National oil companies' projects are at risk of stalling as their international partners face increasing capital constraints amid low oil prices, according to energy industry experts.
Finding an adequate response to the diverging priorities of international oil companies will be a key challenge for state-backed producers across the Arabian Gulf region, including in the UAE where change at the top of Abu Dhabi National Oil Company (Adnoc) has resulted in the appointment of Sultan Al Jaber to lead it as the company enters its next phase of growth.
Sean Korney, a partner at the US-based law firm Burnet, Duckworth & Palmer, said that national oil companies (NOCs) had to keep international investors incentivised to ensure they maintained the desired pace on projects.
“Many investors are now capital-constrained and will be wanting to reduce their overall investment,” he said, adding that NOCs did not face the same monetary hardships and that could cause friction.
The consulting firm Wood Mackenzie estimates that upstream oil and gas projects worth US$380 billion have been shelved since oil prices started to slide in late 2014.
This month, the Royal Dutch Shell chief executive Ben van Beurden said it had responded to lower oil prices by “reducing the number of new investment decisions and designing lower-cost development solutions”.
Shell announced last month that it would withdraw from Adnoc’s Bab sour gas project, saying that the expensive development did not fit with the company’s strategy “particularly in the economic climate prevailing in the energy industry”.
As companies try to streamline operations to address lower revenues, other joint NOC projects around the Middle East and North Africa are at risk of losing foreign stakeholders.
The US firm Occidental Petroleum told The National last month that its first priority was to reshape its portfolio to operate on a budget that would be at least 30 per cent less than last year's. As a result, the company will exit riskier areas such as Iraq, Libya and Yemen by the end of the year to pursue its core areas.
Those NOCs, such as Adnoc, which act as gatekeepers for inward foreign investment in the domestic upstream oil and gas industry, must also contend with longer-term considerations beyond the effect of short-term movements in oil prices.
Contracts need to be resilient, for example, to provide profit for both the NOC and the investor despite market volatility, according to Mr Korney. “If the fiscal structure is overly sensitive to commodity price fluctuations, there can be a winner and a loser,” he said.
“This can also cause the goals of the NOC and the investor to become divergent.”
Mr Korney added that attracting new investment was made even more difficult in the current low oil price environment, and if new investors could be wooed, it might be hard to obtain a price that wasn’t “selling the national patrimony too cheaply”.
Pierre-Louis Brenac, managing partner and Middle East head of the Paris-based consultancy Sia Partners, said that Adnoc should prioritise the consolidation and realignment of its subsidiaries to help reduce costs and build efficiency.
“Adnoc has been a silo holding company of many companies, each independent from the other,” said Mr Brenac.
“What Adnoc has to do as a holding company is to foster and consolidate all of this at a holding level,” he said.
“I think that Adnoc will consolidate their skills … and harmonise the subsidiaries to make them more efficient.”
Sixteen different units operate under the Adnoc umbrella, including three in the area of exploration and production, three in services, four in gas processing, one in oil processing, two in petrochemicals, two in maritime transport and another in charge of distribution.
One local oil and gas executive, who asked not to be named, said that the reality for NOCs today is that they are a supplier in a buyer’s market, forcing everyone to fight for market share.
“Those days of protecting and being in the driver’s seat are gone,” he said.
Finding operational efficiencies at every level will be a priority given that “the capital that has already been committed” for projects that cannot be unwound, the executive said.
International oil companies have been cutting thousands of jobs and NOCs are also laying off people, he said.
“Everyone is looking for a way to reduce costs. You can’t afford to run bloated cost structures.”
Eugene Lindell, an energy analyst at Vienna-based JBC Energy, said that, overall, NOCs had to work harder to keep capital flowing.
“In a low oil price environment there will be more hoops to jump through for NOCs to secure the necessary investment to keep crude production stable, while the more ambitious projects are likely to be scaled back or even frozen,” he said.
lgraves@thenational.ae
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