With a projected budget breakeven oil price of US$69.1 per barrel of Brent this year, according to IMF figures, but accounting for around 96.8 per cent of the UAE’s 98 billion barrels of proved oil reserves (the seventh-largest in the world), Abu Dhabi’s post-oil war position is not quite as bad as many of its OPEC and OPEC+ fellow members. Nonetheless, with Brent crude still trading in the US$40-50 per barrel range, and the US$69.1 per barrel budget breakeven oil price very close to the ‘Trump Cap’ of US$70 per barrel of Brent, Abu Dhabi still needs to plug budget gaps and to fund plans to safeguard its current oil production level and to potentially push it higher next year. Its recent landmark gas deal is critical in this regard.
June 23 saw a statement from the UAE’s state-owned oil company, the Abu Dhabi National Oil Company (ADNOC), saying 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. The consortium comprises the New York-headquartered infrastructure investment fund Global Infrastructure Partners, the Toronto-based alternative asset management company Brookfield Asset Management, Singapore’s sovereign wealth fund GIC, the Ontario Teachers’ Pension Plan Board, South Korea’s NH Investment & Securities, and Italy’s Snam. Despite the price war-led downturn in oil and gas pricing, the US$10 billion+ purchase figure for slightly less than half of the gas pipeline assets is in line with the US$20.7 billion valuation given for the entire assets, which are now held in the newly-formed ADNOC unit, ADNOC Gas Pipelines. The remaining 51 per cent will be held by ADNOC. The deal comes at a time where a number of Middle Eastern gas producers appear to be using the current period of low global gas pricing to dramatically revamp their gas facilities with a view to taking advantage of the future rebound in gas pricing, as a function of rising demand from Asia in general and from China in particular. As part of its overall target of increasing the share of gas in its domestic energy mix to 15 per cent by 2030 (from around half that figure now), driven principally by a switch from coal, in just the past two years or so China has added over 75 billion cubic metres (bcm) to global gas demand, the equivalent of the entire U.K. gas market (the second largest European market), according to the IFRI Centre for Energy & Climate. In the last few weeks, then, Iran and Iraq, most notably – as key cogs in China’s ‘One Belt, One Road’ project – have announced major measures to increase their gas production, as well as Qatar, as covered in depth by OilPrice.com.
In addition to reaching new targets on its South Pars supergiant non-associated gas field, Iran is pushing forward with its liquefied natural gas (LNG) plans, to add to its already high-volume liquefied petroleum gas (LPG) sales to China. Iraq is finally moving ahead with plans to develop its associated and non-associated gas resources in the next two to three years, with the Oil Ministry looking at projects to develop 1.2 billion standard cubic feet per day (scf/d) of associated gas out of the 2.7 billion scf/d produced as an adjunct to oil excavation. At the same time, despite having suspended a number of developments at other gas fields, Qatar is pushing ahead with developments connected to its key North Dome supergiant non-associated gas field (the other part of the overall reservoir that comprises Iran’s South Pars).
This deal by ADNOC falls within these general ambitions but is slightly more nuanced than some. According to an ADNOC statement, the company will lease its ownership interest in the assets to ADNOC Gas Pipelines for 20 years in return for a volume-based tariff and, in turn, ADNOC Gas Pipelines will lease the rights to 38 gas pipelines. This deal structure, according to ADNOC, will allow the state-run firm to maintain full operating control over the strategically-important gas pipeline assets included in the investment whilst concomitantly gaining cashflow as part of the tapping of new pools of global institutional investment capital. Even more specifically, the volume-based tariff that ADNOC will pay ADNOC Gas Pipelines will be for the use of pipelines that transports gas and natural gas liquids from ADNOC’s upstream assets to Abu Dhabi’s key outlets and terminals across the UAE. “The tariff will be charged on the total volumes transported through the pipelines, together with liquefied natural gas flows, subject to a volume cap,” ADNOC stated. The international investors in the consortium will receive 100 per cent of free cash in the form of quarterly dividends, ADNOC added.
Longer-term the deal is part of Abu Dhabi’s drive to develop funding streams for its drive to increase gas production and, in turn, oil production as well, given that gas can substitute for oil in the domestic power generation grid, allowing for more oil to be exported for a higher price than gas or used in the value-added petrochemicals sector. ADNOC itself is aiming for complete self-sufficiency in its gas operations, with plans to boost production from its Shah sour gas field from around 1.3 billion scf/d to 1.5 billion scf/day through a joint venture with Occidental Petroleum, among other smaller projects. A geopolitical element to these ambitions, and a counterpoint to the aforementioned developments in Iran, Iraq, and Qatar (which can now be regarded as moving even more firmly into the China-Russia sphere of influence) – is that Abu Dhabi’s gas plans will allow the U.S.-allied UAE as a whole to curtail its dependence on gas imports from Qatar (North Dome) via Dolphin Gas.