Dubai Or Bust

The titular comic-strip character Garfield was always trying to mail the annoying kitten Nermal to the United Arab Emirates, thinking it wouldn’t be able to return. Garfield might have sent himself instead: The place isn’t bad; in fact, it’s the future.

Since the start of this decade, the city of Dubai has grown with a fury with an expanding skyline, increased leisure centers and a continuously expanding corporate presence. U.S.-based oilfield-service companies have been flocking to the city, which is practically an oasis in a desert of less-welcoming governments.

The Dubai area has long been a region that has served as an important trading location between the Eastern and Western hemispheres. The city proper was founded in the early 19th century, originally a major trading area for pearls until the business was damaged in World War I.

Its longtime rivalry with Abu Dhabi spilled into many battles that continued even after the emirates merged into the UAE in 1971. It wasn’t until 1979 that the cities called a truce, and Dubai was free to continue with its fiscal expansion.

One of the keys to this expansion is the tax incentives offered to businesses in the Jebel Ali free zone, which allows foreign companies unrestricted labor imports and export capital. Service and supply companies, wanting to be closer to their customers, are attracted to this zone, though this is not the only reason.

As national oil companies (NOCs) have taken increased control of their oil reserves, some 80% and treading upward, the role of international E&Ps has been diminished. In Dubai, NOCs need not seek out private E&Ps to help facilitate contracts since NOCs are now flush with capital from increased oil revenues.

In this environment, where dealing with E&Ps is optional, oilfield-service firms have stepped up and can now employ a broader set of operations than they would be able to in the U.S.

So not only does Dubai grant service companies a close presence to major NOCs in a positive tax environment, they also have the opportunity to perform tasks they are not called upon to do in other markets. So many Houston-based energy companies are growing their business in the UAE that Emirates Airlines launched Houston-to-Dubai direct-flight services this year.

Long-term investment
Houston-based law firm Vinson & Elkins LLP had been advising businesses in the Middle East for the past 30 years and opened its Dubai office in October 2003 and another in Abu Dhabi in 2007. The firm assists E&Ps, service companies, petrochemical companies, utilities, private-equity funds, investment banks and other companies drawn to or based in the Middle East.

Senior international partner Steve Davis says, “Dubai has been very focused on making itself attractive as a regional headquarter location for many years now. It’s not something that has just come about recently, but instead it is the result of a concerted, long-term effort by the government. It’s been a very successful effort.”

Davis lived in Abu Dhabi in the 1970s and says the UAE in general is a great place to base oneself not only to operate in the Middle East but also Southwestern Asia.

UAE practice resident partner Chris Strong agrees, saying that the geographical location of Dubai is a key to its strategic importance.

Strong says, “If you draw a circle around Dubai, in terms of a large radius, you get a long way before you intersect with a similar business hub with the same level of infrastructure as Dubai has. It’s closer to Mumbai and Delhi than from Singapore and Hong Kong. It’s the most hospitable business hub for a several-thousand-mile radius.”

The quality of support staff and tax regimes also appeals to businesses. Companies that have been in Dubai have been staffing up in the region, and other companies without a presence are trying to establish one. The increasing activity in the service sector is due to $100-plus oil, which is attracting more firms trying to ride the wave. Also, the growing importance of the NOCs is demanding oilfield-service firms be closer to these government-owned producers.

Davis says, “Today many of the contracts that are awarded will come directly from NOCs rather than through international oil companies. That’s really the message—the oilfield-service companies want to be close to where their clients are, and increasingly the purchasing decisions are being made by the NOCs and their employees.”

A bold move
Making the greatest headlines in Dubai’s corporate landscape has been major oilfield-service firm Halliburton Inc., which has established its global headquarters there, while maintaining its U.S. headquarters in Houston.

Halliburton has been active in the Middle East since 1946, and based the head of its Middle East operations in Dubai since 1992. The company made news in March 2007 when chief executive officer David Lesar took up office there, joining about 300 employees.

“Halliburton’s energy-services operations have recently celebrated key contract wins, expanded service offerings across the divisions, and increased utilization of integrated services and technologies throughout the Eastern Hemisphere,” the company reports. During 2007, $6.3 billion of Halliburton’s $15.3 billion of oilfield-services revenue was generated from the Eastern Hemisphere.

Lesar works with Halliburton’s Eastern Hemisphere president Ahmed Lotfy, concerning the company’s activities in the Middle East, Africa, Asia Pacific and Europe/Eurasia regions, which are more heavily weighted to oil and are to help bring more balance to Halliburton’s overall business portfolio.

In June 2006, the company was awarded the oilfield-services component of the largest oil-development project in the Arabian Gulf region since the 1950s—the Saudi Aramco Khurais mega-project.

This will boost the production capacity of Saudi Arabia’s oil fields from 11.3 million barrels per day to 12.5 million by 2009. It covers the Khurais, Abu Jifan and Mazalij fields, and will contribute the majority of new production in the country.

Halliburton is also using the UAE as a staging ground for its technology abroad. The company recently deployed its newest rotary steerable technology into the Abu Dhabi market, the first international deployment.
And, the company opened the first real-time operations center for drilling operations in Saudi Arabia in December 2006. The first operation was performed the following February in Qatar.

Jumbo bits
Houston-based drillbit manufacturer Varel International Inc. has had a Middle Eastern presence since 2000 that includes the UAE, Qatar, Egypt, Saudi Arabia and Kuwait, and it has representation in Yemen as well. The company is in the process of opening a new office in Dubai that will support its Middle Eastern operations.

Varel president and chief executive Jim Nixon says, “We view Dubai as the logistics hub for the Middle East. By establishing an office there, we can enhance our service and support for our customers working in this important region.

“We’ve been a major supplier of drillbits for the Middle East for many years, and our longevity and success in this market is due to the fact that we’ve been able to design application-specific bits to help our customers meet their specific drilling needs. The Dubai office will ensure faster, more effective delivery of the right bit at the right time to the right customer at the right drilling location.”

Through collaborative discussions and relationships with customers, Varel has refined its products and expanded its design capabilities to now designing drillbits specifically for Middle East plays. Today, approximately 45% of Varel’s Eastern Hemisphere revenues come from the Middle East.

Nixon says, “Wells in the Middle East are very deep and require many different sizes and types of bits. Most of the well profiles require what are often referred to as ‘jumbo bits’—these are bits ranging in diameters from 17.5 to 36 inches.”

Varel is one of the few manufacturers of 34- and 36-inch roller-cone bits. “So, initially, we saw this as a niche opportunity to establish credibility and, ultimately, a customer base in this region. Our strategy was, as Varel grew, we would leverage this credibility to build more long-term relationships with customers in this market.”

In 1998, the once family-owned company was sold to Nixon and several institutional investors. At the time, Varel was heavily weighted to the U.S. land drilling market with a small presence in the Middle East. The following year, the U.S. land market became particularly volatile and forced the new owners to offset domestic instability by focusing abroad.

A year later, the company sought to widen its scope, adding a PDC product and manufacturing facilities in Houston and France, spurring the company into the realm of the leading drillbit-technology and services internationally. The company is now a major supplier for the Middle East.

Varel’s plans for the Middle East include expanding its engineering resources in the various regions to elevate service and relationship building. Its new office in Dubai will be instrumental in this growth, Nixon says. “This market will continue to be a top priority for us.”

Rig-up yard
Houston-based National Oilwell Varco Inc. set up shop in Dubai in 1997, having previously overseen its operations in the region from Houston. Fadi Matta, vice president of service, Middle East and North Africa, says local companies kept asking for National Oilwell Varco to increase its presence there. The city of Dubai seemed to be a perfect location.

“We asked, ‘Where would we be best suited to support the Middle East as a region?’ Would it be Abu Dhabi? Would it be Bahrain? We selected Dubai because it’s central and the ease of set-up and operations in the Jebel Ali free zone,” Matta says.

“It provides the best logistical place for the Middle East. There’s a lot of connecting flights, and the proximity of that played into the decision as well.”

The company has two facilities in the city: a service center with warehouses and engineering, and a downhole-tools and distribution center. This center also houses pumping and supply-chain solutions, MD Totco instrumentation and controls, and Tuboscope pipe-coating and inspection services.

It is the largest downhole-tools facility outside North America, Matta says.

The company is currently constructing a $500-million rig-up yard to increase its manufacturing capabilities. National Oilwell Varco has a unique history in rig construction in Dubai, as its first rig built there, five years ago, was part of ushering in the current era of growth.

“The turning point for us was when we manufactured and delivered a locally built land rig using equipment from around the world. This had not been done before in the Middle East. We were the first company that produced a new rig for the Middle East market built in Dubai.”

Since 2003, the company has built 14 rigs in Dubai, and plans to build six more this year. The current infrastructure allows the company to work on one rig at a time comfortably, and two if resources are stretched. When the new rig-up yard is completed, the Dubai facility will be able to work on four rigs simultaneously.

Along with rigs, the Dubai office provides installation and commissioning for offshore packages, service and overhaul of equipment, engineering and upgrades. Matta adds that National Oilwell Varco offers training to local companies and seeks to expand classes.

The Dubai location is also being used as a staging site for the region with satellite offices popping up in locations such as Saudi Arabia, Libya, Egypt and Algeria, each to emulate the Dubai office model.

Along with assisting in the region, Matta says items produced at the Dubai facilities are sent around the world, with the location manufacturing for the Eastern hemisphere and locally fabricated derricks being sent to Norway and even Houston.

Despite some fears that inflation is causing some strains on the cost of living, Matta says National Oilwell Varco will stick it out and continue to grow in the region.

“That was a signal that we’re here to stay. We’re not leasing warehouses anymore; we’re building our own.”

Quality of life
Englewood, Colorado-based energy-research and -consulting firm IHS Inc. has had long-standing relationships in the UAE and the larger Middle East region, and is currently in the process of ramping up its presence in the Persian Gulf. Stuart Lewis, director of international regional teams, says IHS has seen a large increase in oilfield-service companies moving to Dubai.

“Although the foreign operators, such as Halliburton, have received considerable attention, another important development is the number of locally funded and operated private service companies throughout the Gulf that are becoming very active and are expanding their presence.”

Along with the tax regime and logistics of the area, Lewis says the economic diversification and general quality of life in the UAE are important considerations as well. Recent growth in construction, leisure activities, and other quality-of-life progress attest to the region’s attractiveness.

Lewis adds that Dubai will offer specific incentives for oilfield-service companies, since the area will require additional technology and workforce in the future for recovering its oil reserves.

“On the oil side, boosting recovery from known fields is one of the single greatest sources of future energy production, so it is a reasonable assumption that service companies will continue to play a key role in addressing this largely technological challenge within a region that encompasses 64% of known conventional oil resources.”

And the desire in the UAE for further expansion of infrastructure and other developments will grant service companies opportunities outside their normal scope of operations.

“As the local Persian Gulf economies continue to expand and diversify into non-oil businesses as well, the additional synergies of co-location get even stronger—especially for service companies with broader product and service portfolios.”

Tax-free state
Even Saudi Arabia’s national television network is headquartered in the UAE, where it enjoys a corporate tax-free status. Many North American oilfield-service companies are choosing the UAE for their base of operations abroad, so their growing incomes earned outside the U.S. are not taxed by the U.S.

In the UAE, Abu Dhabi accounts for almost 90% of the emirates’ oil and gas production, compared with just 8% for Dubai, thus the latter has turned to attracting corporate headquarters and other commerce for income.

Vinson & Elkins’ Strong says, “This is, in particular, attractive to non-U.S. citizens. Dubai is attractive to Europeans, Australians and folks in other countries that don’t tax their non-resident citizens.”

Dubai will be a strong catalyst for the region, and countries such as Qatar are becoming more open as well. Strong doesn’t believe other countries will go the same distance, but its success has started to rub off.

Davis notes that the UAE’s openness and progressiveness are not new, with its seaside location that has hosted many cultures. It would welcome Garfield and Nermal too.