Rising contractor prices will affect the region's oil giants

15 January 2010

The kind of savings that Adnoc made last year on contractors’ prices are no longer available

Abu Dhabi National Oil Company (Adnoc) awarded an astonishing $35bn-worth of contracts in 2009. But the figure was far lower than it might have been. Thanks to aggressive negotiating tactics, Adnoc saved up to 20 per cent on the prices submitted by contractors.

It was able tocapture such deep discounts because of a collapse in demand across the region for contractors and materials.

But, as Adnoc continues to push for even more discounts, it may be time for the state energy company to concede that the market has now bottomed out and the only way for prices is up.

The changing nature of the market is already affecting its talks with the local National Petroleum Construction Company (NPCC). The two are negotiating deals worth around $1.5bn which form the cornerstone of Abu Dhabi’s’1.8 million’ project to boost onshore oil production by 400,000 barrels a day.

Sources close to the talks say the Adnoc subsidiary involved in the deal, Abu Dhabi Company for Onshore Operations, has asked NPCC to revise its prices three times and the contractor has now reached its bottom limit.

High oil prices do not help Adnoc’s cause. While the benchmark West Texas Intermediate crude oil fetched an average of $41.71 a barrel in 2009, it has been selling at an average of $82.15 so far this year.

These prices will encourage other oil companies to push ahead with projects, creating greater competition for contracting resources.

MEED has repeatedly said in recent months that the number of projects Adnoc is planning would soon push prices back up.

That point has now been reached, and the kind of savings Adnoc made last year are no longer available. The company had a fantastically successful 2009. This year, it and other national oil companies will just have to get used to higher costs.

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