US embassy cable - 03ABUDHABI1513

S E C R E T SECTION 01 OF 03 ABU DHABI 001513 
 
SIPDIS 
 
DEPT FOR NEA/RA, NEA/ARP, INR/EC, EB/IEP, EB/CBA 
 
E.O. 12958: DECL 03/30/13 
TAGS: EPET, PGOV, ENRG, ECON, EINV, IR, TC 
SUBJECT:  (C) DOLPHIN GAS PROJECT:  STILL NO GAS SALES 
AGREEMENTS AS UAE SHAYKHS WRANGLE OVER PRICING 
 
THIS MESSAGE CONTAINS BUSINESS PROPRIETARY INFORMATION -- 
PLEASE PROTECT ACCORDINGLY. 
 
1.  (U) Classified by Ambassador Marcelle M. Wahba for 
reasons 1.5 (B) and (D). 
 
2.  (S)  SUMMARY AND COMMENT:    Almost one year 
after the selection of U.S. firm Occidental 
Petroleum to assume a 24.5 percent stake in the 
Dolphin project to pump natural gas from Qatar to 
the UAE, actual gas purchase agreements in the 
UAE remain unsigned.  Politics as much as 
business can be blamed for the delay, since an 
actual agreement will depend upon deliberations 
among three top UAE leaders:  Shaykh Muhammad Bin 
Zayid Al-Nahyan (the de facto Defense Minister 
whose Offsets Group owns 51 percent of Dolphin), 
Shaykh Muhammad Bin Rashid Al-Maktoum (de facto 
ruler of Dubai Emirate which expects to buy at 
least half of Dolphin's gas) and, perhaps most 
importantly, Shaykh Khalifa Bin Zayid Al-Nahyan 
(the de facto Abu Dhabi ruler who ultimately must 
decide whether and by how much to subsidize 
Dubai's gas supply -- and at whose expense).  The 
private sector participants in Dolphin (Oxy and 
TotalFinaElf) are growing increasingly nervous 
about the multi-billion dollar commitments they 
shortly will be called upon to make -- which if 
not backed by supply agreements will represent 
unsecured risks to shareholders.  Offsets 
officials are confident that agreements will be 
forthcoming eventually, but how these deals are 
negotiated and under what terms will bear close 
watching since they will likely provide key 
insights into emerging UAE leadership dynamics. 
END SUMMARY AND COMMENT. 
 
3.  (C)  WHERE ARE THE SALES CONTRACTS?  Almost 
one year after Occidental replaced the ill-fated 
Enron as a 24.5 percent stakeholder in the 3.5 
billion USD Dolphin gas project, no sales 
agreements have been signed.  These so-called 
"take or pay" contracts are crucial, since they 
obligate a customer to assume financial liability 
for the gas to be provided.  Without such 
contracts, the participants in the project 
(Occidental is joined by France's TotalFina/Elf 
as a 24.5 equity holder and Abu Dhabi's Offsets 
Group holds the other 51 percent) could find 
themselves in the position of having built a 3.5 
billion USD pipeline with no customers -- just a 
huge liability which, at least for the two 
private oil firms, would prove hard to explain to 
shareholders. 
 
4.  (C)  COMMERCIAL TERMS OR SUBSIDIES?  Few here 
doubt that purchase agreements will eventually 
materialize, but timing is at issue.  Basically 
put, the UAE Offsets Group (UOG) and its chief 
patron Shaykh Muhammad Bin Zayid Al-Nahyan (MBZ - 
- the de facto Defense Minister), seek a 
commercial price for their gas.  That likely will 
not prove a problem in wealthy Abu Dhabi, but 
could be at issue in Dubai, where as much as 
fifty percent of the Dolphin gas is to be 
marketed.  UOG believes a commercial price is 
necessary because it is the only basis upon which 
the private sector participants in the project 
will be able to obtain financing.  However, the 
de facto ruler of Dubai, Shaykh Muhammad Bin 
Rashid Al-Maktoum (MBR), seeks a subsidized gas 
price which will reflect both foregone access to 
cheaper Iranian gas, and the special relationship 
between oil-rich Abu Dhabi and its oil-poor 
northern sibling, Dubai (not to mention MBR's 
hopes to buy the gas himself and sell it onward 
to end-users in Dubai at a mark-up, thereby 
generating a nice revenue stream for the Al- 
Maktoum family). 
 
