Abu Dhabi National Oil Company Business Information, Profile, and History

History of Abu Dhabi National Oil Company

The Abu Dhabi National Oil Company (ADNOC) is a state-owned enterprise engaged in all phases of the oil industry. It has a complex and intricate holding company structure involving, in a manner unusual for Middle East oil companies, equity links with large Western oil enterprises. Abu Dhabi is the largest of the seven states that formed the United Arab Emirates (UAE) in 1971, and it is the heart of the UAE's oil industry.

Although ADNOC dates only from 1971, it is necessary to understand the historical development of Abu Dhabi's oil industry in order to understand the present structure of ADNOC. Abu Dhabi was a latecomer to the Middle Eastern oil industry, only beginning production in 1962. However, the search for oil had begun nearly 30 years earlier. As elsewhere in the Middle East, this search was in the hands of foreign oil interests organized in a consortium. In 1928 a group of U.K., Anglo-Dutch, and U.S. international oil companies formed the Iraq Petroleum Company (IPC) with a concession which came to cover most of Iraq. Once the Iraq Petroleum Company was formed, each partner agreed that it would not hold concessions in any other part of the former territory of the Ottoman Empire except in association with all the other partners, and in the same proportions as the Iraq Petroleum Company. Most of the Persian Gulf states, including Abu Dhabi but excluding Kuwait, were included in this nebulous area. The oil companies involved marked in red on a map the boundary of the area to which they intended the agreement to apply, and it became known as the Red Line Agreement. Thus, when attention turned to searching for oil in the Trucial States--as the UAE was known until 1971--a consortium with exactly the same ownership structure as IPC was formed. In 1935 a new U.K. company was formed, Petroleum Development (Trucial States) Ltd., commonly referred to as PDTC. PDTC's ownership was identical to that of IPC, with the Anglo-Persian Oil Company (later British Petroleum), Shell, Compagnie Fran&ccedilse des Pétroles, and a group of two U.S. companies--Exxon and Mobil Oil--owning 23.75% each of the shares, and investor Calouste Gulbenkian's interests the remaining 5%. PDTC contacted all the sheikdoms offering arrangements for concession rights to explore for oil, and to develop production should oil be found. In January 1939 Abu Dhabi granted PDTC such concessions for a period of 75 years.

Oil exploration in Abu Dhabi was slow to get started. It was delayed first by World War II. Thereafter, the IPC group focused on the search for oil in Qatar, where oil exports began in 1949. Knowledge of the geology of the emirate was limited, and economic conditions there were very underdeveloped. The town of Abu Dhabi itself was no more than a tiny village, and there were no roads in the entire emirate in the 1950s. Drilling finally began in 1950, but the search for oil proved a prolonged one. In July 1953 a well was drilled in the Bab field in Murban, south of Tarif, but mechanical difficulties led to its being abandoned despite evidence of the presence of oil. Further drilling at Bab finally established the potential of the field by 1960. The Bu Hasa field was proved soon after when oil was discovered in commercial quantities, and exports started in 1963. In the following years, PDTC relinquished its concessions in the other Trucial States to concentrate its efforts on Abu Dhabi. In 1963, PDTC was renamed the Abu Dhabi Petroleum Company (ADPC).

Meanwhile, oil had also been discovered offshore by other companies. In 1951 Abu Dhabi had established that the concession granted to PDTC did not include the continental shelf belonging to the emirate. As a result, Abu Dhabi granted a concession to cover the offshore territory first to the International Marine Oil Company, which failed to achieve results, and then, in 1954, to Abu Dhabi Marine Areas Ltd. (ADMA), a new company two-thirds owned by British Petroleum (BP) and one-third by Compagnie Fran & ccedilse des P & eacute;troles. In 1959 ADMA's drilling barge struck oil at Umm Shaif, which is located 80 miles into the gulf near Das Island. In 1962 the first shipment of oil was loaded from Das Island. The onshore and offshore oil discoveries made Abu Dhabi a large-scale oil producer. Its oil production grew from zero in 1960 to 102.8 million barrels in 1965, and 253.7 million barrels in 1970. By that date its production was one of the largest in the Middle East, and about one-quarter of that of Kuwait.

During the late 1960s there was growing resentment in Abu Dhabi, as elsewhere in the Middle East, of foreign ownership of oil resources, and especially the consortium system. The government concluded a 50-50 profit-sharing agreement with ADPC and ADMA in 1965 and 1966, respectively. In 1971 the government established the Abu Dhabi National Oil Company (ADNOC) as a wholly state-owned company. Following the formation of the Organization of Petroleum Exporting Countries (OPEC), Abu Dhabi followed the general policy of requesting participation in the foreign oil companies active in its territory. ADNOC acquired, effective January 1, 1973, 25% of the assets of ADPC and ADMA. The finalization of the ADMA participation agreement was complicated by BP's announcement in December of 1972 of the sale of a 30% interest in ADMA to the Japan Oil Development Co. (Jadco), formed by a consortium of Japanese companies. The government withheld its approval of this deal until March 1973, when BP agreed to finance the construction of an ADNOC-owned refinery in Abu Dhabi. By a further agreement in December 1974, the ADNOC interest in the ADPC and ADMA concessions was raised to 60%. These two companies were later reincorporated as Abu Dhabi Company for Onshore Oil Operation and Abu Dhabi Marine Operating Company.

