Abu Dhabi’s production: 3 million bopd
Adco concession expiry date: 2014
A view of the GCCJanuary 23, 2017
TOGY talks to Christopher Gunson, partner at Amereller, about the oil and gas industry in the UAE and the surrounding region, other countries with potential, and the challenges oil and gas companies face when operating within the emirate's legal framework. Amereller, established in Dubai in 2003, offers legal solutions and assistance on business establishment.
What is your current assessment of the oil and gas industry in UAE and GCC?
Abu Dhabi remains one of the largest oil exporters in the world. It is not on the level of Saudi, but it produces about 3 million bopd, much of which is exported. After Saudi, the big four players are Iraq, Iran, Kuwait and Abu Dhabi. There are other big producers such as Algeria or Libya, which are important, but Libya has political problems and Algeria has high domestic consumption and also exports to a captured market in Europe. From the Gulf, companies export mostly to East Asia, but potentially to anywhere in the world, so it is a very important export market.
What makes Abu Dhabi unique compared to the other big oil exporting countries in the Gulf, is that there is a high level of foreign investment. Abu Dhabi has always considered it beneficial to have major multinationals involved in the upstream oil and gas industry. Supermajors like Exxon, Shell, BP and Total are all involved to this day.
Traditionally, there was a 75-year onshore oil production concession with Exxon, Shell, BP and Total as the main players. That concession began in 1939 and expired in 2014. Today, Total is the only one that has become involved. Exxon has firmly stated that it is not interested in the current structure. We do not hear much about BP. BP has become involved in offshore, so they have other interests in Abu Dhabi. Shell is the interesting one. Shell right now just has a small investment in Gasco, the LPG processing company. It will be interesting to see what Shell does in the future. It used to have a large involvement in Abu Dhabi, but now it is quite small.
How stable is the legal system in the UAE?
The country has a developing legal system and we are seeing improvements over time. The competition law in 2012 was an improvement. The new bankruptcy law, which is about to come in, should be a welcome improvement. We need something like an administrative procedures law that clearly sets up the publication of administrative rules; that is probably the most important thing we currently lack.
A lot of these places, like Japan, Singapore and Eastern Europe, grapple with these same problems as they modernise, which is to say that they have powerful government agencies that essentially have to give up that power as the economy and systems law develops. They must formalise the rules for what government can and cannot do. That is what we really need here. That would be the biggest thing to improving the legal climate: a systems law that formalises government procedures.
Do you see this changing the legal boundaries and changing the rules of the game?
Abu Dhabi’s system is unique in that it is largely established on precedent. There is a way of doing things here that everyone is familiar and comfortable with and there is little law out there. There are decrees regarding taxation that date back to before the UAE existed. There are also some laws from the 1970s that specify who owns natural gas and how drilling operations should be conducted.
The Supreme Petroleum Council (SPC) is the supreme regulator and decision making body of the industry. The SPC will make decisions and the SPC is chaired by the president and senior members of the government. Essentially, their decisions carry the force of law so that is where meaningful law is passed. Since the SPC was set up in 1988, there have been no significant laws concerning the oil and gas industry.
Many countries will pass new laws as a way of reforming the current ones to change the industry, or make environmental restrictions stricter, et cetera. You do not see that here. Here, you just see the SPC make decisions. It probably has a lot to do with politics. In a lot of countries new oil and gas laws come from the democratic process and people wanting a different outcome from the oil and gas business. Here, there are not the same societal pressures pushing for new law regulation.
How are tax reforms going to reshape the economy?
It is well-known worldwide that the UAE has no proper income tax and is therefore a very attractive place for people to live and for businesses to set up a base for operations. There is, in fact, a tax decree in every emirate, which in many cases dates back to even before the UAE was established, but, there has never been a federal law on tax. The law on the books of each emirate only applies to two sectors, however: oil and gas production and foreign banks with branches in the emirates. This is a unique system that we have.
Now, VAT is coming in as a GCC-wide agreement, so whether you are in Kuwait, Saudi, Bahrain, Oman, Qatar or the UAE, you are going to be under the same tax system. We are going to have a federal tax when it comes in and essentially every onshore invoice that goes out for services or goods will have to add 5% for this. It will not be permitted to keep the same price and force the invoicing party to absorb the tax cost. It is something that the market is going to have to pay for.
What are other reasons why FDI remains so high in the UAE?
What makes the UAE so attractive is lifestyle; it is very open. It has great schools. It has Emirates and Etihad airlines. When you look at the big factors for FDI, the UAE is more convenient for carrying out logistical operations between the Suez Canal and the Far East. And it is more attractive for people to live here than in, say, southern Sri Lanka or eastern Oman, which have similar – even superior – geographic advantages. Although those might be useful as a logistics hub, they simply don’t have the same international air connectivity. There are so many advantages in the UAE, and it should be able to maintain its advantages for a long time to come.
