US embassy cable - 05ABUDHABI4741

C O N F I D E N T I A L SECTION 01 OF 05 ABU DHABI 004741 
 
SIPDIS 
 
DEPARTMENT FOR NEA/ARPI, EB/ESC/IEC/EPC 
NSC FOR HUTTO 
ENERGY FOR SENIOR FOREIGN POLICY ADVISOR MOLLY WILLIAMSON, 
SENIOR ADVISOR GETTO, AND DAS BRODMAN 
OVP FOR KEVIN O,DONOVAN 
STATE PLS PASS TO USTR 
 
E.O. 12958: DECL: 11/16/2015 
TAGS: EPET, ENRG, EINV, ETRD, PK, AF, SA, IR, IZ 
SUBJECT: ENERGY SECRETARY BODMAN'S VISIT TO THE UAE 
 
REF: ABU DHABI 4546 
 
Classified By: Ambassador Michele J. Sison for 
reasons 1.4 (B) and (D). 
 
1. (C) Summary: UAEG and Abu Dhabi government interlocutors 
told Secretary Bodman during his November 11-13 visit that 
the UAE is committed to expanding crude oil production 
(including condensates) to 4 mb/d over the next seven to ten 
years, with 200,000 b/d coming on line in early 2006.  The 
UAE is also investing in increasing refining capacity, 
including planning to build a refinery in the Emirate of 
Fujairah, which would give direct access to the Indian Ocean. 
 The Emiratis agreed with Secretary Bodman's contention that 
improved consumer-producer dialogue and transparency would 
help calm oil markets, with President Khalifa instructing his 
energy minister to discuss the idea with his GCC colleagues. 
His interlocutors welcomed U.S. investment in the energy 
sector, noting that a decision on ExxonMobil's bid for a 28% 
stake in the Upper Zakum field was expected shortly.  Several 
of the Emirati officials complained about Saudi efforts to 
block closer cooperation between the smaller states of the 
GCC, criticizing Saudi actions on the Qatar-Kuwait pipeline 
and the Qatar-UAE causeway. They expressed strong concern 
about the role that Iran was playing in the region and their 
desire that any Iraqi government not be a puppet of Iran.  In 
a business round table, U.S. businesses generally expressed 
their satisfaction with the investment environment in Abu 
Dhabi's energy sector. End Summary. 
 
2. (U) Secretary of Energy Bodman and his delegation visited 
the United Arab Emirates from November 11 to 13.  On November 
12, Secretary Bodman met separately with UAE President Sheikh 
Khalifa bin Zayed Al-Nahyan, Abu Dhabi Crown Prince Sheikh 
Mohammed 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.  In addition, Secretary Bodman held a 
roundtable meeting with U.S. business people in the energy 
sector.  On November 13, Secretary Bodman launched the Arabic 
translation of the Energy Information Administration's 
"International Energy Outlook" at a Gulf Research Center 
event in Dubai.  Secretary Bodman also gave several press 
conferences.  President Khalifa, noting that the UAE 
considered the U.S. a close friend, specifically encouraged 
further cabinet level visits to help deepen the relationship. 
 
Thanking the UAE 
---------------- 
 
3. (SBU) Secretary Bodman thanked the UAE for its friendship; 
for its generous support for humanitarian causes, including 
its $100 million donation to the U.S. for Hurricane Katrina 
assistance; for its support in the war on terror; and for its 
support to Pakistan in the aftermath of the earthquake. 
President Khalifa said he was "deeply saddened by the Katrina 
tragedy" and wished that the UAE could have helped more, a 
sentiment expressed in all the meetings.   President Khalifa 
explained that the UAE's foreign aid went beyond humanitarian 
assistance, noting that in 2003, for example, the UAE had 
allotted Pakistan $270 million in assistance and asked the 
GOP to help identify projects that would have a direct impact 
on the Pakistani economy.  He explained that UAE aid projects 
in Afghanistan were limited by the security environment, but 
that the UAE was providing economic assistance where 
possible. 
 
Producer Consumer Cooperation 
----------------------------- 
 
4. (C) Secretary Bodman also thanked the UAE for playing a 
leadership role in promoting responsible OPEC behavior in 
response to increased global demand for oil.  President 
Khalifa, Energy Minister Al-Hamili, and ADNOC,s bin Yousef 
separately told Secretary Bodman that the UAE wanted "fair" 
--not high-- oil prices.  Al-Hamili stressed that the UAE 
believes that oil prices should support world economic growth 
and investment in the oil sector.  High prices could cause a 
world-wide recession, which would harm the region. Bin Yousef 
emphasized that $70 per barrel "kills the market." 
 
