SCENESETTER - VISIT OF ENERGY SECRETARY BODMAN TO

S E C R E T SECTION 01 OF 04 ABU DHABI 004546 SIPDIS ENERGY FOR SENIOR FOREIGN POLICY ADVISOR MOLLY WILLIAMSON, SENIOR ADVISOR GETTO, AND DAS BRODMAN E.O. 12958: DECL: 11/16/2015 TAGS: EPET ENRG ETRD AE SUBJECT: SCENESETTER - VISIT OF ENERGY SECRETARY BODMAN TO UAE REF: A. ABU DHABI 4367 ¶B. ABU DHABI 4104 ¶C. ABU DHABI 3884 ¶D. ABU DHABI 3580 ¶E. ABU DHABI 3441 ¶F. ABU DHABI 3439 Classified By: Ambassador Michele J. Sison for reasons 1.4 (B) and (D). ¶1. (C) We look forward to Secretary Bodman and team's November 11 to 13 visit to the UAE. The UAE is both a key regional security partner and a major oil producer. It holds 8 to 9 percent of the world's proven oil reserves and is the world's fifth largest natural gas reserves. The individual emirates, rather than the UAE federal government, control their own hydrocarbon reserves, which mean that Abu Dhabi emirate, which controls over 94 percent of the oil and gas reserves, is by far the richest and most powerful of the seven emirates. Abu Dhabi emirate also funds 56% of the federal budget and pays for a number of expenses -- including defense -- that would normally be funded by a federal government. The UAE's current oil production capacity is 2.5-2.6 million barrels per day (mb/d),of which Abu Dhabi emirate produces about 2.4 mb/d. Minister of Energy Al-Hamili has publicly said that the UAE will increase its oil production capacity by 200,000 barrels per day by March 2006, primarily from its onshore fields. The UAE is also the only Gulf OPEC member that has always maintained a partnership with international oil companies (IOCs). ExxonMobil, BP, Total, Shell, and the Japan Oil Development Company are all minority shareholders in one or more of the three main upstream oil companies, with ADNOC holding the majority share on behalf of Abu Dhabi. U.S. companies hold a 45% market share in oil and gas field equipment, spare parts and services. ¶2. (SBU) We have scheduled meetings for you with UAE President Sheikh Khalifa bin Zayed Al-Nahyan, Minister of Energy Mohammed bin Dha'en Al-Hamili, Abu Dhabi National Oil Company CEO Yousef Omair bin Yousef, and long-time Presidential Advisor - Mohammed Habroush Al-Suwaidi (who holds the rank of minister). All are members of Abu Dhabi's Supreme Petroleum Council (SPC),which makes the key decisions regarding Abu Dhabi Emirate's oil and gas policy. General Themes -------------- ¶3. (C/Rel UAE) -- Thank the UAE for working closely with us on supporting Iraq (military, financial, humanitarian aid) and other humanitarian needs world wide (i.e., $100 million for Pakistan earthquake relief, aid to Palestinians). -- Thank the UAE for support for oil market stability by producing at or near sustainable capacity and supportive public statements in context of OPEC meetings. -- Inquire about UAE plans for short and medium term expansion of oil production capacity and potential constraints. -- Express appreciation for the ongoing partnership between IOCs and ADNOC and interest in building on that partnership, especially for U.S. companies. (Note: ExxonMobil would prefer that we do not carry a strong, specific advocacy message on its behalf for the Upper Zakum bid, citing the sensitive nature of the negotiations and the timing.) -- Thank the UAE for their generous financial support for Hurricane Katrina reconstruction ($100 million cash). Update on Regional Efforts -------------- ¶4. (C) The UAEG is an important partner in our efforts to bring stability to the region. The UAE pledged $215 million assistance to Iraq during the Madrid donor's conference, and publicly committed to forgiving most of Iraq's $3.5 billion in debt to the UAE. In addition, the UAE has provided extensive support for the Iraqi security forces, by training police and military (engineering) forces and by providing equipment to the Iraqi security forces. The UAE also provides the U.S. military with bases in Afghanistan and in the UAE. The Al-Dhafra air base supports the U.S. 380th air wing, which provides reconnaissance and refueling support to Operations Iraqi and Enduring Freedom. In addition, UAEG special forces and support troops are in Afghanistan supporting Operation Enduring Freedom. The UAE prefers to keep its military cooperation with us low-key. The UAE is also a major donor to humanitarian and reconstruction efforts -- including a $100 million cash donation to the U.S. for Hurricane Katrina and a further $100 million cash donation to Pakistan for earthquake relief. The UAE is a generous aid donor to the Palestinians and recently started a $100 million housing project for Palestinians called Sheikh Khalifa City. Oil Production and Expansion Plans -------------- ¶5. (C) The Abu Dhabi Company for Onshore Operations (ADCO) is the operating company responsible for Abu Dhabi Emirate's onshore production. It is 60% owned by ADNOC and 40% owned by international oil company partners. Currently ADCO is producing around its capacity of 1.2 mb/d and has plans to add 100,000 barrels per day to capacity by end 2005 and another 100,000 barrels per day by end 2006. (Note: This pace is somewhat slower than Al-Hamili,s public claim.) we understand ADCO is developing a plan to increase production capacity to 1.5 - 1.6 mb/d by the end of the decade. Much of the increase in production would need to come from ADCO's smaller fields, which would be more expensive to exploit (ref F). ¶6. (C) The Abu Dhabi Marine Operating Company (ADMA/OPCO) operates ADMA's offshore concessions. It is also 60% ADNOC owned and 40% owned by the international oil companies. ADMA-OPCO currently produces approximately 500,000 to 600,000 b/d of oil and 1 bcf per day of natural gas. We understand the company has a program to increase sustainable production capacity 150,000 barrels per day by 2008 and was developing a plan for increasing production capacity by another 200,000 barrels per day (from currently undeveloped fields). ADMA/OPCO can currently produce 600,000 barrels per day -- which we