The Commodity Investor weighs in on how investors can benefit from a concession that is coming up for renewal in the United Arab Emirates.
The United Arab Emirates (UAE), a small country located in the Arabian Gulf, has oil reserves of about 100 billion barrels; that amount represents roughly 10 percent of global reserves. The UAE is a key member of the Organization of the Petroleum Exporting Countries (OPEC) and plays an important role in supplying oil to global markets. While not as influential in setting oil policies as neighboring Saudi Arabia, which holds almost three times the reserves of the UAE, it nevertheless has a very well-organized and developed hydrocarbon industry. This installment of The Commodity Investor examines some of the changes occurring in the UAE’s oil industry and how investors can benefit.
A growing industry
The British were the first to discover oil in the UAE territory before the UAE was formally declared a state, and production has been constant ever since. The country’s oil sector is divided between onshore and offshore oil systems, with offshore being an important locomotive in the country’s energy industry. The offshore Zakum field is one of the largest in the world and accounts for a little less than half of the country’s oil output.
State-run oil company Abu Dhabi National Oil Company (ADNOC) is responsible for the exploitation and development of these oil fields through joint ventures with international partners. Total production is currently 2.7 million barrels per day, and while there have been no new major discoveries over the last decade, there are optimistic projections that the country could have even more oil. I will discuss the implications of further discoveries in the section below. What the country’s oil industry may lack in new discoveries it is making up for through Enhanced Oil Recovery (EOR) techniques.
Through EOR, companies are able to extract even more oil from existing fields, both onshore and offshore. One company that is leading the way in this area is Technip (OTC Pink:TKPPY), a leading technology and project management solutions company focused on the energy industry. This French company has experience in EOR techniques worldwide and it is putting them to good use in the Arabian Gulf.
Another company that offers tremendous exposure to the UAE is one that is a household name: ExxonMobil (NYSE:XOM). Exxon has been active in the UAE for seven decades and is a leader in both onshore and offshore oil field developments, implementing cutting-edge technological solutions to enhance oil recovery throughout the country. Exxon has joint ventures with the UAE’s state-run oil company that allow it exposure to the Zakum offshore oil system, one of the region’s most coveted.
A changing industry
The coming year will be a turning point in the UAE’s oil history, and may very well mark the beginning of a new oil regime throughout the Middle East. At the end of the year, the onshore oil concession agreement that has been in place since 1939 will come to an end. When oil was first discovered in the territory back in the late 1930s, the existing government and the oil superpowers of the time signed a 75-year concession that has been extremely beneficial to oil majors.
This onshore concession, which has been extremely lucrative not only for ExxonMobil, but also for Royal Dutch Shell (NYSE:RDS.A,LSE:RDSA) and BP (NYSE:BP,LSE:BP), is now expiring and the government is actively receiving bids from interested parties. While this trio will continue to play an active role in the country and the region’s oil industry, the renewal of the concession will dramatically alter the landscape in the country — and that presents an interesting investment opportunity for investors.
While a lot of the oil is being exploited in partnership with western oil companies, almost all of the oil produced by the UAE is now being shipped to eastern nations. Indeed, over 85 percent of the oil the country produces heads to countries such as China, South Korean, Japan and India. The Commodity Investor expects that oil companies from these countries will play an increasing role in the development and exploitation of hydrocarbons in the UAE and the region.
Specifically, investors should keep an eye out for China’s CNOOC (NYSE:CEO,HKEX:0883) and PetroChina Company (NYSE:PTR,HKEX:0857), which are actively pursuing discussions and projects in the region and the country. In addition, Japanese companies that have been active in the region are getting more involved in the UAE, Qatar and other neighboring countries. One Japanese company to keep on your watch list is Japan Petroleum Exploration Company (OTC Pink:JPTXF), which has good prospects for landing lucrative contracts in the area.
For decades, the region’s hydrocarbon industry has been influenced by western oil companies. As decades-old contracts come up for renewal, The Commodity Investor expects eastern companies to play a larger role — and that will open up a key area for investors looking to generate long-term returns in the natural resource industry.
Securities Disclosure: I, Amine Bouchentouf, hold no positions in the stocks mentioned.
Columnist Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the bestselling Commodities For Dummies, published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities.