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 ABU DHABI 00001021 001.2 OF 005 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. ABU DHABI 00001021 003.2 OF 005 ¶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 ABU DHABI 00001021 004.2 OF 005 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? -------------- -------------- ABU DHABI 00001021 005.2 OF 005 ¶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