China continues to expand its influence in the Middle East through oil and infrastructure deals, and the latest deal with ADNOC is a great example of how Beijing looks to grow its presence in the offshore oil business.
It is little surprise to see that China – again – figures in yet another concessions award in the Middle East, this time relating to the Abu Dhabi National Oil Company (ADNOC). In the aftermath of Saudi Arabia’s second disastrous oil price war against the U.S. shale sector, virtually all major Middle Eastern state-owned oil firms are looking to plug varyingly significant operational deficits, as are their governments.
In the absence of a sudden major spike in oil prices, economic survival in practical terms now comes down to one of two broad options.
The first is to sell off chunks of state assets in initial public offerings (IPOs) or stakes in ongoing oil and gas projects, which ADNOC recently did with the sale of a 49 per cent stake in its gas pipelines for just over US$10 billion to international investors.
The second is to sell-off the same assets to companies from countries for which the immediate economic shortfall inherent in such deals pales into insignificance compared to the longer-term geopolitical and financial advantages.
In this latter regard, Russia has its own financial constraints to deal with but China does not.
Specifically, ADNOC has announced the transfer of ownership rights in its Lower Zakum, and Umm Shaif and Nasr offshore concessions from the existing holding of the China National Petroleum Corporation (CNPC) to China National Offshore Oil Corporation’s (CNOOC) subsidiary, CNOOC Limited. This will be done by CNOOC acquiring a 40 per cent interest in CNPC’s majority-owned subsidiary PetroChina Investment Overseas (Middle East) Ltd (PetroChina) through its holding company, CNOOC Hong Kong Holding Limited (CNOOC HK). After the proposal has been approved by Abu Dhabi’s Supreme Petroleum Council (SPC) – a rubber-stamping affair - CNOOC will join the principal operating consortium in the Lower Zakum concession, comprising India’s ONGC Videsh (10 per cent stake), Japan’s INPEX Corporation (10 per cent), China’s CNPC (6 per cent), Italy’s Eni (5 per cent), and France’s Total (5 per cent). CNOOC will also join the principal operating consortium in the Umm Shaif and Nasr concession, comprising Total (20 per cent), Eni (10 per cent), and CNPC (6 percent). ADNOC will retain a 60 per cent majority ownership interest in both concessions.
Significantly, aside from the broader relentless expansion of China into the Middle East, in line with its multi-generational ‘One Belt, One Road’ programme, this deal marks the first time a dedicated Chinese offshore oil and gas company has joined in any ADNOC concession. These points did not go unnoticed by the chairman of CNOOC, Wang Dongjin, who said: “CNOOC will leverage our extensive expertise in the offshore sector and be dedicated to value creation in these concessions for our mutual benefit.”
In this context, this latest deal follows the signing on 22 July 2019 of a comprehensive framework agreement between ADNOC and CNOOC to ‘explore new opportunities for collaboration’ in the upstream, midstream, and downstream oil sectors as well as in liquefied natural gas (LNG). Described at the time by ADNOC chief executive officer, Ahmed Al Jaber as “far-reaching”, the deal is such a significant move by China into the core oil and gas interests of one of the U.S.’s few remaining vocal allies in the Middle East - the UAE - that the deal signing ceremony was attended in person by China’s President, Xi Jinping.
Although couched in the usual platitudes expected in such deals, even the official guidance on its contents highlighted its vast scope and scale. For example, ADNOC and CNOOC, according to the official published notes on the agreement, will ‘share knowledge, best practices and technologies in ultra-sour gas development to improve operational efficiency in gas processing and treatment, deliver efficiency, performance and reliability for drilling operations and develop field and reservoir development plans’. As an adjunct to this, China’s Offshore Oil Engineering Company (COOEC) would be in prime position for associated engineering, procurement and construction opportunities, as would China Oilfield Services Ltd (COSL) for the supply of oilfield services and to explore collaboration opportunities in offshore oil and gas field assets in Abu Dhabi.
Also according to the July 2019 agreement, ADNOC and CNOOC would jointly explore LNG sales and purchase opportunities, share knowledge and expertise in LNG markets, and evaluate partnerships and joint investment opportunities in the LNG value chain. Finally, in the downstream sector, the two companies would collaborate in new integrated refining and petrochemical assets in China, co-operate in CNOOC’s refining assets, and jointly partner and invest in the refining and petrochemical value chain.
One of these early, albeit indirect, China investments may well be into an investment platform to fund local chemicals projects, as part of an overall push to invest US$45 billion in downstream activities in Abu Dhabi, according to a senior oil and gas industry source familiar with the project. The investment platform is to be run as a joint project between ADNOC and the Abu Dhabi state-owned holding company, ADQ (formerly known as the Abu Dhabi Developmental Holding Company) and will oversee the development of projects in the planned Ruwais Derivatives Park. Although ADNOC has not made public the breakdown of where all of the funding is to come from, ADNOC and ADQ together will hold a 60 stake in the project.
That the ADQ has any money at all for such an investment, or indeed for anything at all, is surprising, given that less than two months ago it was in urgent talks to raise a loan of “at least US$3 billion”, according to various reports. “ADQ’s attempts to put together a syndicate of banks did not go well and yet here it is with investment funding, at a time when the broader deal with China is moving forward,” he said. “There are no public statements that China is involved in the funding, of course, but it is fair to say that if ADQ or ADNOC had asked China for funding for the investment platform then China would have given it,” he concluded.