UAE ANNOUNCES NEAR TERM OIL PRODUCTION CAPACITY

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 004104

SIPDIS

DEPARTMENT FOR NEA/ARPI AND EB/ESC/IEC/EPC
ENERGY FOR MOLLY WILLIAMSON
NSC FOR HUTTO
WHITE HOUSE FOR OVP KEVIN O'DONOVAN

E.O. 12958: DECL: 09/26/2015
TAGS: ECON EPET ENRG TC
SUBJECT: UAE ANNOUNCES NEAR TERM OIL PRODUCTION CAPACITY
INCREASES


Classified By: Ambassador Michele J. Sison for reasons 1.4 (b and d).

This message contains business proprietary information.
Please protect.


1. (C) Summary: On September 25, UAE Minister of Energy
Al-Hamili announced that the UAE would raise its oil
production by 200 kb/d by March 2006, which tracks with what
we have been told privately by Abu Dhabi National Oil Company
(ADNOC) officials. The same day, Exxon Al-Khaleej President
Frank Kemnetz told Ambassador that Exxon/Mobil President Lee
Raymond would be visiting to the UAE, Qatar, and Saudi Arabia
the week of October 1-5, and would try to move forward
negotiations with the UAE over Exxon's bid for a 28% stake in
the Upper Zakum field. Kemnetz (please protect) also said
that large increases in Abu Dhabi's production capacity (to 4
mb/d) would require senior officials to develop a more
aggressive mind set toward development. He said that Abu
Dhabi Crown Prince Sheikh Mohammed bin Zayed was pushing
ADNOC in that direction, but that President Khalifa still
appeared to be more cautious. Kemnetz also commented that
the tight fiscal terms in Abu Dhabi's contracts with its
international oil company (IOC) partners acted to discourage
large scale foreign investment. Occidental Petroleum GM
David Scott (please protect) has told us that Abu Dhabi's IOC
partners were reluctant to engage in large scale investment
because their concession agreements would run out between
2014 and 2018. End Summary.

UAE Increasing Capacity by 200 kb/d by 2006
--------------


2. (U) On September 25, on the margins of the Emirates Center
for Strategic Studies and Research's "Gulf Oil and Gas"
conference, UAE Minister of Energy Mohammed bin Dha'en
Al-Hamili announced that the UAE would raise its crude oil
production capacity by 200,000 barrels per day to 2.7 mb/d by
March 2006. He explained that the UAE would add 100,000
barrels per day by 4th quarter 2005 and an additional 100,000
barrels per day 1st quarter 2006 primarily from onshore
fields. Al-Hamili said that the UAE would produce about 2.5
mb/d during the month of October. He also reiterated OPEC's
commitment to supply the market with the oil it needed

Exxon on Production Constraints
--------------


3. (C) On September 25, Frank Kemnetz, the president of
Exxon/Mobil's Arabian Gulf subsidiary, told Ambassador and
EconChief that Exxon's CEO Lee Raymond would be visiting the
region from October 1 to 5 and would try to meet UAE
President Khalifa bin Zayed to discuss the ongoing
negotiations over Exxon/Mobil's bid for a 28% stake in the
Upper Zakum field. Kemnetz said that the negotiations were
down to a few items -- "mostly the money" -- and Raymond
wanted to move them forward.


4. (C) Kemnetz also discussed the "political" constraints to
increases in Abu Dhabi's oil production. He said that, with
the appropriate investment, Abu Dhabi could increase its
production capacity to 4 mb/d in the medium term, but that it
would also require ADNOC and Abu Dhabi's Supreme Petroleum
Council (SPC) to be more aggressive in developing their
assets. He noted that both organizations had a very
conservative mindset about preserving Abu Dhabi's oil wealth
for the long term, rather than immediately exploiting it.
(Note: Currently, ADNOC's reservoir management policy
requires fields to be able to produce at the same rate for 25
years. End Note) Kemnetz said that he understood that Abu
Dhabi Crown Prince Sheikh Mohammed bin Zayed (MbZ) was
pushing for more aggressive oil sector development, a point
which other oil executives have confirmed to us. Kemnetz
noted, however, that UAE President (and SPC Chair) Sheikh
Khalifa still appeared to have a more cautious approach. In
August, BP Deputy representative Nicholas Cochrane-Dyet,
drawing a comparison with MbZ's push for quicker development
of Abu Dhabi's oil resources, had also commented to EconChief
that President Khalifa and some of his key advisors on the
SPC (including his key financial advisor Mohamed Habroush
Al-Suwaidi) were "cautious" in their approach to development.

It's the Money
--------------


5. (C) Kemnetz also emphasized that the current fiscal
arrangements between Abu Dhabi and its international oil
company (IOC) partners acted as a disincentive to aggressive
development of new oil resources. He noted that Abu Dhabi's
current fiscal terms were the toughest he had seen in his
career in the oil industry. "The government takes something
like 99 percent" of the revenues, he said. Kemnetz explained
that these terms worked in the past, but discouraged the kind
of new investment that Abu Dhabi needed to really develop new
capacity. Cochrane-Dyet echoed this view, saying that the
Abu Dhabi "finance guys" were "tight with a dollar."

Or the Concessions?
--------------


6. (C) In a separate conversation with Econchief, Occidental
Petroleum GM David Scott stated that the oil majors were
reluctant to make the kind of aggressive investments that Abu
Dhabi needed to dramatically increase its production because
of the short remaining life of the oil field concessions as
well as the tight fiscal terms of the current arrangements.
He stressed that more nimble companies (i.e., Oxy) would be
very interested in breaking into Abu Dhabi's upstream oil
sector. (Note: In response to Econchief's question about
whether the need to renew concession agreements served to
discourage the IOCs from large scale investments in Abu
Dhabi's oil sector, Exxon's Kemnetz had replied that renewing
the concessions was on Exxon's mind and it was a subject that
Abu Dhabi needed to start focusing on. The ADCO (onshore)
concession expires in 2014; the ADMA-OPCO (offshore)
concession expires in 2018. Embassy understands that
preliminary discussions are taking place between ADNOC and
its international partners on renewing the concessions. End
Note.)


7. (C) Comment: Al-Hamili's remarks on oil production
capacity increases track with what he and ADNOC officials
have told us in private. Onshore production is currently 1.2
mb/d and will be raised to 1.4 mb/d by the end of 2006 at the
latest. It is unusual, however, for a UAE official to
publicly discuss production or plans to increase capacity.
ADNOC has a number of plans and programs to gradually
increase oil production capacity over the next few years, but
Exxon's points about the essentially conservative nature of
ADNOC and the SPC track with what other western oil
executives have told us. End Comment.
SISON