Sunday, June 24, 2012

Fujairah: A Slumbering City May Become A Major Gas Terminal

July 24, 2012
The Emirate of Fujairah is one of the seven emirates that make up the United Arab Emirates (U.A.E.) and it's the only one that abuts the Gulf of Oman (Indian Ocean) rather than being located within the Persian Gulf.

The city of Fujairah does not have the appeal of the two main cities of the U.A.E.: Abu Dhabi and Dubai. And as a matter of fact, already many Fujairah's residents travel to the western emirates for entertainment and shopping ends. Part of this Fujairah's slumbering attitude is due to pitiable land transport infrastructure, which only recently has been improved thanks to the Dubai-Fujairah motorway.

The real importance of this slumbering city is its port facing the Indian Ocean. In fact, Fujairah's main businesses are shipping and ship-related services. Geographically the city is perfectly located  Chinese and Indian merchants sailed regularly from and to Fujairah more than 2,000 years ago and as a consequence ships trading from the Persian Gulf anchor here for provisions, bunkering, repair and technical support before starting their long voyages. Its port along with Singapore's and Rotterdam's ranks as one of the top three bunkering ports in the world.

Now, two relevant events have the potential to additionally boost and strongly diversify the economic development of the Emirate of Fujairah. The first one is the recent inauguration of the Abu Dhabi Crude Oil Pipeline (Adcop), which permits the U.A.E. oil to bypass the Strait of Hormuz and to be exported directly from the Indian Ocean. The second one is the plan by Mubadala and International Petroleum Investment Company (IPIC) of building a major floating L.N.G. import and regasification unit in Fujairah. This option would eliminate the need for gas vessels to enter the Strait of Hormuz.

Let's now focus our attention on the second event, which is related to the construction of the gas terminal. In relation to the first event for more detailed information please refer to: BACCi, A., U.A.E.s Alternative Oil Exporting Route Bypassing the Strait of Hormuz, July 2012.

The basic idea behind the construction of this gas terminal (it will be the second regasification terminal in the U.A.E. after the one in Dubai)  the project feasibility study was completed last year and the terminal should be ready by 2014 is to provide gas tankers with the possibility of delivering their cargoes to the U.A.E. directly in Fujairah in this way cargoes would avoid to pass through the Strait of Hormuz. In other words, we are talking about energy security. Headlines normally point out the importance of the strait for oil trade, but with reference to L.N.G. the position is probably worse. For, currently there are no available alternatives for gas to the route through the Hormuz waterway. And, given the relevance of Qatar in the L.N.G. market, this means that almost a third of all world's L.N.G. shipments pass through the strait. The construction of the floating storage and regasification unit (FSRU) is another Emirati step aimed at mitigating its exposure to Iran's possible destructive actions within the Persian Gulf. During the last months in response to U.S. and E.U.'s economic sanctions Iran has menaced to close the Strait of Hormuz raising again the tension in the area. And surely, memories of the 1980s with its Tanker War (1984-88) are still very vivid and present in the U.A.E.

For completing the FSRU, the two wholly owned investment vehicles of the Government of Abu Dhabi, Mubadala Development Company (The gas project is run by its subsidiary Mubadala Oil & Gas) and IPIC have established the joint venture Emirates L.N.G. The gas unit will be built in two phases and in the end it will have an import capacity of 1.2 billion standard cubic feet of gas per day.

For decades the U.A.E. had been a gas exporter, but since 2007 it has been requiring more gas that it has been producing. Increasing natural gas production in the U.A.E. is not an easy task because of the subsidized prices. Now, the majority of the country's electricity is generated by plants that burn natural gas. With energy-hungry industries (for instance: steel production, aluminum and petrochemicals) and households consuming more and more energy, the U.A.E. (the Emirate of Dubai in 2010) and previously Kuwait (in 2009) have been forced (especially during the summer season) to import gas notwithstanding the fact that Middle East owns 40 percent of the world's known natural gas reserves. In specific, Abu Dhabi owns 3 percent of the world's total. It's quite probable that Bahrain and Oman will soon start importing L.N.G. as well. According to the Oxford Institute for Energy Studies, it seems that together the G.C.C. countries have a gas shortage summing up to 46 billion cubic meters a year. In general, forecasts state that between 2010 and 2030 Middle East annual gas consumption will double from 315 billion cubic meters to 550 billion cubic meters.

