Growing Energy Connections With China

BMI View: We see upside risk to the UAE oil production forecast following the joint venture between ADNOC and CNPC, which will bring fresh investment to the country's upstream. The deal also highlights the growing energy partnership between the UAE and China, particularly as the UAE targets increased production and its main historical export market, Japan, is offering fewer growth opportunities.

According to state news agency WAM, Abu Dhabi National Oil Company (ADNOC) has created a joint venture with China National Petroleum Corporation (CNPC) to develop oil in the United Arab Emirates (UAE). The two companies will take a 60:40 share in Al Yasat Company For Petroleum Operations, which will target the development of both onshore and offshore oil fields in the Emirate of Abu Dhabi. The new company will largely target upstream development, though it will also hold some responsibilities for marketing and exporting the crude produced.

CNPC's move into the UAE offers the Chinese company access to the 7th largest source of oil reserves in the world, while it gives ADNOC access to the world's largest oil import market. The UAE's oil sector had traditionally been dominated by international oil companies (IOC), though the non-renewal of a number of 75-year old oil production partnerships at onshore fields opened the door for a new wave of investment. We previously highlighted the interest of Chinese and Korean companies in the UAE following the departure of IOCs ( see 'Production Target Jeopardised By Reshuffle And Delays', January 21), and expect the Al Yasat company to play a role in redeveloping some of the onshore fields.

Targetting 3.5mn b/d By 2020
UAE Oil Production

BMI View: We see upside risk to the UAE oil production forecast following the joint venture between ADNOC and CNPC, which will bring fresh investment to the country's upstream. The deal also highlights the growing energy partnership between the UAE and China, particularly as the UAE targets increased production and its main historical export market, Japan, is offering fewer growth opportunities.

According to state news agency WAM, Abu Dhabi National Oil Company (ADNOC) has created a joint venture with China National Petroleum Corporation (CNPC) to develop oil in the United Arab Emirates (UAE). The two companies will take a 60:40 share in Al Yasat Company For Petroleum Operations, which will target the development of both onshore and offshore oil fields in the Emirate of Abu Dhabi. The new company will largely target upstream development, though it will also hold some responsibilities for marketing and exporting the crude produced.

CNPC's move into the UAE offers the Chinese company access to the 7th largest source of oil reserves in the world, while it gives ADNOC access to the world's largest oil import market. The UAE's oil sector had traditionally been dominated by international oil companies (IOC), though the non-renewal of a number of 75-year old oil production partnerships at onshore fields opened the door for a new wave of investment. We previously highlighted the interest of Chinese and Korean companies in the UAE following the departure of IOCs ( see 'Production Target Jeopardised By Reshuffle And Delays', January 21), and expect the Al Yasat company to play a role in redeveloping some of the onshore fields.

The capital backing and experience of CNPC should support fresh development plans to maximise production from the oil fields in the UAE, particularly those that saw underinvestment towards the end of their IOC tenure. CNPC's participation in the UAE upstream therefore provides some upside risk to our forecast, and could assist helping the UAE achieve its target of producing 3.5mn barrels per day (b/d) of crude by 2020 (note below chart shows crude, NGPLs and other liquids).

Targetting 3.5mn b/d By 2020
UAE Oil Production

While the domestic production outlook appears strong, the UAE is looking to strengthen its energy partnership with China to firm up export markets. The UAE has historically held a close energy relationship with Japan, which was the UAE's top oil export market in 2013 and is the destination of all the country's long term liquefied natural gas (LNG) contracts.

However, we forecast Japanese oil imports to reduce by around 200,000b/d by 2020, while Chinese oil imports are set to increase by around 2mn b/d over the same period. As a result we anticipate the UAE to direct much of its crude oil production growth to China.

Checking Out China As Japan Drops
Chinese And Japanese Oil Imports*

According to customs data, China imported around 100,000b/d of crude oil from the UAE in 2010, compared to around 775,000b/d exported to Japan. A supply deal organised between CNPC and ADNOC in 2011 should see the UAE double its 2010 oil deliveries to China to 200,000b/d in 2014. In contrast, with falling demand from Japan's downstream sector following the loss of over 400,000b/d of refining capacity due to new regulations, we expect to see oil exports to Japan fall.

Refining Markets
Chinese And Japanese Oil Refining Capacity

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This article is tagged to:
Related sectors of this article: Oil & Gas, Refining/Marketing, Upstream, Development, Production, Oil Market
Geography: United Arab Emirates, China, Japan
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