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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 Oil Takes Center Stage In U.S. Pushback Against China

Abu Dhabi – the oil powerhouse at the centre of the U.S.’s pushback against increasing Chinese influence across the Middle East - last week further cemented this alliance with a dramatic re-organisation of its government to further empower its oil sector, and the awarding of further oil concessions to U.S.-friendly firms. Both of these developments were in line with plans to boost the crude oil production of the chief corporate proxy in this U.S.-Israel strategy – the Abu Dhabi National Oil Co (ADNOC) – from around the current 4 million barrels per day (bpd) to at least 5 million bpd by 2030 at the latest, and to increase its gas output as well. For a long time a huge hurdle for Abu Dhabi’s plans to dramatically increase oil revenues has been the reticence of various members of its Supreme Petroleum Council (SPC) to endorse any proposals regarded as not in keeping with the broadly conservative nature of the Emirate. This reticence persisted despite the March-April 2020 Oil Price War having left the Emirate with a projected budget breakeven oil price of US$69.1 per barrel of Brent for the year, according to IMF figures, whilst Brent struggled to trade over US$50 per barrel during that time. 

The pressure to plug budget gaps and to fund plans to safeguard oil production levels resulted in a statement on 23 June from ADNOC that it had agreed to sell a 49 per cent stake in its gas pipelines for just over US$10 billion to a consortium of international investors, subject to the standard regulatory approvals. It also opened the way to China increasing its expansion efforts into the UAE and, as a counter to this move into yet another of the Middle Eastern states made economically vulnerable by the Saudi-instigated 2020 Oil Price War, to the UAE being top of the list for a relationship normalisation with the U.S.-Israel axis.

Last week, though, Abu Dhabi ruler Sheikh Khalifa bin Zayed Al Nahyan issued a decree to re-organise the SPC into a more oil- and economy-friendly Supreme Council for Financial and Economic Affairs, which will be chaired by Abu Dhabi Crown Prince Mohamed bin Zayed, who was formerly the vice-chairman of the SPC. He will now oversee this new version of the SPC, which will cover all of Abu Dhabi’s financial, investment, economic, petroleum and natural resources affairs. The new iteration of the SPC will comprise of board members with a limited tenure of just three years, including in the first instance the Minister of Industry and Advanced Technology, Sultan al-Jaber, who is also the chief executive officer of ADNOC. Khaldoun al-Mubarak, chief executive officer of the Abu Dhabi sovereign wealth fund Mubadala Investment Co will also be an initial board member.   

Related: Rising LNG Prices Welcome News For U.S. Exporters

Crucially as far as new oil projects and corollary financing are concerned, according to the notes accompanying the decree: “The law also stipulates that the Supreme Petroleum Council’s regulatory powers will be merged with those of the new council and its members will continue to exercise their role as ADNOC’s board members until a new board of directors is appointed.” It added that: “The council's methodology allows the boards of concerned authorities the corporate autonomy to develop their strategies to be approved by the council, and the independence to develop, approve and implement their annual plans.” In short, the new version of the SPC will make quicker, bolder, and more financially savvy decisions than the previous version.  This augurs well for a number of crude oil production-boosting initiatives that are key to ADNOC achieving its 5 million bpd crude oil production target by 2030. Before the new version of the SPC had been formed, the previous SPC had approved ADNOC’s US$122 billion spending plan over the next five years, albeit a 10 per cent lower capex figure than was supposed to have been spent between 2019 and 2023. It had also announced in November the discovery of 22 billion stock tank barrels (STB) of recoverable unconventional onshore oil resources have been discovered by ADNOC, plus another 2 billion STB in recoverable conventional oil reserves. These new discoveries mean that the UAE’s recoverable conventional oil reserves are now 107 billion STB, on a level with the best U.S. shale oil plays, said the SPC. 