Mubadala is already a partner (with a 51 percent stake) in the Dolphin Project, a pipeline, whose full capacity is up to 3.2 billion cubic feet a day. This pipeline carries natural gas from Qatar to the U.A.E. (both Abu Dhabi and Dubai are served) and to Oman at very discounted prices ($1.3 to $1.5 per million British thermal units). The problem here is that the pipeline is operating at less than two-thirds (around 1.859 billion cubic feet a day adding together the gas for the U.A.E. with the gas for Oman)of its full capacity. Currently, the U.A.E. imports from Qatar an average of 1.659 billion cubic feet a day (929 million cubic feet a day of gas for Abu Dhabi and 730 million cubic feet a day for Dubai), while Oman receives only 200 million cubic feet a day. And for sure, Qatar with its immense reserves of natural gas ideally would be the best candidate for providing gas to the other G.C.C. countries. But power politics among the six G.C.C. countries and Qatar's desire to maximize its revenues (which is absolutely not unfounded) have always impeded progress in relation to a pan-G.C.C. gas network. Qatar prefers to sell its L.N.G. outside the Persian Gulf at much more remunerative prices. And it makes sense.

Plus, until at least 2015 Qatar is set to maintain a moratorium on gas export projects and this well precludes for both the U.A.E. and Oman the possibility of purchasing supplementary gas to be transported through the Dolphin pipeline. Given the current confrontation between Qatar and the potential G.C.C. customers, some G.C.C. countries are necessarily trying to develop some extreme gas projects like Saudi Arabia in the Empty Quarter or the U.A.E. with the Shah ultra-sour gas field in the Emirate of Abu Dhabi (the latter is a joint venture between the Abu Dhabi National Oil Company (Adnoc) and U.S. Occidental Petroleum and it's due to come on stream in late 2014). Still in the U.A.E., Adnoc has signed an agreement with Germany's Wintershall and with Austria's O.M.V. in order to develop a difficult (sulfur) gas field located in the desert of Al Gharbia. In any case, it should be understood that removing sulfur from domestic gas is expensive (gas price up to $6 per MMBtu) and forces the governments to raise the price to final customers as it's now happening with the utility bills in Dubai.

Surely, all that glisters with the newly built pipeline and the still-to-be-built gas terminal is not gold. And new problems may easily arise. For instance, one is piracy. Last February, a container vessel came under attack very close to Fujairah's coast. In the area shipping routes are already menaced by piracy and increasing the number of vessels may further decrease safe shipping routes.

But the real problem is: Where does the L.N.G. to be treated in Fujairah come from? L.N.G. is expensive for a country accustomed to pegging gas prices to around $1 per MMBtu and this well explains why Qatar prefers to sell its gas to the energy-hungry Asian countries, which  given a tight market are right now paying around $16 per MMBtu. Emirates L.N.G. suggested that it could get 1 million tons per annum of gas from Abu Dhabi's Adgas L.N.G. once an existing agreement with Japan's Tepco to supply an additional cargo a month expires in 2013-2014. Moreover, once the 25-year agreement delivering an average of 4.9 million tons per annum by Adgas L.N.G. to Japan expires in 2019, it's highly probable that it won't be renovated, but that this gas will be used domestically. Given these circumstance, supplies may come from far places like Russia, Australia, Mozambique (some commentators think also of the United States as a gas provider for the U.A.E.) but the problem is always the final price.

In the previous months, international oil traders have already built rows of massive oil storage tanks along Fujairah's coast in anticipation of the new pipeline (Sinopec, the Vitol Group and Royal Vopak N.V. are just some of these companies). Summing up, many oil and gas companies are setting up their bases in Fujairah. Estimates envisaged Fujairah's storing capacity (both for crude oil and refined products) to rise from 6.8 million cubic meters in 2012 to 13.3 million cubic meters in 2015.

