Onshore oil production in Abu Dhabi gradually entering a new era

For the past two years Abu Dhabi’s onshore oil industry has been slowly transitioning to a new era. As of January 2014, the concession agreements that had defined the sector from its earliest beginnings more than 75 years ago are no more.

As of late 2015, however, the outline of the new concessions had only partially taken shape. In determining the composition of its new partners for onshore production, the Abu Dhabi National Oil Company (ADNOC) will attempt to balance strategic considerations with the desire to optimise recovery and boost production.

Local Player

The Abu Dhabi Company for Onshore Petroleum Operations (ADCO) is the ADNOC subsidiary responsible for the vast majority of Abu Dhabi’s onshore sector. ADCO’s operations are divided into four main assets: Bab, responsible for around 50% of ADCO’s production capacity; Bu Hasa/Huwaila/Bida Al Qemzan around 35%; the South East Asset, responsible for around 33%; and North East Bab (NEB), which currently accounts for around 7%. Until 2014, ADCO had been a joint venture between the Abu Dhabi government, which owned 60% through ADNOC, and a group of international oil corporations (IOCs): BP, Shell, ExxonMobil and Total, each owning 9.5%, and Partex, which held 2%. Although both existing and potential future shareholders had been invited to make offers prior to the lapse of the old concessions, the deadline passed without ADNOC having made a decision. As a result, full ownership in the concessions – which cover 11 producing fields that account for about 1.6m barrels per day (bpd) of oil production – reverted to the government. It was not until January 2015 that ADNOC announced the first participant in the restructured ADCO: French major Total. As well as a 10% shareholding in ADCO, Total was also appointed asset leader for fields accounting for two-thirds of ADCO’s total production, including Bu Hasa, the biggest single field, as well as the South East Asset, which includes the Asab field. The new concession will run for 40 years, and Total was reported to have paid a $2.2bn signing bonus. Speaking to Abu Dhabi-based daily The National after the announcement, Patrick Pouyanné, the CEO of Total, outlined the broad terms of the new deal. “If you are an asset leader you have a dollar fee per barrel and if you meet expectations you are rewarded, so it gives us an additional margin,” he said. According to Pouyanné, the additional fee is taken in physical barrels, which Total can then market itself. The new terms would appear to be a marginal improvement on the prior concessions, which were reportedly limited to around $1 per barrel.

In April and May 2015 Japan’s Inpex and South Korea’s GS Energy agreed to 5% and 3% shares, respectively, having reportedly been asked to match Total’s bid. According to The National, the request to match Total’s terms has whittled down the remaining field, which had initially included new bidders Statoil, Occidental Petroleum, Eni and Rosneft, leaving prior concession holders like BP as favourites for the larger shareholdings, and the Korea National Oil Corporation and PetroChina for smaller stakes.

Foreign Player

Another major player in the sector, UK firm Penspen, recently served as design consultant for a 380-km pipeline from the UAE’s Western Region to the Gulf of Oman. Established in 1954 as an onshore pipeline engineering firm, the company is now a global provider of both engineering and management services for the energy sector. Operating in all regions of the world and employing more than 1000 people, Penspen has developed extensive services that range from engineering and project management through to asset integrity, asset management and training. The firm was also awarded a contract in July 2014 to provide the Abu Dhabi Marine Operating Company (ADMA-OPCO) with project management consultancy services for the Technip/ National Petroleum Construction Company upgrade of gas facilities at the Umm Shaif Super Complex to 200m standard cubic feet per day. Michael Simm, Penspen’s executive vice-president for the Middle East and Asia Pacific, told OBG that while the lower oil prices have slowed down projects, they have afforded companies a chance to improve operational efficiency. Simm said, “The current economic landscape will likely result in companies diversifying their service offerings into areas such as asset integrity and software engineering, as well as expanding their geographic presence.”

New Responsibilities

Regardless of who are the eventual winners, all of ADCO’s new and returning shareholders will be expected to assist fully in the company’s strategic goals of increasing recovery rates to 70% and expanding onshore production to a target of 1.8m bpd by 2017. Current onshore production is estimated at 1.6m bpd, representing around 60% of Abu Dhabi’s total output of 2.8m bpd. The planned increase is part of the emirate’s goal to reach production of 3.5m bpd by 2017, which also includes substantial increases in offshore production.

As of June 2015 this ambitious target had been set back somewhat, with Qasem Al Kayoumi, manager of ADNOC’s offshore division, telling delegates at a conference that production would likely hit 3.4m bpd by 2017, with 3.5m bpd likely by the following year, according to a Bloomberg report. Abdul Munim Saif Al Kindy, CEO of ADCO, told OBG, “Abu Dhabi has vast oil reserves and has always adopted a very conservative approach in terms of extraction. Therefore, the emirate is in very good shape for many years to come. However, achieving a 70% recovery rate will take considerable time and effort. Therefore, it is important that we continue investing today if we are to achieve our long-term goals.”

