WILL UAE ENERGY NEEDS PROMPT IRAN-UAE GAS DEAL?

C O N F I D E N T I A L SECTION 01 OF 05 ABU DHABI 001021

SIPDIS

SIPDIS

DEPT FOR NEA/ARP, NEA/IR, INR/EC, EEB/IEP
ENERGY FOR SENIOR FOREIGN POLICY ADVISOR MOLLY WILLIAMSON

E.O. 12958: DECL: 06/20/2017
TAGS: EPET ENRG PREL ECON IR AE
SUBJECT: WILL UAE ENERGY NEEDS PROMPT IRAN-UAE GAS DEAL?

REF: A. STATE 74354

B. 2006 DUBAI 6919

C. 05 DUBAI 4987

D. 05 ABU DHABI 3440

E. 04 ABU DHABI 1429

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



1. (C) Summary: The Government of Iran has expressed
interest in improving energy cooperation with the UAE and has
had "on again off again" discussions with the Emirate of Abu
Dhabi about gas purchase agreements. However, Abu Dhabi
authorities are skeptical about the reliability of the
Iranians as energy suppliers. The Dana Gas deal with the
National Iranian Oil Company has run into a major pricing
dispute and most indications are that it will not move
forward quickly. The Iranians have sharply increased the
price of gas that they would provide to Dana Gas under the
agreement from one dollar per thousand cubic foot to five
dollars per thousand cubic foot. The Iranians have also
threatened to sell the gas elsewhere should Dana gas not
resolve the pricing dispute.


2. (C) Summary Continued: Despite having the fifth largest
proven gas reserves in the world, the UAE is not producing
enough gas to meet its current power needs and is facing
massive increases in power requirements to meet ambitious
development plans. Gas belongs to the seven individual
emirates, not the UAE as a whole, and are unevenly
distributed among the emirates (with Abu Dhabi having around
93 percent of the total reserves). There is no national
electricity grid and Abu Dhabi does not produce enough gas to
meet the demands of all of the other emirates. Abu Dhabi is
looking at expanding its gas production considerably and the
UAE as a whole is looking at other sources of power.
Although many observers believe that Abu Dhabi can meet its
near term energy needs without Iranian gas, they are less
convinced about the ability of other emirates to do so. Most
observers and Abu Dhabi government officials doubt Iran's
reliability as a gas supplier. Although Abu Dhabi officials
have expressed their reluctance to rely on Iranian gas, not
all have ruled it out, if the price were right and
commercially viable. Should that be the case, one probable
source would be Iran's Salman field (shared with Abu Dhabi).
Although Abu Dhabi is talking to Iran about gas, there is no
existing infrastructure to bring in Iranian gas. Given that
and the concerns about Iranian reliability as a supplier, the
threat does not appear to be a near term one. End Summary.

The Iranians Speak - Is Abu Dhabi listening?
--------------


3. (C) During Iranian President Mahmoud Ahmadinejad's May
13-14 visit to the UAE, he reportedly stressed Iran's
interest in deepening economic -- and energy -- cooperation
with its neighbor. UAE officials have said that the Iranians
came with 20 draft economic MoUs and pressured them --
unsuccessfully - to sign. Khaldoon Al-Mubarak, Mubadala CEO
and Chairman of Abu Dhabi's Executive Affairs Authority, told
us that it was clear that the Iranians were looking for a
public relations coup rather than anything substantive.


4. (C) There may be more potential for cooperation than Abu
Dhabi is admitting, however. The Australian Ambassador told
Ambassador that he had met with the Iranian Ambassador for a
read out of Ahmadinejad's visit. He said that the Iranian
Ambassador had told him that Iran and Mubadala were in
negotiations over a gas purchase deal. In 2004, Abu Dhabi
officials (including now Crown Prince, Sheikh Mohamed bin
Zayed) confirmed that Mubadala had undertaken
discussions/negotiations about purchasing Iranian gas (ref
E). At that time nothing developed and Abu Dhabi had also
been clear in its opposition to the Crescent Petroleum/Dana
Gas deal to buy Iranian gas (ref D).


5. (C) Over the past several weeks, we have met with a number
of UAE officals and oil company executives to express our
opposition to any investment in Iran's hydrocarbon
infrastructure and to try and uncover further information on
Iranian - UAE gas deals. Several of our interlocutors, while
stressing the UAE's need for gas, have expressed skepticism
that Abu Dhabi would want to depend on Iranian gas, although
they acknowledged that other emirates might be more tempted.

