ENERGY SECRETARY BODMAN'S VISIT TO THE UAE

C O N F I D E N T I A L SECTION 01 OF 05 ABU DHABI 004741

SIPDIS

DEPARTMENT FOR NEA/ARPI, EB/ESC/IEC/EPC
NSC FOR HUTTO
ENERGY FOR SENIOR FOREIGN POLICY ADVISOR MOLLY WILLIAMSON,
SENIOR ADVISOR GETTO, AND DAS BRODMAN
OVP FOR KEVIN O,DONOVAN
STATE PLS PASS TO USTR

E.O. 12958: DECL: 11/16/2015
TAGS: EPET ENRG EINV ETRD PK AF SA IR IZ
SUBJECT: ENERGY SECRETARY BODMAN'S VISIT TO THE UAE

REF: ABU DHABI 4546

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


1. (C) Summary: UAEG and Abu Dhabi government interlocutors
told Secretary Bodman during his November 11-13 visit that
the UAE is committed to expanding crude oil production
(including condensates) to 4 mb/d over the next seven to ten
years, with 200,000 b/d coming on line in early 2006. The
UAE is also investing in increasing refining capacity,
including planning to build a refinery in the Emirate of
Fujairah, which would give direct access to the Indian Ocean.
The Emiratis agreed with Secretary Bodman's contention that
improved consumer-producer dialogue and transparency would
help calm oil markets, with President Khalifa instructing his
energy minister to discuss the idea with his GCC colleagues.
His interlocutors welcomed U.S. investment in the energy
sector, noting that a decision on ExxonMobil's bid for a 28%
stake in the Upper Zakum field was expected shortly. Several
of the Emirati officials complained about Saudi efforts to
block closer cooperation between the smaller states of the
GCC, criticizing Saudi actions on the Qatar-Kuwait pipeline
and the Qatar-UAE causeway. They expressed strong concern
about the role that Iran was playing in the region and their
desire that any Iraqi government not be a puppet of Iran. In
a business round table, U.S. businesses generally expressed
their satisfaction with the investment environment in Abu
Dhabi's energy sector. End Summary.


2. (U) Secretary of Energy Bodman and his delegation visited
the United Arab Emirates from November 11 to 13. On November
12, Secretary Bodman met separately with UAE President Sheikh
Khalifa bin Zayed Al-Nahyan, Abu Dhabi Crown Prince Sheikh
Mohammed 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. In addition, Secretary Bodman held a
roundtable meeting with U.S. business people in the energy
sector. On November 13, Secretary Bodman launched the Arabic
translation of the Energy Information Administration's
"International Energy Outlook" at a Gulf Research Center
event in Dubai. Secretary Bodman also gave several press
conferences. President Khalifa, noting that the UAE
considered the U.S. a close friend, specifically encouraged
further cabinet level visits to help deepen the relationship.

Thanking the UAE
--------------


3. (SBU) Secretary Bodman thanked the UAE for its friendship;
for its generous support for humanitarian causes, including
its $100 million donation to the U.S. for Hurricane Katrina
assistance; for its support in the war on terror; and for its
support to Pakistan in the aftermath of the earthquake.
President Khalifa said he was "deeply saddened by the Katrina
tragedy" and wished that the UAE could have helped more, a
sentiment expressed in all the meetings. President Khalifa
explained that the UAE's foreign aid went beyond humanitarian
assistance, noting that in 2003, for example, the UAE had
allotted Pakistan $270 million in assistance and asked the
GOP to help identify projects that would have a direct impact
on the Pakistani economy. He explained that UAE aid projects
in Afghanistan were limited by the security environment, but
that the UAE was providing economic assistance where
possible.

Producer Consumer Cooperation
--------------


4. (C) Secretary Bodman also thanked the UAE for playing a
leadership role in promoting responsible OPEC behavior in
response to increased global demand for oil. President
Khalifa, Energy Minister Al-Hamili, and ADNOC,s bin Yousef
separately told Secretary Bodman that the UAE wanted "fair"
--not high-- oil prices. Al-Hamili stressed that the UAE
believes that oil prices should support world economic growth
and investment in the oil sector. High prices could cause a
world-wide recession, which would harm the region. Bin Yousef
emphasized that $70 per barrel "kills the market."