For the moment the real winner of all this frantic activity along the Indian Ocean is the Emirate of Fujairah that  while maintaining its long-dated shipping and ship-related services could really become U.A.E.'s energy security hub both with reference to oil and gas with the two commodities well suited to being clustered in the same area. At this regard, the gas terminal may well supply energy to IPIC's still-in-construction 200,000-bbl/d crude oil refinery in Fujairah, which will be operational in 2016.


Tuesday, June 19, 2012

The U.A.E. Alternative Oil Exporting Route Bypassing the Strait of Hormuz

July 19, 2012
On July 15, 2012 Abu Dhabi started to export crude oil through the Abu Dhabi Crude Oil Pipeline (Adcop) bypassing the Strait of Hormuz. The initial shipment consisted of 500,000 barrels. The 403-kilometer pipeline runs from Habshan, which is a collection point for Abu Dhabi's onshore oil fields (Habshan is an area in the southwestern part of the emirate of Abu Dhabi), to the emirate of Fujairah, which is on the Gulf of Oman (Indian Ocean) past the Strait of Hormuz. From Fujairah,  the crude oil continues its trip to Pakistan in order to be unloaded at the Pak Arab Refinery Ltd., which is a joint venture between the International Petroleum Investment Company (IPIC) and the government of Pakistan. In specific, IPIC owns a 40 percent stake of this refinery, which on a regular basis utilizes 40,000 barrels a day (bbl/d) of Abu Dhabi's crude oil out of a daily consumption amounting to 100,000 bbl/d. The pipeline is operated by the Abu Dhabi Company for Onshore Operations (ADCO), which is the main oil producer of Abu Dhabi's onshore fields.

The pipeline was paid for (the link was completed as recently as last March) by IPIC, which is an investment company established  pursuant an Emir's decree of 1984 by the government of the Emirate of Abu Dhabi (which owns it). The mandate of the investment company is to invest in energy and energy-related fields across the globe. During the inauguration ceremony, Khadem al-Qubaisi, IPIC's managing director said that the final cost of the pipeline was $4.2 billion. In the end, the project was 27 percent more expensive than the $3.3 billion contract that had been awarded in 2008 to China Petroleum Engineering & Construction Corporation. Part of the additional costs was due to the a more-than-one-year delay in completing the project because of some technical problems.

According to the released information, the pipeline is able at full capacity to transport at least 1.5 million bbl/d of Murban crude, which is the oil loaded within the Gulf but at periodic intervals the pipeline could pump as much as 1.8 million bbl/d, officials stated recently. This capacity is quite interesting considering that, according to data related to last month,  the U.A.E. is the fifth largest OPEP oil producer with 2.61 million bbl/d. Were the pipeline operating at 1.5 million bbl/d of crude oil, 57.4 percent of the UAE's crude oil production (Abu Dhabi holds 90 percent of U.A.E.'s oil) would bypass the Strait of Hormuz. During the next months, ADCO will gradually increase oil capacity and by December the pipeline should be ready to operate at full capacity. The system at Fujairah is planned to load tankers at three offshore mooring buoys. Currently, only one of these three buoys is already working.

Strategic reasons are behind the decision of building the pipeline. In fact, up to now U.A.E.'s oil export route has passed through the Strait of Hormuz, which is located between Iran and Oman and is wide at its narrowest point 21 nautical miles (39 kilometers). The problem is that the width of the shipping line is in either directions only two miles separated by a two-mile buffer zone. The Strait of Hormuz is mainly considered for its importance in relations to crude oil. Around 20 percent of the world's oil (including all of Abu Dhabi's crude oil) or 35 percent of seaborne traded oil, passes through the strait. Thanks to the new pipeline the U.A.E. wants to have an alternative route for exporting its oil. This is of paramount importance, if Iran blocks the strait. After, at the beginning of the year, the U.S. and the E.U. approved sanction measures in response to Iran's suspected nuclear-weapons program, Iran later carried out some naval exercises in the area near the waterway. And it explicitly affirmed that it would implement a blockade of the Strait of Hormuz if the sanctions undermined its oil-exporting activity. The current possibility of Iran blocking Hormuz is no doubt very difficult, but in any case it cannot be completely ruled out. In fact, it's quite probable that Iran would never use the Strait of Hormuz option unless Iran was forced to a-last- resort action in order to maintain power or to countermand an imminent invasion.

