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SanawaOil Ltd Company in the UAE Market Report

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Updated: Apr 30th, 2020

Brief Synopsis of the Issue

SanawaOil Ltd will enter UAE as a joint venture with the state-owned ADNOC and one of the private international oil companies (IOCs). One of the reasons for preferring a joint venture is the law requirement in the country. Another reason is that most oil fields in the country are like to be covered under different long-term concessions.

ADNOC owns a large proportion of the stake in the oil and gas sector. An IOC, such as JODCO, will offer SanawaOil new technology needed in the extraction of sour gas. The firm will need to conduct a benefit-cost analysis before the venture. Governance issues will cover compliance with conventional standards and international law directing the oil and gas industry. It will also deal with making plans and managing investment risks.

Recommendations

(1) SanawaOil should operate a low cost hospital or a training center in coordination with the government. The main reason for government involvement is that overbidding by international companies for oil fields in the UAE oil sector may result in low returns for SanawaOil as an IOC.

(2) SanawaOil should purchase the latest technology in extracting sour gas. Gas extraction offers a greater opportunity because of ease of entry and the high domestic demand in the UAE.

(3) A benefit-cost analysis is necessary to avoid engaging in activities that do not generate positive returns in the long run.

(4) SanawaOil may employ Emiratis in a few managerial positions, even if the firm has been exempted from the law, as a firm operating in the oil and gas industry.

Background

In Abu Dhabi, the first concession was issued in 1939 to the Petroleum Development Company owned by the Iraq Petroleum Company (IPC). The IPC was a joint venture that included BP, Shell, Total, Exxon, and Mobil. The Petroleum Development Company was issued with a 75-year concession to carry out exploration and production activities in all onshore fields (Butt n.d.: 232).

In 1958, the D’Acry Oil Company was awarded concession in offshore fields. Two years later, the offshore concession was transferred to the Abu Dhabi Marine Areas – ADMA (Lancaster and Lancaster 2011: 371). Abu Dhabi began exporting oil in 1962. In 1965, ADMA discovered the Zakum oil fields located offshore. In 1968, Abu Dhabi Oil Company (ADCO) obtained a 45-year offshore concession granted by ADMA (Butt n.d.: 233). ADCO was formed as a joint venture with other three companies.

In 1971, ADNOC was formed to oversee oil & gas production in Abu Dhabi as a government entity. It acquired 25% stake in ADPC and ADMA. In 1977, ADNOC was holding a 60% stake in all oil & gas production activities in Abu Dhabi (Butt n.d.: 233). Companies have been transferring ownership and rights since the 1970s. In 1978, ADCO constituted several firms. ADNOC had a 60% stake, Shell 9.5%, BP 9.5%, Total 9.5%, Exxon 4.75%, Mobil 4.75%, and Partex 2% (Butt n.d.: 233). The historical information shows that companies have always operated as joint ventures in the UAE.

SanawaOil has a great opportunity to engage in oil production in the UAE because of the high demand for gas and the government’s willingness to allocate bidding firms acreage of land and offshore space for exploration and production. The government is considering dividing the gas fields and issuing them to different firms (Business Monitor 2010: 7).

The annual growth rate of greed and grievance.
Graph 1: The annual growth rate of greed and grievance (see Appendix 1 for a table)
The annual growth rate of net import/export of oil.
Graph 2: The annual growth rate of net import/export of oil. Source of data: EIA (2013)
Annual growth rate gas net exports.
Graph 3: Annual growth rate gas net exports. Source of data: EIA (2013)

Attractiveness of UAE

Graph 1 indicates that greed and grievance levels have dropped since 2002. Lower greed and grievance levels create a peaceful environment to conduct operations. It will provide time for the firm to organize its philanthropic programs without responding to pressure from the communities.

Graph 2 shows that net exports of oil declined between 2003 and 2009. Net oil export increased after 2010. The increase may be as a result of the recovery of major economies from the global recession. The UAE is one of the countries that produces above the quota allocated to it by OPEC. It produces below capacity to influence market prices as required by OPEC. There is excess capacity for oil production in the UAE. The market price influences the level of oil that the country produces. SanawaOil has an opportunity to venture into UAE because the government continues to support oil exploration despite the production ceiling set by OPEC (IMF 2005: 20).

The attractiveness of UAE in oil production is reinforced by the fact that the country’s oil reserves account for 10% of the world proven oil reserves (Business Monitor 2010: 29). The main challenge on oil exploration in the UAE is that most areas are under concessions (EIA 2013: 4). A new firm will need to purchase rights or sign contracts with existing firms. Recent explorations have also failed to discover new oil fields.

