US embassy cable - 05ABUDHABI4104

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 004104 
 
SIPDIS 
 
DEPARTMENT FOR NEA/ARPI AND EB/ESC/IEC/EPC 
ENERGY FOR MOLLY WILLIAMSON 
NSC FOR HUTTO 
WHITE HOUSE FOR OVP KEVIN O'DONOVAN 
 
E.O. 12958: DECL: 09/26/2015 
TAGS: ECON, EPET, ENRG, TC 
SUBJECT: UAE ANNOUNCES NEAR TERM OIL PRODUCTION CAPACITY 
INCREASES 
 
 
Classified By: Ambassador Michele J. Sison for reasons 1.4 (b and d). 
 
This message contains business proprietary information. 
Please protect. 
 
1. (C) Summary: On September 25, UAE Minister of Energy 
Al-Hamili announced that the UAE would raise its oil 
production by 200 kb/d by March 2006, which tracks with what 
we have been told privately by Abu Dhabi National Oil Company 
(ADNOC) officials.  The same day, Exxon Al-Khaleej President 
Frank Kemnetz told Ambassador that Exxon/Mobil President Lee 
Raymond would be visiting to the UAE, Qatar, and Saudi Arabia 
the week of October 1-5, and would try to move forward 
negotiations with the UAE over Exxon's bid for a 28% stake in 
the Upper Zakum field.  Kemnetz (please protect) also said 
that large increases in Abu Dhabi's production capacity (to 4 
mb/d) would require senior officials to develop a more 
aggressive mind set toward development.  He said that Abu 
Dhabi Crown Prince Sheikh Mohammed bin Zayed was pushing 
ADNOC in that direction, but that President Khalifa still 
appeared to be more cautious.  Kemnetz also commented that 
the tight fiscal terms in Abu Dhabi's contracts with its 
international oil company (IOC) partners acted to discourage 
large scale foreign investment.  Occidental Petroleum GM 
David Scott (please protect) has told us that Abu Dhabi's IOC 
partners were reluctant to engage in large scale investment 
because their concession agreements would run out between 
2014 and 2018.  End Summary. 
 
UAE Increasing Capacity by 200 kb/d by 2006 
------------------------------------------- 
 
2. (U) On September 25, on the margins of the Emirates Center 
for Strategic Studies and Research's "Gulf Oil and Gas" 
conference, UAE Minister of Energy Mohammed bin Dha'en 
Al-Hamili announced that the UAE would raise its crude oil 
production capacity by 200,000 barrels per day to 2.7 mb/d by 
March 2006.  He explained that the UAE would add 100,000 
barrels per day by 4th quarter 2005 and an additional 100,000 
barrels per day 1st quarter 2006 primarily from onshore 
fields.  Al-Hamili said that the UAE would produce about 2.5 
mb/d during the month of October.  He also reiterated OPEC's 
commitment to supply the market with the oil it needed 
 
Exxon on Production Constraints 
------------------------------- 
 
3. (C) On September 25, Frank Kemnetz, the president of 
Exxon/Mobil's Arabian Gulf subsidiary, told Ambassador and 
EconChief that Exxon's CEO Lee Raymond would be visiting the 
region from October 1 to 5 and would try to meet UAE 
President Khalifa bin Zayed to discuss the ongoing 
negotiations over Exxon/Mobil's bid for a 28% stake in the 
Upper Zakum field.  Kemnetz said that the negotiations were 
down to a few items -- "mostly the money" -- and Raymond 
wanted to move them forward. 
 
4. (C) Kemnetz also discussed the "political" constraints to 
increases in Abu Dhabi's oil production.  He said that, with 
the appropriate investment, Abu Dhabi could increase its 
production capacity to 4 mb/d in the medium term, but that it 
would also require ADNOC and Abu Dhabi's Supreme Petroleum 
Council (SPC) to be more aggressive in developing their 
assets.  He noted that both organizations had a very 
conservative mindset about preserving Abu Dhabi's oil wealth 
for the long term, rather than immediately exploiting it. 
(Note: Currently, ADNOC's reservoir management policy 
requires fields to be able to produce at the same rate for 25 
years. End Note)  Kemnetz said that he understood that Abu 
Dhabi Crown Prince Sheikh Mohammed bin Zayed (MbZ) was 
pushing for more aggressive oil sector development, a point 
which other oil executives have confirmed to us.  Kemnetz 
noted, however, that UAE President (and SPC Chair) Sheikh 
Khalifa still appeared to have a more cautious approach.  In 
August, BP Deputy representative Nicholas Cochrane-Dyet, 
drawing a comparison with MbZ's push for quicker development 
of Abu Dhabi's oil resources, had also commented to EconChief 
that President Khalifa and some of his key advisors on the 
SPC (including his key financial advisor Mohamed Habroush 
Al-Suwaidi) were "cautious" in their approach to development. 
 
It's the Money 
------------- 
 
5. (C) Kemnetz also emphasized that the current fiscal 
arrangements between Abu Dhabi and its international oil 
company (IOC) partners acted as a disincentive to aggressive 
development of new oil resources.  He noted that Abu Dhabi's 
current fiscal terms were the toughest he had seen in his 
career in the oil industry.  "The government takes something 
like 99 percent" of the revenues, he said.  Kemnetz explained 
that these terms worked in the past, but discouraged the kind 
of new investment that Abu Dhabi needed to really develop new 
capacity.  Cochrane-Dyet echoed this view, saying that the 
Abu Dhabi "finance guys" were "tight with a dollar." 
 
Or the Concessions? 
------------------- 
 
6. (C) In a separate conversation with Econchief, Occidental 
Petroleum GM David Scott stated that the oil majors were 
reluctant to make the kind of aggressive investments that Abu 
Dhabi needed to dramatically increase its production because 
of the short remaining life of the oil field concessions as 
well as the tight fiscal terms of the current arrangements. 
He stressed that more nimble companies (i.e., Oxy) would be 
very interested in breaking into Abu Dhabi's upstream oil 
sector.  (Note: In response to Econchief's question about 
whether the need to renew concession agreements served to 
discourage the IOCs from large scale investments in Abu 
Dhabi's oil sector, Exxon's Kemnetz had replied that renewing 
the concessions was on Exxon's mind and it was a subject that 
Abu Dhabi needed to start focusing on.  The ADCO (onshore) 
concession expires in 2014; the ADMA-OPCO (offshore) 
concession expires in 2018.  Embassy understands that 
preliminary discussions are taking place between ADNOC and 
its international partners on renewing the concessions.  End 
Note.) 
 
7. (C) Comment:  Al-Hamili's remarks on oil production 
capacity increases track with what he and ADNOC officials 
have told us in private.  Onshore production is currently 1.2 
mb/d and will be raised to 1.4 mb/d by the end of 2006 at the 
latest.  It is unusual, however, for a UAE official to 
publicly discuss production or plans to increase capacity. 
ADNOC has a number of plans and programs to gradually 
increase oil production capacity over the next few years, but 
Exxon's points about the essentially conservative nature of 
ADNOC and the SPC track with what other western oil 
executives have told us.  End Comment. 
SISON