5. (C) Energy Minister Al-Hamili told Secretary Bodman that
he thought that the UAE, as a major oil producer, has a duty
to be a responsible supplier. He added that he thought the
UAE -- and OPEC in general -- are doing a good job keeping
markets supplied. The market is "squeezed," he acknowledged,
but there are no shortages. Al-Hamili said that it was
equally important to work on expanding capacity to meet
growing demand. He emphasized that oil producers, consumers,
and the international oil companies (IOC) need to work
together to expand capacity, not just in crude production,
but in refining capacity. He said that he hoped the U.S.
would ease its restrictions on refineries and that the IOCs
could be encouraged to invest some of their large profits in
the downstream market.


6. (C) Secretary Bodman urged Al-Hamili to encourage OPEC --
or at least its GCC members -- to provide more transparent,
consolidated information on the steps they are taking to
increase production. This added information would be one
factor that would help cut volatility in the oil markets, he
noted. Al-Hamili admitted that OPEC had bad PR, noting that
the "average Joe" hated OPEC as much as he hated the major
oil companies. ADNOC CEO Bin Yousef said that he had "no
doubt" that improved producer-consumer dialogue and
coordination would be helpful in helping to minimize market
disturbances. He emphasized that oil is a "strategic
commodity" and producers and consumers need to exert extra
efforts to promote stability. He noted, however, that ADNOC
was not inclined to talk to the press about its specific
plans. After Secretary Bodman urged President Khalifa to
promote more GCC transparency, the president instructed
Al-Hamili to "take the idea up" with his GCC colleagues.

U.S. Energy Policy
--------------

7. (U) Secretary Bodman briefed each of his interlocutors on
the U.S. and world energy landscape. He explained that
President Bush had signed energy legislation in August that
would help increase the supply of energy from various sources
over the long term by encouraging the construction of new
liquid natural gas (LNG) terminals, encouraging the
construction of new nuclear power plants and promoting
greater efficiency in production. He also explained that
projected world-wide energy demand is projected to increase
by over 50% by 2025, and that need for Arabian Gulf oil would
continue to increase.

Oil and Gas in the UAE
--------------


8. (U) Secretary Bodman asked his interlocutors for their
thoughts on the UAE's efforts to develop its economy, on
planned increases in production and refining capacity, and on
investment opportunities for U.S. businesses.


9. (C) ADNOC CEO bin Yousef explained that Abu Dhabi is
currently producing about 2.7 mb/d of crude oil (including
condensates) and planned to increase capacity to 4 mb/d
(including condensates) over the next seven to ten years.
(Note: In a subsequent meeting, presidential advisor Mohammed
Habroush Al-Suwaidi confirmed that President Khalifa had
instructed ADNOC to increase production capacity to 4 mb/d,
although he believed that it could be accomplished more
quickly. End Note.) Bin Yousef stated that ADNOC would add
200,000 b/d of crude production capacity by April 2006. Bin
Yousef explained that ADNOC had been meeting increased demand
by producing over its "technical rate" (the rate it could
produce over the long term without affecting its reservoirs)
for "some time." In the short term, he added, ADNOC could --
and was -- producing over its technical rate. In the medium
term, however, ADNOC needed to raise sustainable production
capacity. Bin Yousef laid out ADNOC's three-step program to
increase oil production. The first step is to produce above
the technical rate. The second step is to increase
production capacity through de-bottlenecking and improved
efficiency. The third step would be to develop new fields.
He noted that ADNOC had already approved 5-6 projects worth
around $4 billion to improve oil and gas production.


10. (C) ADNOC deputy CEO Abdulla Nasser Al-Suwaidi noted that
the UAE's production had historically been capped by either
OPEC or the market, so it had increased production capacity
largely by improving production at existing reserves rather
than developing new fields. He said that ADNOC had much
larger "surface capacity" (or ability to produce at the well
head) than it produced and that it needed to de-bottleneck to
reduce inefficiencies. He noted that Abu Dhabi had also
taken a decision to relax reservoir management guidelines
somewhat, which would help speed up development of new
production capacity. (Note: IOC executives have frequently
noted that ADNOC's reservoir management guidelines are
extremely conservative calling for 25 years with no decrease
in production. End Note.)


11. (C) Minister of Energy Al-Hamili noted that the UAE
needed to expand its production capacity, but that
significant capacity increases would take time and would be
expensive. He reported that Gulf oil and gas producers are
pursuing large, billion dollar projects that few companies
could deal with. In addition, producers are facing a
shortage of skilled engineers -- all of which have increased
costs more than anticipated.