Graph 3 shows that the UAE has changed from a net exporter to a net importer of gas. The demand for gas has increased in the UAE. The main reasons for the high demand are that gas is used for energy generation and injection in the mature oil reserves. The Business Monitor (2010: 29) explains that gas accounted for 70% of fuel used in the UAE compared with oil at 30%. According to the enhanced oil recovery (EOR) techniques, the UAE re-injected about 26% of the gas produced between 2002 and 2012 in its mature oil fields (EIA 2013: 9). The EOR techniques seek to extend the lifespan of the mature oil fields.

The UAE has greater prospects for oil exploration driven by the high demand and the need for advanced technology to separate sulphur from gas. In 2009, UAE was considered to have the world’s fifth largest natural gas reserves with a quantity of 6,432 billion cubic meters (Business Monitor 2010: 29). However, the vast amounts of gas are mixed with sulphur (sour gas). Stevens (2008: 25) discusses that IOCs can succeed in their bid to produce in the emerging market by providing the latest technology, such as shale gas and tar sands production. Without an advantage in the most advanced technology, SanawaOil is unlikely to benefit from the opportunities available in the UAE.

SanawaOil will find the UAE more attractive because it has managed the ‘resource curse’. The Economist (2005) points out that oil producing countries in the Gulf seem to have evaded the paradox of plenty. The governments have developed systems to distribute revenues generated from oil exports. Some of the governments have supported free health care and education systems that are aimed at empowering the local people. The UAE supports a free education and health care system for Emiratis.

The ‘resource curse’ is attributed to poor governance and poor institutional structures (The Economist 2005). Part of the ‘resource curse’ comes from the appreciation of local currency following a large inflow of foreign currency from the sale of natural resources. The appreciation of the local currency against major foreign currencies reduces the competitiveness of the resource country to export other products. In the Gulf region, governments are redistributing directly to the masses some of the revenues generated from oil. It has helped to reduce grievance levels in countries such as the UAE.

The UAE has taken steps that adhere to the concept of resource nationalism. Stevens (2008: 5) describes resource nationalism as a concept where governments limit the influence the IOCs to benefit the future output of the nationals. It provides lower profit margins as the government increases the bidding rates for firms that are awarded oil concessions.

The UAE requires that multinational corporations employ Emiratis when they operate in the UAE. Oil & Gas companies are excluded from the requirement of filling managerial positions with a certain proportion of Emiratis. Multinational companies that operate outside the free trade zones are required to sell 51% of ownership to the UAE nationals (IBP, Inc. 2013: 30).

Feasibility of entry options

The best entry method is an alliance with a state-owned firm or a multinational. SanawaOil can be allocated gas fields more easily than oil fields. The main reason is that the government has been looking for firms that can engage in gas production. Gas production in the UAE has been avoided because it is costly. Recently, with the emergence of less costly technology to separate sulphur from gas, the UAE has been seeking companies to venture into gas production.

Entry into the oil production segment will be difficult because firms hold long-term concessions to explore and produce oil in all viable fields. Most of the oil reserves are located in Abu Dhabi. Abu Dhabi holds about 94% of the UAE oil reserves (Business Monitor 2010: 29). The Abu Dhabi National Oil Company (ADNOC) has the largest stake in most of the fields (EIA 2013: 4). The firms operate through multiple joint ventures with the same or different companies. For example, the Abu Dhabi Gas Industries Limited Company (GASCO) is a joint venture that involves ADNOC, Shell, Total, and Partex (EIA 2013: 3). The Zakum petroleum system is operated by ZADCO, which is a joint venture among “ADNOC (60%), ExxonMobil (28%), and the Japan Oil Development Company (JODCO, 12%)” (EIA 2013: 5).

The national oil companies can sell part of the stake it holds in the oil fields to multinationals. ADNOC, which operates 15 subsidiaries, sold 28% of the offshore in the Upper Zakum field to ExxonMobil in 2007 (Business Monitor 2010: 7). New entrants can be allocated stake if they add value in the form of more efficient technologies. The government has reconsidered offering contracts to companies that may benefit the country in technological development.

There are three reasons that make it necessary to have SanawaOil enter UAE as a joint venture. Firstly, SanawaOil can enter as a joint venture with multinationals, such as ExxonMobil and JODCO, because they are most likely to be the developers of the latest technology.

Secondly, SanawaOil may enter as a joint venture with the government operated firm because they hold rights to most of the oil and gas fields. The government is willing to transfer ownership to a firm that brings in new methods of exploration and production. Stevens (2008: 25) explains that some of the technologies have been imitated. They no longer provide an advantage for multinational firms. Some of the technologies, such as 3D and 4D seismic technology and coiled tube drilling, that used to provide an advantage for MNCs have been imitated. The government has a significant interest in new firms that can enhance the country’s technological abilities (Oxford Business Group 2010: 92).

