OVERVIEW OF OIL AND GAS IN THE UAE

S E C R E T SECTION 01 OF 05 ABU DHABI 003441

SIPDIS

STATE FOR NEA/ARPI AND EB/ESC/IEC/EPC
ENERGY FOR MOLLY WILLIAMSON AND JOHN BRODMAN
NSC FOR HUTTO

E.O. 12958: DECL: 08/08/2015
TAGS: ENRG EPET TC
SUBJECT: OVERVIEW OF OIL AND GAS IN THE UAE

Classified By: Ambassador Michele J. Sison for reasons 1.4 (B) and (D).


1. (C) Begin Summary. Oil and natural gas form the basis of
the modern economy in the United Arab Emirates, which holds 8
to 9 percent of the world,s proven oil reserves and controls
the world,s fifth largest natural gas reserves. Over 90
percent of the country,s established oil and natural gas
reserves are located in the emirate of Abu Dhabi. Under the
UAE constitution, oil and gas reserves belong to the
individual emirates and not the federal government. The UAE
accounted for 3.3 percent of total world oil production in
2004, and the Abu Dhabi National Oil Company (ADNOC) plans to
expand oil production capacity from 2.5 to 2.6 million
barrels per day (bpd) to 3.0 million bpd by 2007. ADNOC,s
Deputy CEO Abdullah Nasser Al Suwaidi expects that recent
initiatives, such as the development of the Upper Zakum
region, will contribute significantly to this capacity
increase. Natural gas production capacity is currently
between 4 and 5 billion standard cubic feet (bcf) per day and
is expected to grow as well. U.S. companies have a
considerable stake in oil and gas equipment and services in
the UAE, and their share in upstream oil and gas production
is growing. End summary.

OVERVIEW OF UAE OIL AND NATURAL GAS
--------------


2. (U) Oil in the UAE is considered fairly sweet, with
gravities in the 34-40 degree API range. Abu Dhabi is the
second leading supplier of crude oil to Japan (behind Saudi
Arabia) and is a significant oil exporter to the Far East in
general. Hydrocarbon exports are a critical part of the UAE
economy, particularly in Abu Dhabi. In 2004, total
hydrocarbon export revenues reached $38 billion, or 46% of
total exports. Abu Dhabi,s Supreme Petroleum Council (SPC)
sets policy for oil production by the Abu Dhabi National Oil
Company (ADNOC). Dubai and Sharjah both have their own oil
production and export policy. Companies in the UAE oil and
gas industry generally fall into three categories:
exploration and production, energy services and downstream
activities.


3. (U) Natural gas production and consumption is growing
considerably in the UAE. The UAE holds 212.1 trillion cubic
feet of proven natural gas reserves, accounting for
approximately 4.6 percent of the world total ) the fifth
largest reserves behind those in Russia, Iran, Qatar and
Saudi Arabia. Gas consumption has doubled over the past
decade in the UAE, and is anticipated to rise to 4.5 bcf/d in

2005. As a result, most natural gas produced in the UAE goes
to domestic markets and gas re-injection projects.

THE SUPREME PETROLEUM COUNCIL
--------------


4. (S) The Supreme Petroleum Council (SPC) is among the most
powerful bodies in Abu Dhabi,s government because it makes
the key decisions regarding the emirate,s oil policy. It is
the SPC, not the UAE Ministry of Energy, that manages the Abu
Dhabi National Oil Company and responds to OPEC issues. The
SPC holds formal meetings two to three times per year, in
addition to informal ad hoc gatherings. The SPC is organized
more like a tribal majlis (council) than a modern
institution: its twelve members make decisions on a consensus
basis, policy proposals are not always made in writing, and
personal connections are exceedingly influential. Although
UAE President Khalifa bin Zayed Al-Nahyan gives the final
word on all policies and has the power to make decisions
independently, the unanimous approval of other SPC members is
critical given social and political norms.


5. (C) In June 2004, Sheikh Khalifa (who was then Abu Dhabi
Crown Prince) replaced several members of the SPC with
younger, Western-educated technocrats and key figures from
ADNOC. The SPC has a great deal of respect for international
oil companies (IOCs) like Exxonmobil, Totalfina/Elf, BP and
Shell, and has occasionally supported them in the face of
ADNOC,s attempts to diminish their role. Nonetheless, the
SPC primarily depends upon ADNOC,s analysis of the technical
details of competing proposals (which is not entirely
invulnerable to outside influence).

