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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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UAE Cements US, Israel Alliance With This Huge Oil Deal

Abu Dhabi

The Abu Dhabi National Oil Co (ADNOC) - the key corporate proxy at the centre of the U.S.’s Middle East pushback against increasing Chinese and Russian influence across the region via the recent ‘normalisation deals’ between Israel and the UAE and Bahrain –– last week further cemented this alliance with the award of a second major oil and gas exploration block concession to the U.S.’s Occidental. The U.S. major had previously won the 5,782 square kilometre (sq. km) Onshore Block 3 in Abu Dhabi's first competitive bid round in February last year. In return for an initial investment of AED514 million (US$140 million), Occidental has secured a 100 per cent stake in the exploration phase of the 4,212 sq. km onshore block while ADNOC will retain the option to own 60 per cent of the production phase in the 35-year concession. This award aligns neatly with ADNOC’s current initiative to increase its crude oil output by around 1 million barrels per day (bpd) to at least 5 million bpd by 2030 at the latest, and to increase its gas output as well. This, in turn, is part of the U.S.’s new Middle East strategy to counter the ever-increasing influence of China (and Russia) across the region, in line with its multi-layered multi-generational ‘One Belt, One Road’ (OBOR) project, using Iran, Iraq, and Syria – plus the remaining countries in the Shia Crescent - as key foundation points. ADNOC, and the UAE more broadly, are perfect vehicles for the U.S. to advance this new strategy as ADNOC is already the UAE’s biggest energy producer (and OPEC’s third-largest oil producer) and already has well-established ties with India, China’s major economic rival in Asia.  

In this latter context, ADNOC’s chief executive officer, Sultan al-Jaber announced recently that he looks forward to exploring partnerships with even more Indian companies across the energy giant’s hydrocarbon value chain, including expanding the commercial scale and scope of the Indian ‘Strategic Reserves Partnership’ (SPR). Following the agreement of the UAE’s normalisation deal with Israel, India’s government approved a proposal that allows ADNOC –the only overseas company entitled to hold and store India’s vitally-important SPR - to export oil from the reserves if there is no domestic demand for it. In the first instance this will be from the Mangalore strategic storage facility, with the other major SPR pool being at Padur. This decision marked a major shift in the policy of India in the handling of these vital energy reserves, with the country having previously completely banned all oil exports from the SPR storage facilities.

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Concomitant with these developments was the recent approval by the UAE’s Supreme Petroleum Council (SPC) of AED448 billion of new investments by ADNOC over the next five years in order to reach the new 5 million bpd target with carefully selected international partners.  These new deals, as OilPrice.com was exclusively told by senior legal sources close to ADNOC, were always intended to involve high-profile U.S. companies such as Occidental, in line with the US$10 billion+ that ADNOC recently secured from a consortium of international investors by selling a 49 per cent stake in its gas pipelines a year after striking a similar deal for its oil pipelines. ADNOC also secured US$5 billion+ last year with a similarly-constituted group of heavy-hitting U.S. financial companies, BlackRock, and KKR.  The remainder of the original five blocks to be offered in the second bidding round – which were Offshore Block 3, Offshore Block 4, Offshore Block 5, Onshore Block 5 and Onshore Block 2 (which has two separate licensing awards available - one for conventional, the other for unconventional) – are also likely to go either to U.S. firms or to the firms of countries tied in to the new U.S. Middle East initiative, despite the recent award of an AED1.9 billion ‘technology-only’ contract to BGP, a subsidiary of China National Petroleum Company. As a guide to future awards, one of the legal sources close to ADNOC told OilPrice.com that it is apposite to look at which companies featured in the first round of concession awards that ended in March 2019. These were: a consortium led by Italy’s ENI and Thailand’s PTT Exploration and Production Public Co. for Offshore Block 1 and Offshore Block 2, while Onshore Block 1 was awarded to India’s Bharat Petroleum Corp. and the Indian Oil Corp., Onshore Block 3 was awarded to the U.S.’s Occidental Petroleum, and Onshore Block 4 was awarded to Japan’s INPEX Corp.

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ENI has also been chosen, along with Austria’s OMV, to be the major partners with ADNOC in a new joint venture for a second trading arm for the UAE oil firm – ADNOC Global Trading (AGT) - focussing on higher-value refined products, following the creation in September of crude oil-only trading arm. Broadly allowing for refined product sales with new delivery, pricing, and hedging options, the AGT will concentrate in the first instance on trading light and middle distillates, including jet, naphtha, diesel, and gasoline, according to statements from ADNOC. 

The ramping up of the UAE’s trading infrastructures and abilities is not just in line with similar initiatives to more tightly control the pricing and delivery of oil, gas, and petchems products to the market undertaken by other Middle Eastern countries in recent years – notably Saudi Arabia (with Aramco Trading) – but is also part of creating a more integrated hydrocarbons sector in the country. This includes ADNOC’s recently reiterated plan to launch a Murban futures contract on a new Abu Dhabi-based exchange – the ICE Futures Abu Dhabi platform (IFAD) - on 29 March 2021, in partnership with the Intercontinental Exchange (ICE). The light, sweet Murban crude oil grade is one of the four crudes produced by ADNOC, although it accounted for around half of the UAE’s total near-4 million bpd crude oil production before the outbreak of the COVID-19 pandemic. According to ICE and ADNOC, Murban futures will be the second physically delivered futures contracts traded on a regional exchange after Dubai Mercantile Exchange’s Oman crude futures. ICE and ADNOC will be partnering with BP, GS Caltex, Inpex, ENEOS, PetroChina, PTT, Shell, Total and Vitol to launch the IFAD, and ICE has also announced agreements with Chevron, Trafigura, and Occidental to explore using the contract to price crude exports from the U.S. to Asia. 

By Simon Watkins for Oilprice.com


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