EB A/S SULLIVAN'S MEETINGS IN THE UAE

C O N F I D E N T I A L SECTION 01 OF 04 ABU DHABI 003685

SIPDIS

SIPDIS


DEPT FOR E, NEA/ARP
NSC FOR DNSA DMCCORMICK
OVP FOR KEVIN O'DONOVAN
ENERGY FOR SENIOR FOREIGN POLICY ADVISOR MOLLY WILLIAMSON
STATE PASS USTR FOR DONNELLY AND BELL

E.O. 12958: DECL: 09/17/2016
TAGS: ETRD EPET EINV ELAB AE
SUBJECT: EB A/S SULLIVAN'S MEETINGS IN THE UAE

REF: A. ABU DHABI 3629

B. ABU DHABI 3619

C. ABU DHABI3565

Classified By: Ambassador Michel J. Sison or reasons 1.4 (b & d).



1. (C) Summary: A/S Sulivan held a series of bilateral
meetings with AE officials and U.S. business representatives
o September 11. ADNOC CEO Yousef Omair Bin Yousef xplained
that Abu Dhabi was increasing its oil poduction capacity to
4 million barrels per day ovr the next five to seven years.
He commented tha oil prices of $70-$80 per barrel were too
high nd that a price range of $55-60 was preferable in erms
of longer term stability. UAE officials all stressed the
UAE's interest in concluding FTA negotiations with the U.S.
They emphasized, however, that there were three main sticking
points: energy, labor and (possibly) telecoms. ADNOC CEO bin
Yousef stated categorically that certain areas of the
hydrocarbon sector would remain closed, but noted that even
absent an agreement, U.S. companies -- as proven leaders in
the energy field -- would "not only maintain, but increase"
their role in the energy sector. A/S Sullivan's
interlocutors all expressed their interest in deepening the
economic dialogue and in increasing the private sector's role
in the dialogue. End Summary.


2. (U) EB Assistant Secretary Daniel Sullivan visited the UAE
from September 8 to September 13. A/S Sullivan was the
State Department lead for an interagency delegation to the
Iraq Compact Preparatory Group meeting on September 10 and
also co-chaired the Joint Terrorist Finance Coordinating
Committee meeting on September 12 (septels). In addition,
A/S Sullivan held bilateral meetings with UAE officials and
met with key U.S. businesses in the UAE on September 11,

2006. With Deputy Secretary of the Treasury Robert Kimmit,
A/S Sullivan participated in bilateral meetings with Abu
Dhabi Crown Prince, Sheikh Mohammed bin Zayed Al-Nahyan, and
UAE Foreign Minister Sheikh Abdullah bin Zayed Al-Nahyan
(refs b & c). He met with Minister of State for Financial and
Industrial Affairs Dr. Mohammed Khalifan bin Kharbash, Abu
Dhabi National Oil Company (ADNOC) CEO and Secretary General
of the Supreme Petroleum Council Yousef Omair bin Yousef,
MinEcon Under Secretary Abdullah Al-Saleh, Mubadala CEO
Khaldoon Al-Mubarak, and ADIA Deputy Managing Director
Khalifa Al-Kindi on September 11. (Meetings with Al-Mubarak
and Al-Kindi reported septel.)

Thanking the UAEG for Hosting the Iraq Compact
--------------


3. (U) A/S Sullivan thanked his interlocutors for hosting the
Iraq Compact Preparatory group meeting and for actively
supporting the Iraqis to make it a successful event. He
passed on Secretary Rice's appreciation for the UAE's
outstanding efforts hosting the first major international
conference in which the Iraqi government, including five
ministers, played a leading role. MinState Khirbash said it
was a pleasure to participate and he thought that the Iraqi
delegation did "very well." He also noted that Iraqi DPM
Barham Salih was impressive.