12. (SBU) Al Hamili also explained that the UAE is investing
in increased refining capacity and is in the process of
negotiating with Conoco over a joint venture project for a
refinery in Korea 50% owned by the UAE. In addition, the UAE
is looking at building a new refinery in Fujairah. Al-Hamili
stressed that this refinery would open up a direct export
opportunity to the Indian Ocean that would bypass the Straits
of Hormuz.


13. (C) Al-Hamili explained that gas is important to the UAE
for power and water production and for re-injection into oil
reservoirs. He said that the UAE's gas reserves are similar
to those of the U.S., but that UAE gas is sour gas. It is
cheaper for the UAE to buy its gas from Qatar. He noted,
however, that Qatar appears to have overcommitted itself. He
had recently asked the Qatari Energy Minister to buy more
gas, but was told that Qatar could not make any more
commitments until it studied what it could give. As an
aside, Al-Hamili said that he thought gas pricing of about 2
per thousand cubic feet is fair for the gulf region. In a
subsequent meeting, President Khalifa volunteered that the
UAE views the Dolphin project as the way to meet the UAE's
need for power, to supply Oman, and to enable the UAE to use
its own gas for reservoir management.

U.S. Investment opportunities, FTA
--------------


14. (C) Secretary Bodman welcomed the fact that the UAE is
one of the countries in the Gulf region that is open to
foreign investment. He stressed that he hoped the ongoing
FTA negotiations would make progress toward an agreement,
which would further develop the relationship. President
Khalifa said that he thought an FTA is in the best interests
of both countries and hoped that the negotiations would move
forward rapidly. President Khalifa also told Secretary
Bodman that whatever he could do to accelerate progress would
be appreciated.


15. (C) Secretary Bodman asked for thoughts about
opportunities for U.S. businesses to participate in mutually
beneficial projects. President Khalifa stressed that the UAE
has a policy of being open to foreign investment, especially
in the energy sector. He stressed that U.S. companies are
always welcome for their technological expertise. He noted,
however that in some cases U.S. companies (especially in
services and exploration) were reluctant to pursue
opportunities in the UAE. U.S. companies would say, "we have
too much business to bid." (Note: Abu Dhabi Crown Prince
Mohammed bin Zayed (MbZ) later told Secretary Bodman that
President Khalifa had been referring to pre-1985 when U.S.
policy focused more on Saudi Arabia. At that time, U.S.
firms were less interested in participating in the UAE's
efforts to increase production. Currently, MbZ thought that
the oil companies are very interested in the UAE. He
acknowledged, however, that the EPC companies are
overstretched. End Note.)


16. (SBU) Al-Hamili stressed that the UAE has always welcomed
foreign participation in the energy sector, noting that the
UAE has never fully nationalized its upstream oil sector and
is one of the few countries in the region with the IOCs as
equity partners. Al-Hamili explained that this had been a
specific policy of the UAE's first president, Sheikh Zayed.


17. (C) Al-Hamili mentioned ExxonMobil's significant presence
in the UAE, adding that the government would be selling it a
28% share in the Upper Zakum field. Al-Hamili said that
Upper Zakum is a complex field, and that Abu Dhabi is more
interested in "know-how" than money. He pointed out that the
Japanese, as current Upper Zakum equity partners, are
interested in increasing their share of the field, but that
Abu Dhabi wants the IOCs. He stressed that Exxon's technical
proposal was the deciding factor in the decision to narrow
down negotiations to ExxonMobil only. In a later meeting,
ADNOC CEO Yousef said that Abu Dhabi and ExxonMobil would
finalize the deal "hopefully in the near future."


18. (C) Secretary Bodman asked Al-Hamili about the UAE's
power and desalination needs. Al-Hamili said that the UAE is
facing increasing demands for both water and power,
commenting that "we drink seawater." The problem with
desalination, he said, is dealing with the salt residues.
Putting residues back into the sea raised the salinity of the
sea water, and too high a level damages the environment.
Al-Hamili explained that the UAE is looking at ways to spread
the waste and minimize the damage.

