THE NEW TIMES OF UAE
OGFJ wrote, as one of the world's top 10 oil and gas producers, the UAE enjoys one tenth of global reserves, but the new reality of USD 50 a barrel has not left the Gulf petro-state entirely unscathed. With a Federal Cabinet reshufﬂe and the appointment of a new CEO for the Abu Dhabi National Oil Company (ADNOC), who unveiled a plan outlining transformative reform, it is clear that the UAE is seizing the opportunity of the oil price crash to thoroughly revamp itself.
In February 2015, in response to the prospect of oil running out in the UAE in 50 years, Sheikh Mohammed, crown prince of Abu Dhabi suggested, "if we are investing today in the right sectors ... we will celebrate at that moment" - an extraordinary statement, no less because the UAE currently depends on oil for around half of its GDP. With the country going all out to convert its oil leadership to a true energy leadership, the time is truly now.
Faltering global E&P activity has meanwhile pushed oil and gas companies to return their attentions to petroleum Mecca: the Middle East, which possesses 60 percent of global reserves and an average onshore lifting cost of USD 27 per barrel, according to compiled sources from International Energy Agency and Morgan Stanley Equity Research. As Halliburton SVP Ahmed Kenawi declares, "I am convinced that the last drop of oil globally will come from this region." An oasis of calm in a hot region, the UAE is at once a critical geo-market and the ideal gateway to the most important oil and gas region in the world.
INCREASING OPERATIONAL EFFICIENCY
Despite being in a region where high underground pressure forces crude oil to literally gush out of the ground, not even the UAE cannot afford to ignore the 'new normal' of being fit for fifty. With the social compact of Gulf petro-states premised on the role of the state as the chief distributor of wealth, the International Monetary Fund (IMF) estimates the UAE's breakeven price - needed to meet overall government expenditure - at USD 73. While the UAE has sufficient fiscal buffer to withstand USD 50 oil for nearly thirty decades, it also needs to contend with the various challenges of its maturing oilfields, most of which have been operational for decades. Little wonder, then, that new ADNOC CEO, H.E. Dr. Sultan Al Jaber, announced upon his appointment a program of modernization and restructuring centered on the concept of 'operational efficiency' "to drive efficiency, performance and profitability." The ultimate goal, he declared, was to "ensure the ADNOC group remains a pillar of the UAE's social and economic development for decades to come". To this end, ADNOC "must evolve into a more agile organization to maintain its competitive edge in today's global economy." Key initiatives include the centralization of procurement in the parent company through the use of mega-tenders and the introduction of benchmarking practices based on industry best practices.
Furthermore, ADNOC remains committed to its 2013 plan to increase production from 2.8 million barrels per day (bpd) to 3.5 million bpd by 2018. With the low oil price grinding E&P activity to a temporary halt, ADNOC is counting on maximizing production from existing fields, having set the unprecedented target of achieving an Enhanced Oil Recovery (EOR) rate of 70 percent. Add to this ADNOC's intention to raise offshore production from its current 40 percent share of total to 50 percent as well as their increased emphasis on sour gas through the Integrated Gas Development (IGD) project, technical challenges abound. These, the UAE is preparing to meet, with timely assistance from technology companies specializing in EOR. Musabbeh Al Kaabi, CEO of Mubadala Petroleum admits, "we still need to address certain technology gaps in EOR and unconventionals," but points out that, due to their relationships with IOCs, they have "historically benefited from accelerated access to cutting-edge technologies and advanced know-how". As CH2M SVP Joel Eacker highlights, however, the Middle East is always "looking at the bigger picture and is not overly focused on quarterly results. Consequently, clients are willing to spend money to invest in technological improvements".
In a beleaguered global market, IOCs are understandably eager to assist ADNOC - which controls 95 percent of the UAE's oil and 92 percent of its gas - in its goals to retain their participation in the UAE. BP President and GM (UAE) Abdulkarim Al Maazmi affirms, "BP has been investing in Abu Dhabi for about 75 years" and "is a leader in developing and deploying EOR techniques ... to boost recovery from maturing fields."
Total MD Hatem Nuseibeh has even bigger ambitions. "As development manager, we started the first EOR pilots in the early 1990s starting with 'huff and puff', then first gas injection pilots, horizontal wells and experimentation with selective injection production. When you aggregate these sorts of findings to Total's overall knowledge and technology base derived from the company's entire experiences round the world, I view the 70 percent target as highly achievable." In the Emirati spirit of dreaming big, he adds, "why not even 80 percent one day?"