ADNOC AND ITS GROUP OF COMPANIES
--------------


6. (U) The Abu Dhabi National Oil Company (ADNOC) oversees
the emirate,s oil and natural gas production, participating
heavily in both upstream and downstream activities. ADNOC
is a large state-owned monopoly, holding a majority share in
all operating companies in the UAE. ADNOC and its Group of
Companies comprise 18 ventures, which are devoted to
exploration and production, seismic studies, onshore and
offshore drilling operation, oil refining, gas processing,
storage, transportation, shipping, port operation,
distribution of refined products and other support services.
These companies are involved in the production of crude oil,
gas, condensate, natural gas liquids (NGL),liquid natural
gas (LNG),liquefied petroleum gas (LPG),refinery products,
polymers, lubricants, fertilizers, and drilling chemicals.
The three main operating companies in the ADNOC Group of
Companies are ADMA-OPCO, ZADCO and ADCO.


7. (C) The Abu Dhabi Marine Operating Company (ADMA-OPCO)
operates ADMA,s offshore concessions. These include two
major oil and gas producing fields: Umm Shaif and Zakum.
Zakum is one of the world,s largest offshore oilfields.
ADMA-OPCO currently produces approximately 500,000 to 600,000
bpd of oil and 1 bcf per day of natural gas. ADMA-OPCO plans
to raise production capacity by 150,000 bpd by 2007 to 2010,
and is examining the feasibility of an additional 200,000 bpd
increase beyond that. Current shares in ADMA-OPCO are:
ADNOC, 60%; BP, 14.7%; TotalFinaElf, 13.3%; and Japan Oil
Development Company (JODCO),12%.


8. (C) The Abu Dhabi Company for Onshore Oil Operations
(ADCO) operates onshore and along the shallow waters of Abu
Dhabi,s coast. Its five main oil fields are the Asab, Bab,
Bu Hasa, Sahil and Shah fields. ADCO,s current capacity for
oil production is 1.2 million bpd, but it plans to raise
capacity to 1.3 million bpd by the end of 2005, 1.4 million
bpd by the end of 2006 and between 1.5 and 1.6 million bpd by

2011. ADCO,s General Manager Kent Wells told Econchief in
August 2005 that he does not believe that ADCO could increase
production much beyond this figure. It could potentially
increase production to around 1.8 million bpd if ADNOC
changed its policy of maintaining current production capacity
for a period of 25 years. Wells also said that he thought
ADCO was expanding capacity as quickly as it reasonably
could. ADCO,s shareholders are: ADNOC, 60%; BP, 9.5%;
Shell, 9.5%; TotalFinaElf, 9.5%; ExxonMobil, 4.75%; Mobil,
4.75%; and Partex, 2%.


9. (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 bpd, which it plans to
increase to 600,000 bpd in the next three to five years. As
per the original ZADCO mandate, ADNOC owns 88 percent and
JODCO owns 12 percent. However, ADNOC has all but awarded a
28 percent equity stake in Upper Zakum to ExxonMobil. This
will roughly double the overall U.S. share of foreign
participation in the UAE oil sector.

OIL AND GAS COMPANIES IN THE OTHER EMIRATES
--------------


10. (C) The remainder of UAE oil and gas production outside
of Abu Dhabi is concentrated in the emirates of Dubai and
Sharjah. According to official public figures, Dubai
produces roughly 250,000 bpd of oil and has 4.1 trillion
cubic feet of natural gas reserves. However, Al Suwaidi has
reported that oil production is actually closer to 130,000
bpd. The government of Dubai controls Dubai,s oil and
natural gas through the government-owned Emirates National
Oil Company (ENOC) and the Dubai Natural Gas Company (DUGAS).
A large holding company, ENOC controls 28 subsidiaries.
ENOC is primarily concerned with upstream and downstream oil
and gas activities, but it is also involved in many other
initiatives, from information technology to chemical storage.
The Dubai Petroleum Company (DPC),a wholly owned subsidiary
of ConocoPhillips (U.S.),is the major operator in Dubai and
holds a 32.5 percent share of production.