Problems with Saudi Arabia
--------------


19. (C) President Khalifa, MbZ, and Mohammed Habroush
Al-Suwaidi all raised concerns about Saudi Arabia with
Secretary Bodman. In response to Secretary Bodman's request

SIPDIS
for advice on issues of importance to the GCC, President
Khalifa suggested that he stress GCC countries' shared
interests and need to cooperate. He highlighted Saudi
Arabia's decision to block a Kuwait - Qatar pipeline that
would supply Kuwait with needed natural gas. He noted that
the end result of Saudi sensitivities was that Kuwait would
need to go to Iran for its gas, which was not in anyone's
interest. He stressed that relying on Iranian gas would "put
them at the Iranians' mercy." MbZ told the Secretary that he
didn't understand the lack of GCC cooperation. He stressed
that a Qatar-Kuwait gas deal would be a "win-win" for
everyone. He mentioned that Prince Bandar told him that the
Saudis had decided not to allow the pipeline because they did
not like "the (unspecified) person" involved.


20. (C) Mohammed Habroush Al-Suwaidi asked Secretary Bodman
to encourage the Saudis to cooperate with their neighbors.
He commented that the Saudis object to both UAE-Qatar ties
(the causeway) and Kuwait-Qatar ties (the pipeline). He said
that the Saudi view is short-sighted, arguing that the Saudis
always want to control the GCC, which is "not right." He
said that the states of the GCC should be "a group, not
followers" of Saudi Arabia. He also noted that if the Saudis
behaved differently, the GCC would be more like the UAE
(i.e., a closer federation). He noted that at the founding
of the UAE, the individual emirates pushed to retain a great
deal of autonomy. Late Sheikh Zayed's position was to let
them have their autonomy relying on time to change their
minds. Al-Suwaidi added that the success of this policy was
evidenced by the growing responsibilities of the federal
government.

Iraq and Iran
--------------


21. (C) Secretary Bodman discussed the role that Iraq and
Iran are playing in the region. President Khalifa noted that
it was difficult to assess who is in charge in each country
and who would take charge. In response to Secretary Bodman's
observation that it appeared clear that President Ahmadinejad
appeared to be in charge in Iran, President Khalifa said "I
hope not," adding that he feared that the person &really in
charge8 is even worse that Ahmadinejad could be. Al-Suwaidi
commented that the UAE didn't care about whether a Sunni or a
Shia government ran Iraq as long as it is "not an Iranian
puppet."


22. (C) In a subsequent meeting, MBZ elaborated on the
leadership's view that Ayatollah Ali Khamenei is actually the
man in charge. In the recent Iranian elections, he said,
Khamenei narrowed the field down from 1007 volunteers to
eight candidates. Whoever won would be Khamenei's man,
"driving a train" down a track laid by Khamenei. "The driver
of a train can't change direction," he said, and can't
"change speed." All he can do is keep the engine running.
In other words, MbZ said, it doesn't matter who is president
in Iran.


23. (C) MbZ opined that it was just a matter of time before
Iran develops a nuclear capability. He added that most
people are worried about Iranian nuclear capability because
they don't want "the mullahs" to have the bomb. The problem,
he said, was worse. If Iran went nuclear the whole region
would follow suit. He said it is not in the UAE's best
interest to have a nuclear-armed Iran, but he didn't know how
to stop it. MbZ added that the Iranians are trying to keep
the U.S. tied up in Iraq as a way of distracting the USG.
He said that if the U.S. and the coalition could secure Iraq,
Iran "will blink, I think." MbZ also added that he thought
there was no way the USG could withdraw from Iraq now. If it
did, we would see a splintered Iraq or another war, which
would destabilize the region and cut oil supplies would
decline. MbZ opined that the de-Baathification of the Iraqi
military was a big mistake. Bringing them back in was a good
idea, but too late. MbZ stressed that he was not just
engaging in "20-20" hindsight, noting that he had told
Secretary Rumsfeld this in May 2003.

SIPDIS

U.S. Business Views
--------------


24. (SBU) Secretary Bodman met with U.S. business
representatives from the energy sector. In general, they
said that the environment in the UAE is very encouraging to
energy sector investors. They asked the Secretary to use his
good offices to encourage other GCC countries to allow more
foreign investment. They also noted that the UAE had pledged
to increase oil production. The challenge would be how to do
that with the current shortage of supplies and contractors.


25. This cable has been cleared by Secretary Bodman's party.
SISON