understand it is doing -- but cannot sustain this production in the long term. The program involves building a pipeline from ADMA/OPCO's offshore facilities on Das Island to onshore gas processing facilities. With this pipeline and some upgrades, ADMA/OPCO should be able to produce at 600,000 barrels per day for the next 25 years (ref d). ¶7. (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 b/d, which it plans to increase to 600,000 b/d in the next three to five years. Currently, this company is 88% owned by ADNOC and 12% owned by the Japanese, but ADNOC is in final negotiations with ExxonMobil for a 28% stake in the Upper Zakum field. Constraints on Production Increases -------------- ¶8. (C) Several factors limit the Abu Dhabi emirate's ability to raise oil production capacity. It faces the same physical and personnel constraints as other world oil producing countries, with steel, drilling rigs, and trained engineers in short supply. In addition, international oil company executives note that Abu Dhabi needs to change its "political" culture to be more aggressive in developing its assets. Both ADNOC and the SPC have a very conservative mindset about preserving Abu Dhabi's oil wealth for the long term rather than immediately exploiting it. Currently ADNOC's reservoir management policy requires fields to be able to produce at the same rate for 25 years. It appears that Abu Dhabi Crown Prince Sheikh Mohamed bin Zayed is pushing ADNOC to move more quickly, but that his older brother UAE President and SPC chair Khalifa (and some of his key advisors) still take a more cautious approach. The current fixed price arrangements between ADNOC and its IOC partners act as a disincentive for the international oil companies to aggressively develop new oil resources. In addition, the current oil concessions expire in 2014 (ADCO) and 2018 (ADMA/OPCO). According to at least one oil company executive, the short remaining life of the concessions also discourages the IOCs from making the kind of aggressive investments that Abu Dhabi needs to dramatically increase the production of its fields. Critical Infrastructure Protection -------------- ¶9. (S) Abu Dhabi recognizes that protecting its onshore and offshore infrastructure is critically important. Over the past four years, the Abu Dhabi National Oil Company (ADNOC) has commissioned risk assessment studies and taken steps to boost the physical security of its facilities, but the process is not complete, and the UAE's facilities -- particularly its offshore ones -- remain vulnerable to attack. All of Abu Dhabi's exported oil goes through one of three terminals, the offshore Das Island and Zirku facilities and the onshore Jebel Dhana terminal. These terminals are considered to be Abu Dhabi's most critical choke points. Although a terrorist attack or other disruption could temporarily shut down exports and production, ADNOC officials maintain that the UAE would be able to continue exporting by using its reserves. ADNOC officials maintain that their focus on safety and preventing/minimizing the impact of major industrial accidents has reduced the number of choke points and may help to mitigate the impact of a terrorist attack. UAEG officials have told us they are more concerned with the vulnerability of water and power facilities, since their disruption would have a more immediate impact on UAE residents. Major Projects -------------- ¶10. (C) The most significant ongoing energy projects in the UAE are the development of Upper Zakum and the Dolphin project to build a pipeline to bring natural gas to the UAE from Qatar. ADNOC has entered into final negotiations with ExxonMobil that will grant the U.S. company a 28 percent equity stake in Upper Zakum, 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. With ExxonMobil's technical contributions, ADNOC hopes that Upper Zakum's oil production will gradually rise from 530,000 to 600,000 b/d in three years to 700,000 bpd and beyond. We understand that the remaining negotiations are about the fiscal terms of the agreement. ExxonMobil CEO Lee Raymond met with UAE President Khalifa on October 2 in order to allow Abu Dhabi to raise any major outstanding issues. We understand that the Emiratis did not raise any major issues and that the Supreme Petroleum Council is to meet this month to make a final decision on the Upper Zakum tender. ¶11. (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 tells us that they are not concerned about finding demand to meet additional supply and that the UAE hopes eventually to 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. Buying Iranian Gas -------------- ¶12. (C) On October 3, the UAE closed its IPO for a 34.3% share of a new gas company, Dana Gas, which is partially owned by Crescent Petroleum in Sharjah emirate. This company will be purchasing Iranian gas from the Salman field. The Iranians are building a pipeline to Crescent Petroleum's offshore platform in the Mubarak field (shared by Sharjah and Iran). Crescent is building the pipeline and other infrastructure on the UAE side of the border to bring in and utilize the gas. Ambassador, CG Dubai, and State A/S Tony Wayne have raised USG concerns about this project with UAEG officials and officials from Abu Dhabi, Sharjah, and Ras Al-Khaima emirates. Megaports -------------- ¶13. (U) On May 11, the Dubai Government and the USG signed a Memorandum of Understanding to implement DOE's Megaports Initiative at Dubai Port. DOE will supply Dubai Customs with equipment, materials, and training for the purpose of detecting and interdicting illicit trafficking in nuclear and other radioactive materials. DOE plans to install 8-10 radiation portal monitors, and are looking at a 9 month to 1 year set up period. The MOU requires Dubai customs to provide the USG with data on detections or seizures of radioactive material made as a result of the DOE-provided equipment. The site survey and stakeholders meetings have taken place, and a DOE engineering survey is currently underway in Dubai. SISON