US embassy cable - 05ABUDHABI4546

S E C R E T SECTION 01 OF 04 ABU DHABI 004546 
 
SIPDIS 
 
ENERGY FOR SENIOR FOREIGN POLICY ADVISOR MOLLY WILLIAMSON, 
SENIOR ADVISOR GETTO, AND DAS BRODMAN 
 
E.O. 12958: DECL: 11/16/2015 
TAGS: EPET, ENRG, ETRD, AE 
SUBJECT: SCENESETTER - VISIT OF ENERGY SECRETARY BODMAN TO 
UAE 
 
REF: A. ABU DHABI 4367 
     B. ABU DHABI 4104 
     C. ABU DHABI 3884 
     D. ABU DHABI 3580 
     E. ABU DHABI 3441 
     F. ABU DHABI 3439 
 
Classified By: Ambassador Michele J. Sison for reasons 1.4 (B) and (D). 
 
 
1. (C) We look forward to Secretary Bodman and team's 
November 11 to 13 visit to the UAE.  The UAE is both a key 
regional security partner and a major oil producer.  It holds 
8 to 9 percent of the world's proven oil reserves and is the 
world's fifth largest natural gas reserves.  The individual 
emirates, rather than the UAE federal government, control 
their own hydrocarbon reserves, which mean that Abu Dhabi 
emirate, which controls over 94 percent of the oil and gas 
reserves, is by far the richest and most powerful of the 
seven emirates.  Abu Dhabi emirate also funds 56% of the 
federal budget and pays for a number of expenses -- including 
defense -- that would normally be funded by a federal 
government.  The UAE's current oil production capacity is 
2.5-2.6 million barrels per day (mb/d), of which Abu Dhabi 
emirate produces about 2.4 mb/d.  Minister of Energy 
Al-Hamili has publicly said that the UAE will increase its 
oil production capacity by 200,000 barrels per day by March 
2006, primarily from its onshore fields.  The UAE is also the 
only Gulf OPEC member that has always maintained a 
partnership with international oil companies (IOCs). 
ExxonMobil, BP, Total, Shell, and the Japan Oil Development 
Company are all minority shareholders in one or more of the 
three main upstream oil companies, with ADNOC holding the 
majority share on behalf of Abu Dhabi.  U.S. companies hold a 
45% market share in oil and gas field equipment, spare parts 
and services. 
 
2. (SBU)  We have scheduled meetings for you with UAE 
President Sheikh Khalifa bin Zayed Al-Nahyan, Minister of 
Energy Mohammed bin Dha'en Al-Hamili, Abu Dhabi National Oil 
Company CEO Yousef Omair bin Yousef, and long-time 
Presidential Advisor - Mohammed Habroush Al-Suwaidi (who 
holds the rank of minister).   All are members of Abu Dhabi's 
Supreme Petroleum Council (SPC), which makes the key 
decisions regarding Abu Dhabi Emirate's oil and gas policy. 
 
General Themes 
-------------- 
 
3. (C/Rel UAE) 
 
-- Thank the UAE for working closely with us on supporting 
Iraq (military, financial, humanitarian aid) and other 
humanitarian needs world wide (i.e., $100 million for 
Pakistan earthquake relief, aid to Palestinians). 
 
-- Thank the UAE for support for oil market stability by 
producing at or near sustainable capacity and supportive 
public statements in context of OPEC meetings. 
 
-- Inquire about UAE plans for short and medium term 
expansion of oil production capacity and potential 
constraints. 
 
-- Express appreciation for the ongoing partnership between 
IOCs and ADNOC and interest in building on that partnership, 
especially for U.S. companies.  (Note:  ExxonMobil would 
prefer that we do not carry a strong, specific advocacy 
message on its behalf for the Upper Zakum bid, citing the 
sensitive nature of the negotiations and the timing.) 
 
-- Thank the UAE for their generous financial support for 
Hurricane Katrina reconstruction ($100 million cash). 
 
