UAE Pumps $6 Billion Into Oil And Gas Expansion Projects

• ADNOC is planning to invest up to US$6 billion towards improving its drilling business

• In line with the UAE’s position as a key U.S. ally in the region going forward, U.S. companies featured heavily in the contract awards

• This latest announcement falls in line with the UAE’s ambition to expand production capacity to 5 million bpd

The U.S.-sponsored ‘relationship normalisation’ deal signed last year between Israel and the UAE is a core element of Washington’s attempt to counterbalance the advance of China and Russia across the Middle East. The key corporate proxy of the UAE at the forefront of this is the Abu Dhabi National Oil Co (ADNOC), and the announcement last week from the firm that it will invest up to US$6 billion towards improving its drilling business is in line with this overall aim. It is also vital in enabling the UAE to achieve the corollary targets of increasing its crude oil production to 5 million barrels per day (bpd) by 2030 and of achieving self-sufficiency in gas as soon as possible. The broader aims of the U.S.-Israel-UAE alliance were also evidenced by the defence deal signed last week between the UAE’s defence conglomerate, Edge, and Israel Aerospace Industries (IAI).

The specifics of the investment, as announced by ADNOC, include US$3.27 billion for wellheads and related components, US$2.34 billion for down-hole completion equipment and services, and US$337 million for liner hangers and cementing accessories. In line with the UAE’s position as a key U.S. ally in the region going forward, U.S. companies featured heavily in the contract awards, most notably including Baker Hughes (whose UAE agent, Al Gaith Oilfield Supplies & Services Company, was part of the US$3.27 billion award, and also of the US337 million deal), and Schlumberger Middle East, which won a major share of the US$2.34 billion contract. As part of ADNOC’s ‘in-country value program’ around 60 percent of the total value of the US$6 billion awards could flow back into the UAE’s economy, according to a statement from the company.

These announcements follow on from a flurry of similarly-themed activities announced and undertaken by the company since the announcement of the UAE’s relationship normalisation deal with Israel was announced on 13 August 2020. These have variously been aimed at one of three principal aims: expanding the UAE’s regional economic power, increasing its role as a key hub for energy trading, and countering Iranian threats to oil supplies through the Strait of Hormuz.  The first of these developments is ‘Operation 300 Billion’, which intends to raise the contribution of the UAE’s industrial sector to AED300 billion (US$81 billion) from the current AED133 billion within the next 10 years. At the centre of these plans, which in turn fall within the UAE’s Circular Economy Policy 2021-2031, will be an adjunct build-out of the UAE’s energy sector. This includes the increase in crude oil production from 4 million bpd to at least 5 million bpd by 2030. Much of this increase will be geared towards India as the prime end-user in the East that is being cultivated by the U.S. to become a more active regional rival to neighbouring China. 

This dovetails into a second key initiative, which is to make the UAE a key regional energy trading hub. In this context, ADNOC launched a dedicated Murban futures contract on a new Abu Dhabi-based exchange – the ICE Futures Abu Dhabi platform (IFAD) - in partnership with the Intercontinental Exchange (ICE). The light, sweet Murban crude oil grade is one of the four crudes produced by ADNOC, although it accounted for around half of the UAE’s total near-4 million bpd crude oil production before the outbreak of the COVID-19 pandemic. According to ICE and ADNOC, Murban futures is the second physically delivered futures contracts traded on a regional exchange after Dubai Mercantile Exchange’s Oman crude futures, and Murban is also a deliverable grade in the Platts benchmark Dubai and Oman crude assessments. ICE and ADNOC initially partnered with BP, GS Caltex, Inpex, ENEOS, PetroChina, PTT, Shell, Total and Vitol to launch the IFAD, and ICE has also announced agreements with Chevron, Trafigura, and Occidental to explore using the contract to price crude exports from the U.S. to Asia.

This new trading hub neatly ties into the third major initiative – countering Iranian threats to oil supplies through the Strait of Hormuz – which is being addressed by ongoing plans to dramatically expand the capacity and facilities of the major port in the UAE’s Fujairah emirate over the next 10 years. Fujairah offers an unencumbered direct access point to the Gulf of Oman – but on the eastern side of Oman itself – which means that any oil kept there be able to avoid any blockade that Iran might again impose on ships passing through the Strait of Hormuz. This option became increasingly attractive to Iran after it finalised its Guriyeh-Jask oil pipeline that allows its oil to flow without going through the Strait even as it blockades 30 per cent of the rest of the world’s oil supply. As it stands, Fujairah is the key hub from which the UAE’s Murban oil is exported, making its way there through the 360 kilometre Abu Dhabi Crude Oil Pipeline from the Habshan onshore field in Abu Dhabi and capable of transporting 1.8 million bpd. ADNOC is also currently developing underground oil storage caverns in Fujairah that can hold 42 million barrels, including Murban, with the project expected to be completed in 2022.  

It would be naïve of anyone to think that any substantive deal engineered by the U.S. and Israel in the Middle East would not include a significant element of co-operation on intelligence and military matters and this deal is no different. As analysed in depth in my new book on the global oil markets, a key part of this joint intelligence initiative has been the dramatic increase in the past two years of commercial property in Iran’s southern Khuzestan province – a key sector for oil and gas reserves – being purchased by UAE-registered businesses, particularly those based in Abu Dhabi and Dubai. These apparently Abu Dhabi and Dubai businesses are supported by funds from a major Israeli company that in turn is funded from an Israel-U.S. operation specifically set up for this project, with a budget of US$2.19 billion in the first instance, OilPrice.com understands from sources with knowledge of the matter. Essentially, Israel aims to achieve through the UAE presence in southern Iran what Iran has done through its presence in Lebanon and Syria. 

A more overtly tangible sign of such co-operation was in evidence last week with the announcement that the UAE’s Edge defence conglomerate and Israel’s IAI have signed a strategic agreement to jointly design unmanned vessels capable of carrying out anti-submarine warfare. According to a statement from the two companies, the ‘170 M’ advanced modular unmanned service vessels that they will design and produce will be usable for both military and commercial purposes. “These developments will open many doors for us in local and global markets, military and commercial alike,” Faisal Al Bannai, chief executive officer of Edge said in the statement. “[The new product] will also be usable for intelligence, surveillance, reconnaissance, mine detection and sweeping, and as a deployment platform for certain types of aircraft,” the company added. This not only follows of all the developments mentioned above but also the agreement made just after the August 2020 relationship normalisation deal that the U.S. will provide the UAE with the latest F-35 fighter planes.