Currently, were the Strait of Hormuz blocked, Bahrain, Kuwait and Qatar would be completely unable to export oil (and obviously all of Qatar's liquefied natural gas exports would be similarly blocked). Only Saudi Arabia is partially able to bypass Hormuz thanks to the 5 million-bbl/d East-West Crude Oil Pipeline (Petroline) which is used to transport oil from the Abqaiq refineries in the Eastern Province to the Red Sea terminals (Yanbu). In addition to Petroline, Saudi Arabia recently has reopened an old pipeline called the Iraqi Pipeline in Saudi Arabia (IPSA, with a capacity of 1.65 million-bbl/d), which was built in Saudi Arabia by Iraq in the 1980s with the aim of bypassing the Strait of Hormuz. In fact, during the eight-year Iraq-Iraq War, oil tankers in the Persian Gulf were possible targets for the two contending countries so, Saddam Hussein's regime decided to build IPSA, which was useful for carrying oil from the Persian Gulf to the Red Sea (Mu'ajjiz). This pipeline was laid across Saudi Arabia by Iraq, but it has not been carrying Iraqi oil since the Iraqi invasion of Kuwait in 1990. The pipeline was then confiscated in 2001 by Saudi Arabia as a compensation for Iraqi debts and was used for transporting gas from east of the country to the power plants located in the western part of Saudi Arabia. In order to carry crude oil Saudi Arabia had to recondition the pipeline. In practice, reconditioning IPSA is Saudi Arabia's move to secure an additional alternative route to export its oil.

The big problem for Riyadh is that Petroline and IPSA are able to move oil towards the Red Sea, which is not the best location in times of rising oil demand from Asia and declining demand in Europe. For many customers Yanbu's exports are economically unattractive in comparison to Ras Tanura's exports (Ras Tanura is Saudi Arabia's main oil port in the Persian Gulf). In practice, for shipping to Asia departing from Yanbu and passing through Bab al-Mandab adds up to five days than departing from Ras Tanura.

Summing up, Petroline and IPSA for Saudi Arabia and Adcop for the U.A.E. are the insurance tools permitting the two countries to maintain a good percentage of their oil revenues in the event of an Iranian blockade of the Strait of Hormuz. Surely, given current market trends where the main buyers of Persian Gulf oil are Asian countries, Adcop, having access to the Indian Ocean and not to the Red Sea, has a better location for serving Asian customers.

Putting aside strategic considerations, commercially the pipeline will be a useful transporting means if the U.A.E. is able to maintain the same price for the oil to be loaded at Fujairah and for the oil loaded from inside the Gulf, stated Robin Mills, the head of Manar Energy Consulting. In practice, had this pipeline been of paramount importance on pure commercial terms, the U.A.E. would have built it some years ago. According to some internal sources, the initial crude oil to be shipped is priced as Murban crude oil. It's possible that in the next months Abu Dhabi may identify a different pricing formula also accounting for the cost of using the link.

The day of the inauguration, on the other side of the Persian Gulf, an Iranian M.P. Mohammad-Hassan Asferi affirmed that, given the limited capacity of the pipeline, it would be impossible to consistently reduce the oil that has to pass through the Strait of Hormuz. He then continued stating that this link is "propaganda and political maneuvering guided by Western countries, especially the United States which aims to reduce the strategic importance of the Strait of Hormuz".

There are three other useful considerations. First, in Fujairah it's possible to operate with very large crude carriers (V.L.C.C.s), i.e., any oil tanker with 200,000 deadweight or more. Second, loading in the Gulf of Oman will reduce the shipping traffic through Hormuz. Third, there will be additional economic development for Fujairah. At this regard, it has to be underlined that IPIC plans to build there a refinery with a capacity of 250,000 bbl/d. This refinery will be set in order to produce oil derivatives for both local sale and export. The refinery  whose cost is esteemed at $3.5 billion  could increase the importance of Fujairah's port transforming it into a relevant hub for processing, storage and shipment of fuels.