Adnoc Distribution is a component company that is part of the Adnoc group, whose diverse interests embrace academic institutions, exploration and production of oil and gas, oil and gas processing, exploration and production services, chemicals and petrochemicals, maritime transportation, petroleum products marketing and distribution. The latter is where Adnoc Distribution resides, and despite a reluctance to attract media attention, some of the brand names within its portfolio are well-known in their respective industries.

Adnoc Distribution is grappling with the fact that at the end of 2014 technical standards in the GCC (Gulf Cooperation Council) were raised to API CH-4 for heavy-duty diesel engine oil, although passenger car motor oils stayed at API SJ. Yet, in the current market, up to 45 percent remains monograde API CF/CD due to the fact that a lot of older equipment is still in service.

We also have state-related consumers that are quite dominant, Mupambo said, referring to municipalities and contractors working on behalf of the government and accounting for a sizeable portion of the CF/CD market. The impact of changes in standards is reverberating throughout the region with the movement of lower specification products curtailed and, according to Mupambo, the transfer of PCMO API SL/CF has been significantly affected. He added that even with the new legislation, Adnoc Distribution has to consider the requirements of local distributors who are resisting the new standard largely as a result of increased costs.

According to Mupambo the 10 to 15 percent cost differential between API CF and CH-4 remains a hard-sell to end users. Old habits die hard in the Middle East, and API CF is firmly entrenched in many markets with consumers slow to adopt the concept of longer drain intervals. We see API CF local production and use continuing in the short to medium term, Mupambo said. That is also the result of a lack of enforcement by regulators who often do not have the capability to check product compliance in the market. The lack of regulatory oversight has seen the rise of counterfeit lubricants particularly in Saudi Arabia and the U.A.E.

Environmental Pressures

Global emission regulations are a common denominator among regulators. The U.A.E. is no exception, and the country is emphasizing environmental protection. We believe that the approach of the U.A.E. government with respect to the environment is pointing to a new way of doing business. That, according to Mupambo, will present new opportunities in the lubricants market. He cited three examples, all of which will open new opportunities for the lubricants market.

The U.A.E. is in the vanguard of renewable energy in the Gulf. Its flagship project Masdar City, located next to Abu Dhabi airport, relies on solar energy and other renewable energy sources and is home to the International Renewable Energy Agency. Second, the U.A.E. has decided that clean energy provided by nuclear power will be an integral part of an environmental policy. Mupambo said that nuclear power plants will begin feeding into the national power grid by 2017 and that by 2020, one-quarter of power generated, approximately 5,600 Megawatts, will be provided by nuclear energy. As a result, Adnoc Distribution expects a growth in several lubricant categories, particularly turbine oils, gear oils, bearing and circulating oils and compressor oils.

Finally, he claimed that the increasing push for cleaner fuels will also open new lubricant applications in the U.A.E. There is a push toward wider use of natural gas vehicles (NGVs), and Adnoc already has NGV products in 12 filling stations and five conversion centers involved in converting cars to dual-fuel.

Adnoc is betting an expansion of the NGV network will push the market to respond by importing factory-fitted natural gas cars. Mupambo said the impact of NGV on reducing tailpipe emissions is indisputable and will stimulate an irreversible change in the market with implications for the future of engine oils in the U.A.E.

The public transport system was the initial target for early conversion of the taxi fleet. There are huge challenges in promoting the use of NGVs, and until the public has wider access to natural gas fuel it will be difficult to persuade them to make the switch, he told delegates. That will come with easier access and a policy-led marketing campaign Mupambo believes.

Ultralow sulfur diesel will add to the menu of new lubricant opportunities, Mupambo believes. The U.A.E. upgraded from 500 to 10 parts per million diesel fuel in July 2014, and the market is dominated by Euro II based trucks. But there is a drift to upgrade to Euro IV.

Fleet operators have historically tended to run oversize trucks – using 450-horsepower trucks for tasks that could be done by 300-hp vehicles – but the trend is toward rightsizing. The inefficient use of trucks is a legacy of subsidized fuel prices in the Gulf, but with crude prices under pressure, there are calls to eliminate the practice amid a growing awareness of fuel economy.