5. (C) Energy Minister Al-Hamili told Secretary Bodman that 
he thought that the UAE, as a major oil producer, has a duty 
to be a responsible supplier.  He added that he thought the 
UAE -- and OPEC in general -- are doing a good job keeping 
markets supplied.  The market is "squeezed," he acknowledged, 
but there are no shortages.  Al-Hamili said that it was 
equally important to work on expanding capacity to meet 
growing demand.  He emphasized that oil producers, consumers, 
and the international oil companies (IOC) need to work 
together to expand capacity, not just in crude production, 
but in refining capacity.  He said that he hoped the U.S. 
would ease its restrictions on refineries and that the IOCs 
could be encouraged to invest some of their large profits in 
the downstream market. 
 
6. (C) Secretary Bodman urged Al-Hamili to encourage OPEC -- 
or at least its GCC members -- to provide more transparent, 
consolidated information on the steps they are taking to 
increase production.  This added information would be one 
factor that would help cut volatility in the oil markets, he 
noted.  Al-Hamili admitted that OPEC had bad PR, noting that 
the "average Joe" hated OPEC as much as he hated the major 
oil companies.   ADNOC CEO Bin Yousef said that he had "no 
doubt" that improved producer-consumer dialogue and 
coordination would be helpful in helping to minimize market 
disturbances.  He emphasized that oil is a "strategic 
commodity" and producers and consumers need to exert extra 
efforts to promote stability.  He noted, however, that ADNOC 
was not inclined to talk to the press about its specific 
plans.  After Secretary Bodman urged President Khalifa to 
promote more GCC transparency, the president instructed 
Al-Hamili to "take the idea up" with his GCC colleagues. 
 
U.S. Energy Policy 
------------------ 
7. (U) Secretary Bodman briefed each of his interlocutors on 
the U.S. and world energy landscape.  He explained that 
President Bush had signed energy legislation in August that 
would help increase the supply of energy from various sources 
over the long term by encouraging the construction of new 
liquid natural gas (LNG) terminals, encouraging the 
construction of new nuclear power plants and promoting 
greater efficiency in production.  He also explained that 
projected world-wide energy demand is projected to increase 
by over 50% by 2025, and that need for Arabian Gulf oil would 
continue to increase. 
 
Oil and Gas in the UAE 
---------------------- 
 
8. (U) Secretary Bodman asked his interlocutors for their 
thoughts on the UAE's efforts to develop its economy, on 
planned increases in production and refining capacity, and on 
investment opportunities for U.S. businesses. 
 
9. (C) ADNOC CEO bin Yousef explained that Abu Dhabi is 
currently producing about 2.7 mb/d of crude oil (including 
condensates) and planned to increase capacity to 4 mb/d 
(including condensates) over the next seven to ten years. 
(Note: In a subsequent meeting, presidential advisor Mohammed 
Habroush Al-Suwaidi confirmed that President Khalifa had 
instructed ADNOC to increase production capacity to 4 mb/d, 
although he believed that it could be accomplished more 
quickly. End Note.) Bin Yousef stated that ADNOC would add 
200,000 b/d of crude production capacity by April 2006.  Bin 
Yousef explained that ADNOC had been meeting increased demand 
by producing over its "technical rate" (the rate it could 
produce over the long term without affecting its reservoirs) 
for "some time." In the short term, he added, ADNOC could -- 
and was -- producing over its technical rate.  In the medium 
term, however, ADNOC needed to raise sustainable production 
capacity.  Bin Yousef laid out ADNOC's three-step program to 
increase oil production.   The first step is to produce above 
the technical rate.  The second step is to increase 
production capacity through de-bottlenecking and improved 
efficiency.  The third step would be to develop new fields. 
He noted that ADNOC had already approved 5-6 projects worth 
around $4 billion to improve oil and gas production. 
 
10. (C) ADNOC deputy CEO Abdulla Nasser Al-Suwaidi noted that 
the UAE's production had historically been capped by either 
OPEC or the market, so it had increased production capacity 
largely by improving production at existing reserves rather 
than developing new fields.  He said that ADNOC had much 
larger "surface capacity" (or ability to produce at the well 
head) than it produced and that it needed to de-bottleneck to 
reduce inefficiencies.  He noted that Abu Dhabi had also 
taken a decision to relax reservoir management guidelines 
somewhat, which would help speed up development of new 
production capacity.  (Note:  IOC executives have frequently 
noted that ADNOC's reservoir management guidelines are 
extremely conservative calling for 25 years with no decrease 
in production.  End Note.) 
 