Service companies also see ample opportunity in the UAE's stated targets. Amec Foster Wheeler Regional Operations Director Ross Gibson points out, "We have seen a reduction in capital expenditure (Capex) from our customers, which is very understandable. However, operating expenditure (Opex) has increased." Industry estimates put total fall in E&P investment worldwide in excess of USD 400 billion. To meet clients' Opex needs, companies are rolling out new service lines, as Expro VP (MENA) Riccardo Muttoni outlines: "we recently launched four new business streams, including production optimisation and well abandonment, which reflect the changing needs of our industry." He stresses, "Our strategy is focused on delivering multi-product line, integrated solutions for customers."
Operational efficiency is also driving deeper structural changes: increasingly, clients prefer to have one company manage complex assets in full instead of relying on multiple consultants offering specialist services. In January 2016, Penspen was awarded a four-year PMC contract by the Abu Dhabi Marine Operating Company (ADMA-OPCO) for ongoing work on Das Island, the main industrial center of offshore oil and gas production. Penspen SVP (Middle East and Asia-Pacific) Michael Simm explains, "this is [the new delivery] model that the UAE is increasingly turning towards, with a focus on obtaining better value from their oil resources," which integrates operations and integrity management more closely.
CH2M SVP Eacker concludes, "the current downturn in oil prices means that service companies need to think strategically and position themselves as solutions providers to our clients. My role is to imagine a future where the price of oil remains at USD 50 to 60 a barrel for the long-term." The usual recourse is cost cutting and globally the industry has seen significant layoffs, with even ADNOC cutting almost ten percent of its workforce. While understandable, cost cutting is not a panacea and AGR CEO Svein Sollund cautions, "we do not want to see a lost generation in this industry." He adds, "we have been very careful to retain such a skill base, while still streamlining the organization [by] increasing the integration and skills transfer" between their teams in Norway, the UK, APAC, UAE and the Americas." Jotun's Regional Protective Sales Director Trevor Maughan adds, "innovation is necessary to survive and grow," which is why "we have focused on continuous product innovation." Involvement in major flagship infrastructure projects like the Burj Khalifa, the Burj Al Arab, the Dubai Metro and more recently, the Dubai Opera House, are testament to their success. CH2M's motto rather sums it up: "global capabilities, local execution."
AVOIDING THE CLASH OF CIVILIZATIONS
With falling activity in the Americas and the North Sea, oil and gas companies are refocusing on the Middle East. Hong Namkoong, Vice President & Managing Director at Samsung Engineering UAE, emphasizes, "Since 2000, the Middle East has been Samsung Engineering's primary market." The multicultural and aggressively open environment of the UAE may prevent the worst of culture shock, but international companies still need to adapt to the quirks and foibles of the industry there. Archer Regional Director Sherif Refaat muses, "the Gulf is a very different environment from Europe ... it is people-oriented as opposed to systems-oriented [so] the approach to training has to be different," which explains Archer's strong HR program. For Halliburton's Ahmed Kenawi, employing locally is intuitive: "as an Egyptian, I have benefited from working for Halliburton both in my country of origin, as well as in Houston and in the Middle East at large. I understand the culture of this region."
However, working effectively in this region still requires a physical presence. The Emirate of Dubai, strategically placed at the crossroads of Europe, Africa and Asia, is the natural epicenter, with its aggressive openness to foreign investment, well-regulated legal environment and advanced infrastructure links. EXPRO's Muttoni states, "Having regional headquarters in the UAE is critical in delivering our breadth of operations and continued growth. This country has strong manufacturing and logistical capabilities and is a key hub from which to run our operations."
Another hurdle for IOCs is the need to cultivate strong relationships with NOCs, whose patronage - or lack thereof - decides the success of the company. This challenge is perhaps familiar for Total, whose defining challenge has always been the paucity of home production, which is why they need to forge excellent working relationships with NOCs globally. This explains why Total has had a very successful incursion into the UAE, with involvement across the entire oil and gas value chain and even in other parts of the energy sector like desalination and solar power generation. In January 2015, Total was awarded a 10 percent share in Abu Dhabi Company for Onshore Oil Operations (ADCO), which is responsible for over half of the Emirate's production, beating out established rivals like Royal Dutch Shell and BP. Total's MD Nuseibeh explains that this is the result of "a radical new arrangement" with "a whole new dimension to the concept of partnership", involving "the creation of a technology hub that will essentially connect ADCO to Total's entire internal systems."