Oil Prices Too High at $70-$80
--------------


4. (C) On September 11, A/S Sullivan told ADNOC CEO bin
Yousef that the USG appreciated the moderating role the UAE
plays in OPEC and asked whether bin Yousef had any thoughts
as to the likely outcome of the September 11 OPEC meetings
being held the same day. Bin Yousef stated that he did not
expect much to change at the meeting, noting that -- in
reality -- OPEC production quotas are not being observed or
implemented. He acknowledged that the market was tight and
opined that prices in the $70 to $80 range were too high and
that $55-$60 would be a more reasonable level, particularly
in terms of long-term market stability for both producers and
consumers. Bin Yousef added that overly high prices would
eventually impact global economic growth negatively, which
was not in the interest of either producers or consumers. He
expressed surprise that the current round of high oil prices

ABU DHABI 00003685 002 OF 004


had had limited impact on economic growth. A/S Sullivan
agreed, but underscored that sustained prices in the $70 or
above range would likely affect growth negatively. Bin
Yousef noted that this could not last forever, adding that
were the price to spike to $100 a barrel, it would impact
growth.


5. (SBU) In response to A/S Sullivan's question about OPEC's
spare capacity, bin Yousef stated that supply and demand were
roughly in balance, but acknowledged that there was little
spare capacity to serve as a cushion. He noted that
"speculators" were driving prices and that they reacted to
rumors or crises. Problems in Nigeria and Venezuela were
reflected in the futures markets. He also expressed his
concern that speculators could drive the price down as well
as up. Bin Yousef stressed that producers and consumers had
an incentive to cooperate, since oil is a "strategic
commodity" and both would benefit from stability at a "fair
value."


6. (C) A/S Sullivan asked bin Yousef to elaborate on ADNOC's
stated plans to expand production to 4 million barrels per
day (mb/d). Bin Yousef explained that ADNOC currently
produced about 2.8 mb/d in crude and condensate, having added
110,000 b/d in production in 2006. By mid 2008, ADNOC will
add 130,000 b/d of condensate to its production. bin Yousef
noted that, "realistically speaking," it would take
five-seven years for ADNOC to increase its capacity to 4 m/d
and that the plans being implemented might "slip a year or
two." The major bottleneck is the shortage of qualified
energy, procuring and construction (EPC) contractors. The
current run of high oil prices, he noted, had caught everyone
by surprise and producers were competing for trained people.


7. (C) A/S Sullivan expressed appreciation to bin Yousef for
ADNOC's decision to sign agreements with ExxonMobil for a 28%
stake in the Upper Zakum offshore oil field, noting that
American companies in general bring more sophisticated
technology and services to the marketplace in the energy
sector. Bin Yousef agreed with A/S Sullivan,s comments and
said that he was pleased that Abu Dhabi had decided in favor
of Exxon and praised Exxon as an industry leader. Bin Yousef
added that Exxon is likely "to stay with us in the long term."

Free Trade Agreement
--------------


8. (C) During the meetings, A/S Sullivan's interlocutors
stressed the UAEG's interest in concluding an FTA with the
U.S. but acknowledged that the UAE had sensitivities in areas
such as energy, labor and telecoms. ADNOC CEO bin Yousef
stated categorically that certain areas of the hydrocarbon
sector would remain closed, but noted that even absent an
agreement, U.S. companies -- as proven leaders in the energy
field -- would "not only maintain, but increase" their role
in the energy sector. He stressed that, just as the U.S. had
its strategic concerns, so too, did the UAE. Bin Yousef
assured A/S Sullivan that "the highest authority" in Abu
Dhabi had made a "strategic decision" to engage with U.S.
companies in the energy sector, adding that ADNOC was
exploring new areas of cooperation. He stressed that "even
areas that are currently closed will be opened up." Rather
than opening up the energy sector generally, he explained
ADNOC would reach out to leaders in the field through
negotiations. He specifically referred to ExxonMobil,
Bechtel, and Fluor.


9. (SBU) In his meeting with A/S Sullivan, MinEcon U/S
Al-Saleh said that he still thought that an FTA was possible,
but that he was less optimistic than he had been a year
earlier. He cited three major obstacles to reaching an FTA:
energy, labor, and (possibly) telecoms. He explained that,
constitutionally, energy resources belonged to the individual
emirates not the UAEG. The UAEG did not have the authority
to make commitments on energy resources. Turning briefly to
telecoms he noted that the UAE's new second
telecommunications company needed time to establish itself in
the market and needed a transition period before facing
international competition. He explained that the UAE, as a
country where nationals were in a clear minority, had

ABU DHABI 00003685 003 OF 004


demographic problems that affected its willingness to
compromise on labor issues.