What challenges do newcomers experience when they establish their presence in the UAE?
The biggest challenge here is that there is an area of uncertainty that does not exist in many developed countries. Maybe the law is not written down, it is just a known rule. That rule may change without warning. You could be doing the same thing every day, but then suddenly one day it is different just because it is. When there is rule, there is often a gap between law and practice. Rules are not widely publicised, so there is uncertainty that pervades everything. It does not necessarily result in high cost, but it results in frustration and extra work. This frustration, however, is not what you would call a real business risk.
Bribery is not a way of life in the Gulf and a lot of these NGOs that do global rankings of corruption and perception of corruption demonstrate that the UAE ranks essentially on par with Western Europe. Saudi, Kuwait and Oman do not have the same ranking. I have been in the UAE for eight years and I have never been solicited for a bribe here.
How do you assess legal activates for the oil and gas industry in UAE?
The oil and gas work has definitely dropped off substantially. I would say that we are the busiest we have ever been, but it is in sectors such as automotive, not oil and gas. There is also a lot of work on debt collection. Nonetheless, the payment collection is on the rise now and that is a general activity without reference to any sector.
Is Iran a potential market for the oil and gas companies nowadays?
Iran is a major area of interest for many different businesses. It has fantastic potential because it has a large population, on par with Turkey or Egypt. It has a huge resource base in terms of proven reserves and its current production is relatively small. The population is relatively well-educated and it has a functioning domestic economy that does not really rely on anything foreign. It has its own homegrown technology and labour force. It is in a very strong position and it is a very interesting country.
Now, the biggest challenges are the ongoing sanctions. Despite the end of most secondary sanctions, and the end of most UN and EU sanctions, there remain US primary sanctions. Maintaining compliance with that is one of the biggest challenges for any non-US business seeking to do work in Iran. It is not that the Department of Justice is going to force you to stop doing business with Iran, but what is going to happen is that a bank will cut you off because you are doing business with Iran. US companies are cut off.
What are the ups and downs in going public or privatising the key hydrocarbons assets in this region?
Every Middle Eastern country has its own NOC, but Abu Dhabi’s strategic investments outside of Abu Dhabi are done by IPIC, ADIA, TAQA or Mubadala. They are not done by ADNOC. ADNOC does not have any material investments outside of Abu Dhabi.
It is a very bold move to try to list a company like Aramco. Currently, Aramco dominates the supply chain from upstream operations and it does not publish anything about what it does. It is a very active oil and gas company and the world’s biggest by a long shot. So, how could we structure Aramco so that it could be listed? It may remain the concession holder of its oil fields or, more likely, it will sort of separate it so that the service side of the company will be listed, but the side that holds the concessions will not be. It will still be a massive company.
The strategy would basically be to sell the assets and monetise them. Aramco said that it will list 5%, which would be the biggest listing in history. In doing this, Aramco is not really giving up any real control. What it is giving up is a lot of information. It will have to disclose a lot of information to satisfy investors. It will have to disclose it in such a way that makes it subject to more scrutiny. Up until now, it has given out information piecemeal. That won’t be possible if it is publicly listed.
What is the legal framework like for renewable energy in the UAE?
Any solar programme will only function with a feed-in tariff system, by which the utility promises to buy solar energy at a higher price. Now, most countries will bring that in by law; that is the typical way to do it. What happened in Abu Dhabi with the first solar project that was financed was that the Abu Dhabi Department of Finance gave a promise to buy at a certain price, a so-called “green payment”. This functioned like a feed-in tariff.
This is a model for how it could be successful but, as a noted before, it is not something that is codified by law. There is a precedent based on this certain deal that was done and that is now the model for how it could be done. Essentially, it achieves the same result. Instead of having the utility buy it at a higher price, we have the Department of Finance come in and give a green payment. Now, if a company wants to come build a solar facility, it would expect the same generosity that Abu Dhabi offered back many years ago, but it is not a contract, per se.
What is your outlook for the next year ahead regarding Abu Dhabi and its hydrocarbons industry?
The nicest word to use is challenging. It is going to be very challenging so long as the oil price remains what it is today, which I anticipate to last for some time to come. There is going to be a lot of pressure on the industry to cut costs. There is reluctance on the part of banks to lend to companies involved in the industry. There is going to be a general lack of demand. We have already seen that affect the industry and we see it continuing for the foreseeable future. As has happened in the past, it will end at some point, but right now the oil and gas industry in the region is facing real challenges.
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