However, there is still inertia from fleet owners. The higher unit cost of newer technology trucks is a hindrance as the rates paid for state-funded projects remain subdued. Mupambo said there are opportunities for lubricant blenders and marketers in the top-tier heavy-duty segment, primarily CJ-4 and synthetic CI-4. With the prospect of Euro IV coming in, we think the opportunity to grow the top-tier market is more realistic than before.

Notwithstanding changes in the U.A.E. market, there is little indication from Adnoc Distribution what role they will play when new Group II and III base oil production finally begins to stream from Takreers plant in Ruwais. Takreer is wholly owned by Adnoc, yet the project has been beset by delays and residual questions as to whether Takreer will go it alone to market its base oils. That decision is largely down to timing, particularly because there appears to be a steady march toward a comprehensive deal with Iran that could see the countrys early return to oil markets.

That scenario is not lost on Takreer whose launch into international base oil markets could be lost in the noise of such an agreement. Takreer ditched Finnish base oils refiner and marketer Neste in 2013 and stated it would pursue its own marketing strategy. That may be about to change as sources close to discussions said negotiations between the two companies were back on. An executive from Adnocs refined products division declined to comment because they are not authorized to speak to the press.

Railroad the Next Major Segment?

Gulf States have decided to link their respective countries via a rail network that is currently at different stages of evolution. According to Mupambo, Saudi Arabia already has a mature rail network, but that mode of transportation is relatively new elsewhere in the Gulf.

When the regional network is complete, it will link all six members of the GCC and run from Kuwait to Oman. The rolling stock will consist of diesel locomotives capable of speeds up to 200 kilometers per hour. As with most pan-GCC projects, unified completion is unlikely, but there is a target to finish at least some phases by 2017. Aside from the GCC plan, the FIFA 2022 World Cup in Qatar is an extra incentive to move ahead with rail expansion.

In the U.A.E., Etihad Rail has completed 264-km and has commenced work on Stage 2 of the project to add a further 628 km. When fully complete, the network will total 1,171 km.

Trains of up to 110-wagons long capable of carrying up to 22,000 tons of granulated salt are already operating on the U.A.E. network. That is equivalent to 300 trucks working 24 hours a day said Mupambo.

Kuwait has indicated it will construct a 511 km network with feasibility studies currently underway. Qatar will have a network of 510 km, with Phase 1 comprising 156 km and connecting to neighboring Bahrain in progress. Oman is planning a 2,135-km network but remains at the design/startup phase. The fall in oil prices has dented Omans budget, plunging it into deficit, and there remains a question mark over the financial viability of the project.

Such ambitious plans will provide the scale to supply railroad engine oils, opening a potentially profitable market for many lubricant blenders. Mupambo said lubricants may be equivalent the United States Locomotive Maintenance Officers Association lubricating oil Generation 6 classification. Nevertheless, with such a wholesale transfer of freight from road to rail, there is likely to be an impact on heavy-duty engine oil volumes in the region. Its not hard to see that as the trains replace 250 to 300 trucks, we expect [heavy-duty] volumes may go down.

Coping With Change

The next 12 months may be momentous in the Middle East. If a full agreement with Iran is struck, there is a distinct prospect of renewed activity in Irans refining sector that will have dual consequences. On one hand, an agreement will trigger significant investment flow to Iran, and the base oils and lubricants sector will be early beneficiaries. On the other hand, Irans return to international markets is potentially disruptive to base oil prices already reeling from the fall in crude prices. However, the years of underinvestment in Irans refining sector diminishes the possibility that the country will be an immediate threat in the finished lubricants sector.

With large scale investment in Iran, it is unclear how long it will take to garner the expertise to become a credible competitor in the lubricants market. The temporary window provides time for GCC blenders to consider a way forward as international oil companies appear keen to partner with their Iranian counterparts, potentially shaking up regional markets. Adnoc is indisputably a key regional player with critical mass in oil markets. Yet, it may need to review its passive approach to its corporate visibility. After all, in the Middle East, out of sight is invariably out if mind.