ABU DHABI 00001021 002.2 OF 005


They have also noted that Abu Dhabi's energy demands over the
next few years are manageable without resorting to Iranian
gas. Econchief met with Al-Mubarak recently to discuss any
potential deal and to reiterate our opposition to investments
in the Iranian hydrocarbon sector. Al-Mubarak stressed his
belief that the Iranians were unreliable gas suppliers and
were "100 percent consistent" in treating their potential
partners (such as Dana Gas) badly and in "screwing-up" the
deal. He added that the Iranian officials that he had dealt
with used to be "pragmatists" but that they were now much
more doctrinaire and would not even "agree to disagree."
When econchief directly asked whether Abu Dhabi was
negotiating with Iran for gas, however, he hedged. He
admitted that Mubadala had talked to the Iranians -- among
other suppliers -- and that Abu Dhabi would take the action
that it deemed to be in its best interests. He acknowledged
USG concerns and stressed that Abu Dhabi would not rush into
anything. He did not, however, flatly deny the possibility.

What about Dana Gas?
--------------


6. (C) Emirate of Sharjah-based Dana Gas (through its parent
entity Crescent Petroleum) already has a gas purchase
agreement with the National Iranian Oil Company (NIOC) to
purchase gas from Iran's Salman field (shared with the
Emirate of Abu Dhabi, where it is called Abu Al-Bukhoosh).
Under the deal signed in 2002, the Iranians would build the
infrastructure to extract the gas and transport it to
Crescent Petroleum/Dana Gas' offshore facilities at the
Mubarak field, which is near the UAE claimed and Iranian
occupied Island of Abu Musa. According to the signed
agreement, gas was to start flowing from 2005. For its part,
Dana Gas has completed all of the facilities on the UAE side
of the border, including its Sajaa Gas sweetening facility
(ref A). The Iranians have reportedly not finished their
infrastructure.


7. (C) The Dana Gas-NIOC deal has run directly into major
pricing disputes, and most indications are that it will not
move forward quickly. Al Waleed Khalid bin Khadem, Director
General of the Sharjah Electricity and Water Authority, told
PolEconoff in early June that he hopes the deal is resolved
soon, for the sake of Sharjah's critical energy needs. As
for a near term conclusion however, he had no reason to
believe a compromise was close. Al Waleed said the Iranian
government is "a bad business partner because it is not
responsible to its people." Although one western oil company
executive suggested that Crescent/Dana Gas would eventually
need to agree to terms, he wouldn't give a timeframe.
Mubadala's Khaldoon Al-Mubarak, was more skeptical. "Even if
they come to an agreement" he noted, "the Iranians would just
come back," in a year with more demands.


8. (C) We understand that the original price of the gas was 1
dollar per thousand cubic foot (mcf) of gas. In 2006,
however, the Iranian State Audit Bureau raised accusations of
corruption and a need to renegotiate the price of the gas.
We have heard that the Iranians are currently asking 5 dollar
per mcf. The new Iranian Oil minister has publicly delivered
an ultimatum to Crescent Petroleum to resolve the price
dispute or face losing the gas. In addition, the Iranian
authorities arrested the director-general of the former
Iranian oil minister and eleven other officials over the
contract.

Other Candidates?
--------------


9. (C) Although the UAE has the fifth largest reserves of
natural gas in the world, around 93 percent of the reserves
are in the Emirate of Abu Dhabi. The other emirates are gas
poor (Sharjah has about 5 percent, Dubai 2 percent, and Ras
Al-Khaimah around a half a percent). Power generation
capacity is also unevenly distributed, with the Abu Dhabi
Water and Electricity Authority responsible for 53 percent of
total capacity, Dubai Electricity and Water Authority - 29
percent, Sharjah Electricity and Water Authority - 11
percent, and the Federal Electricity and Water Authority
(FEWA, covering the other northern emirates) - only 7
percent. FEWA's small power plants currently burn liquids
rather than natural gas. Dubai is undergoing a building boom
and the other emirates largely appear to be following this
development model.

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10. (C) Although the UAE is building a national electrical
grid, it is not yet fully interconnected. Originally
designed to serve during emergencies and based around a
sub-station in Sharjah's centrally located city of Dhaid,
once the grid is completed, Abu Dhabi should be better able
to sell power to the other emirates (assuming it can meet its
own power generation needs). Currently, Abu Dhabi sells
electricity to the Emirates of Dubai and Sharjah. This year,
Dubai is purchasing 600 MW, while Sharjah is buying 200 MW --
set to increase to 300 MW next year from ADWEA. Dubai also
purchases gas from Abu Dhabi. Al Waleed said there is no
surplus gas in the UAE for Sharjah to buy despite his
emirate's already existing shortfall. Instead, Sharjah buys
and burns diesel from Emarat, another UAE-government owned
petroleum distribution company. He said the ENOC price was
too high. Al Waleed expressed hope that once the grid is
completed, his authority will be able to buy more electricity
from ADWEA, since their use of natural gas makes their
electricity production cheaper.