11. (C) Minister of Energy Al-Hamili noted that the UAE 
needed to expand its production capacity, but that 
significant capacity increases would take time and would be 
expensive.  He reported that Gulf oil and gas producers are 
pursuing large, billion dollar projects that few companies 
could deal with.  In addition, producers are facing a 
shortage of skilled engineers -- all of which have increased 
costs more than anticipated. 
 
12. (SBU) Al Hamili also explained that the UAE is investing 
in increased refining capacity and is in the process of 
negotiating with Conoco over a joint venture project for a 
refinery in Korea 50% owned by the UAE.  In addition, the UAE 
is looking at building a new refinery in Fujairah.  Al-Hamili 
stressed that this refinery would open up a direct export 
opportunity to the Indian Ocean that would bypass the Straits 
of Hormuz. 
 
13. (C) Al-Hamili explained that gas is important to the UAE 
for power and water production and for re-injection into oil 
reservoirs.  He said that the UAE's gas reserves are similar 
to those of the U.S., but that UAE gas is sour gas.  It is 
cheaper for the UAE to buy its gas from Qatar.  He noted, 
however, that Qatar appears to have overcommitted itself.  He 
had recently asked the Qatari Energy Minister to buy more 
gas, but was told that Qatar could not make any more 
commitments until it studied what it could give.  As an 
aside, Al-Hamili said that he thought gas pricing of about 2 
per thousand cubic feet is fair for the gulf region.  In a 
subsequent meeting, President Khalifa volunteered that the 
UAE views the Dolphin project as the way to meet the UAE's 
need for power, to supply Oman, and to enable the UAE to use 
its own gas for reservoir management. 
 
U.S. Investment opportunities, FTA 
---------------------------------- 
 
14. (C) Secretary Bodman welcomed the fact that the UAE is 
one of the countries in the Gulf region that is open to 
foreign investment.  He stressed that he hoped the ongoing 
FTA negotiations would make progress toward an agreement, 
which would further develop the relationship.  President 
Khalifa said that he thought an FTA is in the best interests 
of both countries and hoped that the negotiations would move 
forward rapidly.  President Khalifa also told Secretary 
Bodman that whatever he could do to accelerate progress would 
be appreciated. 
 
15. (C) Secretary Bodman asked for thoughts about 
opportunities for U.S. businesses to participate in mutually 
beneficial projects.  President Khalifa stressed that the UAE 
has a policy of being open to foreign investment, especially 
in the energy sector.  He stressed that U.S. companies are 
always welcome for their technological expertise.  He noted, 
however that in some cases U.S. companies (especially in 
services and exploration) were reluctant to pursue 
opportunities in the UAE.  U.S. companies would say, "we have 
too much business to bid."  (Note: Abu Dhabi Crown Prince 
Mohammed bin Zayed (MbZ) later told Secretary Bodman that 
President Khalifa had been referring to pre-1985 when U.S. 
policy focused more on Saudi Arabia.  At that time, U.S. 
firms were less interested in participating in the UAE's 
efforts to increase production.  Currently, MbZ thought that 
the oil companies are very interested in the UAE.  He 
acknowledged, however, that the EPC companies are 
overstretched. End Note.) 
 
16. (SBU) Al-Hamili stressed that the UAE has always welcomed 
foreign participation in the energy sector, noting that the 
UAE has never fully nationalized its upstream oil sector and 
is one of the few countries in the region with the IOCs as 
equity partners.  Al-Hamili explained that this had been a 
specific policy of the UAE's first president, Sheikh Zayed. 
 
17. (C) Al-Hamili mentioned ExxonMobil's significant presence 
in the UAE, adding that the government would be selling it a 
28% share in the Upper Zakum field.  Al-Hamili said that 
Upper Zakum is a complex field, and that Abu Dhabi is more 
interested in "know-how" than money.  He pointed out that the 
Japanese, as current Upper Zakum equity partners, are 
interested in increasing their share of the field, but that 
Abu Dhabi wants the IOCs.  He stressed that Exxon's technical 
proposal was the deciding factor in the decision to narrow 
down negotiations to ExxonMobil only.  In a later meeting, 
ADNOC CEO Yousef said that Abu Dhabi and ExxonMobil would 
finalize the deal "hopefully in the near future." 
 
18. (C) Secretary Bodman asked Al-Hamili about the UAE's 
power and desalination needs.  Al-Hamili said that the UAE is 
facing increasing demands for both water and power, 
commenting that "we drink seawater."  The problem with 
desalination, he said, is dealing with the salt residues. 
Putting residues back into the sea raised the salinity of the 
sea water, and too high a level damages the environment. 
Al-Hamili explained that the UAE is looking at ways to spread 
the waste and minimize the damage. 
 
