ADNOC's declining Upper Zakum exports complicates new futures contract plan

Abu Dhabi National Oil Co.’s exports of Upper Zakum crude have trended downward over the last eight months, complicating plans for a much-discussed futures contract underpinned by the grade.

In the last few months, Upper Zakum exports have hovered around 700,000 b/d, dropping to as low as 589,000 b/d in June, according to S&P Global Commodities at Sea data. Last year, they exceeded 1 million b/d, the data show.

The decline in exports of the medium sour crude come as ADNOC has completed its Ruwais West refinery transformation project that now allows the 418,000 b/d facility to process heavier crude, including Upper Zakum, freeing up volumes of lighter flagship grade Murban for export. Upper Zakum has an API of 33.9, compared with Murban’s of 40.5, according to the Platts Periodic Table of Oil by S&P Global Commodity Insights.

Shipments are now below what former oil trader Adi Imsirovic says the market considers adequate liquidity to support a new futures contract.

“In Brent, we used a 'rule of thumb' that anything below 800,000 b/d was becoming problematic from a liquidity point of view,” said Imsirovic, director of consultancy Surrey Clean Energy.

Omar Najia, global head of derivatives for BB Energy, agreed and questioned the market's need for an Upper Zakum futures contract.

“Without price discovery, meaning volume, no one cares,” he told Commodity Insights in an email. “Upper Zakum...simply won’t work on any platform.”

But some traders say a contract based on the grade may more accurately reflect the real-time value of Middle East medium sour crudes than the light sour Murban. One said on condition of anonymity that the offshore-produced Upper Zakum could be used to arbitrage against the Platts Market on Close assessment process for the region's crude, adding that “it would be mostly competing with Oman,” which is also a medium sour grade.

OPEC+ quota

The proposed Upper Zakum futures contract, first discussed in 2022, was initially targeted for a launch in the second half of 2023, according to market sources. The contract is likely to be physically delivered on a FOB basis at Zirku Island, where Upper Zakum normally loads for export and be the second contract based on an ADNOC grade to trade on ICE Futures Abu Dhabi, following the introduction of Murban futures in 2021, sources have said.

ICE declined to comment when asked if the decline in Upper Zakum export volumes would impact an associated futures contract launch, while ADNOC directed Commodity Insights to a statement about the Ruwais refinery upgrade.

“ADNOC has previously communicated about its Crude Flexibility Project, which provides ADNOC Refining more flexibility in the crude oils that it processes,” a spokesperson said in a statement emailed to Commodity Insights.

In late 2023, when asked about the delayed launch, Philippe Khoury, ADNOC’s executive vice president of trading and sales, told Commodity Insights: “It’s all about timing. The politics right now are not conducive to a change.”

But some relief could be coming for the UAE’s production, as the OPEC+ alliance is set to begin rolling back some of its production cuts in December. ADNOC produces the vast majority of crude in the UAE, which is currently held to an OPEC+ quota of 2.91 million b/d.

Under a plan announced by OPEC+ ministers Sept. 5, the UAE’s quota is set to increase by about 14,000 b/d in December, and then 47,000 b/d each month from the beginning of 2025, until it hits 3.375 million b/d in November 2025.

However, OPEC+ officials have maintained that the output rises will only be implemented if market conditions allow.

The Platts Dubai benchmark swung between $74.49/b and $80.54/b in August, having been above $90/b at some points in April. The Platts Dubai crude benchmark includes as deliverable crude grades Dubai, Upper Zakum, Oman, Murban and Al-Shaheen.

Murban up

The OPEC+ plans come as ADNOC is expanding operations at its offshore Upper Zakum field, with subsidiary ADNOC Drilling winning a $412 million contract in April 2023 to further develop the reservoir over five years. The Zakum field’s ultimate recoverable reserves stand at 32.53 billion barrels of oil and 22.97 Bcf of gas, according to Commodity Insights data.

Murban had long been the crude of choice at the Ruwais refinery, but following the $3.5 billion crude flexibility project, the plant has been taking in heavier grades from Qatar, Saudi Arabia and Iraq.

Exports of the two ADNOC grades show an inverse relationship, with Upper Zakum exports down 200,000 b/d to 400,000 b/d since December, depending on the month, while Murban exports are up 300,000 b/d to 500,000 b/d, CAS data show.

“The partial switch from Murban to Upper Zakum for the Ruwais refinery feedstock was as per plan,” said Dong Wang, principal research analyst at Commodity Insights.

Exports of the higher quality, light sour Murban crude have climbed steadily since December 2023. In July, Murban exports reached 1.58 million b/d, compared with 1.19 million b/d in the same month last year. ADNOC has forecast that Murban exports will climb to 1.77 million b/d by August 2025, Commodities Insights previously reported.

Higher Murban export volumes are good news for the Murban futures contract, which traded at its highest volumes ever in June, jumping 32.5% on the month.

“Murban exports have increased accordingly, by at least 200,000 b/d, adding more liquidity to the existing, reasonably well-functioning contract and certainly improving it,” Imsirovic said.

He added that, if Middle East producers wanted to create a robust medium sour futures contract, they should work together to combine their streams.

“For example, Upper Zakum, Oman, and Arab Light would together, in one contract, be a mighty contract and potentially even a global sour benchmark,” he said.

Platts Dubai has robust derivatives activity, with ICE Dubai futures contracts, which settle on the calendar month average of Platts Dubai assessments, the most liquid of Middle East crude futures contracts. In July, more than 1.8 million lots of ICE Dubai futures traded.