For L&T Hydrocarbon Engineering, their knack for interacting with NOCs came about similarly through familiarity. With their slogan being "we make things that make India proud," they have been described by a former Indian finance minister as a 'national company' metaphorically because of their unique position straddling the public and private sector. CEO Sarma says, "as an Indian company, we are used to collaborating with national companies" so it was "a natural extension to us to work with the likes of ADNOC or Saudi Aramco in the Middle East." This worked immensely in their favor, as "NOCs are the most important clients in this region" and "while the IOCs and major oil companies are active in such markets, they are mostly present as partners."
LOCALIZING THE EMIRATI WAY
With Emiratis forming less than 10 percent of the total population, it is understandable that the oil and gas industry remains powered by IOCs and employs only a small fraction of the local population. Historically, petroleum activity in the UAE predates the country itself, with Iraq Petroleum Company (IPC) being the first exploration company to be established in 1936. In line with the UAE's focus on sustainability and efficiency, however, significant efforts have been invested in cultivating a local knowledge base. Emiratization is a crucial national priority; while the UAE does not yet have the official local content requirements common in the region, Gary Graham, VP (MENA) of ABS Group reveals, "increasingly, a key performance indicator when it comes to the awarding of contracts is local workforce content."
As there still remains a skills gap between Emiratis and expat workers, this poses a supply problem for IOCs that are keen to hire local talent. As a result, it has become increasingly common - and necessary - for companies to implement their own training programs. Samsung Engineering, for instance, has offered the Samsung Engineering Internship Program (SEIP) in the UAE since 2010, "to demonstrate our commitment to the UAE" and "contribute to the holistic development of the country," according to VP and MD (UAE) Hong Namkoong. As L&T Hydrocarbon Engineering CEO Subramanian Sarma vows, "LTHE actively engages in development of local citizens through campus recruitments, skill development initiatives and sponsored training at its various Indian centers." CH2M SVP Eacker expounds even further on this notion of corporate citizenry, exalting, "what sets us apart is that we are an employee-owned company" and "we look to combine having the best people with an ethical, sustainable and long-term approach to business."
There is certainly no lack of potential in the UAE. Nabil Al-Alawi, CEO of Al Mansoori, one of the largest and most well known local service providers in the region, said his motivation was precisely "to show that there is considerable talent and potential in this region, and that it is possible for a local company to develop and compete head to head with the largest international service companies."
BECOMING A TRUE ENERGY LEADER
Both vision and commitment from the characteristically prescient leadership underpin the UAE's aggressive pursuit of energy and economic diversification to realize their dream of a post-oil economy. The February 2016 Cabinet reshuffle saw a merger of the Ministry of Education and the Ministry of Higher Education and Scientific Research, the reallocation of the water portfolio to the Ministry of Energy and the expansion of the Ministry of Environment's mandate to include Climate Change (and subsequent renaming as Ministry of Climate Change and Environment). Ministry of Energy Undersecretary H.E. Dr. Matar Al Neyadi says that this "was fundamentally anchored in the UAE's commitment to sustainable growth across all sectors."
Embracing energy's multifaceted nature, the UAE is seeking to position itself at the vanguard of the clean energy revolution by capitalizing on synergies between the traditional and clean energy sectors. Energy leaders in the UAE often straddle both spheres comfortably; most notably, ADNOC CEO H.E. Dr. Al Jaber started his career in Abu Dhabi Gas Industries Limited (GASCO) and led Mubadala's Energy portfolio but was also instrumental in founding Masdar, where he served as CEO until his appointment to ADNOC (he is now the chairman of Masdar) as well as the UAE's Special Envoy for Energy and Climate Change to the UN.
Newly appointed Minister of Climate Change and Environment H.E. Dr. Thani Al Zeyoudi, himself from an oil and gas background, states, "we see the IOCs as innovative solution providers, contributing to best practices in the region." This reflects the global trend of increasing collaboration between the traditional and alternative energy sectors. For instance, Total has diversified into solar power through its affiliate, SunPower, and is a key player on the Shams-1 project in Abu Dhabi, the largest concentrated solar power (CSP) plant in operation in the world. Masdar is working with ADNOC to develop commercial-scale projects for carbon capture, usage and storage, with the long-term vision being a national network that captures carbon from power generation in order to use it for enhanced oil recovery (EOR), reducing the need to use valuable natural gas on EOR.
