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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Abu Dhabi Adapts To Low Oil Prices With Mega Merger

OPEC nations are continuing to tackle the challenge of exceptionally low oil prices. Oil majors are searching for solutions to stay afloat during a time of bitter crude oil prices. Government owned Abu Dhabi National Oil Co. are consolidating their assets in order to boost efficiency and reduce costs. ADNOC plans to merge three shipping companies Abu Dhabi National Tanker Co., Petroleum Services and Abu Dhabi Petroleum Ports Operating Co. by the end of next year.

Last month, ADNOC merged two of their offshore oil companies, Abu Dhabi Marine Operating Corp. and Zakum Development Co. The two companies produce almost 1.7 million barrels per day, over half of ADNOC’s production. The idea of simplifying logistics makes sense when companies have multiple subsidiaries but the repeated process of mergers show clear signs of tough times for the energy major. In the long term, however, ADNOC will benefit from these logistical revisions. Control of 165 operating shipping vessels for the use of 6 percent of world oil reserves could improve their status drastically.

OPEC has been discussing the possibility of an oil production freeze for several months now but matters have been growing exceedingly complicated. This past weekend, Iraq stated they would only lower production down to their September level of 4.78 million barrels per day. Iraq claims they need the revenue from their oil production to continue repelling the Islamic State from their nation. It’s unlikely Iran, Nigeria or Libya will play a role in the cuts either with their already hindered production levels due to sanctions and militant attacks. OPEC has also decided to include Russia in talks to cut production but so far the nation has been noncommittal. The group is supposed to meet in late November to set each countries respective output limits but with a third of the nations already not willing to contribute problems will undoubtedly persist.

If a deal is unable to emerge then the United Arab Emirates and other OPEC member nations will continue to suffer from overproduction of crude oil and low prices. The Emirates rely on oil for 38 percent of their exports meaning if the price is to remain stagnant then their economy will surely worsen. Related: Can Saudi Arabia Scramble Out Of The Pit It Dug for Itself?

The unceasing shale boom in the United States adds to the competition for market share in the oil industry. As of last week, it was noted that the U.S. has been exporting a significant portion of gas to other countries, especially Mexico. The 811,000 million barrels per day is a clear sign of potentially becoming self-sufficient.

ExxonMobil and BP each held considerable stakes in the two oil companies combined last month. ADNOC acknowledges their presence and will redistribute their entitlements through the new operating agreements. It’s beneficial for the two oil majors to own portions of this substantially larger company and they will likely witness subtle growth in their shares.

Oil futures will likely slide back into the mid $40’s if the OPEC talks continue to show less hope. The United Arab Emirates’ Dirham will see a reduced value in comparison to the U.S. dollar as they shadow the state of their respective economies.

By Michael McDonald for Oilprice.com

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