Problems with Saudi Arabia 
--------------------------- 
 
19. (C) President Khalifa, MbZ, and Mohammed Habroush 
Al-Suwaidi all raised concerns about Saudi Arabia with 
Secretary Bodman.  In response to Secretary Bodman's request 
 
SIPDIS 
for advice on issues of importance to the GCC, President 
Khalifa suggested that he stress GCC countries' shared 
interests and need to cooperate.  He highlighted Saudi 
Arabia's decision to block a Kuwait - Qatar pipeline that 
would supply Kuwait with needed natural gas.  He noted that 
the end result of Saudi sensitivities was that Kuwait would 
need to go to Iran for its gas, which was not in anyone's 
interest.  He stressed that relying on Iranian gas would "put 
them at the Iranians' mercy."  MbZ told the Secretary that he 
didn't understand the lack of GCC cooperation.   He stressed 
that a Qatar-Kuwait gas deal would be a "win-win" for 
everyone.  He mentioned that Prince Bandar told him that the 
Saudis had decided not to allow the pipeline because they did 
not like "the (unspecified) person" involved. 
 
20. (C) Mohammed Habroush Al-Suwaidi asked Secretary Bodman 
to encourage the Saudis to cooperate with their neighbors. 
He commented that the Saudis object to both UAE-Qatar ties 
(the causeway) and Kuwait-Qatar ties (the pipeline).  He said 
that the Saudi view is short-sighted, arguing that the Saudis 
always want to control the GCC, which is "not right."  He 
said that the states of the GCC should be "a group, not 
followers" of Saudi Arabia.  He also noted that if the Saudis 
behaved differently, the GCC would be more like the UAE 
(i.e., a closer federation).  He noted that at the founding 
of the UAE, the individual emirates pushed to retain a great 
deal of autonomy.  Late Sheikh Zayed's position was to let 
them have their autonomy relying on time to change their 
minds.  Al-Suwaidi added that the success of this policy was 
evidenced by the growing responsibilities of the federal 
government. 
 
Iraq and Iran 
------------- 
 
21. (C) Secretary Bodman discussed the role that Iraq and 
Iran are playing in the region.  President Khalifa noted that 
it was difficult to assess who is in charge in each country 
and who would take charge.  In response to Secretary Bodman's 
observation that it appeared clear that President Ahmadinejad 
appeared to be in charge in Iran, President Khalifa said "I 
hope not," adding that he feared that the person &really in 
charge8 is even worse that Ahmadinejad could be.  Al-Suwaidi 
commented that the UAE didn't care about whether a Sunni or a 
Shia government ran Iraq as long as it is "not an Iranian 
puppet." 
 
22. (C) In a subsequent meeting, MBZ elaborated on the 
leadership's view that Ayatollah Ali Khamenei is actually the 
man in charge.  In the recent Iranian elections, he said, 
Khamenei narrowed the field down from 1007 volunteers to 
eight candidates.  Whoever won would be Khamenei's man, 
"driving a train" down a track laid by Khamenei.  "The driver 
of a train can't change direction," he said, and can't 
"change speed."  All he can do is keep the engine running. 
In other words, MbZ said, it doesn't matter who is president 
in Iran. 
 
23. (C) MbZ opined that it was just a matter of time before 
Iran develops a nuclear capability.  He added that most 
people are worried about Iranian nuclear capability because 
they don't want "the mullahs" to have the bomb.  The problem, 
he said, was worse.  If Iran went nuclear the whole region 
would follow suit.  He said it is not in the UAE's best 
interest to have a nuclear-armed Iran, but he didn't know how 
to stop it.  MbZ added that the Iranians are trying to keep 
the U.S. tied up in Iraq as a way of distracting the USG. 
He said that if the U.S. and the coalition could secure Iraq, 
Iran "will blink, I think."  MbZ also added that he thought 
there was no way the USG could withdraw from Iraq now.  If it 
did, we would see a splintered Iraq or another war, which 
would destabilize the region and cut oil supplies would 
decline.  MbZ opined that the de-Baathification of the Iraqi 
military was a big mistake.  Bringing them back in was a good 
idea, but too late.  MbZ stressed that he was not just 
engaging in "20-20" hindsight, noting that he had told 
Secretary Rumsfeld this in May 2003. 
 
SIPDIS 
 
U.S. Business Views 
------------------- 
 
24. (SBU) Secretary Bodman met with U.S. business 
representatives from the energy sector.  In general, they 
said that the environment in the UAE is very encouraging to 
energy sector investors.  They asked the Secretary to use his 
good offices to encourage other GCC countries to allow more 
foreign investment.  They also noted that the UAE had pledged 
to increase oil production.  The challenge would be how to do 
that with the current shortage of supplies and contractors. 
 
25. This cable has been cleared by Secretary Bodman's party. 
SISON