2016 marks the tenth anniversary of Masdar Clean Energy and Executive Director Bader Al Lamki makes it unequivocally clear that the UAE is serious about clean energy. "As a major supplier of the world's energy needs, the UAE is committed to do its part in developing constructive approaches to combat the impact of climate change and to exemplify a leadership model in sustainable energy and economic development." In the past decade, Masdar Clean Energy has been involved in a total of 1.7 gigawatts of clean energy projects globally, including some of the world's largest projects, like Shams-1 and the London Array in the UK, the world's largest operational offshore wind farm, and plans to double this in the next five years. In 2009, the UAE became the first developing country to host a major international organisation, with Abu Dhabi becoming home to the headquarters of the International Renewable Energy Agency (IRENA), testament to the UAE's emerging role as a global energy leader, and in 2019, the UAE will also be the first OPEC member country to host the World Energy Congress.
IN IT FOR THE LONG HAUL
Despite the difficult times, the UAE continues to be one of the most exciting oil and gas markets today, and the stable political climate has entrenched it as a great place to conduct business, with the UAE being the top recipient of foreign direct investment (FDI) in the region. L&T Hydrocarbon Engineering Sarma's last words of advice: "the nature of the oil and gas markets change over time, and you need [to be] responsive to developments, with a set of core values consistent with what the customer requires. Ultimately, dependability comes from good execution."
The stability of the Emirati leadership and openness to the private sector has produced a generation of expats that has grown to see the UAE as home, and the UAE relies on them in large part to realize its dreams. Haven Fire & Safety MD Gerry Boux reminisces, "I came to the Middle East in 1981 and the UAE in 1982 and like many others I only planned of staying for a couple of years. It has now been over thirty years and counting. Not only have I raised a family here, my children are also raising their families here."
WEATHERING THE STORM
Given the importance of relationships in Arab culture, the UAE is not a place to make a quick buck; Emiratis want to see genuine commitment to the country. Weatherford's UAE office is one of its top ten affiliates with a huge market share of projects involving Directional Drilling and LWD services, so it is little wonder that this Big Four company has sunk significant investment into the UAE. Mohamed Galal, Central MENA area director exults, "The importance of our operations in the UAE has grown over time and the UAE now serves as the hub for the region because we are able to deliver equipment and support services for all our clients in the Eastern Hemisphere; which covers the Middle East, Africa and Asia-Pacific. Moreover, logistics ranging from visa processes, safe business practices and the infrastructure of the seaports and airports in the UAE allow Weatherford to operate in a controlled environment."
He explains their dual-Emirates strategy. "Our regional headquarters are in Dubai while in Abu Dhabi we have three facilities in Mussafah, as well as our downtown office located close to our clients." This is important because Dubai has better transport links to the rest of the world while ADNOC sits in Abu Dhabi - and critically, any oil and gas company wishing to work in the sector must register an office in Abu Dhabi. To show investment and commitment, "the company built three state-of-the-art facilities five years ago in ICAD, including our training center where we offer our employees and clients both technical and nontechnical training."
Having a strong local presence also brings convenience and efficiency to companies. Galal elaborates, "These strategically built facilities allow Weatherford to fix and build tools locally instead of having to ship equipment back to Houston or the United Kingdom, resulting in faster services and turnaround time for our clients - which allows us to take on more projects." Weatherford's efforts have been recognized, most recently during the 2015 Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC), when they were awarded 'Best Oilfield Services Company' in the International category.
WHEN FIRE AND ICE COMBINE
Norway and the UAE may not often be mentioned in the same breath but remarkable parallels can be drawn between the two oil and gas giants, not least because the oil industry in both countries only started in the 1970s. Norwegian ambassador H.E. Jens Eikaas outlines, "the UAE has long since had an interest in Norway because of the way that Norway has managed its petroleum resources." Statoil, the Norwegian IOC, begun as an NOC that had to rely heavily on IOCs for technology and expertise, but as Statoil VP Middle East Neri Askland explains, "with contracts that included the condition that we would take over as operators after a certain number of years [to strike] a balance between gaining the outside expertise and experience we required and the domestic control necessary for our national plan."
The UAE's Emiratization program also echoes Norway's attempt to introduce nationals into the petroleum industry. NORDIC CEO Sonny Sola applauds this initiative, but warns, "My only reservation is that this has to be well-managed. Local content rules need to be supplemented with education and a complete training infrastructure to ensure that demand of skilled labor is matched by supply." Norway is seen as a global leader in EOR and subsea technology in part because they have developed rigorous training standards and best practices.
