Thursday, August 22, 2013

On Abu Dhabi’s ‘spot’ chaps, ADNOC & INR

It's good to spot a traditional dhow on millionaire's yacht row at the marina here in Abu Dhabi. Though a millionaire or some tour company probably owns the thing! Switching tack from spot photography to spot crude oil trading – the community here in the UAE is in bullish mood, as is the national oil company – ADNOC.

With the spot Brent price in three figures, and above the US$110-level last time this blogger checked, few here (including the administration), have anything to worry about. The Oilholic has always maintained that a $80 per barrel plus price keeps most in OPEC, excluding Venezuela and Iran and including the Saudis and UAE happy. Short-term trend is bullish and Egyptian troubles, Libyan protests plus the US Federal Reserve's chatter will probably keep Brent there with the regional (DME Oman) benchmark following in its wake, a mere few dollars behind.

Furthermore, of the three traders the Oilholic has spoken to since arriving in the UAE, American shale oil is not much of a worry in this part of the world. "Has it dented the (futures) price?? An American bonanza remains…well an American bonanza. The output will be diverted eastwards to importing jurisdictions; they have in any case been major importers of ADNOC’s crude. What we are seeing at the moment are seasonal lows with refiners in India and China typically buying less as summer demand for distillate falls," says one.

In fact, on Wednesday, Oil Movements – a tanker traffic monitor and research firm – said just that. It estimates that OPEC members, with the exception of Angola and Ecuador, will curtail exports by 320k barrels per day or 1.3% of daily output, in the four weeks from August 10 to September 7.

Meanwhile, ADNOC is investing [and partnering] heavily as usual. Recently, it invited several IOCs to bid for the renewal of a shared licence to operate some of the Emirate's largest onshore oilfields. The concession (on Bu Hasa, Bab, Asab, Sahil and Shah oilfields), in which ADNOC holds a 60% stake, is operated by Abu Dhabi Company for Onshore Oil Operations (or ADCO) subsidiary.

Existing partners for the remaining stake include BP, Shell, ExxonMobil, Total and Partex O&G. All partners, except Partex have been invited to apply again, according to a source. Additionally, ADNOC has also issued an invitation to seek new partners. Anecdotal evidence here suggests Chevron is definitely among the interested parties.

The existing 75-year old concessions expire in January 2014, so ADNOC will have to move quickly to decide on the new line-up of IOCs. For once, its hand was forced as the UAE's Supreme Petroleum Council rejected an application for a one-year extension of the existing arrangement. Doubtless, Chinese, Korean and Indian NOCs are also lurking around. A chat with an Indian contact confirmed the same.

Whichever way you look at it – its probably one of the few new opportunities, not just in the UAE but the wider Middle East as well. Abu Dhabi is among the few places in the region where international companies would still be allowed to hold an equity interest; mostly a no-no elsewhere in the region. But in the UAE's defence, ever since the first concession was signed by this oil exporting jurisdiction in 1939 – it has always been open to foreign direct investment, albeit with caveats attached. ADNOC is also midway through a five-year $40 billion investment plan aimed at boosting oil and gas production and expanding/upgrading its petrochemical and refining facilities.

Meanwhile, the slump of Indian Rupee (INR) is headline news in the UAE, given its ties to the subcontinent and a huge Indian expat community here in Abu Dhabi. The slump could stoke inflation, according to the Reserve Bank of India, which is already struggling to curtail it. The central bank has tried everything from capital controls to trying to stabilise the INR for a good few months by hiking short-term interest rates. Not much seems to have gone its way (so far).

Furthermore, the INR's troubles have exposed indebtedness of the country's leading natural resources firms (and others) – most notably – Reliance, Vedanta and Essar. Last week, research conducted by Credit Suisse Securities noted that debt levels of top ten Indian business houses in the current fiscal year have gone up by 15% on an annualised basis.

With the currency in near freefall, the report specifically said Reliance ADA Group's gross debt was the highest, with Vedanta in second place among top 10 Indian groups. Draw your own conclusions. On a personal level, Mukesh Ambani (Chairman of Reliance Industries Ltd, the man who holds right to the world largest refinery complex and India's richest tycoon), has lost close to $5.6 billion of his wealth as the INR's plunge has continued, according to various published sources.

Few corporate jets less for him then but a much bigger headache for India Inc, one supposes. If the worried lot fancy a pipe or two, then the "Smokers Centre" (pictured right) on the City's Hamdan Street is a quirky old place to pick up a few. More generally, should one fancy a puff of any description shape, size or type then Abu Dhabi is the city for you. What's more, the stuff is half the price compared to EU markets! For the sake of balance, this humble blogger is officially a non-smoker and has not been asked to flag this up by the tobacco lobby!

Just one more footnote to the INR business, Moody's says the credit quality of state-owned oil marketing and upstream oil companies in India will likely weaken for the rest of the fiscal year (April 2013 to March 2014), if the Indian government continues to ask them, as it did in April-June, to share a higher burden of the country's fuel subsidies.

To put this into context - the INR has depreciated by about 10% and the crude oil prices have increased by about 6% since the beginning of June, as of August 20. Moody's projections for the subsidy total assumes that there will be no material changes in either the INR exchange rate or the crude oil price for the rest of the fiscal year (both are already out of the window). That's all from Abu Dhabi for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2013. Photo 1: A dhow on the Abu Dhabi marina, UAE. Photo 2: Smokers Centre, Hamdan Street, Abu Dhabi, UAE © Gaurav Sharma, August, 2013.

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