Update on Regional Efforts 
-------------------------- 
 
4. (C) The UAEG is an important partner in our efforts to 
bring stability to the region.  The UAE pledged $215 million 
assistance to Iraq during the Madrid donor's conference, and 
publicly committed to forgiving most of Iraq's $3.5 billion 
in debt to the UAE.  In addition, the UAE has provided 
extensive support for the Iraqi security forces, by training 
police and military (engineering) forces and by providing 
equipment to the Iraqi security forces.  The UAE also 
provides the U.S. military with bases in Afghanistan and in 
the UAE.  The Al-Dhafra air base supports the U.S. 380th air 
wing, which provides reconnaissance and refueling support to 
Operations Iraqi and Enduring Freedom.   In addition, UAEG 
special forces and support troops are in Afghanistan 
supporting Operation Enduring Freedom.  The UAE prefers to 
keep its military cooperation with us low-key.  The UAE is 
also a major donor to humanitarian and reconstruction efforts 
-- including a $100 million cash donation to the U.S. for 
Hurricane Katrina and a further $100 million cash donation to 
Pakistan for earthquake relief.  The UAE is a generous aid 
donor to the Palestinians and recently started a $100 million 
housing project for Palestinians called Sheikh Khalifa City. 
Oil Production and Expansion Plans 
---------------------------------- 
 
5. (C) The Abu Dhabi Company for Onshore Operations (ADCO) is 
the operating company responsible for Abu Dhabi Emirate's 
onshore production.  It is 60% owned by ADNOC and 40% owned 
by international oil company partners.  Currently ADCO is 
producing around its capacity of 1.2 mb/d and has plans to 
add 100,000 barrels per day to capacity by end 2005 and 
another 100,000 barrels per day by end 2006.  (Note: This 
pace is somewhat slower than Al-Hamili,s public claim.)  we 
understand ADCO is developing a plan to increase production 
capacity to 1.5 - 1.6 mb/d by the end of the decade.  Much of 
the increase in production would need to come from ADCO's 
smaller fields, which would be more expensive to exploit (ref 
F). 
 
6. (C) The Abu Dhabi Marine Operating Company (ADMA/OPCO) 
operates ADMA's offshore concessions.  It is also 60% ADNOC 
owned and 40% owned by the international oil companies. 
ADMA-OPCO currently produces approximately 500,000 to 600,000 
b/d of oil and 1 bcf per day of natural gas.  We understand 
the company has a program to increase sustainable production 
capacity 150,000 barrels per day by 2008 and was developing a 
plan for increasing production capacity by another 200,000 
barrels per day (from currently undeveloped fields). 
ADMA/OPCO can currently produce 600,000 barrels per day -- 
which we understand it is doing -- but cannot sustain this 
production in the long term.  The program involves building a 
pipeline from ADMA/OPCO's offshore facilities on Das Island 
to onshore gas processing facilities.  With this pipeline and 
some upgrades, ADMA/OPCO should be able to produce at 600,000 
barrels per day for the next 25 years (ref d). 
 
7. (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 b/d, which it plans to 
increase to 600,000 b/d in the next three to five years. 
Currently, this company is 88% owned by ADNOC and 12% owned 
by the Japanese, but ADNOC is in final negotiations with 
ExxonMobil for a 28% stake in the Upper Zakum field. 
 
Constraints on Production Increases 
----------------------------------- 
 
8. (C) Several factors limit the Abu Dhabi emirate's ability 
to raise oil production capacity.  It faces the same physical 
and personnel constraints as other world oil producing 
countries, with steel, drilling rigs, and trained engineers 
in short supply.  In addition, international oil company 
executives note that Abu Dhabi needs to change its 
"political" culture to be more aggressive in developing its 
assets.  Both ADNOC and the SPC have a very conservative 
mindset about preserving Abu Dhabi's oil wealth for the long 
term rather than immediately exploiting it.  Currently 
ADNOC's reservoir management policy requires fields to be 
able to produce at the same rate for 25 years.  It appears 
that Abu Dhabi Crown Prince Sheikh Mohamed bin Zayed is 
pushing ADNOC to move more quickly, but that his older 
brother UAE President and SPC chair Khalifa (and some of his 
key advisors) still take a more cautious approach.  The 
current fixed price arrangements between ADNOC and its IOC 
partners act as a disincentive for the international oil 
companies to aggressively develop new oil resources.  In 
addition, the current oil concessions expire in 2014 (ADCO) 
and 2018 (ADMA/OPCO).  According to at least one oil company 
executive, the short remaining life of the concessions also 
discourages the IOCs from making the kind of aggressive 
investments that Abu Dhabi needs to dramatically increase the 
production of its fields. 
 
