Abu Dhabi bolstering oil resources as market improvements remain elusive

On Sunday 22 November, the Supreme Petroleum Council (SPC) of Abu Dhabi announced a notable upgrade in the emirate's hydrocarbon resources - the discovery of 22 billion barrels (Bbbl) of unconventional oil and a 2-Bbbl increase in conventional oil reserves. This comes a year after a similar uptick in certified hydrocarbon reserves that pushed the United Arab Emirates (UAE) from seventh to sixth place in the world rankings for the largest recoverable oil and gas resource base. Estimated to hold over 90% of UAE's recoverable hydrocarbons (albeit while also covering a comparable proportion of its land mass), Abu Dhabi remains the seven-emirate federation's leader in oil and gas production. Concurrent with the latest announcement, the SPC outlined state company Abu Dhabi National Oil Company (ADNOC)'s spending programme for the next five years and stated that awards from last year's Bid Round are imminent.

The news comes days after rumours began circulating that the UAE was questioning the value of its membership in the Organisation of Petroleum Exporting Countries (OPEC). In a statement on 19 November, Energy Minister Suhail Al-Mazrouei said that the country "has always been a committed member" of OPEC, but remained concerningly cryptic about its future plans. While countries leaving OPEC is not out of the ordinary (Qatar and Ecuador have done just that in the last two years), the UAE is the cartel's third-biggest producing nation after Saudi Arabia and Iraq, so its departure would have far-ranging effects. As the UAE famously has one of the most diversified economies in the Middle East, with hydrocarbons accounting for less than a third of its GDP, this could give it a more advantageous negotiating position that many neighbouring producers do not have. Already the coronavirus disease 2019 (COVID-19) pandemic had led to fractures among oil producers, notably causing a temporary price war between Saudi Arabia and Russia - the world's biggest producers along with the United States - in March that resulted in the lowest oil prices in nearly two decades.

While a new OPEC+ output cut agreement was ultimately concluded in April, the UAE was certainly not ambiguous about its plans for a post-production cut world. During the few weeks in March when it appeared the markets would turn into a free-for-all, ADNOC announced that it was able to accelerate plans to significantly increase its output capacity from the already-record levels of 3.4 MMb/d to 4 MMb/d, with a stretch goal of 5 MMb/d by 2030. Under the reinstated production cuts, the UAE's current production is around 2.5 MMb/d, with the threshold to rise to 2.74 MMb/d from January. Perhaps tellingly, in its latest statement, the SPC emphasised that the country's production capacity is now effectively above 4 MMb/d, indicative of its readiness to be free of the shackles once the market situation improves. With oil prices now holding steadily above USD 40 per barrel and more optimism about a COVID-19 vaccine leading to a return to normal in the medium term, the UAE will likely continue weighing the pros and cons of remaining in OPEC, especially as the cartel's influence continues to be diluted by rising production from countries such as the United States. However, with the spike of COVID-19 cases across the world demonstrating that things might get worse before they get better, no major decisions are expected during the next round of OPEC+ talks set for 30 November.

In the meantime, the UAE continues bolstering its resources, with the government approving a AED 448 billion (USD 122 billion) capital expenses programme for ADNOC through 2025. The SPC added in its statement that despite the challenging market conditions, foreign direct investment in ADNOC's activities reached AED 62 billion (USD 16.8 billion) this year. The 2 Bbbl of new reserves increases the country's reserves base to 107 Bbbl of conventional recoverable oil, particularly thanks to appraisal activities near the Al Dabbiyah oil field. The 22 Bbbl of new unconventional oil resources - deemed "technically recoverable" by an independent assessment supported by well data and a dedicated appraisal programme - are reportedly similar to the prolific shale plays of North America, according to ADNOC, and could be just as transformative if they live up to their potential. The state company also recently reached a milestone on the unconventional gas front, with first production reported from the Ruwais Diyab concession, where it is partnered with French major Total. In last year's announcement, the SPC notably reported the discovery of 160 trillion cubic feet (Tcf) of unconventional gas (presumably in-place) on the territory of Abu Dhabi, adding to 58 Tcf of conventional gas reserves.

More foreign partners may join the fray in the coming months, adding to companies such as Italy's Eni, Thailand's PTTEP and a consortium of Indian players that previously garnered stakes in oil and gas projects. The SPC stated last Sunday that it had authorised ADNOC to sign concession agreements with the winners of the Abu Dhabi Bid Round 2019, which saw five conventional and two unconventional exploration blocks on offer. The companies are not yet announced, but it was confirmed earlier this year that one of the shortlisted bidders was a consortium of Pakistan-based players PPL, Mari Petroleum and OGDCL. ADNOC stated that it estimates that the soon-to-be-awarded blocks also hold multi-Bbbl and multi-Tcf potential.

The state company also has its sights set on future exploration opportunities, with the 2018 award of a record-breaking 30,000 sq km onshore and offshore 3D seismic survey to BGP, a contract worth USD 1.6 billion. With seismic works now underway, it was reported in mid-November that the scope has been expanded to include more offshore areas in the Transition Zone, adding USD 519 million to the contract value. With this mix of short-, medium- and long-term oil and gas projects, Abu Dhabi certainly cannot be accused of resting on its laurels, but like most producers (or nearly all companies across every industry) in the current climate, it may find itself hampered by market realities for much longer than it would like.

Sergey Myakishev is a senior editor for the Energy industry at IHS Markit.

Posted 27 November 2020

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.