with a capacity of 740-780 MW. They should be in operation in the second quarter of 2008. A second potline with a 326,000 t/y capacity is to be on stream by 2010/12. This is ADWEA's first external investment, having successfully privatised the power and water desalination business in Abu Dhabi. The other 40% partner in SAC is Oman Oil Co. (OOC). Alcan of Canada holds the remaining 20% in the JV.

Overseas investments by IPIC now include stakes in four integrated groups: 19.6% in OeMV, 65% in Borealis, 12% in Cepsa of Spain, a major stake in a South Korean refining/marketing operation, and a smaller equity in Total. IPIC in May 2005 offered $5 bn for a stake in state-owned Taiwan oil refiner Chinese Petroleum Corp (CPC) in a bid to clear obstacles to the sale. IPIC Managing Director Muhammad al-Khaily on Oct. 21 was quoted as saying: "We are very interested to be in Chinese Petroleum as it's an attractive company, in a good position in Taiwan, with profitability growing". The investment would be Abu Dhabi's first in Asia's sixth-largest economy and would help Taiwan secure additional crude oil supplies. (Taiwan's oil imports rose 13% in 2004 to 369m barrels, 3.8% from the UAE).

The bid is a test of Taiwan's determination to privatise CPC, whose union argues that selling a stake to IPIC would be illegal. The Taiwanese government, which owns 100% of CPC, plans to reduce its stake to less than 50% by auctioning shares, according to the Council for Economic Planning and Development, the nation's top economic planner. There is no timetable for the sales. Taiwanese law on privatisations states the government "should" invite public bids from potential investors. An IPIC alliance with CPC is attractive to Taiwan, provided obstacles to the deal can be overcome. For IPIC, CPC has a sizable market share in Taiwan and provides a step towards entering the Asian market.

As part of its May deal with CPC, IPIC agreed to consider investing in an $11.6 bn chemical plant which CPC is helping develop in western Taiwan. Still, Abu Dhabi is more likely to participate in a chemical project with CPC in the Gulf than in Taiwan, Khaily said, adding: "We are already big in petrochemicals, but such a project in Abu Dhabi is a different thing". CPC may use its ties with IPIC to develop a chemical plant in Abu Dhabi. CPC Vice President Roy Chiu was on Sept. 15 quoted in Doha as saying: "With its raw material, political stability and convenient port facilities, Abu Dhabi has lots of advantages".

The portfolio of IPIC has now touched $8 bn, but the firm wants to expand even further. "We want to see continued growth in our portfolio and extract synergies from our partners as well as bring new alliance partners into our portfolio", Gamal James Harris, investment evaluation adviser at IPIC told a Middle East Economic Digest conference's closing day on Nov. 22. He said: "IPIC is penetrating new markets in South Asia, China, India and North America by identifying opportunities. These are energy-focused markets".

IPIC's strategy has been to buy stakes from 10 to 50% in energy companies abroad. Its $8 bn investment portfolio comprises seven energy-related companies in Austria, Denmark, Egypt, South Korea, Pakistan, Spain and one in Dubai's Gulf Energy Maritime Shipping Co. Traditionally, IPIC has been funding its investments overseas through equity, but things are set to change. Harris said: "We are looking at alternative funding structures but also synergies through the existing portfolio". IPIC recently enhanced its stake in Borealis from 25 to 65% in a deal worth 736m. While IPIC has 30% in Pakistan-Arab Refinery Ltd (Parco), it sold its stake in Pak-Arab Fertilisers this year, said Harris declining to comment on why the exit took place.

The Abu Dhabi state's total investments overseas, including those of IPIC, are now said to be worth more than $210,000m. Held mostly in liquid assets, they are worth more than twice as much as those of Saudi and Kuwaiti states combined.

Decision making in Abu Dhabi for oil or gas policies and for projects is controlled by the SPC. The number of young Abu Dhabian graduates joining the decision makers is increasing steadily. The SPC remains under the control of the new Abu Dhabi ruler, Shaikh Khalifa bin Zayed. The Crown Prince Mohammed bin Zayed heads the local government of Abu Dhabi.

The SPC members represent the most important sectors in the emirate, mainly ADIA and ADNOC. ADNOC initiates most of the decisions or projects, which must be approved by the SPC. ADNOC was restructured in October 1998.

The ADNOC Structure: After restructuring in late 1998 and early 1999, ADNOC has eight directorates functioning as autonomous divisions. Of these, five operating directorates were created in October 1998, with each in charge of a sector and subsidiary companies. Now ADNOC's structure is as follows:

The E&P Directorate is in charge of the upstream sector, including ADNOC's exploration work and the E&P joint ventures: onshore ADCO (the largest oil producer, with an output capacity of 1.2m b/d rising to 1.595m b/d by 2008); offshore ADMA-OPCO (the third largest oil producer, with an output capacity of 470,000 b/d rising to 600,000 b/d), ZADCO (the second oil producer, with ExxonMobil taking a 28% stake and to raise its capacity from 550,000 b/d to 1.2m b/d by 2008), and the smaller producers offshore (with an output of 137,000 b/d expected to be stabilised for as long as possible).

The Gas Processing Directorate is in charge of (Gasco) and of the LNG-exporting joint venture ADGAS. Gasco is in charge of the gas processing plants and gas pipelines. On April 23, 2001, ADNOC's fully-owned Abu Dhabi Gas Processing Co. (Atheer), set up in early 1999, was merged into Gasco in order to streamline ADNOC's onshore gas operations. Now Gasco is owned 68% by ADN0C, 15% by Shell, 15% by Total and 2% by Partex. Gasco handles all of ADNOC's gas projects.

The crude oil/products Marketing and Refining Directorate is in charge of the Abu Dhabi Refining Co. (Takreer) and the autonomous Abu Dhabi National Oil Co. for Distribution (ADNOC-FOD). ADNOC Marketing & Refining is responsible for selling to the international markets ADNOC's equity share of crude and condensate production, natural gas liquids and sulphur, together with the refined oil products processed by Takreer. It also sells oil products to ADNOC-FOD for the domestic market and the northern emirates. It co-ordinates the activities of Abu Dhabi National Tanker Co. (ADNATCO) and the National Gas Shipping Co. (NGSCO) all of which are wholly-owned subsidiaries of ADNOC. Murban is exported from Jebel Dhanna. The offshore lower Zakum and Umm Shaif crudes are exported from Das Island. Offshore Upper Zakum crude is exported from Zirku Island.

The Chemicals and Petrochemical Directorate is in charge of the Borouge olefins venture (60% ADNOC/40% Borealis) and the fertilisers producer Fertil, which are both expanding.

The Services Directorate is in charge of National Drilling Co. (NDC), Abu Dhabi Drilling Chemicals and Products (ADDCAP), Abu Dhabi Petroleum Ports Operating Co. (ADPPOC), and National Marine Service Co. (NMS). National Petroleum Construction Co. (NPCC), a highly successful contractor 30% owned by the Athens-based Lebanese firm CCC, has been transferred to General Holding Corp. (GHC) of the Economics Department (local ministry) and it is being restructured before the state's 70% stake is privatised. A planned initial public offering (IPO) in NPCC was to take place before end-2005. A new board of directors has been appointed for NPCC, chaired by Nasser Bin Ahmad Al-Suwaidi.

The Marine Transportation Directorate is in charge of Abu Dhabi National Tanker Co. (ADNATCO) and National Gas Shipping Co. (NGSCO).

The Directorate of Finance; and the Directorate of Human Resources.