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Abu Dhabi Faces Tight Deadline to Renew Oil Concession

Source: WSJ 5/19/2013, Location: Middle East

Abu Dhabi’s state oil company is under pressure to take a quick decision on which foreign companies will get concessions in one of the Middle East’s oldest oilfields.

The top decision-making body in the Abu Dhabi oil industry, the Supreme Petroleum Council, has rejected a proposal from the state-owned Abu Dhabi National Oil Co. to extend by a year the concessions in the onshore oil fields which make up more than half of the United Arab Emirates’ crude production of 2.6 million barrels a day, industry officials said last week.

The existing 75-year old concessions expire in January 2014, so the decision gives Adnoc just over seven months to decide on the new line-up of foreign partners.

At stake is one of the few major oil-producing areas in the Persian Gulf where international companies are still allowed to hold an equity interest. As Saudi Arabia, Kuwait and other Gulf countries have nationalized their oil industries over the years, Abu Dhabi has remained as one of the few in the region to allow foreign holdings in its oil industry.

BP PLC, Exxon Mobil Corp., Royal Dutch Shell PLC, Total SA and Partex Oil & Gas hold a combined 40% stake in the Abu Dhabi Co. for Onshore Oil Operations, or Adco, which operates the onshore Bu Hasa, Bab, Asab, Sahil and Shah oil fields. Adnoc holds the controlling 60% stake.

The exact motives of the Supreme Petroleum Council in refusing an extension of the Adco concession remains a matter of speculation. But whatever its intentions, the SPC has as left Adnoc with a fairly short period to take a far-reaching decision on its most productive oilfields, leaving some observers doubtful that it will meet the January deadline for a decision on the new Adco concession holders.

Adnoc remains at a fairly early stage in assessing the oil companies competing to win the new concession rights. So far, it has pre-qualified four of the existing partners and a host of potential newcomers for the concession bidding process. In late April, some of the newcomers asked Adnoc for clarification meetings about the bidding process, which remains a source of confusion for many of the bidders.

“It is all up in the air now, and existing partners in the Adco concession are trying to understand what Adnoc actually wants,” an official at one of the bidding companies said.

Some point to the failure of Adnoc’s gas field subsidiary to reach a quick decision on the renewal of a concession to operate the emirate’s onshore gas fields, back in 2008. The concessions expired before the Abu Dhabi Gas Industries Co. could agree on the terms of the renewal. It was eventually renewed in April 2009, with the 20-year contract backdated to start in 2008.

"There is a confusion of what is going to happen now. There is a big question mark - can Adnoc actually meet the deadline, or (will it) repeat history," said one person close to the discussions.

Using history as a guide, another possible source of delay could be disagreements between the Supreme Petroleum Council and Adnoc.

This was the case with the renewal of the Zakum Development Co. offshore concession in 2006. Adnoc favored bids from BP and Total to operate the Upper Zakum field, but the SPC overruled the state oil company and awarded the concession to ExxonMobil. The concession runs until 2026.

The companies prequalified for the renewal of the Adco concession are BP, Exxon Mobil, Shell, total, Occidental Petroleum Corp., China National Petroleum Corp., Japan’s Inpex Corp., Korea National Oil Corp., Italy’s Eni SpA, Norway’s Statoil ASA and Russia’s OAO Rosneft.

The Adco concession, which covers six main deposits, is the largest in the country with the capacity to produce about 1.5 million barrels daily. The United Arab Emirates, which includes Abu Dhabi, plans to increase its output capacity to 3.5 million barrels a day by 2017, from its current estimated maximum output capacity of around 2.85 million barrels a day.

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