UAE - Part 2 - Dubai's Petroleum Trade & Union's Logistics.

Dubai exports all of its crude oil production, which is averaging about 240,000 b/d compared with a peak of 425,000 b/d in October/November 1990. By 2015, Dubai will have become almost totally dependent on oil and gas imports from neighbouring Abu Dhabi and other GCC sources. By then, according to a programme started in early 1997, the contribution of non-petroleum sectors to Dubai's GDP will have reached 100%. But Dubai will remain a player in regional oil trade.

Dubai is importing condensates for its refinery, which went on stream in 1999 (see Downstream Trends of this week). The emirate is a major consumer and importer of natural gas. Local demand for gas has been rising by 17-20% per annum in recent years and has reached more than 1,500 MCF/day. But actual gas consumption averages 1,170 MCF/d, up from less than 500 MCF/d in 1995, because of a lack of supply sources. Demand is projected to rise to more than 2,000 MCF/d in 2010. The latter figure could be much higher if city gas is introduced to cover the emirate's urban consumers. The adjacent emirate of Sharjah is the first in the GCC to have a city gas grid in operation. It will be followed by Abu Dhabi.

Dubai has become an important player in regional oil products trade. The state-owned Emirates National Oil Co. (ENOC), which operates a condensate refinery at Jebel Ali, is co-leader of Van Ommeren Tank Terminal Fujairah. This has major storage, blending and terminal facilities for oil products in the emirate of Fujairah, on the Gulf of Oman, which have been in operation since January 1999. At Dubai's Jebel Ali free zone, the private Star Energy Corp. has similar facilities which are expanding.

ENOC unit, Dubai Shipping Co. (DSC), carries fuels exported from the condensate refinery and oil products and chemicals imported for local consumption. In 2000 it took delivery of two 85,000 CM tankers built at the cost of $64.6m by Daewoo Heavy Industries in South Korea. Named 'Gulf Grace' and 'Gulf Progress', the two vessels now carry condensates to the refinery from Iran, Qatar and other sources. Dubai-based Dubai & Kuwait Shipping Co. (D&K Shipping) is a 50-50 JV of ENOC and the Kuwaiti firm Independent Petroleum Group (IPG), which in 2001 got three oil tankers with each having a capacity of up to 80,000 dwt, in addition to one 45,000 dwt oil vessel purchased in 2000 at $15.5m.

Earlier this month ENOC entered into a JV with Abu Dhabi's International Petroleum Investment Co (IPIC), Oman Oil Co. (OOC) and Thales, the international electronics and systems group, to set up a $430m shipping company, Gulf Energy Maritime (GEM). ENOC holds 35% in GEM, which is capitalised at $129m. IPIC and OOC each have 30% and Thales 5% under the UAE Offset Programme.

The project, with the outlay being structured as a mix of 30% equity and 70% debt, will have 16 vessels in the first phase. Abu Dhabi Commercial Bank, Emirates Bank and Mashreqbank are financing the company. Initially, GEM will have a fleet of two double-hull Panamax vessels and four others that are Panamax size. They are being built by Hyundai Heavy Industries and are expected to be delivered by 2005.

ENOC Supply & Trading is expanding its trading operations. It has major offices in Singapore and Dubai, with small offices in London and Bombay. The firm trades across the barrel, from crude oil to naphtha, distillates and fuel oil. Having started up in South-East Asia, it is moving into the Indian subcontinent and the Middle East. It will eventually move into Europe, Russia and the Caspian.

Dubai's Emirates Petroleum Products Co. (EPPCO), in which Caltex has a stake, is marketing products in most of the UAE emirates (see Downstream Trends).

Trade & Pricing: The Dubai government allows its crude oil to be traded freely, whereas the other oil exporting governments in the Middle East put restrictions on their sales. The export blend, called Dubai, is heavy and sour of 32.5[degrees] API gravity with 1.7% sulphur.

Dubai is the world's marker for trading in heavy/sour crudes. Iran and its Arab Gulf neighbours price their east-bound crude oil sales according to the average spot market prices of Dubai and Oman crudes. The price of Oman, a lighter and sweeter crude relatively rich in distillates, is determined to a large extent by the spot market value of Dubai.

The market value of Dubai, as a benchmark, is assessed mainly in terms of spreads against Dated Brent - a light/sweet grade which is the marker for most of the world's crude oils. Brent is influenced by WTI, a similar crude which does not trade outside the US.

The physical trade in Dubai, however, is lacking in transparency and has become illiquid, because its output is limited to less than 15 cargoes per month. As the volume is too small to sustain a spot market, Dubai has become subject to manipulation. Only ten or 12 cargoes of Dubai per month are traded on spot basis. This limitation means the spot price of Dubai is influenced by large liftings.

If a company loads two VLCCs within days, the spot price of Dubai rises quickly irrespective of the situation for Dated Brent. But the offtaker using VLCCs would only buy when the spread between Dated Brent and Dubai is wide, i.e., when the spot market value of Dubai is low enough for the buyer to jump to the opportunity.

In February 2002, Shell and Wall Street trader J. Aron exercised their seller's option to supply Oman - in place of Dubai - into several Dubai-related contracts. The contracts valued Oman at a premium of 5 cents/barrel over Dubai. It was the first time that Oman was delivered in place of Dubai since November 2001, when Platts said it would start taking such trades into consideration in assessing Dubai values. Usually Oman commands a higher premium over Dubai.

The state-owned Indian Oil Co. (IOC) is one of the largest buyers of Dubai. At times it takes full advantage of low Dubai prices and buys large cargoes of the crude when the spread is wide.

Dubai has had a role in the NYMEX futures market since May 2000, when the New York Mercantile Exchange launched a sour crude contract based on Dubai. But because this contract has failed to gather adequate liquidity, the trade has been dominated by buyers. Charges of price manipulation has undermined the contract's credibility (see background in Vol. 58).

Because of a shortage in infrastructure capacity at Cushing, where a slight shift may cause WTI futures and spot prices to rise or fall sharply, NYMEX has been advised to move its WTI delivery point to the Gulf coast. While stocks at Cushing are low, those on the Gulf coast are high.