Reed Smith Client Alert

Abu Dhabi’s 75-year-old onshore oil concession expired 10 January 2014, ending its existing partnership with BP plc, Royal Dutch Shell plc, Exxon Mobil Corp., Total SA and Portugal’s Patex Oil and Gas.

Since 1939, Abu Dhabi has extracted crude oil at its primary onshore oil fields through concession agreements with the above foreign oil companies (FOCs). In the 1970s, the Abu Dhabi National Oil
Company (ADNOC) became a partner to these FOCs and together formed the Abu Dhabi Company for Onshore Oil Operations (ADCO), a partnership which has successfully increased total national oil extraction levels to 1.5 million barrels a day of Murban grade crude oil.

However, the expiry of Abu Dhabi’s oldest and largest concession agreement risks leaving these oil majors without direct interests in the onshore oil deposits of Abu Dhabi.

New Production Agreement

In light of the expiration of the concession, ADNOC has invited FOCs to bid for new production agreements. Over the coming year, ADNOC will be evaluating bids from the previous concession holders: BP plc, Royal Dutch Shell plc, Exxon Mobil Corp. and Total SA (Patex has not been invited to bid this round). ADNOC will also be evaluating bids from a host of new contenders, including bids from Rosneft, Eni, Statoil, Korea National Oil Corporation, China National Petroleum Company (CNPC) and
Occidental Petroleum Corporation. The concession agreements will be granted for as long as 40 years, making them a very attractive target for FOCs.

However, terms will be challenging: bidders are required to present their plans for attaining a 70 per cent recovery rate, roughly double the current market average, over the 40-year term of the concession. Bidders will be granted between 5 per cent and 10 per cent stakes. The concession itself has been divided into four blocks. Of the companies working on each block, one will be allocated an “asset group leader” tasked with cooperating with ADNOC on the advancement of its field development programme and will, in turn, receive a tax credit based on the capital it invests.

Transitional Arrangements

Although the existing concession expired 10 January 2014, and the original FOCs have relinquished their collective 40 per cent stake in ADCO, ADNOC has arranged for four of the FOCs (Exxon Mobil, Royal Dutch Shell, BP and Total) to continue their work while new bids are being evaluated, under the terms of special sales agreements which will enable them to continue to off take the same volume of oil as prior to the expiry of the concession, although at a price fixed at 11 cents over the official sales price per barrel.

The reasoning for retaining the participation of the previous FOCs throughout the transition period is clear: ADNOC wishes to safeguard current production rates. It also aims to meet its target for raising production from the current rate of 3 million bpd to 3.5 million bpd by 2019

The oil fields which comprise the concession currently produce 1.6 million bpd: a critical contribution for meeting the 2019 target.

Looking Ahead

To date, what is the world’s fourth-largest oil concession has been largely dominated by western FOC participation. However, the award of contracts to Asian FOCs would shift the sphere of influence eastward. The Supreme Petroleum Council, which must give its approval to bids evaluated by ADNOC, has been in talks with the Chinese regarding the award of a concession to CNPC.

In early 2013, CNPC and ADNOC signed a strategic cooperation agreement outlining the intentions of the parties to work together to further develop Abu Dhabi’s oil and gas resources. Since the signing of the strategic cooperation agreement, CNPC has undertaken an evaluation of seven undeveloped blocks in the west of Abu Dhabi. The Supreme Petroleum Council has since claimed to be content with CNPC’s work and is seriously evaluating granting a concession to CNPC.

The granting of a concession to CNPC, and potentially to the South Korea National Oil Company, could mark a change in the region’s relationships, signalling the commencement of strong working relations
with Asian FOCs, not to mention the numerous off-take arrangements which Asian FOCs, including Japanese FOCs, are keen to pursue. Western FOCs will be keen to bid competitively to ensure that their longstanding foothold in the region is not curtailed.

It is anticipated that ADNOC will commence announcing the results of its bid evaluations in March 2014, although evaluations may continue into 2015. All ADNOC evaluations will be subject to approval by the Supreme Petroleum Council.

Client Alert 2014-025