06 October 2016

Following a series of high-profile consolidations in Abu Dhabi this year, the Abu Dhabi National Oil Company (ADNOC) is the latest entity to enact structural changes in an effort to drive down costs and increase efficiency.

In early October the state-owned oil firm announced the consolidation of two of its largest offshore subsidiaries, the Abu Dhabi Marine Operating Company (ADMA-OPCO) and the Zakum Development Company (ZADCO), into one entity, which will eventually manage all of the associated offshore oil concessions.

The recent announcement dovetails with ADNOC’s emphasis on optimising costs and streamlining operations across the firm’s 19 subsidiaries and joint ventures, a process initiated at the beginning of this year.

ZADCO currently operates three offshore fields. Its most important field, Upper Zakum, covers 1200 sq km and has approximately 50bn barrels in reserves. Oil is processed at a facility on nearby Zirku Island, along with oil from ZADCO’s Umm Al Dalkh and Satah fields.

Meanwhile, ADMA-OPCO produces oil from two primary fields – Umm Shaif and Lower Zakum ­– with crude transported to the company’s Das Island facilities for processing, storage and export.

Offshore expansion

As ADNOC looks to boost production levels – current output is 3.1m barrels per day (bpd), with a target of 3.5m bpd by 2018 – offshore development remains a central focus of the company.

ADNOC’s offshore fields contribute a combined 1.2m bpd, with production expected to reach 1.7m bpd next year, thanks to output at the Satah Al Rasboot, Nasr and both Umm fields, as well as completion of the UZ750 project.

The $10bn UZ750 development, which consists of the construction of four artificial islands, aims to increase daily production at the Upper Zakum field from 640,000 bpd to 750,000 bpd by next year.

With Abu Dhabi’s offshore fields pointing to promising yields, the firm’s CAPEX spend has remained in line with past years to meet the company’s 2018 target. Meanwhile, international spending on exploration and production is expected to decline by 21% year-on-year in 2016, according to Barclays’ revised forecast released in March.

While offshore fields are more technologically challenging, and thus more expensive to develop, recovery techniques such as dredging and the incorporation of artificial islands are helping to bring down the long-term costs of these ventures.

Towards integration

According to Sultan Al Jaber, CEO of ADNOC, the consolidation of the two entities represents a logical next step in achieving the company’s objectives around people, efficiency, performance and profitability.

“Importantly, it will unite our offshore experience, streamline governance and decision making, and give management a better line of sight through the company’s operations,” he said in a company statement released earlier this month.

The operating costs of ADMA-OPCO’s Satah Al Rasboot field, for example, whose two artificial islands were completed in 2014, were already set to be reduced with a move to link services with Zirku Island, itself belonging to ZADCO.

Additionally, the combined Upper and Lower Zakum fields previously divided between ADMA-OPCO and ZADCO, respectively, together constitute the largest single offshore field in the world in terms of reserves.

Concession arrangement

ADNOC’s international partners are also working with the firm throughout the integration process.

Currently, ADNOC holds a majority share of ADMA-OPCO at 60%, with the remaining shares owned by BP (14.67%), Total (13.33%) and the Japan Oil Development Company (JODCO, 12%). Likewise, ZADCO is a partnership between ADNOC (60%), ExxonMobil (28%) and JODCO (12%).

In the near term, a steering committee has been appointed by ADNOC and its joint venture partners to oversee the integration, with the consolidation process expected to be completed by early 2018.

“The existing concession rights of our partners in the concessions currently operated by ADMA-OPCO and ZADCO will not be affected by the consolidation,” Al Jaber said in a company statement released in early October.

However, international firms are positioning themselves for the expiration of ADMA-OPCO concessions in 2018; ZADCO’s concessions do not expire until 2041.

Consolidation across the board

ADNOC’s consolidation is the latest in a series of moves in the emirate.

In August Abu Dhabi-based investment and development company Mubadala Development Company, which owns Mubadala Petroleum, merged with the International Petroleum Investment Company, with $125bn of combined assets. This consolidation brings together two of the emirate’s most important investment companies, offering a wide range of domestic and international energy portfolios.

This followed the announcement of a $175bn merger between National Bank of Abu Dhabi and First Gulf Bank in July.

© Oxford Business Group 2016