Around the same time, ADNOC’s al-Jaber announced that the company would: “…continue to pursue partnerships with investors that will allow us to generate new value streams for us to reinvest in higher value, higher return projects.” These new deals, as OilPrice.com highlighted at the time after exclusive interviews with senior legal sources close to ADNOC, would focus initially on the awarding of five potentially massive oil and gas blocks as part of the second competitive bidding round that was launched in May 2019. The sources added that they would likely be awarded to U.S. and U.S.-allied firms, in line with the US$10 billion+ that ADNOC secured from a consortium of international investors by selling a 49 per cent stake in its gas pipelines. The five blocks comprise 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). 

Related: Crude Oil Flow From Saudi Arabia To U.S. Falls To Zero

OilPrice.com also highlighted that the chosen U.S-friendly firms would also be in line with those firms that had been vetted as being suitable by the U.S. in the first round of concession awards that ended in March 2019. These featured 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. 

As it transpired last week, ADNOC did precisely as predicted, awarding ENI and PTTEP an exploration concession to look for oil and gas in Offshore Block 3. ENI and PTTEP will hold 100 per cent of the exploration phase with investments up to AED1.51 billion (US$412 million), which include exploration and appraisal drilling, and a participation fee to explore for and appraise oil and gas opportunities. ENI will be the operator in the exploration phase for the block that spans an 11,660 sq km area while ADNOC retains the option to hold a 60 per cent stake in the production phase of the 35-year concession, which starts with the commencement of the exploration phase.

Future awards, OilPrice.com understands from the senior legal sources close to ADNOC, are likely to involve firms from India as well – probably the Bharat Petroleum Corp. and the Indian Oil Corp – as India is an absolutely vital geopolitical component of the U.S. push-back against China. India had demonstrated decisively in the 15 June 2020 clash between military units of the two great Asia powers in the disputed territory of the Himalayas’ Galwan Valley its willingness to change to a more confrontational approach than had been usual towards its neighbour as and when required. It marked a new ‘push back’ strategy from India against China’s policy of seeking to increase its economic and military alliances from Asia through the Middle East and into Southern Europe, in line with its multi-layered multi-generational ‘One Belt, One Road’ (OBOR) project, and is now a core part of the U.S. Asia-Pacific strategy to try to contain China.

As the U.S.’s new poster-boy oil company proxy in the Middle East, ADNOC has been busy cementing its ties with India. ADNOC’s 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 will allow ADNOC – currently the only overseas company allowed 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 from the Mangalore strategic storage facility (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. 

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on January 08 2021 said:
    The author seems to be aggrandizing the role of UAE’s oil in the US’s pushback against increasing Chinese influence across the Middle East. A close scrutiny of these plans shows they look like castles on the sand and therefore are doomed to fail.

    The plans seem to be based on increasing UAE’s oil production from just under 3 million barrels a day (mbd) currently to 5 mbd by 2030 and to award further oil concessions to US and US-friendly oil companies. The inclusion of UAE in US plans appears to be a ploy for enabling US companies to get the lion’s share in UAE’s planned expansion of its oil production.

    The downsides to these plans are numerous. The first is that it is very improbable that UAE can raise its crude oil production to 5 mbd. The second is that the bulk of UAE’s crude oil exports go to China. The Chinese can easily replace them with Iraqi, Saudi and Russian oil imports.

    The third downside is that China’s economy with an estimated GDP of $29.5 trillion in 2020 based on the purchasing power parity (PPP) which is the most reliable yardstick used by both the World Bank and IMF to measure GDP, is 37% larger than the United States’ at $21.5 trillion. Furthermore, China’s Belt and Road Initiative (BRI) has helped it extend its economic influence across the world. The US is in no way capable of subduing or restricting the spread of China economy as President Trump’s trade war against China ended with his loss of the trade war.

    The fourth downside is that China already dominates the oil and gas business in two of the world’s largest oil producers, namely, Iraq and Iran and also has considerable influence on Saudi Arabia, UAE and most major oil producers of the world by virtue of being the world’s largest importer of crude oil and also the driver of the global economy. The world is China’s oyster when it comes to oil imports.

    That is why the US’s pushback against increasing Chinese influence across the Middle East is bound to fail as other plans with India and other Asian powers have failed to arrest the spread of the BRI.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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