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UAE fights to withstand the downturn.

The United Arab Emirates is pushing ahead with ambitious oil and gas development plans. But with oil price projections remaining weak, will this investment prove enterprising or reckless?

Dwindling crude oil prices have taken their toll on Gulf economies. For the past two years, the world oil markets have been suffering from severe oversupply problems and the effects on the Gulf countries have been significant. This brings home the reality that oil earnings remain at the heart of the region's economic progress. Oil accounts for nearly 80 per cent of GCC government revenue and 30 per cent of gross domestic product.

According to the International Monetary Fund (IMF), the decline in oil prices, if sustained, would pose a serious risk to the region's growth outlook. The Organisation of Petroleum Exporting Countries (OPEC) members' total revenue during the first quarter of 1998 was some $8 billion lower than in the same period of 1997. The collapse of oil prices cost Saudi Arabia alone an estimated $10 billion in 1998.

Realising the damaging effects lower oil revenues would have on their economies, GCC governments are ringing alarm bells. At the six Gulf Arab oil producers' annual summit, held in Abu Dhabi last December, oil superpower Saudi Arabia gave other Gulf producers a tough reality check by telling them that the boom days of easy petrodollars are gone forever. The UAE did the same, urging fellow Gulf Arab states to diversify their economies to ease the impact of crumbling oil prices.

The plunge in world oil prices in 1998 slashed the region's total oil revenues to an estimated $55 billion, 31 per cent down on the $80.9 billion earned in 1997. Brent crude, the international benchmark pumped from the North Sea, averaged $13 during 1998, compared to $19 in 1997 and nearly $21 in 1996.

Feeling the pinch, Kuwait has already implemented 25 per cent state spending cuts. Oman is also considering steps that include spending cuts of up to 35 per cent.

But although several major construction projects across the region have either been delayed or stretched, analysts believe the Gulf Arab states will still need to invest nearly $200 billion in their energy sectors over the next decade to meet an expected increase in demand for oil and other energy resources. According to recent forecasts, demand for oil from OPEC countries is likely to rise to 35 million barrels per day (b/d) by 2005 from 27 million b/d. These investments would be required for development and construction plans within the GCC energy sector in the next ten years.

The UAE, which saw its oil revenue fall by 5.9 per cent in 1997 to 53.5 billion dirhams ($14.6 billion) primarily because of a decline in oil prices, has already pumped more than $42 billion over the past four years into developing its economy. Investments in the oil sector alone accounted for nearly one fifth of the total. The funds invested in oil were used to maintain and develop existing onshore and offshore oil fields, to boost capacity and meet growing global crude demand.

The UAE, which has oil reserves making up 10 per cent of the world's total, is believed to have allocated another $7 billion to spend on oil and gas development projects in the next couple of years.

HIGH BUSINESS CONFIDENCE

According to Cyprus-based Capital Intelligence (CI), the UAE is better placed than many other countries in the region to withstand not only the current downturn but also a prolonged period of low oil prices. Business confidence in the UAE remains high despite the drop in oil prices to a 12-year low in 1998, and there has been no noticeable impact on the economy so far. However, the agency warns that UAE government departments are expected to tighten their belts soon, which could translate into lower business levels this year.

This has not happened yet. At the fourth Middle East Gas Summit, which was held in Abu Dhabi last October, UAE Minister of Petroleum and Mineral Resources, Obeid bin Saif Al-Nasseri, called for more investments in the energy sector to meet growing world demand. He said the UAE would push ahead with oil and gas development plans undisturbed by weak oil prices.

DOWNSTREAM MOVES AHEAD

After years of investment in oilfield development, the UAE is now focusing on gas, refining and petrochemicals. In May 1998, the Abu Dhabi National Oil Company (ADNOC) announced the launch of a new company for the production and marketing of polyethylene, the Abu Dhabi Polymers Company Limited (Borouge).

The production complex, to be located at Ruwais in Abu Dhabi, will include a world class 600,000 tonne cracker and two polyethylene plants with a capacity of 225,000 tonnes each. The polyethylene plants will produce high-density and linear low-density polyethylene.