11. (C) Dubai reportedly negotiated with Iran at least
partially to drive down the price of gas from the Dolphin
project (or drive up any subsidy from Abu Dhabi). The Vice
Chairman of the Ras Al-Khaimah Petroleum Company Hussein
Sultan publicly expressed his interest in the gas noting that
"everybody would like to get the Iranian Gas. Personally, if
I had the clearance, I would go for it." One western oil
official noted that "Sultan is an old ENOC (Dubai Government
owned Emirates National Oil Company) man," suggesting that he
continues to keep Dubai's power interests to heart.

Explosive Growth Driving Demand for Power
--------------


12. (C) High oil prices and changes to property laws in
various emirates are driving a building boom. The Emirate of
Dubai has been the most aggressive in its development plans
in an effort to diversify away reliance on small and
declining oil reserves. Other emirates are following suit,
however. The Emirate of Abu Dhabi, for example, has
announced 172 billion dollar in real estate "mega projects"
since 2005. This figure does not include new energy
intensive industrial projects, such as the two aluminum
smelters that are planned to be built, which will reportedly
require around 800 million cubic feet per day (MMCF) of gas
to operate. The Abu Dhabi water and Electricity Company's
recent demand forecast for 2011 is 39percent higher than its
2005 estimates, and it has publicly stated that new
Independent Power and Water Projects will need to be added
from 2011.


13. (C) In the short term (this summer),there will not be
enough gas to supply the power plants fully. Abu Dhabi's
plants will be burning diesel this summer to make up the
deficit. Nick Carter, the Director General of Abu Dhabi's
power regulatory authority, has told econchief that ADNOC
only supplies enough gas to meet about half of Abu Dhabi's
current power generating capacity. One western oil executive
noted that 300 diesel tankers per day were going to Abu
Dhabi's Shuwaihat power plant. He speculated that Abu Dhabi
could also see "brown outs" this summer, similar to those
that affected Dubai in 2006, which would cause a massive
public reaction. Abdulla Nasser Al-Suwaidi, ADNOC Deputy
CEO, was more optimistic. He acknowledged that ADNOC could
not supply enough gas to meet short term demand. It
currently supplies around one billion cubic feet per day
(BCF) to ADWEA. He stressed, however, that it supplied
enough liquids (diesel and crude) to make up the difference.
In an emergency, he added, ADNOC could cut the amount of gas
it re-injects into its oil fields and divert that to power
plants. This would not be a preferred solution, due to its
reservoir management implications, but could be done. (Note:
Nick Carter has told us that the Abu Dhabi Water and
Electricity Company has unsuccessfully sought assurances from
ADNOC that it would supply extra gas in an emergency,
although he speculated that the gas would be made available
in an emergency. End Note.) The Federal Water and
Electricity Authority's power plant serving the northern
emirates already burn liquids in addition to (or instead of
natural gas).


14. (C) It is also apparent that Abu Dhabi dramatically
underestimated the pace of economic development and the

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resulting demand for gas. The shortages have inspired both
blame passing and genuine efforts to solve the problem. A
western oil executive noted that ADNOC's position was that
the Dolphin Project had been supposed to solve the problem.
Nick Carter commented that the Abu Dhabi Water and
Electricity Company (ADWEC) had been trying to get ADNOC to
focus on the need for more gas, but that ADNOC CEO Yousef
Omair had ignored them. David Scott, Director of Economic
Affairs for Abu Dhabi's Executive Affairs Authority, noted
that all of Abu Dhabi's entities dealing with power issues
(ADNOC, Mubadala, ADWEA and its various subsidiaries) had
good people but were very stove-piped. The Emirate of Abu
Dhabi, he added, has created an interagency energy committee
to try and coordinate the efforts of all of the agencies and
companies and explore alternatives for conservation and new
sources of energy. The Emirate of Abu Dhabi is trying to
rationalize and restrain the growth, instituting a master
development plan that has cut projected population densities,
but growth is still expected to be considerable.

Meeting the Demand
--------------


15. (C) The Emirate of Abu Dhabi's gas reserves are located
both offshore and onshore and consist of both associated
(located with oil fields) and non-associated gas. According
to Al-Suwaidi, the largest offshore non-associated gas field
reserves are located in the Khuff formation below the Umm
Shaef oil field (around 11.4 trillion cubic feet (TcF) of gas
remaining, with only about 1.7 TcF having been produced from
the original total). The second largest offshore gas field
would be under the Abu Al-Bukhoosh (ABK) field, which has
around 4-5 TcF. In addition, there are significant
quantities of associated gas in Umm Shaef and ABK.


