SUSTAINING ENERGY DIALOGE - UAE

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 002624 SIPDIS STATE PASS USTR - BELL ENERGY FOR MOLLY WILLIAMSON NSC FOR HUTTO E.O. 12958: DECL: 06/12/2010 TAGS: ECON EPET ENRG ETRD ELAB TC SUBJECT: SUSTAINING ENERGY DIALOGE - UAE REF: A. STATE 96427 ¶B. ABU DHABI 1872 Classified By: (U) Classified by Ambassador Michele J. Sison for reason s 1.4 (B) and (D) ¶1. (C) Summary: On June 12, Ambassador met with UAE Energy Minister Al-Hamili as part of our continued dialogue on energy issues, to include briefing him on U.S. efforts to spur conservation and improve energy efficiency and exchanging views on the volatile oil supply situation. Al-Hamili noted that he had been tracking several of President Bush's recent speeches on the subject, mentioning POTUS' May 25 remarks at a Shell hydrogen fueling station. Al-Hamili complimented the U.S. on its conservation efforts and noted that the UAE would be bringing on 200,000 barrels per day in production capacity by end-2005/early 2006. He said that he thought oil supply and demand were roughly in balance, and linked current price fluctuations to fears of sharply limited spare production capacity. Al-Hamili expressed concern that oil producers would not be able to keep up with increased demand, even though $50 per barrel oil made more investments attractive. He noted that the UAE and other Gulf states were facing difficulties in getting companies to bid on major oil and gas projects, since the "good firms" were already overwhelmed with work. Al-Hamili also asked about ongoing U.S. - UAE Free Trade Agreement negotiations. End Summary. ¶2. (C) Ambassador and Econchief met with UAE Energy Minister Mohammed bin Dha'en Al-Hamili on June 12 to deliver ref A points, the first day he was in the country and available for a meeting. She stressed our shared responsibilities for market stability and explained U.S. efforts to spur conservation and energy efficiency. Ambassador underscored that that we remain a dependable and reliable partner in global energy markets. She shared U.S. concerns about the tight oil supply situation and the increases in oil production capacity that would be needed to fuel world economic growth. Ambassador shared recent POTUS speeches on energy and briefed on the upcoming visit of Molly Williamson, Senior Foreign Policy Advisor to Secretary of Energy Bodman. Al-Hamili welcomed Williamson's visit. ¶3. (C) Al-Hamili complemented U.S. efforts on conservation and improving fuel economy standards. He said that he had always been reluctant to drive a SUV, because they were "gas guzzlers," even though gas prices in the UAE were relatively cheap. He added, however, that his Ministry was pushing the UAEG to raise gas prices or lift the gasoline price cap entirely, since retail companies were losing around two dirhams (50 cents) per gallon on gas sold in the UAE. He also said that the UAE would be adding another 200,000 barrels per day in capacity by the end of 2005 -- early 2006. He joked, however, that he worried about the USG's investment in alternative energy sources, jesting that as an energy producer "we (Emiratis) feel conservation is good, but alternatives are bad." He then expressed his real concern that supply would not be able to keep pace with growing demand. ¶4. (C) Ambassador asked whether the UAE was experiencing constraints such as shortages of steel or drilling rigs to increasing production capacity. (This had been a theme raised by several U.S. and other energy companies operating in Abu Dhabi. Ref B) Al-Hamili agreed that this could be a problem in bringing new projects on line, but shouldn't affect existing projects. In discussing foreign investment in the UAE's oil sector, Al-Hamili added that countries such as the UAE, Kuwait, Saudi Arabia, and Qatar were having problems getting companies to bid on large oil and gas projects. There were a limited number of qualified companies to bid on large projects, and they were overwhelmed with work. The companies that would bid wanted a premium for their services. ¶5. (C) Al-Hamili viewed current supply and demand for oil as roughly in balance, adding that U.S. stocks were increasing. He explained that he found the continuing high -- and volatile -- oil prices disturbing, noting that oil producers were used to daily price fluctuations of a few cents, not dollars. He speculated that the continuing price volatility represented market fears about limited spare production capacity. He told Ambassador that he thought world spare production capacity was being sharply squeezed and might be down to one to two million barrels. He questioned whether the Saudis had the "real" spare capacity they claimed. Al-Hamili said that the UAE was producing at a level it was "comfortable" with; one that it was sure would not damage the reservoirs or require flaring. ¶6. (C) Al-Hamili then asked Ambassador about the progress of the U.S. - UAE Free Trade Agreement. He said that the USG needed to recognize that the UAE relied heavily on foreign labor, and that meeting all of the ILO's requirements could be difficult. He agreed, however, that a solution could be found. Al-Hamili also commented that the Dubai businessmen sometimes felt like they were being "kept in the dark" and that the UAEG had not done as much outreach as should have. Al-Hamili noted that the USG appeared to be pushing for quick negotiations and that the UAE negotiators were not used to that pace. As an aside, he also commented that the number of UAE FTA negotiations was proliferating, with the UAE talking to the EU, the U.S., Australia, and others. SISON