In order to meet this goal ADCO will invest a further $5bn-7bn between 2015 and 2017, having already invested around $5bn in the first phase of its production expansion programme up to the end of 2012, which increased production by 225,000 bpd. As part of these plans ADCO awarded a $2.25bn contract in December 2014 to Italy’s Maire Tecnimont to implement processes and associated units for phase three of the Al Dabb’iya Surface Facilities Project, located 40 km south-west of Abu Dhabi City. The project is part of the NEB development, which includes a network of crude gathering pipelines, oil and gas export pipelines, and a central process plant. NEB currently produces approximately 7% of ADCO’s production; however, according to the company, there is a significant number of zones that are currently in early production schemes and that will be developed in the near future. As a relatively new development NEB also offers ADCO the opportunity to implement new technologies. Indeed, it is the first ADCO full-field development built with an “i-field” concept, which includes systems for real-time data acquisition and analysis.

High-Tech Solutions

Optimising recovery rates and maximising production will require ever more extensive use of technology. Hatem Nuseibeh, president of Total UAE, told OBG that the company was grateful for the opportunity to continue working with ADCO and that technology will be a vital aspect of the continuing relationship. “We have invested heavily in research and development, and knowledge transfer, which is what is expected from a partnership,” Nuseibeh said. “But in the new contract we are expected to meet certain challenges, and we are happy with this. In particular, being an asset leader for certain fields gives us a new perspective now. When you are responsible, you are also accountable.”

Partnership

Total is currently the only independent oil company to operate a field in Abu Dhabi without part-ownership by ADNOC – namely the offshore Abu Al Bukhoosh field, signed in 1973. Total operates the field with a 75% stake, while Japan’s Inpex owns the remaining 25%. Through use of enhanced oil recovery and advanced seismic technology Total has managed to significantly lift recovery rates at Abu Al Bukhoosh to 55% – something Sultan Al Hajji, vice-president and chief strategy officer for Total UAE, described as “a landmark for the industry”. Al Hajji told OBG, “We will make every effort to assist in meeting the government’s expectations of a 70% recovery rate. Abu Dhabi is well-known for taking long-term considerations into account when it comes to production decisions, and price fluctuations will not drastically affect strategic decisions. Abu Dhabi is a flagship within the oil industry for balancing production and optimising reserves through technology.” Ibrahim Al Alawi, deputy CEO of Al Mansoori Specialized Engineering, which provides specialised oilfield services to some of the major IOCs operating in Abu Dhabi, agrees that technology will be increasingly important as production matures across the region. “The main concern here is optimisation and the need for efficiency within reservoirs,” he told OBG. “Reservoirs need to be developed with a long-term view in mind. Also, ADNOC is starting to look at developing smaller, more challenging fields, with production of up to 10,000 bpd.”

Emphasising that the role of increased investment in education and training future employees will play a key role in future developments, Al Kindy told OBG, “Succession will be a challenge for ADNOC going forward as key people will ultimately have to be replaced by the next generation. A seamless transfer of knowledge and experience will be vital to ensure the continued development of the organisation.”

Pushing Up Production

The drive to increase production both onshore and offshore will necessitate a short-term peak in activity. According to a June 2015 Bloomberg report, by the end of 2015 ADNOC was deploying 100 drilling rigs across its operations, compared with 69 in 2014. The rig count will increase to about 120 in 2017 and 2018 as the capacity-raising project nears completion, before declining to 103 from 2021 to 2024.

As the emirate is a mature market, ADCO’s strategy going forward is to maximise existing plays and to engage in exploration activities sufficient to replace current production. The company’s stated aim is to focus new exploration on “material” plays or those of a sufficient size to impact ADCO’s production needs over the next decade – the rough period over which the 1.8m bpd production target is expected to plateau. Exploration of smaller structural plays, which are relatively easier to find through 3D seismic imaging, will be postponed until needed to support declining fields. With at least two further concessions still to be awarded, the final make-up of the second version of ADCO remains to be seen. However, few surprises are expected. Regardless of the companies eventually chosen to partner with ADNOC, the strategic course for onshore oil recovery has already been set: the government will be looking to reward producers that can not only offer the best deal, but also optimise mature assets and ensure that the future of Abu Dhabi’s onshore oil remains as bright as its past.

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The Report: Abu Dhabi 2016

Energy chapter from The Report: Abu Dhabi 2016

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