11. (C) Sharjah produces approximately 15,000 bpd of oil,
almost entirely from the Mubarak field, and holds 10.7
trillion cubic feet of proven natural gas reserves. The
Sharjah Petroleum Council replaces the Sharjah Department of
Petroleum and Minerals, and manages Sharjah,s oil policy.
Sharjah-based Crescent Petroleum is a privately-owned company
that holds the full concession to Sharjah,s offshore Mubarak
field, and supplies oil and gas to Sharjah and the northern
emirates. The Mubarak field lies on the border between Iran
and Sharjah, splitting production and revenue between Sharjah
and Iran. Crescent Petroleum has most recently founded a
1.63 billion dollar company, Dana Gas, which hopes to bring
in gas from Iran to satisfy demand for natural gas in the
northern emirates (subject to approval from the UAE federal
government).

OTHER COMPANIES
--------------


12. (SBU) The main International Oil Companies (IOCs) present
in the United Arab Emirates are BP, Shell, TotalFinaElf,
ExxonMobil, JODCO and Tokyo Electric Power Company (TEPCO).
IOCs in the UAE still hold concessions, unlike in fully
nationalized oil markets. However, IOCs may only hold a
minority share in Abu Dhabi,s operating companies and
concession agreements do not tend to favor the IOCs. This
regulation sharply limits IOC profit opportunities.
ExxonMobil is the only U.S. company active in Abu Dhabi,s
upstream oil production, but its prominence in the region is
likely to increase due to its unique investment in research
and development activities.


13. (U) In 2004, U.S. companies held a 45 percent market
share in oil and gas field equipment, spare parts and
services ) even though they controlled a mere 13 percent
share in upstream oil and gas production. This is
attributable in part to the advanced technology particular to
U.S. service providers like Halliburton and Baker-Atlas.
Halliburton, Baker-Atlas, Schlumberger and other service
providers act as an oligopoly and enjoy exceedingly large
profit margins.


14. (SBU) There are three levels of exploration and
production companies (EPCs) in the UAE. Only Bechtel (U.S.)
and Technip (France) work on contracts exceeding 300 million
dollars. Unlike in the U.S., EPC companies at this level
must agree to lump-sum contracts instead of cost-plus
contracts; these greatly increase risk to the contractor that
its costs will squeeze profit margins. In the under-300
million dollar category, several companies (including
Bechtel) work primarily with engineering, and face both
greater competition and smaller risk. The final level of
EPCs handle front end engine design (FEED) and project
management consulting (PMC),and entail minimal risk to EPCs.



15. (SBU) General suppliers in the UAE are tender based, and
either supply directly to ADNOC or to an EPC contractor.
ADNOC requires that a minimum of five potential suppliers bid
on each project. Given the increased demand for oil and gas
production, ADNOC is often unable to find five qualified
bidders and must then lower its standards to allow more
companies to participate. This policy also prevents the sale
of exclusively patented products by U.S. companies because
there would only be one bidder in such cases. As a result,
ADNOC often buys old technology instead of newer,
cutting-edge products. Before participating in ADNOC,s
bidding process, suppliers must first establish a local agent
and pre-qualify with ADNOC. Many U.S. companies lament
ADNOC,s lengthy pre-qualification practice: although ADNOC
states that the process takes 3 to 8 months, it can take over
a year in some cases.

PRODUCTION AND CAPACITY TARGETS
--------------


16. (C) ADNOC Deputy CEO Abdullah Nasser Al-Suwaidi told a
visiting Washington delegation in June 2005 that the UAE was
producing at its maximum sustainable rate of 2.5 to 2.6
million bpd. The UAE,s peak production capacity is
currently 2.7 bpd. The UAE should be able to easily produce
a sustainable 2.7 million bpd and a peak 2.9 million bpd by
early 2006, with a planned 200,000 bpd increase in onshore
production and 150,000 bpd offshore. The UAE plans to raise
its sustainable production rate to 3 million bpd by 2007.
Al-Suwaidi told the Ambassador in 2004 that Abu Dhabi has a
plan to increase oil production capacity to 4-4.5 million bpd
in the long term. The UAE is also working to increase
production of condensates, which now constitute an additional
220,000 bpd that do not count toward official OPEC production
figures. In an emergency, the UAE could produce an
additional 200,000 bpd of oil if it abandoned its strict
no-flare policy. ADNOC tends to be conservative with raising
capacity because it wants to maintain steady production rates
for the next 25 years. However, ADCO,s Kent Wells told
Econchief that he thought ADNOC could raise onshore
production by 200,000 to 300,000 bpd in a crisis, without
flaring. Foreign oil companies report that the UAE will
begin investing this year in another wave of development,
which would bring an additional 200,000 bpd of onshore and
100,000 bpd of offshore oil production online by 2008 or