5.  (C)  THE IRANIAN OPTION:  Dubai's gas options 
from Iran would include the close-by Sirri field, 
which while insufficient to meet more than a 
fraction of Dubai's needs, would easily be 30-40 
percent cheaper than market price for Dolphin's 
Qatari gas.  Iranian oil officials have also said 
that they could provide larger gas supplies from 
South Pars at "very competitive" rates, although 
it is unclear how much cheaper this gas might be 
than gas from Dolphin.  (Note:  Dolphin struck a 
hard bargain with the Qataris on pricing, but 
this must be balanced by the recognition that the 
Iranians are increasingly hungry for ready 
markets for their growing gas production 
capacity.  End Note.)  MBR has sought through the 
occasional vague public utterance regarding 
Dubai's "energy options" to reinforce the message 
-- accurate in our view -- that the decision to 
go with Dolphin gas reflects political (read: Abu 
Dhabi) considerations more than it does 
commercial (read: Dubai) ones. 
 
6.  (S)  THE TWO MUHAMMADS WRANGLE OVER HOW TO 
APPROACH KHALIFA:  Under the circumstances, it 
would appear that both MBZ and MBR have a vested 
interest in securing the agreement of Abu Dhabi 
Crown Prince Khalifa bin Zayid -- who controls 
Abu Dhabi's purse strings -- to subsidize 
(probably sub rosa) the gas to be supplied to 
Dubai out of Abu Dhabi's large coffers.  But the 
ticklish issue to be addressed is how the two 
Muhammads will agree to a set price/subsidy 
request, and how MBZ's elder half-brother Khalifa 
is to be approached.  MBZ, who needs Khalifa's 
approval for his many defense projects, is no 
doubt reluctant to go to him on Dolphin, and 
certainly not without MBR in tow.  MBR, from what 
we have heard, is not close to nor well-regarded 
by, the Abu Dhabi Crown Prince.  (Note:  It is 
reliably reported that Shaykh Khalifa recently 
cut Abu Dhabi's direct oil subsidy to Dubai, 
citing budgetary pressures.  Oil execs well- 
connected to the Abu Dhabi leadership claim, 
however, that the cut was intended to send the 
signal to MBR that he can no longer end-run 
Khalifa by appealing for assistance directly to 
the aging Shaykh Zayid.  End Note.) 
 
7.  (S)  AFTER YOU MY DEAR ALPHONSE:  Interested 
observers in a position to know suggest that what 
is currently happening is a Shaykhly form of the 
game of "chicken,"  with both MBZ and MBR waiting 
for the other to make the first move (i.e., to 
broach the issue via trusted subordinates).  The 
two enjoy a close but complicated relationship, 
since MBR (as nominal Defense Minister) is both 
theoretically MBZ's boss (MBZ's official title is 
Armed Forces Chief of Staff) as well as senior to 
him in protocol terms since he is a Crown Prince. 
For MBZ, the higher the price he can get from 
Dubai, the lower the subsidy will be that must be 
asked of Khalifa, while for MBR, the lower the 
price the more Dubai (whose own oil resources are 
rapidly running out) will be able to benefit. 
Yet while this would appear to put the two at 
loggerheads, in a political sense each needs the 
other -- MBZ needs Dubai's support for his 
candidacy as possible future Abu Dhabi Crown 
Prince, and MBR needs MBZ's support to help 
ensure that Abu Dhabi's historical generosity to 
Dubai does not fall off sharply when the more 
fiscally conservative Khalifa succeeds his father 
as Abu Dhabi ruler and likely President of the 
UAE.  Thus, given the sensitivities involved, it 
is unlikely that the two could meet personally to 
resolve the matter until trusted intermediaries 
had first negotiated the deal -- and this does 
not yet appear to have happened. 
 
8.  (S)  SHAYKHS WAIT, COMPANIES STEW:  In these 
delicate situations, the usual approach here is 
simply to wait.  MBR is turning up the heat by 
continuing to put it about that Dubai has cheap 
gas alternatives (namely, Iran).  MBZ is having 
the senior Dolphin leadership brief Khalifa on 
the project -- and the briefing will reportedly 
stress the importance of commercial terms (i.e., 
higher gas prices).  Nonetheless, while almost 
all here are sure the situation will ultimately 
resolve itself, Dolphin's equity partners worry 
that unless a deal is struck and struck soon, 
they could face the unpleasant task of assuming 
major financial liabilities on the basis of a 
hunch that everything will work out.  We would 
judge that both Occidental and TotalFinaElf would 
in that circumstance swallow hard and forge ahead 
-- they have privately said as much -- but they 
clearly are both hoping that the Shaykhs will be 
able to resolve the matter before it gets to that 
point.  How the ultimate gas sales agreements are 
struck, and under what terms, may provide 
interesting insights into evolving leadership 
dynamics in the UAE. 
 
Wahba