This is even more important, he elaborates, because "the Middle East in general is exhibiting a marked regional trend in shifting towards high-technology automated drilling rigs that require skilled labour. With each well costing around USD 10 million, companies understandably want a guarantee of the quality of their subcontractors."
To help meet this critical need, NORDIC is in the process of setting up the Norwegian Well Intervention Academy, to provide quality training in all aspects of well intervention. "We would like to export the Norwegian style standards and systems of education, training and certification to the UAE and to the region, in order to facilitate the regulation and formalization of the industry here", he declares. "This is a way for us to capitalize on the potential here as well as to contribute our technology to the industry."
OILING THE GEARS OF INNOVATION
Oil and gas reserves do not an energy hub make; the top oil and gas capitals of the world - Aberdeen, Stavanger, Houston and Perth - have all developed world-class ecosystems of research, development and innovation. To add its name to that list, Abu Dhabi is investing lavishly on its R&D infrastructure and capabilities, with ADNOC championing efforts with its Petroleum Institute (PI), founded in 2001 on the model of the Colorado School of Mines. President Dr. Thomas Hochstettler emphasized, "Growing and developing the PI's research capabilities via partnerships is something that the school is consciously focusing on at the moment." Currently, over 95 percent of externally sponsored research projects are funded by the ADNOC Group of Companies, with the remaining mainly by UAE government departments or national industries, the assumption being that ADNOC's deep pockets will be a significant lure. Testament to its success is the fact that PI has engaged in collaborative research projects with top-tier international institutions like the Massachusetts Institute of Technology (MIT), Stanford University and Imperial College in the UK.
But the UAE is also seeking a more substantial role in these partnerships. Associate Provost and VP (Research) of the Masdar Institute of Science and Technology, Dr. Steven Griffiths looks towards Singapore as a key model: "I would like to encourage more companies to base their R&D operations for the Middle East region here". Hochstettler admits that "traditionally, our research efforts have relied heavily on our collaborating partner-institutions for laboratory and technical support, but the inauguration of our new facilities, with over 8,000 square meters of laboratory space, will allow PI to participate as an equal player in these important collaborations." The USD 90 million PI Research Center (PIRC) is set to open in November 2016.
The UAE is fertile ground for groundbreaking research, with no lack of technically complex challenges to tackle, most notably the issue of sour gas. PI has also been mandated to contribute to an increase of five percent in Abu Dhabi's EOR rate and, to this end, it has signed research agreements with companies like Wintershall. In this way, Abu Dhabi hopes to water its innovation desert with not just oil money but topnotch research facilities and the draw of challenging problems.
STRATEGICALLY INVESTING IN THE FUTURE
As all eyes turn to the UAE, the country is shrewdly exploiting its relatively strong position in this downturn to pursue countercyclical strategies. Flush with oil wealth, Abu Dhabi has created several investment arms, of which Abu Dhabi Investment Authority, one of the largest sovereign wealth funds in the world, is the largest and invests its USD 500 billion bounty only in non-oil industries. Another prominent example of the UAE's astuteness is the recently announced merger of Mubadala, the Abu Dhabi Development Company, with the International Petroleum Investment Company (IPIC), in order to consolidate their portfolios, which exhibit some overlap.
Musabbeh Al Kaabi, CEO of Mubadala Petroleum, Mubadala's international E&P investment arm, has a dual strategy in this regard: the pursuit of strategic M&A opportunities and internationalization. Al Kaabi explains, "in terms of growth, we have been proactive in identifying emergent merger and acquisition opportunities" but admits, "owing to the sheer market volatility that we are witnessing right now, it's going to be extremely difficult to embark upon bold steps." However, with low oil prices pushing M&A activity to one of its lowest levels in 2015, he confidently predicts, "we can expect there to be some attractive opportunities waiting to be grasped once a degree of oil price normality resumes".
Mubadala Petroleum remains, interestingly, a somewhat hybrid company with IOC characteristics fused with a distinctly NOC function, a significant set-up that enables it to retain the best of both worlds. As they are actively investing internationally, Al Kaabi elaborates, "we need to be competitive in terms of running our business [through] flexible decision making and decentralization". Nevertheless, as a government-owned entity, we "are actively unlocking new opportunities that would be beyond the reach of a purely private enterprise", citing examples like the recent enhanced collaboration agreements they have signed with their Chinese and Mexican counterparts, Chinese National Petroleum Company (CNPC) and Pemex.
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