Critical Infrastructure Protection 
---------------------------------- 
 
9. (S) Abu Dhabi recognizes that protecting its onshore and 
offshore infrastructure is critically important.  Over the 
past four years, the Abu Dhabi National Oil Company (ADNOC) 
has commissioned risk assessment studies and taken steps to 
boost the physical security of its facilities, but the 
process is not complete, and the UAE's facilities -- 
particularly its offshore ones -- remain vulnerable to 
attack.  All of Abu Dhabi's exported oil goes through one of 
three terminals, the offshore Das Island and Zirku facilities 
and the onshore Jebel Dhana terminal.  These terminals are 
considered to be Abu Dhabi's most critical choke points. 
Although a terrorist attack or other disruption could 
temporarily shut down exports and production, ADNOC officials 
maintain that the UAE would be able to continue exporting by 
using its reserves.  ADNOC officials maintain that their 
focus on safety and preventing/minimizing the impact of major 
industrial accidents has reduced the number of choke points 
and may help to mitigate the impact of a terrorist attack. 
UAEG officials have told us they are more concerned with the 
vulnerability of water and power facilities, since their 
disruption would have a more immediate impact on UAE 
residents. 
 
Major Projects 
-------------- 
 
10. (C) The most significant ongoing energy projects in the 
UAE are the development of Upper Zakum and the Dolphin 
project to build a pipeline to bring natural gas to the UAE 
from Qatar.  ADNOC has entered into final negotiations with 
ExxonMobil that will grant the U.S. company a 28 percent 
equity stake in Upper Zakum, 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.  With ExxonMobil's technical 
contributions, ADNOC hopes that Upper Zakum's oil production 
will gradually rise from 530,000 to 600,000 b/d in three 
years to 700,000 bpd and beyond.  We understand that the 
remaining negotiations are about the fiscal terms of the 
agreement.  ExxonMobil CEO Lee Raymond met with UAE President 
Khalifa on October 2 in order to allow Abu Dhabi to raise any 
major outstanding issues.  We understand that the Emiratis 
did not raise any major issues and that the Supreme Petroleum 
Council is to meet this month to make a final decision on the 
Upper Zakum tender. 
 
11. (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 tells us that they 
are not concerned about finding demand to meet additional 
supply and that the UAE hopes eventually to 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. 
 
Buying Iranian Gas 
------------------ 
 
12. (C) On October 3, the UAE closed its IPO for a 34.3% 
share of a new gas company, Dana Gas, which is partially 
owned by Crescent Petroleum in Sharjah emirate.  This company 
will be purchasing Iranian gas from the Salman field.  The 
Iranians are building a pipeline to Crescent Petroleum's 
offshore platform in the Mubarak field (shared by Sharjah and 
Iran).  Crescent is building the pipeline and other 
infrastructure on the UAE side of the border to bring in and 
utilize the gas.  Ambassador, CG Dubai, and State A/S Tony 
Wayne have raised USG concerns about this project with UAEG 
officials and officials from Abu Dhabi, Sharjah, and Ras 
Al-Khaima emirates. 
 
Megaports 
--------- 
 
13. (U) On May 11, the Dubai Government and the USG signed a 
Memorandum of Understanding to implement DOE's Megaports 
Initiative at Dubai Port.  DOE will supply Dubai Customs with 
equipment, materials, and training for the purpose of 
detecting and interdicting illicit trafficking in nuclear and 
other radioactive materials.  DOE plans to install 8-10 
radiation portal monitors, and are looking at a 9 month to 1 
year set up period.  The MOU requires Dubai customs to 
provide the USG with data on detections or seizures of 
radioactive material made as a result of the DOE-provided 
equipment.    The site survey and stakeholders meetings have 
taken place, and a DOE engineering survey is currently 
underway in Dubai. 
 
 
SISON