Thirdly, SanawaOil needs to enter as a joint venture because of the legal requirements of the country. MNCs are allowed to have a 49% maximum ownership proportion (OECD n.d.: 17). They are also required to hire a considerable proportion of the UAE nationals. The government would like to see that benefits of operating in the UAE are achieved in the form of skill transfer and knowledge sharing (Gonzalez et al. 2008: 57). SanawaOil cannot enter as a single entity because of legal requirements. The norm in the country is that MNCs partner with state-owned firms and other MNCs in exploration and production activities.

Governance standards

The oil and gas industry is governed by a set of international laws that forbid bribery and corruption. There are anti-trust laws that prohibit the use of information from competitors obtained through unconventional means. Ernst & Young (2012: 2) explain that compliance with international laws has become one of the major areas that firms have increased interest. Investment is taken to prevent lawsuits by training employees on compliance. There is a constant communication between internal auditors and legal advisors to mitigate risk associated with non-compliance.

Carrying out a due diligence is necessary to ascertain the benefits that the firm will derive from vendors and sub-contractors (Ernst & Young 2012: 4). It is essential to prevent possible cases of corruption. Employees may be required to provide justification for using a third party.

SanawaOil can portray a better image by practicing codes of conduct that forbids its employees from engaging in bribery, corruption, and political contribution. Major players have shown their commitment to codes of conduct that disallow political contribution, bribery and corruption that seeks to create a business advantage over competitors.

ExxonMobil, Petrobas and Shell are among a group of firms that have separated themselves from bribery and corruption through CSR codes of conduct that prohibit such actions (Costa 2008: 6). Ernst & Young (2012: 3) indicates that making political contributions increases suspicion, which requires firms to be cautious or avoid them altogether.

There are ISO standards for different parts and equipments used in the oil and gas industry. There are different standards set for different areas such as the amount of noise produced, fire safety measures, and welded parts among others (OGP 2012: 42). The standards are set to reduce the possibility of accidents.

Implementation Plan

The first step will be to define the project in terms of its scope and objectives. SanawaOil needs to carry out a community program associated with CSR to build its reputation. The firm needs to venture into the UAE to increase its oil and gas reserves.

In the project initiation phase, the firm assesses opportunity identification and qualification (Hill 2008: 29). The UAE has vast proven oil and gas reserves (Abed, Hellyer, and Vine 2006: 146). Most of the oil fields are covered under long-term concessions with private and state-owned firms. SanawaOil can purchase exploration rights from the state-owned ADNOC.

The UAE provides a great opportunity to increase SanawaOil oil and gas reserves. The UAE has a weakness that most of the oil reserves are located in Abu Dhabi. There is a high demand from MNCs to produce oil in the UAE. There is a challenge in finding new fields that have not been explored. New techniques can increase the accuracy of finding new oil reserves in the other six Emirates.

SanawaOil will need to engage in CSR activities such as running a low cost hospital, and a training center. SanawaOil should also consider employing Emiratis in a few managerial positions, even if they are exempted by the law from the requirement.

SanawaOil should work with one MNC, such as JODCO, in accessing new technology to extract the sour gas in the UAE. Natural gas offers a greater opportunity for SanawaOil because the UAE has turned to be a net importer of gas. There is a high domestic demand for gas in the UAE. The government is seeking import-substituting firm in gas production.

SanawaOil will need to select a project management team. The team will project needs and requirements (Hill 2008: 34). It will ensure the project completion meets the objectives of the firm. The team will assess the staffing requirements. There may be need to train some of the UAE nationals to fill positions in the project. The team will specify the number of employees to be hired and the type of exploration or extraction technology that needs to be purchased. The firm will choose vendors and contractors to supply some of the materials it does produce.

The team will estimate a schedule for project completion. An extraction firm may operate for 3 to 5 years without reporting positive net revenues. The team will conduct a benefit-cost analysis to assess the viability of the project before the project is started. There will be a risk management plan developed to ensure that the firm does not engage in activities that may result in lawsuits, increased grievances, and negative publicity. There is a need for a response plan for disaster such as oil spillage or gas leakage. The quality and acceptance plan will ensure that the firm adheres to standards set for oil and gas exploration and extraction firms. It may be necessary to create a vision of sustainability to support environmental concerns and other CSR activities (Hitchcock, Willard, and Atkisson 2008: 38).

Once plans have been completed, the projected can be started when it has a positive benefit-cost analysis. The net present value method may be used. There is a need for a communication system to link different sections. It is necessary for linking project managers and stakeholders (Russell 2007: 85). The communication system will be used for controls to ensure that the project implementation goes according to the plan.

List of References

Abed, I., Hellyer, P., and Vine, P. (2006) United Arab Emirates Yearbook. London: Trident Press Ltd

Business Monitor (2010) The UAE Oil & Gas Competitive Intelligence Report [online] London: Business Monitor International.

Butt, G. (n.d.) Oil and Gas in the UAE [online] 2014.

