ADNOC’s upstream earnings experience significant downside under the current market climate. Credit: wasi1370 / Pixabay.

Abu Dhabi National Oil Company (ADNOC) has not reported any direct coronavirus-induced operational disruptions across its value chain. However, the tendering process of a number of key upstream expansion projects is being pushed back by several months due to the market volatility and the company’s CapEx deferrals.

ADNOC’s upstream earnings experience significant downside under the current market climate. Prior to the market downturn as part of company’s 2030 growth strategy, United Arab Emirates’ oil production was expected to reach four million barrels per day (mmbd) by end of 2020 and five mmbd by end of 2030. However, the significant oil demand plunge, coupled with UAE’s commitment to the OPEC+ output cut, are expected to result in an approximately 20% decline in company’s 2020 crude oil production compared to the previous production guidance. This, alongside depressed oil prices, is forecast to result in a 40% decrease in the company’s year-on-year revenue from its upstream business in 2020.

ADNOC has not revealed its revised CapEx budget for 2020, but its major partners in oil and gas projects are considering an average 30% reduction in their 2020 investments, which may force ADNOC to defer its joint venture projects.

ADNOC’s major oil and gas partners’ revised CapEx guidance for 2020

In light of the 2020 market turmoil, ADNOC informed contractors and suppliers of its plan to implement strict cost-saving measures. As part of the company’s execution strategy, costs for existing deals and contracts were reviewed. Two huge EPC contracts for Dalma sour gas project were first cancelled and later re-tendered with the pre-qualified contractors being re-invited to participate, which signifies ADNOC’s intention for a more cost-effective development option. Tendering process of the super-giant Hail and Ghasha sour gas project was also deferred and at least six months delay in the award of corresponding multi-billion dollar contracts is expected. Other major projects that are delayed or at risk of deferral are Upper Zakum expansion, Lower Zakum’s long-term development project (LTDP-1), Umm Shaif Gas Cap Development and Umm Shaif long-term development project (LTDP-1).

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Pursuing its 2030 strategy, although ADNOC is decisively interested to continue investments in the upstream sector amid the market downturn, its ability to move forward with the joint projects will be to some extent limited by its international partners’ reaction to the market turmoil.