Abu Dhabi’s state energy firm moves to enhance its regional profile

As part of its goals, ADNOC has been building a 42 million-barrel underground crude storage facility at Fujairah.
Saturday 27/07/2019
Saudi Aramco CEO Amin H. Nasser (L) shakes hands with Sultan Ahmed Al Jaber, UAE Minister of State and the Abu Dhabi National Oil Company CEO, in Abu Dhabi, United Arab Emirates, November 12, 2018. (Reuters)
Saudi Aramco CEO Amin H. Nasser (L) shakes hands with Sultan Ahmed Al Jaber, UAE Minister of State and the Abu Dhabi National Oil Company CEO, in Abu Dhabi, United Arab Emirates, November 12, 2018. (Reuters)

In a push to derive greater revenue from its crude and oil products, position itself more prominently in the global oil community and enhance its regional profile, Abu Dhabi’s state energy firm is establishing a trading department to rival its competitors. It is also looking to create a regional oil price benchmark from the most popular grade of crude that it exports.

A selling point for the Abu Dhabi National Oil Company (ADNOC) developing its flagship Murban grade as a benchmark crude is that the oil is exported from the United Arab Emirates’ Fujairah port. The facility has ample storage and it is where shipping traffic is largely immune from potential regional strife, in contrast to the Strait of Hormuz.

As part of a plan that has been in the works for several years, ADNOC is creating a full-scale, in-house trading organisation for its crude and refined products to move beyond selling directly to end users and to open to new markets.

The state oil and gas firm is mulling removing destination restrictions for its crude and oil products to allow them to be traded freely on the open market. ADNOC’s oil exports have primarily been dedicated to Asian buyers, with the Murban grade a popular choice for being easily refined and for producing high yields of petrol and other premium fuels.

ADNOC is following several regional state-owned oil firms that have created an in-house trading operation or collaborated with foreign partners in trading joint ventures to achieve more value from their crude and product sales.

Oman Oil Company entered into a 50/50 joint trading operation with Swiss-based trading organisation Vitol in 2005 with the Omani government subsequently buying out Vitol’s share in 2015. In 2012, Saudi Aramco established Saudi Aramco Products Trading Company for marketing refined products and petrochemicals, with the subsidiary beginning to trade non-Saudi crude two years ago.

In June, Saudi Aramco’s trading arm reported that it had opened an office in Fujairah to boost its trading volumes 50% from 2018 levels by 2020. Two years ago, Iraq’s State Oil Marketing Organisation created a Dubai-based joint venture trading firm with the marketing subsidiary of Russian oil giant Lukoil to trade Iraqi, Russian and other crude grades.

Last year, ADNOC announced it was forming its own trading unit and it has been recruiting top trading talent, including from French oil firm Total and other majors and trading houses. The Abu Dhabi state energy giant joined forces in January with Italy’s Eni and Austria’s OMV to establish a joint venture to sell refined products.

ADNOC is also eyeing opportunities to work with a foreign firm that could provide it with extensive worldwide storage facilities to enhance its crude and products trading capabilities and help transform Murban into an oil benchmark.

ADNOC has been building a 42 million-barrel underground crude storage facility in Fujairah. It is also reportedly following Saudi Aramco’s lead in preparing to open a Fujairah trading office.

In trying to establish its Murban crude grade as a regional — and potentially international — crude benchmark, ADNOC will have its work cut out for it. Benchmark crudes essentially serve as reference prices for buyers and sellers, with benchmark crudes widely and actively bought and sold.

Other crudes generally are compared to those benchmarks by agreed-upon price differentials based on factors including American Petroleum Institute gravity, sulphur content and transportation costs.

Three benchmark crudes are the most significant when it comes to selling and buying oil in the global oil market: the United Kingdom’s Brent crude — a blend of light sweet crude oil from 15 different North Sea oil fields — which has the greatest global reach; the United States’ light sweet West Texas Intermediate crude, primarily used as a benchmark for other crudes produced in the United States and for imported crudes from Canada, Mexico and South America; and Dubai/Oman, two medium sour grades of which the prices are averaged to create a benchmark commonly associated with Middle Eastern oil exported to Asian markets.

Gulf producers, including Saudi Arabia, selling to Asian customers typically price their crude grades off the Dubai/Oman benchmark.

ADNOC’s light sour Murban crude grade is generally lighter than other regional crudes but the substantial rise in US light crude volumes particularly directed towards Asian buyers could help boost Murban as a regional and international benchmark.

For Murban to succeed as a crude benchmark, ADNOC must prove the grade’s volumes are stable and relatively large with a derivatives market that allows for hedging and forward trading.

Removing destination-bound requirements and beefing up its storage capabilities in Fujairah and locations outside the Gulf certainly bolster ADNOC’s case but a full-bore campaign to push for Murban as an oil benchmark plan is contingent on approval by UAE governmental entities, including the Abu Dhabi Supreme Petroleum Council.