(C) DOLPHIN GAS PROJECT: STILL NO GAS SALES

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