2009.

17. (C) Several factors limit the UAE,s ability to raise oil
production capacity. The UAE faces the same physical and
personnel constraints as other world oil producing countries,
while manufacturers of drilling rigs, piping and raw
materials cannot expand production quickly enough to meet
demand. In terms of bringing new projects online, the UAE
has been affected by current world shortages of steel and
drilling rigs. According to Frank Kemnetz (protect),
President of ExxonMobil Al-Khaleej, ADNOC is reluctant to pay
higher prices for materials and supplies, even if it means
postponing a lucrative project. Wells said that because
suppliers know that the UAE is a good long-term customer,
they will push prices exactly as much as they can without
hurting the relationship, then back off.


18. (C) Another major world production constraint is the lack
of trained petroleum engineers and geologists, as a
generation of experienced engineers reach retirement age.
This is a particular problem in the UAE because of
Emiratization (creating jobs for Emirati nationals): many
newly-hired Emiratis lack necessary training and experience,
despite their high levels of education. In the last few
months, ADCO reports that it has been losing engineers to
higher salaries in other countries when it should be growing
its workforce. In addition, Al-Suwaidi, Mohammed bin Dha,en
Al Hamili, UAE Minister of Energy, and many Western oil
executives have complained that it is difficult to compel
contractors to bid on projects. Even though high oil prices
make investments more attractive, Al-Hamili noted that the
&good firms8 are too overwhelmed with work to take on new
ventures. This is particularly troubling for the UAE, whose
oil fields require an increasing level of technology and
expertise. ADNOC must traditionally choose from at least
three bids for every exploration and production project, but
often cannot find three willing and capable contractors.
Al-Suwaidi expressed hope that the SPC may be persuaded
toward greater leniency about the three-bid rule in the face
of changing circumstances.


19. (U) Gas processing capacity in the UAE is currently
between 4 and 5 billion cubic feet per day (bcf/d),and
should rise to 7 bcf/d in 2008. The conclusion of the third
phase of the onshore gas development (OGD-3) and of the
second phase of the Asab gas development (AGD-2) will
generate this increase. Additionally, the Abu Dhabi Gas
Industries Company (GASCO) is taking the lead in a planned
annual investment of $1 billion in new gas infrastructure
over the next five years. The Dolphin Project should bring
another 2.2 bcf/d of natural gas imports, starting in 2006.

MAJOR PROJECTS: UPPER ZAKUM AND DOLPHIN
--------------


20. (C) The most significant ongoing energy projects in the
UAE are the development of Upper Zakum and the Dolphin
Project. ADNOC has entered into final negotiations with
ExxonMobil that will grant the U.S. company a 28 percent
equity stake in Upper Zakum, leaving JODCO,s share at 12
percent and 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, where the tight rock structure traps a lot
of available oil. With ExxonMobil,s technical
contributions, ADNOC hopes that Upper Zakum,s oil production
will gradually rise from 530,000 to 600,000 bpd in three
years to 700,000 bpd and beyond. Al-Suwaidi has said that
Upper Zakum could theoretically produce 1 million bpd, but
that it would require further study. ExxonMobil,s Frank
Kemnetz told Econoff that Upper Zakum production could be
pushed to 1.2 million bpd without adverse technical
consequences, but that conservative UAE leaders want
production rates to be sustainable over the next 25 years.


21. (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 Petroleum,s David
Scott is unconcerned about finding demand to meet additional
supply; he says that Abu Dhabi Crown Prince Sheikh Mohammed
Bin Zayed hopes to eventually 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.
SISON