16. (SBU) Abu Dhabi has significant supplies of onshore gas
as well. In April, international Oil companies responded to
an ADNOC tender to develop sour gas reserves in the Arab
fields located below the Bab and Shah oil fields. Estimated
reserves are large -- in the range of seven TcF of gas per
field -- but there is significant uncertainty about the real
reserves in both fields. According to ExxonMobil's
Al-Khaleej President Frank Kemnetz, the range in the resource
size is /- 50percent, with additional appraisal drilling
required. The reservoirs have low permeability and the gas
is sour, with Hydrogen Sulfide levels of 20-35 percent and
CO2 levels of 10 percent. This would be the world's largest
sour gas development project.


17. (C) Currently, offshore gas (and oil) production is
constrained by limited gas processing facilities. ADNOC
currently provides around 1.2 billion cubic feet (BcF) to the
Abu Dhabi Gas Liquefaction Company (ADGAS) and uses an
unknown amount for reservoir management. There is no
pipeline connecting the offshore gas developments onshore, so
gas produced offshore can not be used on shore. ADNOC is
building a pipeline from Das Island onshore, which should
(along with associated gas processing facilities) should be
completed in 2011. The plan would be to bring around 1 BcF
per day from onshore to offshore, from proven but undeveloped
fields. In addition, Abu Dhabi is producing about 4.6 BcF
per day onshore (and reinjecting about a third of it, and
providing around a bcf to the power plants. The hope would be
to provide an additional 500 mmcf-1 BcF per day from the
onshore sour gas development project, though some oil company
executives view this as too ambitious, given the complexities
of the project.


18. (C) In addition, the long awaited Dolphin project is
nearly completed. Dolphin currently has a contract for 2 bcf
from Qatar (and the pipeline has a 3.2 BcF capacity).
Dolphin is currently sending 400 mmcf in "early gas" from
Qatar Petroleum to Dubai, which is reportedly paying 4
dollars per mcf for the gas. ADNOC is blending in another
600 mmcf in gas, which it is selling "at commercial terms."
ADNOC's commitment to Dubai runs until June, and then it
could look at supplying additional gas to ADWEA (currently
about 1 BcF per day. Dolphin is supposed to be shipping its
own gas in summer 2007 and fully operational by first quarter

2008.

Iran - UAE Shared Oil/Gas Field Salman/Abu Al-Bukhoush?
-------------- --------------


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19. (C) The source of the Iranian gas for the National
Iranian Oil Company-Dana gas deal is a shared field between
Iran and Abu Dhabi, which is called Salman on the Iranian
side of the border and Abu Al-Bukhoush on the Abu Dhabi side.
About 60 percent of the field is in Iran. On the Abu Dhabi
side, this field is operated on a concession by the firm
Total, which produces around 20,000 barrels per day of oil.
According to Al-Suwaidi, Total used to pump directly to a
ship, but now pipes to Das Island for export. Iran produces
around 80,000 barrels per day (down from 200,000 originally).
In addition, Total produces gas from the field for ADNOC
(There is currently no foreign participation in gas
development or production). Al-Suwaidi noted that the cost
of production was amazingly low, since all of the
infrastructure had been depreciated. ADMA/OPCO pays total
the cost of production for about 500 mmcf per day at around
$.09 per thousand cubic foot. Al-Suwaidi said that Abu Dhabi
would be developing the UAE side of Abu Al-Bukhoush as well
as its other offshore fields, but stressed that Abu Dhabi
preferred to develop its own resources rather than rely on
imported gas.

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


20. (C) Most observers and indeed Abu Dhabi government
officials have opined that Iran would be an unreliable
supplier of gas. Iran's gas policy frequently wavers between
supporting exports to regional countries and maintaining its
reserves for domestic use. Many have also noted that while
the UAE's projected power needs are immense; Abu Dhabi at
least should be able to meet them in the near term with its
own resources. Over the longer term, the UAE is looking at
other potential sources of power, including nuclear, coal,
and renewables, and more efficient uses of energy. It is
clear, however, that given current subsidies for power demand
side management is tricky. Although Abu Dhabi officials have
expressed a reluctance to rely on Iran, not all of them have
ruled it out, if the price were right and a commercially
viable agreement could be reached. In that case, it would
seem logical that one probable source of the gas could be
Iran's Salman field. As Abu Dhabi develops its offshore gas
reserves and its transmission facilities, it might be able to
connect to work that Iran has already done on the Salman
field, especially if -- as appears likely -- Dana Gas is
unable to afford Iran's new price. There is currently,
however, no infrastructure connecting Abu Dhabi's offshore
gas network onshore. In addition, Abu Dhabi officials are
dubious about the reliability of Iran as a partner. The
threat, therefore, does not appear to be a near term one.
End Comment
SISON