Abu Dhabi was distinctive among the OPEC members in the gulf in retaining the former concessionaire companies as equity holders in the operating enterprises. It did not, as elsewhere, seek to remove foreign ownership entirely. ADNOC, therefore, developed as a holding company with an intricate web of majority and minority equity stakes in other producing companies. The government was motivated in this strategy by a desire to pursue production and exploration as energetically as possible. As part of this aim, from the 1960s various new concessions were granted to mostly independent oil companies in areas relinquished by ADPC and ADMA, all of which included provisions for ADNOC to have the option to take up to 60% interest in successful ventures.

ADNOC established subsidiary companies specialized in the various sectors of the oil industry. In 1973 Abu Dhabi National Oil Company for Distribution was created to take over the marketing of oil products within Abu Dhabi, which was formerly in the hands of the Western oil companies. Abu Dhabi National Tankers was founded in 1975 to operate a tanker fleet. In 1973 the Abu Dhabi Gas Liquefaction Company was formed, owned 51% by ADNOC, 22% by Mitsui, around 16% by BP, around 8% by Compagnie Fran&ccedilse des Pétroles, and 2% by Bridgestone Liquefied Gas. The gas liquefaction company opened a plant on Das Island in 1977 to process gas from the main offshore oilfields. ADNOC was also anxious that Abu Dhabi should have its own refinery capacity. ADNOC's first oil refinery--situated at Umm Al Nar--opened in 1976, and in 1981 the company opened a second refinery at Ruwais. These plants made the UAE self-sufficient in refined petroleum products, with a surplus to export. In 1990 the two refineries had a combined capacity of 180,000 barrels per day, while domestic UAE consumption was about 80,000 barrels per day of refined products.

ADNOC also diversified overseas, again favoring joint venture and mixed ownership structures. Together with the Pakistani government, ADNOC formed Pak Arab Fertilizers Ltd., which started producing chemical fertilizers in Pakistan in 1978 and, by 1983, was producing 290,000 tons of calcium ammonia nitrate, 350,000 tons of nitrophosphate, and 50,000 tons of urea. The Pak Arab Refinery, another joint venture between ADNOC and the Pakistani government, started production in 1981. However, by 1990 ADNOC's foreign ventures remained much less substantial than those of the Kuwait Petroleum Corporation.

The 1980s were an unsettled period for the world oil industry, and Abu Dhabi could not isolate itself from the general problems. Demand for OPEC oil fell sharply by about 45% in the first half of the decade. Producer states such as Abu Dhabi found themselves--and their state oil companies--with large bureaucracies which were slow to respond to changing circumstances. In 1988 the UAE restructured its oil administration with the aim of cutting out some of this bureaucracy. The department of petroleum was abolished, and a new higher council of petroleum was created. The organization of ADNOC was restructured as part of this process. ADNOC's board was replaced by an 11-member petroleum council, and Sohal Fares al-Mazrui was appointed as ADNOC general manager and secretary general to the higher council, chaired by UAE's president, Shaikh Zayed. The move was designed to improve relations between ADNOC and its foreign equity partners, as well as to bring the industry under closer government control. During 1989 Mazrui was also appointed head of the Abu Dhabi National Oil Company for Distribution. During 1987 and 1988 oil exploration and development were virtually halted, but in 1989 a series of new projects were given the go-ahead.

ADNOC has developed as one of the better managed state oil companies. The strategy of alliances with Western oil companies has given it access to skills and technologies which would have been hard to generate internally. Abu Dhabi's huge oil reserves have also placed ADNOC in a powerful competitive position. In terms of sheer production capacity, ADCO in 1990 had achieved the ranks of the world's ten largest oil companies, with a sustainable output of around one million barrels per day, and sufficiently large oil reserves to enable it to keep operating for over 100 years at 1990 production levels. The 1988 restructuring had enhanced the efficiency of the operating affiliates, and ADCO was able to claim that its cost of producing a barrel of oil was one of the lowest in the world. The enormous damage done to neighboring Kuwait's oil production and refining facilities during the Iraqi invasion and occupation of that country between August 1990 and February 1991 enhanced the competitive advantages of the Abu Dhabi oil industry, at least in the short term, but it also served as a reminder of the political uncertainties of the gulf region.

Principal Subsidiaries: Abu Dhabi National Oil Company for Distribution; National Drilling Company; Abu Dhabi National Tankers Company; Abu Dhabi Drilling Chemicals & Products Company Ltd.(75%); National Petroleum Construction Company (70%); Abu Dhabi Gas Industries Ltd. (68%); Ruwais Fertilizers Industries Ltd. (66.67%); Abu Dhabi Company for Onshore Oil Operations (60%); Abu Dhabi Marine Operating Company (60%); Abu Dhabi Petroleum Ports Operating Company (60%); National Marine Services (60%); Abu Dhabi Gas Liquefaction Company Ltd. (51%); Liquefied Gas Shipping Company Ltd. (51%); Umm Al-Daikh Development Company; (50%); Zakum Development Company (50%); Pak Arab Fertilizers Ltd. (48%); Pak Arab Refinery (40%); Arab Petroleum Pipelines Company (15%).