10. (C) Al-Saleh noted that the July investment discussions
in London allowed both sides to look at ways that might
address both parties' concerns about the energy sector. If
these ideas proved practical, the Ministry of Economy could
present the proposal to ADNOC (as the biggest energy player
in the UAE) and seek its concurrence. He said that, in the
GCC-EU FTA negotiations, the EU had accepted the UAE's
constitutional limitations on energy (implying a carve-out).
A/S Sullivan noted that the UAE,s bilateral investment
treaties (BITs) had not carved out the energy sector and
inquired as to the discrepancy. Al-Saleh replied that some
previous BITs did include the energy sector, but noted that
these were not as comprehensive as the proposed U.S.-UAE FTA
with its provisions for 3rd party arbitration, national
treatment, etc. In addition, Al-Saleh noted, he was not
aware that there had been any disputes under existing BITs on
energy sector issues. He added that future BITs would likely
exclude the energy sector.

11.(SBU) MinState Kharbash acknowledged that the U.S.-UAE FTA
negotiations had reached a difficult point, but added that
both sides had the will to see it through. MinFin A/US
Khalid Al-Bustani noted that there were some sensitive issues
in the negotiations. For its part, the UAE had brought the
issues "to the highest authority, whereas he expressed
concern that the U.S. had not done the same. He stressed
that the UAE, Bahrain, and Oman all had different economies
and needed to be treated differently. A/S Sullivan stressed
that the USG faced certain congressionally mandated
constraints on its FTA negotiating authority.
Constitutionally, he explained, the U.S. Congress has the
authority over trade. It lends this authority to the
administration to negotiate agreements, but puts conditions
on that loan.


12. (SBU) A/S Sullivan underscored that in certain areas USG
negotiators have little flexibility because they understand
where Congressional limits reside. In this regard, he noted
that a completed negotiation that did not pass Congress would
be a scenario more troubling than no agreement at all.
Nevertheless, he emphasized that the USG still very much
wanted to complete the FTA negotiations and he encouraged his
UAE interlocutors to work on creative solutions to resolve
remaining issues.

Deepening the Economic Dialogue
--------------

13.(SBU) In the course of their discussions, both MinState
Kharbash and U/S Al-Saleh discussed their interest in
deepening and perhaps formalizing the UAE,s economic
dialogue with the U.S. MinState Kharbash and A/S Sullivan
agreed that the private sector role in such a deepened
dialogue needed to be increased. U/S Al-Saleh noted that
the relationship was strong, but put in a plea for technical
assistance in certain areas: including intellectual property
rights enforcement and export controls. In the area of IPR,
he said that the UAE would appreciate cooperation in
addressing the problem of counterfeit goods. Al-Saleh said
the UAE has IPR laws, but would like to work together to
improve their enforcement. He explained that the Ministry of
Economy had recently assumed responsibilities for all IPR
matters and needed technical assistance and training. On the
issue of export control laws, he said that Legislative
Committee was looking at a draft law. He explained however,
that there were concerns that each ministry would draft its
own export law and that there needed to be a comprehensive
law for exports and imports. He explained that the UAE was
in the process of drafting that law and that he expected to
meet all of the concerned ministries within the next ten
days. Al-Saleh added that the UAE was looking at drafting or
revising other laws (including the Commercial Companies Law)
to reflect the current business environment. He explained
that the UAE had already amended its Agencies law to make it
"fair" to both parties to the agreement.

U.S. Businesses

ABU DHABI 00003685 004 OF 004


--------------

14.(SBU) A/S Sullivan participated in a lunch with U.S.
business representatives from the energy, defense,
construction, automotive, pharmaceuticals, consulting and IT
sectors. In general, U.S. businesses expressed their
satisfaction with their opportunities in the UAE. While
attesting to the success many US companies are having in the
Emirates, the group also expressed concern about UAE agency
laws and all expressed interest in whether and how recent
amendments would be applied.

Comment
--------------


15. (C) All of A/S Sullivan's interlocutors stayed "on point"
on the issue of the FTA. The UAE wants to conclude a deal,
but has sensitive areas that it wants to protect. Bin Yousef
was most explicit that -- in his view -- the oil and gas
sector would not be included in an FTA, but stressed the
favored position that U.S. firms enjoyed and would continue
to enjoy in the sector. End Comment.


16. (U) A/S Sullivan has cleared this message.
SISON