The $600 million deal to build the plant was awarded to Alliance Bechtel/Linde (ABL) in November. Construction is expected to start in the first half of 1999 for completion in 2001. Another contract for the construction of two polyethylene swing plants, both capable of producing linear low and high-density polyethylene, will be awarded in 1999.

The ethane-feed ethylene plant will supply feedstock both to the two polyethylene plants and to ADNOC's planned ethylene di-chloride (EDC) plant. The agreement to prepare the duty specifications and tender document for the construction of the EDC plant was awarded to Brown & Root International, Inc-USA in April.

Meanwhile, gas development work in onshore fields is already underway. In fact, ADNOC has awarded a contract to a Technip/Bechtel joint venture for the addition of new gas treating condensate production and sulphur recovery facilities at its Habshan plant. The new facilities will export gas from the Thamama gas fields in the Bab and Habshan areas. Gas will be pipelined to Abu Dhabi city and the Ruwais area for use in new industrial growth facilities planned for these areas.

The scope of the $1.3 billion project, named the Onshore Gas Development Project Phase II (OGD II) includes new processing units at Habshan to produce one billion standard cubic feet per day of export gas, 45,000 to 55,000 barrels per day of stabilised condensate, 300 to 500 tonnes per day of NGL and 2,100 tonnes per day of sulphur.

Before signing the two agreements, ADNOC awarded on 24 March its first EPC project in 1998, the Ruwais General Utility Plant (GUP), to ABB Power Generation of Switzerland. The project will expand the existing plant in Ruwais by adding two main areas of operation. The first is the power block, which produces power and distilled water and the second is the seawater area. This area includes the seawater pumping station, which provides cooling water to all Ruwais industrial plants.

DEVELOPING GAS RESERVES

Spare oil capacity and OPEC production constraint have encouraged the UAE to focus on the development of its substantial gas reserves, which, at 188.4 trillion cubic feet, are the third largest in the Middle East. In fact, ADNOC is now pressing ahead with a $2.5 billion investment programme aimed at raising upstream gas handling capacity.

According to the Economist Intelligence Unit, three factors are driving the programme forward. Within the Abu Dhabi emirate, demand for gas from new industry and power and water installations is soaring. Over the coming three years domestic demand is projected to rise by 70 per cent to just under three billion cubic feet per day from the current 1.7 billion cubic feet per day. Fresh gas feedstock supplies will also be required for new petrochemicals capacity. ADNOC is also committed to tripling its exports of gas condensates to an estimated 350,000 b/d over the coming four years.

To achieve that, ADNOC is pursuing a multi-million dollar project to meet its gas and condensate production goals. The $600m onshore Asab Gas Development (AGD) project is due to be completed by European and US contractors by early 2000. It involves the extraction and processing of 856m cubic feet per day of wet gas from which 95,000 b/d of condensate will be recovered.

Both AGD and OGD-2 will provide some relief in Abu Dhabi's battle to keep supplies ahead of demand. The problem, however, is that much of Abu Dhabi's reserves are in the form of associated gas, and are, therefore, linked to oil production. So, if Abu Dhabi wishes to increase the volume of gas, oil production would have to increase as well, a distant prospect at present. According to estimates, the gap between gas demand and supply by the year 2007 will reach nearly 1.2 billion cubic feet per day.

PRONOUNCED EFFECT

The UAE has the necessary funds to invest in downstream activities and the government is willing to spend them on large oil and gas development projects to meet the country's rapidly expanding energy requirements.

However, if the current effect of the oil crisis on the UAE economy becomes even more pronounced in 1999, then government expenditure may fall, leading to a further slowing of activity. Abu Dhabi's almost two million b/d of oil production, its overseas investment portfolio of over $120 billion and significant non-oil sector will provide a cushion of comfort. However, they will not be enough to allow the UAE to escape the downturn already gripping the rest of the GCC countries entirely.

Therefore, the real worry is that conditions may get tougher in the next few months with little prospect of oil price recovery. This may force the UAE to bring about painful adjustments to the economy.
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Title Annotation:United Arab Emirates
Comment:The United Arab Emirates (UAE) has made substantial investments on oil and gas development projects despite the prevailing low oil prices.
Author:Taylor, Julian
Publication:The Middle East
Geographic Code:7UNIT
Date:Apr 1, 1999
Words:1594
Previous Article:A chip off the old block.
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