How Abu Dhabi’s national oil company is planning for the energy transition #NewsMarket

A full-size replica of an oil rig stands outside the headquarters of Abu Dhabi’s National Oil Company (Adnoc), a reminder of what the city’s wealth is built on.

But inside the 340m-tall skyscraper, Adnoc’s leaders are working out how to “future proof” the state oil company over the next 25 years as the world tries to wean itself off fossil fuels and hit climate targets.

Like Shell, TotalEnergies and BP, Adnoc is investing as much as $5bn a year in low-carbon energy, according to the consultancy Wood Mackenzie, far more than the US majors.

It has also set a target to hit net zero emissions by 2045, five years ahead of its peers, and is diversifying into products derived from hydrocarbons, such as plastics, which will sustain oil demand after the use of gasoline and diesel starts to drop. At the start of this month, the company announced a $16bn deal for Covestro, a German specialist in polyurethane and polycarbonate.

But unlike the European majors, who are preparing for peak oil sometime in the next decade or so, Adnoc wants to be one of the last oil companies pumping.

It is therefore also investing heavily in raising its crude oil capacity and betting on demand for gas.

“The big challenge for players like us is how to decarbonise the energy system, not how to replace it,” Musabbeh Al Kaabi, Adnoc’s executive director for low-carbon solutions and international growth, told the Financial Times at the oil company’s office.

“Maybe that will come over a very long time. But I think the main focus now for us is to decarbonise the energy of today while investing in the energy of tomorrow,” he added.

Since it was founded in 1971, the United Arab Emirates (UAE), a federation of seven city-states on the north Arabian coast led by Abu Dhabi, has been an oil economy.

Blessed with some of the highest quality reserves in the world, Adnoc has a daily production capacity of 4mn barrels of oil and 10bn cubic feet of gas, according to the prospectus of a recent $4bn bond offering. Last year, more than 40 per cent of Abu Dhabi’s $310bn GDP came from fossil fuels.

But in a landmark speech in 2017, the same year that Shell also started thinking about how to navigate the energy transition, Sheikh Mohamed bin Zayed Al Nahyan, Abu Dhabi’s ruler, said the country needed a long-term plan to cope with oil’s declining importance to the global economy.

Abu Dhabi is now moving to diversify its economy into areas such as chemicals and AI.

Both Abu Dhabi and Adnoc are on a green drive in terms of their own energy use. This year, Abu Dhabi said a quarter of the UAE’s electricity now came from its nuclear power plant, and the country had a target for renewables to generate 44 per cent of its power by 2050.

Adnoc is using solar and nuclear energy for its onshore fields and is spending $3.8bn to connect its offshore operations to the grid, which it says would cut the offshore carbon footprint by half. The company also says it will capture carbon dioxide emissions from its $18bn Hail and Ghasha development to create a net zero oil and gasfield.

The goal is for Abu Dhabi to dramatically cut its use of oil and gas, so that it can sell it overseas instead.

“What the UAE has done well is [that] they are replacing domestic consumption of gas with clean energy, including solar and nuclear, thereby releasing most of this gas for export,” said Aditya Saraswat, head of Middle East and north Africa research at Rystad, an energy consultancy.

“Also if you have a clean energy mix, your in-house emission profile goes down, and as the Middle East opens up to more IPOs, this sustainability matrix plays a big role in raising funds,” he added.

Saraswat added that Adnoc saw opportunities as western oil companies started to step back from oil.

“Most of the other companies see peak oil by 2030 or the mid-2030s. The rest of the sector, because of carbon commitments, see a structural decline in production,” he said.

In contrast, Adnoc wants to have 5mn barrels of daily capacity by 2027, even though Opec, the oil cartel of which the UAE is a key member, is currently struggling to increase its production because of a glut of oil from the US, Brazil, Canada and Guyana that has depressed prices.

He warned, however, that there was a risk that Adnoc would be exposed if oil demand peaked sooner than it expected, or if Asian and African countries went through their energy transition faster than anticipated.

Gas has also become the priority for the Middle East, with many producers believing it will have a role throughout the energy transition because it has lower carbon emissions and is a cheaper source of baseload power for electricity grids than nuclear. However, it has higher methane emissions than oil or coal.

“If you look at all the credible outlooks and energy outlooks to 2050, 2040, 2030, and the near term, it’s clear that natural gas will play a big role in the energy mix,” said Al Kaabi, adding that 70 per cent of liquefied natural gas (LNG) demand will come from Asia by 2040.

A consultant familiar with Adnoc added that the removal of Russia from Europe’s gas market after its invasion of Ukraine had also left a clear path for the UAE and Qatar.

In the first half of this year, Adnoc signed three international gas deals, in Azerbaijan, Mozambique and the US. Domestically, Rystad expects that two-thirds of the $45bn in investment that Adnoc is likely to make in the next three years will be in gas projects. Rystad estimates that the company’s gas sales will rise between 50 and 55 per cent by 2030.

The third pillar of Adnoc’s strategy, according to Khaled Salmeen, executive director of downstream, marketing and trading, is chemicals. Here, Adnoc is rapidly building three chains of products: ammonia, plastics and foams.

Adnoc had already embarked on some significant dealmaking even before clinching the Covestro takeover.

It paid $3.6bn to take control of fertiliser company Fertiglobe last December. It has also closed a deal to buy a stake worth about $3.3bn in Austrian chemicals and energy company OMV, and is in talks to merge Borouge, its chemicals company, with OMV’s Borealis.

Buying into Germany’s industrial heartland will help build relationships in the future for Adnoc’s gas and even the low-carbon hydrogen it hopes to eventually produce, said one foreign oil executive in Abu Dhabi.

While Saudi Arabia had pursued a strategy of buying stakes in the Chinese refineries that were buying its oil, Adnoc had a different focus, said Salmeen.

“Our focus is not about crude placement. It’s much more about future-proofing, looking at what the world needs and how do we continue to be a strategic, long-term investor to provide the required energy in the right form.”