IRAN REFINED PRODUCT SANCTIONS: THE VIEW FROM THE UAE

S E C R E T SECTION 01 OF 02 ABU DHABI 001040

NOFORN
SIPDIS

E.O. 12958: 11/03/2019
TAGS: ENRG EPET PTER PGOV PREL IR AE
SUBJECT: IRAN REFINED PRODUCT SANCTIONS: THE VIEW FROM THE UAE

REF: DOE/EIA IRAN COUNTRY ANALYSIS BRIEF

CLASSIFIED BY AMBASSADOR RICHARD G. OLSON FOR REASONS 1.4 B AND D.


1. (C) SUMMARY. The UAE's ties to Iranian refined product markets are
likely limited to Dubai's involvement as a logistical hub for the
storage and transshipment of these products. However, the UAE diesel
market provides some relevant insight into the impact of refined
product sanctions on Iran. UAE diesel shortages and pricing
discrepancies have driven the development of diesel smuggling, both
domestic and foreign. Smugglers, long established in the region,
could quickly reconfigure their operations to supply Iran with
diesel; disrupting these nimble and small scale operators would be a
significant challenge. END SUMMARY.

UAE TIES TO IRAN'S REFINED PRODUCTS
--------------


2. (C) Detailed UAE trade data is not available, as official
statistics only include non-oil exports. However, senior ADNOC
officials have told EconOff that they do not believe any ADNOC
refined products are sold to Iran. DOE (ref) and press reports
support this analysis, with most analysts agreeing that Iran's
refined products come from European and Indian companies. Some
reports indicate that these products may transit through Dubai's
Jebel Ali port. While Jebel Ali is a major logistics hub, 2008 UAE
trade statistics indicate only $21 million in petroleum (mineral
fuels, oil, waxes and bituminous substances) re-exports to Iran,
while the UAE imported over $160 million of these products from Iran.
(Note: Re-export is the UAE term used for transiting goods. The UAE
does not publish complete statistics on UAE hydrocarbon exports. End
Note.)


3. (C) Star Energy, a joint venture between German-based Oiltanking
and Abu Dhabi's Star Energy Group based in Dubai, is identified in
press reports as storing foreign refined products destined for Iran
in Jebel Ali. On October 8, PolEconOff spoke with a Star Energy
manager, who confirmed that the firm operates a refined product
storage terminal at Jebel Ali. Star Energy does not trade in refined
products, rather it facilitates storage for clients in its 32 tanks.
While the manager would not confirm any details about Star's clients,
he indicated the U.S. Navy uses Star for refined storage. (Note: U.S.
Navy CTF-53 confirmed the Defense Energy Support Center stores
aircraft and ship fuel in Star Energy storage tanks. End Note.) The
manager refused to provide details on the origin or destination for
fuel stored in its tanks.


4. (C) Although it is possible that some refined products destined
for Iran are transiting the UAE, the Mission also has evidence that
Iranian refined products are being exported to the UAE. EmbOffs have
met Iranian nationals who smuggle Iranian diesel in 55 gallon drums
into the UAE by dhow. These smugglers report they make a good
profit, as Iranian diesel prices are low relative to UAE prices. In
recent weeks, smugglers are now complaining that the Iranian
Government has clamped down significantly on smuggling over the last
several months in anticipation that refined product sanctions were
imminent.

REFINED PRODUCTS IN THE UAE
--------------


5. (C) Although the UAE is an oil exporter, there is a shortage of
diesel products within the country. Refinery capacity in the UAE has
not kept pace with rising demand, and ADNOC is currently developing
two large refineries at Taweelah and Fujairah. The former is likely
to be primarily to meet domestic demand. The latter, given its
location on the Indian Ocean, may produce refined products for
export. However, ADNOC also sells refined products throughout the
UAE (with the exception of Dubai) and this refinery's production may
be used domestically.


6. (C) As the UAE's oil reserves are concentrated in - and belong to
- Abu Dhabi Emirate, diesel is cheaper and more plentiful in Abu
Dhabi than in Dubai and the Northern Emirates. Dubai's real estate
boom into early 2008 drove growing demand for diesel, leading trucks
to drive to Abu Dhabi to take advantage of lower prices. ADNOC
implemented a policy to ban residents of other emirates from buying
diesel in Abu Dhabi, but that only encouraged smuggling from other
locations. In addition to the Iranian smuggling discussed in para 4,
Saudi Arabia is also reportedly concerned that Saudi diesel (even
cheaper than Abu Dhabi's) is being smuggled into the UAE. A Western
consultant told EconOff in late 2008 that he was studying Saudi
diesel smuggling into the small Gulf states (presumably on behalf of
Aramco).


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7. (C) Comment: While the UAE's diesel shortages and smuggling
problems may seem irrelevant in the Iranian sanctions context, in
fact they are indicative of the challenges of sanctioned refined
product trade in the Gulf. Where shortages exist, smuggling booms
and the Gulf dhow trade is quick to respond. Just as dhows were used
to smuggle Iraqi oil out of the Gulf, these same traders will likely
be quick to supply Iran with refined products if needed. Disrupting
this trade would be a significant logistical challenge that will
require extensive consultation and support from Gulf states. End
Comment.
OLSON