The long, hot summer is usually a quiet period in the Arabian Gulf. But this season marks some dramatic changes for Middle East state energy companies and their overseas ventures. The falling oil price creates opportunities for some, problems for others, and should make all reconsider their strategies.
Minority shareholders in Dragon Oil have until July 30 to decide whether to accept the offer of Emirates National Oil Company (Enoc), which already holds 53 per cent of the company, to buy them out.
Abu Dhabi National Energy Company (Taqa) is seeking to refinance its hefty debts, while reportedly considering a merger with another of the emirate’s state firms (although Taqa denies this). International Petroleum Investment Company (Ipic) recently parted ways with its managing director. And Qatar Petroleum has absorbed its subsidiary, QP International (QPI), and is planning to shed “non-core” assets.
Leading global oil companies such as Petrobras of Brazil, Petronas of Malaysia and Statoil of Norway applied their technical and commercial skills internationally. They still have an edge at home, but their overseas operations are run much like their domestic ones, and have to compete on an equal basis for capital.
Oil and gas-producing Middle Eastern countries have often secured downstream assets – such as refineries, oil storage, and liquefied natural gas import terminals – to smooth the path to market of their hydrocarbon exports. But, with a few limited exceptions, they have not invested in international upstream (the exploration and production of oil and gas).
Adnoc and Saudi Aramco do not have any overseas upstream assets. Kuwait Petroleum Corporation does, via its subsidiary Kuwait Foreign Petroleum Exploration Company, but this is managed separately from the rest of the business, as was Qatar’s QPI until recently. Enoc does not operate Dubai’s own oil and gasfields, which fall under a separate company, but it does run the emirate’s refinery and fuel retail business.
Instead, Abu Dhabi in particular has invested in overseas exploration and production via new specialised entities. Mubadala Petroleum and Ipic act more as holding companies rather than direct operators.
Taqa followed a very different path. A possible strategy would have been to build overseas power plants to create a market for its gas, but instead the company bought into mature, high-cost fields at peak prices. A subsequent good operational performance has not been enough to erase a large debt burden.
Enoc is different again: having long held the majority of Dragon Oil, its strategic goal is to build an integrated oil company, to support energy-importing Dubai’s development.
We could ask why Middle Eastern countries should be interested in foreign oil and gas production at all. Unlike Petrobras or Statoil, which honed their skills in tough offshore environments, the region’s national oil companies do not have a particular technical edge. Middle Eastern state oil companies tend to be short of human talent, given all the other demands on small national populations.
Given these factors, overseas projects will never generate the same financial returns as investment in low-cost, zero-tax domestic fields, as QPI seems to have discovered. And investing in oil and gas does not diversify the countries’ portfolios, guaranteeing a double hit when commodity prices fall.
There are three good reasons for such investments. One is to bring back technologies, skills and experience to the domestic hydrocarbons industry. This is obviously challenging when the overseas investor is separate from the national oil company. Second, they can leverage political relationships, as Mubadala has done successfully. And third, as with Mubadala’s stake in the Dolphin pipeline, they can secure resources for domestic consumption.
Now is a great time for Middle East state energy companies to pick up oil and gas assets on the cheap. But with national budgets under intense scrutiny, they need to understand how their strategy can prosper in a tough, competitive world.
Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis