US embassy cable - 05ABUDHABI3441

S E C R E T SECTION 01 OF 05 ABU DHABI 003441 
 
SIPDIS 
 
STATE FOR NEA/ARPI AND EB/ESC/IEC/EPC 
ENERGY FOR MOLLY WILLIAMSON AND JOHN BRODMAN 
NSC FOR HUTTO 
 
E.O. 12958: DECL: 08/08/2015 
TAGS: ENRG, EPET, TC 
SUBJECT: OVERVIEW OF OIL AND GAS IN THE UAE 
 
Classified By: Ambassador Michele J. Sison for reasons 1.4 (B) and (D). 
 
1. (C) Begin Summary.  Oil and natural gas form the basis of 
the modern economy in the United Arab Emirates, which holds 8 
to 9 percent of the world,s proven oil reserves and controls 
the world,s fifth largest natural gas reserves.  Over 90 
percent of the country,s established oil and natural gas 
reserves are located in the emirate of Abu Dhabi.  Under the 
UAE constitution, oil and gas reserves belong to the 
individual emirates and not the federal government.  The UAE 
accounted for 3.3 percent of total world oil production in 
2004, and the Abu Dhabi National Oil Company (ADNOC) plans to 
expand oil production capacity from 2.5 to 2.6 million 
barrels per day (bpd) to 3.0 million bpd by 2007.  ADNOC,s 
Deputy CEO Abdullah Nasser Al Suwaidi expects that recent 
initiatives, such as the development of the Upper Zakum 
region, will contribute significantly to this capacity 
increase.  Natural gas production capacity is currently 
between 4 and 5 billion standard cubic feet (bcf) per day and 
is expected to grow as well.  U.S. companies have a 
considerable stake in oil and gas equipment and services in 
the UAE, and their share in upstream oil and gas production 
is growing.  End summary. 
 
OVERVIEW OF UAE OIL AND NATURAL GAS 
----------------------------------- 
 
2. (U) Oil in the UAE is considered fairly sweet, with 
gravities in the 34-40 degree API range.  Abu Dhabi is the 
second leading supplier of crude oil to Japan (behind Saudi 
Arabia) and is a significant oil exporter to the Far East in 
general.  Hydrocarbon exports are a critical part of the UAE 
economy, particularly in Abu Dhabi.  In 2004, total 
hydrocarbon export revenues reached $38 billion, or 46% of 
total exports.  Abu Dhabi,s Supreme Petroleum Council (SPC) 
sets policy for oil production by the Abu Dhabi National Oil 
Company (ADNOC).  Dubai and Sharjah both have their own oil 
production and export policy.  Companies in the UAE oil and 
gas industry generally fall into three categories: 
exploration and production, energy services and downstream 
activities. 
 
3. (U) Natural gas production and consumption is growing 
considerably in the UAE.  The UAE holds 212.1 trillion cubic 
feet of proven natural gas reserves, accounting for 
approximately 4.6 percent of the world total ) the fifth 
largest reserves behind those in Russia, Iran, Qatar and 
Saudi Arabia.  Gas consumption has doubled over the past 
decade in the UAE, and is anticipated to rise to 4.5 bcf/d in 
2005.  As a result, most natural gas produced in the UAE goes 
to domestic markets and gas re-injection projects. 
 
THE SUPREME PETROLEUM COUNCIL 
----------------------------- 
 
4. (S) The Supreme Petroleum Council (SPC) is among the most 
powerful bodies in Abu Dhabi,s government because it makes 
the key decisions regarding the emirate,s oil policy.  It is 
the SPC, not the UAE Ministry of Energy, that manages the Abu 
Dhabi National Oil Company and responds to OPEC issues.  The 
SPC holds formal meetings two to three times per year, in 
addition to informal ad hoc gatherings.  The SPC is organized 
more like a tribal majlis (council) than a modern 
institution: its twelve members make decisions on a consensus 
basis, policy proposals are not always made in writing, and 
personal connections are exceedingly influential.  Although 
UAE President Khalifa bin Zayed Al-Nahyan gives the final 
word on all policies and has the power to make decisions 
independently, the unanimous approval of other SPC members is 
critical given social and political norms. 
 
5. (C) In June 2004, Sheikh Khalifa (who was then Abu Dhabi 
Crown Prince) replaced several members of the SPC with 
younger, Western-educated technocrats and key figures from 
ADNOC.  The SPC has a great deal of respect for international 
oil companies (IOCs) like Exxonmobil, Totalfina/Elf, BP and 
Shell, and has occasionally supported them in the face of 
ADNOC,s attempts to diminish their role.  Nonetheless, the 
SPC primarily depends upon ADNOC,s analysis of the technical 
details of competing proposals (which is not entirely 
invulnerable to outside influence). 
 
ADNOC AND ITS GROUP OF COMPANIES 
-------------------------------- 
 
6. (U) The Abu Dhabi National Oil Company (ADNOC) oversees 
the emirate,s oil and natural gas production, participating 
heavily in both upstream and downstream activities.   ADNOC 
is a large state-owned monopoly, holding a majority share in 
all operating companies in the UAE.  ADNOC and its Group of 
Companies comprise 18 ventures, which are devoted to 
exploration and production, seismic studies, onshore and 
offshore drilling operation, oil refining, gas processing, 
storage, transportation, shipping, port operation, 
distribution of refined products and other support services. 
These companies are involved in the production of crude oil, 
gas, condensate, natural gas liquids (NGL), liquid natural 
gas (LNG), liquefied petroleum gas (LPG), refinery products, 
polymers, lubricants, fertilizers, and drilling chemicals. 
The three main operating companies in the ADNOC Group of 
Companies are ADMA-OPCO, ZADCO and ADCO. 
 
7. (C) The Abu Dhabi Marine Operating Company (ADMA-OPCO) 
operates ADMA,s offshore concessions.  These include two 
major oil and gas producing fields: Umm Shaif and Zakum. 
Zakum is one of the world,s largest offshore oilfields. 
ADMA-OPCO currently produces approximately 500,000 to 600,000 
bpd of oil and 1 bcf per day of natural gas.  ADMA-OPCO plans 
to raise production capacity by 150,000 bpd by 2007 to 2010, 
and is examining the feasibility of an additional 200,000 bpd 
increase beyond that.  Current shares in ADMA-OPCO are: 
ADNOC, 60%; BP, 14.7%; TotalFinaElf, 13.3%; and Japan Oil 
Development Company (JODCO), 12%. 
 
8. (C) The Abu Dhabi Company for Onshore Oil Operations 
(ADCO) operates onshore and along the shallow waters of Abu 
Dhabi,s coast.  Its five main oil fields are the  Asab, Bab, 
Bu Hasa, Sahil and Shah fields.  ADCO,s current capacity for 
oil production is 1.2 million bpd, but it plans to raise 
capacity to 1.3 million bpd by the end of 2005, 1.4 million 
bpd by the end of 2006 and between 1.5 and 1.6 million bpd by 
2011.  ADCO,s General Manager Kent Wells told Econchief in 
August 2005 that he does not believe that ADCO could increase 
production much beyond this figure.  It could potentially 
increase production to around 1.8 million bpd if ADNOC 
changed its policy of maintaining current production capacity 
for a period of 25 years.  Wells also said that he thought 
ADCO was expanding capacity as quickly as it reasonably 
could.  ADCO,s shareholders are: ADNOC, 60%; BP, 9.5%; 
Shell, 9.5%; TotalFinaElf, 9.5%; ExxonMobil, 4.75%; Mobil, 
4.75%; and Partex, 2%. 
 
9. (C) The Zakum Development Company (ZADCO) operates the oil 
fields of Upper Zakum, Umm Al-Dalkh and Satah.  ZADCO,s 
current oil production is 550,000 bpd, which it plans to 
increase to 600,000 bpd in the next three to five years. As 
per the original ZADCO mandate, ADNOC owns 88 percent and 
JODCO owns 12 percent.  However, ADNOC has all but awarded a 
28 percent equity stake in Upper Zakum to ExxonMobil.  This 
will roughly double the overall U.S. share of foreign 
participation in the UAE oil sector. 
 
OIL AND GAS COMPANIES IN THE OTHER EMIRATES 
------------------------------------------- 
 
10. (C) The remainder of UAE oil and gas production outside 
of Abu Dhabi is concentrated in the emirates of Dubai and 
Sharjah.  According to official public figures, Dubai 
produces roughly 250,000 bpd of oil and has 4.1 trillion 
cubic feet of natural gas reserves.  However, Al Suwaidi has 
reported that oil production is actually closer to 130,000 
bpd.  The government of Dubai controls Dubai,s oil and 
natural gas through the government-owned Emirates National 
Oil Company (ENOC) and the Dubai Natural Gas Company (DUGAS). 
 A large holding company, ENOC controls 28 subsidiaries. 
ENOC is primarily concerned with upstream and downstream oil 
and gas activities, but it is also involved in many other 
initiatives, from information technology to chemical storage. 
 The Dubai Petroleum Company (DPC), a wholly owned subsidiary 
of ConocoPhillips (U.S.), is the major operator in Dubai and 
holds a 32.5 percent share of production. 
 
11. (C) Sharjah produces approximately 15,000 bpd of oil, 
almost entirely from the Mubarak field, and holds 10.7 
trillion cubic feet of proven natural gas reserves.  The 
Sharjah Petroleum Council replaces the Sharjah Department of 
Petroleum and Minerals, and manages Sharjah,s oil policy. 
Sharjah-based Crescent Petroleum is a privately-owned company 
that holds the full concession to Sharjah,s offshore Mubarak 
field, and supplies oil and gas to Sharjah and the northern 
emirates.  The Mubarak field lies on the border between Iran 
and Sharjah, splitting production and revenue between Sharjah 
and Iran.  Crescent Petroleum has most recently founded a 
1.63 billion dollar company, Dana Gas, which hopes to bring 
in gas from Iran to satisfy demand for natural gas in the 
northern emirates (subject to approval from the UAE federal 
government). 
 
OTHER COMPANIES 
--------------- 
 
12. (SBU) The main International Oil Companies (IOCs) present 
in the United Arab Emirates are BP, Shell, TotalFinaElf, 
ExxonMobil, JODCO and Tokyo Electric Power Company (TEPCO). 
IOCs in the UAE still hold concessions, unlike in fully 
nationalized oil markets.  However, IOCs may only hold a 
minority share in Abu Dhabi,s operating companies and 
concession agreements do not tend to favor the IOCs.  This 
regulation sharply limits IOC profit opportunities. 
ExxonMobil is the only U.S. company active in Abu Dhabi,s 
upstream oil production, but its prominence in the region is 
likely to increase due to its unique investment in research 
and development activities. 
 
13. (U) In 2004, U.S. companies held a 45 percent market 
share in oil and gas field equipment, spare parts and 
services ) even though they controlled a mere 13 percent 
share in upstream oil and gas production.  This is 
attributable in part to the advanced technology particular to 
U.S. service providers like Halliburton and Baker-Atlas. 
Halliburton, Baker-Atlas, Schlumberger and other service 
providers act as an oligopoly and enjoy exceedingly large 
profit margins. 
 
14. (SBU) There are three levels of exploration and 
production companies (EPCs) in the UAE.  Only Bechtel (U.S.) 
and Technip (France) work on contracts exceeding 300 million 
dollars.  Unlike in the U.S., EPC companies at this level 
must agree to lump-sum contracts instead of cost-plus 
contracts; these greatly increase risk to the contractor that 
its costs will squeeze profit margins.  In the under-300 
million dollar category, several companies (including 
Bechtel) work primarily with engineering, and face both 
greater competition and smaller risk.  The final level of 
EPCs handle front end engine design (FEED) and project 
management consulting (PMC), and entail minimal risk to EPCs. 
 
 
15. (SBU) General suppliers in the UAE are tender based, and 
either supply directly to ADNOC or to an EPC contractor. 
ADNOC requires that a minimum of five potential suppliers bid 
on each project.  Given the increased demand for oil and gas 
production, ADNOC is often unable to find five qualified 
bidders and must then lower its standards to allow more 
companies to participate.  This policy also prevents the sale 
of exclusively patented products by U.S. companies because 
there would only be one bidder in such cases.  As a result, 
ADNOC often buys old technology instead of newer, 
cutting-edge products.  Before participating in ADNOC,s 
bidding process, suppliers must first establish a local agent 
and pre-qualify with ADNOC.  Many U.S. companies lament 
ADNOC,s lengthy pre-qualification practice: although ADNOC 
states that the process takes 3 to 8 months, it can take over 
a year in some cases. 
 
PRODUCTION AND CAPACITY TARGETS 
------------------------------- 
 
16. (C) ADNOC Deputy CEO Abdullah Nasser Al-Suwaidi told a 
visiting Washington delegation in June 2005 that the UAE was 
producing at its maximum sustainable rate of 2.5 to 2.6 
million bpd.  The UAE,s peak production capacity is 
currently 2.7 bpd.  The UAE should be able to easily produce 
a sustainable 2.7 million bpd and a peak 2.9 million bpd by 
early 2006, with a planned 200,000 bpd increase in onshore 
production and 150,000 bpd offshore.  The UAE plans to raise 
its sustainable production rate to 3 million bpd by 2007. 
Al-Suwaidi told the Ambassador in 2004 that Abu Dhabi has a 
plan to increase oil production capacity to 4-4.5 million bpd 
in the long term.  The UAE is also working to increase 
production of condensates, which now constitute an additional 
220,000 bpd that do not count toward official OPEC production 
figures.  In an emergency, the UAE could produce an 
additional 200,000 bpd of oil if it abandoned its strict 
no-flare policy.  ADNOC tends to be conservative with raising 
capacity because it wants to maintain steady production rates 
for the next 25 years.  However, ADCO,s Kent Wells told 
Econchief that he thought ADNOC could raise onshore 
production by 200,000 to 300,000 bpd in a crisis, without 
flaring.  Foreign oil companies report that the UAE will 
begin investing this year in another wave of development, 
which would bring an additional 200,000 bpd of onshore and 
100,000 bpd of offshore oil production online by 2008 or 
2009. 
17. (C) Several factors limit the UAE,s ability to raise oil 
production capacity.  The UAE faces the same physical and 
personnel constraints as other world oil producing countries, 
while manufacturers of drilling rigs, piping and raw 
materials cannot expand production quickly enough to meet 
demand.  In terms of bringing new projects online, the UAE 
has been affected by current world shortages of steel and 
drilling rigs.  According to Frank Kemnetz (protect), 
President of ExxonMobil Al-Khaleej, ADNOC is reluctant to pay 
higher prices for materials and supplies, even if it means 
postponing a lucrative project.  Wells said that because 
suppliers know that the UAE is a good long-term customer, 
they will push prices exactly as much as they can without 
hurting the relationship, then back off. 
 
18. (C) Another major world production constraint is the lack 
of trained petroleum engineers and geologists, as a 
generation of experienced engineers reach retirement age. 
This is a particular problem in the UAE because of 
Emiratization (creating jobs for Emirati nationals): many 
newly-hired Emiratis lack necessary training and experience, 
despite their high levels of education.  In the last few 
months, ADCO reports that it has been losing engineers to 
higher salaries in other countries when it should be growing 
its workforce.  In addition, Al-Suwaidi, Mohammed bin Dha,en 
Al Hamili, UAE Minister of Energy, and many Western oil 
executives have complained that it is difficult to compel 
contractors to bid on projects.  Even though high oil prices 
make investments more attractive, Al-Hamili noted that the 
&good firms8 are too overwhelmed with work to take on new 
ventures.  This is particularly troubling for the UAE, whose 
oil fields require an increasing level of technology and 
expertise.  ADNOC must traditionally choose from at least 
three bids for every exploration and production project, but 
often cannot find three willing and capable contractors. 
Al-Suwaidi expressed hope that the SPC may be persuaded 
toward greater leniency about the three-bid rule in the face 
of changing circumstances. 
 
19. (U) Gas processing capacity in the UAE is currently 
between 4 and 5 billion cubic feet per day (bcf/d), and 
should rise to 7 bcf/d in 2008.  The conclusion of the third 
phase of the onshore gas development (OGD-3) and of the 
second phase of the Asab gas development (AGD-2) will 
generate this increase.  Additionally, the Abu Dhabi Gas 
Industries Company (GASCO) is taking the lead in a planned 
annual investment of $1 billion in new gas infrastructure 
over the next five years.  The Dolphin Project should bring 
another 2.2 bcf/d of natural gas imports, starting in 2006. 
 
MAJOR PROJECTS: UPPER ZAKUM AND DOLPHIN 
--------------------------------------- 
 
20. (C) The most significant ongoing energy projects in the 
UAE are the development of Upper Zakum and the Dolphin 
Project.  ADNOC has entered into final negotiations with 
ExxonMobil that will grant the U.S. company a 28 percent 
equity stake in Upper Zakum, leaving JODCO,s share at 12 
percent and bringing ADNOC,s share to 60 percent.  ADNOC 
chose ExxonMobil largely because its advanced technologies 
will be critical to increasing recovery rates in the 
challenging field, where the tight rock structure traps a lot 
of available oil.  With ExxonMobil,s technical 
contributions, ADNOC hopes that Upper Zakum,s oil production 
will gradually rise from 530,000 to 600,000 bpd in three 
years to 700,000 bpd and beyond.  Al-Suwaidi has said that 
Upper Zakum could theoretically produce 1 million bpd, but 
that it would require further study.  ExxonMobil,s Frank 
Kemnetz told Econoff that Upper Zakum production could be 
pushed to 1.2 million bpd without adverse technical 
consequences, but that conservative UAE leaders want 
production rates to be sustainable over the next 25 years. 
 
21. (C) The U.S. company Occidental Petroleum has a 24.5 
percent stake in the 4 billion dollar Dolphin Project, which 
will begin to pump natural gas from Qatar to the UAE by the 
end of 2006.  The UAE government has already signed 25-year 
contracts to purchase 2.2 billion cubic feet per day (bcf/d) 
from Dolphin Energy, and the pipeline is designed to 
eventually carry 3.2 bcf/d.  Occidental Petroleum,s David 
Scott is unconcerned about finding demand to meet additional 
supply; he says that Abu Dhabi Crown Prince Sheikh Mohammed 
Bin Zayed hopes to eventually buy 4 bcf/d from the pipeline. 
Discussions to begin this year will likely increase 
Dolphin,s 2.2 bcf/d commitments.  Demand for natural gas is 
increasingly overwhelming because Abu Dhabi needs to fuel its 
industrialization plans and Dubai is a major consumer.  The 
arrival of Dolphin gas will contribute to gas re-injection 
for oil production and to ADNOC,s plans to build a gas 
network that would serve 120,000 industrial, residential and 
commercial customers in the UAE. 
SISON