Costa, L. (2008) ‘’. RAE Electronica [online] 7 (1). 1-19.

EIA (2013) [online]

EIA (2013) [online]

Ernst & Young (2012) Risk and Compliance for Today’s Global Oil and Gas Companies [online]

Gonzalez, G. et al. (2008) Facing Human Capital Challenges of the 21st Century: Education and Labor Market Initiatives in Lebanon, Oman, Qatar, and the United Arab Emirates. Santa Monica: Rand Corporation

Hill, G. (2008) The Complete Project Management Office Handbook. 2nd edn. Boca Raton: Auerbach Publications

Hitchcock, D., Willard, M., and Atkisson, A. (2008) The Step-by-step Guide to Sustainability Planning: How to Create and Implement Sustainability Plans in Any Business or Organization. London: Earthscan

IBP, Inc. (2013) How to Invest, Start and Run Profitable Business in the United Arab Emirates Guide. Washington, DC: International Business Publications

IMF (2005) United Arab Emirates: Selected Issues and Statistical Appendix. Washington, DC: International Monetary Fund

Lancaster, W., and Lancaster, F. (2011) Honour is in Contentment: Life before Oil in Ras al Khaimah (UAE) and Some Neighbouring Regions. New York: De Gruyter

Oxford Business Group (2010) The Report: Abu Dhabi 2010. London: Oxford Business Group

OECD (n.d.) [online]

OGP (2012) Catalogue of International Standards used in the Petroleum and Natural Gas Industries [online]

Russell, L. (2007) 10 Steps to Successful Project Management. Alexandria: ASTD Press

Stevens, P. (2008) ‘National Oil Companies and International Oil Companies in the Middle East: Under the Shadow of Government and the Resource Nationalism Cycle’ Journal of World Energy Law & Business [online] 1 (1), 5-31.

The Economist (2005) ‘’. The Economist [online].

Appendices

Appendix 1

Year Greed and Grievance Growth rate of GG UAE Net export oil (thousand barrels per day) Growth in Net Oil Trade (%) UAE natural gas Net Trade (Export-Import) billion cubic feet Growth in Net Trade Natural gas (%)
1980 28.63032 1,672.0000 N/A
1981 27.78851 -2.94% 1,401.0000 -16.21%
1982 21.63152 -22.16% 1,195.0000 -14.70%
1983 17.7346 -18.02% 1,123.0000 -6.03%
1984 28.5904 61.21% 1,126.0000 0.27%
1985 24.92071 -12.84% 1,171.0000 4.00%
1986 14.69912 -41.02% 1,308.3123 11.73%
1987 23.32624 58.69% 1,475.2784 12.76%
1988 17.53257 -24.84% 1,457.6263 -1.20%
1989 31.58347 80.14% 1,747.1180 19.86%
1990 37.20588 17.80% 2,008.6659 14.97% 117 n/a
1991 29.29388 -21.27% 2,228.9870 10.97% 126 7.69%
1992 24.26016 -17.18% 2,104.7463 -5.57% 120.7773 -4.15%
1993 25.27382 4.18% 1,995.0814 -5.21% 139.228 15.28%
1994 28.46104 12.61% 2,025.0511 1.50% 146.09 4.93%
1995 24.64589 -13.40% 2,079.9757 2.71% 230.6 57.85%
1996 33.78329 37.07% 2,133.8058 2.59% 234.8448 1.84%
1997 27.80956 -17.68% 2,162.3383 1.34% 258.1527 9.92%
1998 19.38612 -30.29% 2,196.0276 1.56% 235.9042 -8.62%
1999 21.39646 10.37% 2,013.3427 -8.32% 249.6771 5.84%
2000 28.62115 33.77% 2,241.8412 11.35% 245.4393 -1.70%
2001 21.69641 -24.19% 2,175.3950 -2.96% 242.9672 -1.01%
2002 28.831 32.88% 2,052.2070 -5.66% 245.4393 1.02%
2003 32.56313 12.94% 2,527.8197 23.18% 244.0267 -0.58%
2004 35.23627 8.21% 2,415.6085 -4.44% 214.7152 -12.01%
2005 38.24636 8.54% 2,470.3966 2.27% 202.7081 -5.59%
2006 35.70175 -6.65% 2,499.9808 1.20% 201.2955 -0.70%
2007 30.42889 -14.77% 2,469.9142 -1.20% 41.3186 -79.47%
2008 30.54397 0.38% 2,426.8361 -1.74% -267.6877 -747.86%
2009 17.65997 -42.18% 2,228.6493 -8.17% -361.6256 35.09%
2010 2,194.9891 -1.51% -335.8457 -7.13%
2011 2,470.2562 12.54% -373.6327 11.25%
2012 2,595.1943 5.06% -381.2209 2.03%

Source: EIA (2013)

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