The United Arab Emirates: Selected Issues and Statistical Appendix

This Selected Issues paper on the United Arab Emirates highlights the achievements in the diversification of the economy and the developments and outlook of the hydrocarbon sector. The political structure of the Federation gives a great deal of independence to the individual Emirates in pursuing an economic strategy based on their respective comparative advantages. Openness to trade, trade facilitation, and a favorable business environment have enhanced non-oil diversification by stimulating trade and trade-related services.

Abstract

This Selected Issues paper on the United Arab Emirates highlights the achievements in the diversification of the economy and the developments and outlook of the hydrocarbon sector. The political structure of the Federation gives a great deal of independence to the individual Emirates in pursuing an economic strategy based on their respective comparative advantages. Openness to trade, trade facilitation, and a favorable business environment have enhanced non-oil diversification by stimulating trade and trade-related services.

III. A Survey of the U.A.E. Hydrocarbon Sector4

A. Introduction

28. The United Arab Emirates (U.A.E.) has one of the most diversified oil exporting economies in the Middle Eastern region. Nevertheless, overall economic developments remain dependent on the hydrocarbon sector, which accounts on average for about 30 percent of GDP. Hydrocarbon related industries, such as refining and petrochemicals, also contribute significantly to economic activity.

29. While the relative economic importance of oil production has diminished in recent years, it still has an important impact on the development of the individual Emirates’ economies through the financing of modern infrastructure, social services, and industrial development. Likewise, the natural resource-poor northern Emirates have benefited greatly from Abu Dhabi’s oil riches through direct financial transfers, transfers from the Federal government, and subsidized energy supplies.

30. Abu Dhabi accounts for more than 90 percent of the federation’s oil and gas reserves and production. The direct reliance of the local economies on the hydrocarbon sector differs greatly between the individual Emirates and the sector’s GDP share varies from more than 50 percent in Abu Dhabi to zero in the small northern Emirates of Ajman, Fujairah, and Umm al-Quwain. Oil and gas production contribute about 6 percent to Dubai’s GDP, while its share is about 12 percent in Sharjah and 4 percent in Ras al-Khaimah (Table III.1).

Table III.1.

The Hydrocarbon Sector in 2004

article image
Sources: U.A.E. authorities; EIA.

Ajman; Fujairah; and Umm Al-Quwain.

31. Oil production is currently near capacity at about 2.5 mbd, accounting for three percent of world oil production. This makes the U.A.E. the 9th largest crude oil producer and 6th largest net oil exporter worldwide. With official reserves of around 98 billion barrels, which will last for more than 100 years at the current production rate, the country owns almost 10 percent of the world’s proven oil reserves.

32. The U.A.E. has the world’s fifth largest natural gas reserves, which amount to almost four percent of the world’s total. However, the gas sector still has not yet developed to its full potential, and both domestic utilization as well as exports of natural gas products is likely to increase in the future. The U.A.E.’s current share in global natural gas production is just under 1.7 percent, up from 0.4 percent in 1980. About 85 percent of output is consumed domestically.

B. The Oil Sector

Development of the U.A.E. oil industry

33. Oil in commercial quantities was discovered in Abu Dhabi in 1958, and exportation of crude oil began in 1962. While some small, wholly foreign owned international oil companies have been active in Abu Dhabi since 1965, the bulk of oil production has always been with the Abu Dhabi Company for Onshore Oil Operations (ADCO) and the Abu Dhabi Marine Operating Company (ADMA-OPCO). Since 1974, the Abu Dhabi government holds 60 percent of the equity of the two main producing companies.5 A third large, partly state-owned company, the Zakum Development Company (ZADCO), was established in the mid-1980s.6 The Abu Dhabi National Oil Company (ADNOC) has been entrusted with the management of the government’s equity shares in these companies (Box III.1).

The Abu Dhabi National Oil Company (ADNOC)

The Abu Dhabi National Oil Company (ADNOC) was established in November 1971. The company’s main objectives are (1) to act on behalf of the Abu Dhabi government in taking up its option for participation in oil exploration concessions; (2) to manage the government’s participation share in the equity of the partly government-owned concessionaires; and (3) to be responsible for the supply, distribution, and marketing of oil products in Abu Dhabi.

The company has also been responsible for foreign investment in oil-related industries. In 1982 it established the International Petroleum Investment Company (IPIC) in partnership with Abu Dhabi Investment Authority (ADIA), in order to invest in oil exploration, refinery operations, petrochemicals, and alternative energy sources outside Abu Dhabi.

ADNOC initially sold most of its participation oil back to the international co-owners of ADCO and ADMA. However, encouraged by its greater marketing experience, the proportion of crude oil marketed directly by ADNOC to parties other than the foreign equity holders rose quickly. In addition, ADNOC got engaged through various subsidiary companies in gas production and processing, oil and gas shipping, refining, exploration and oil field development, oil industry related services, petrochemicals, and fertilizer production. Today, most activities of ADNOC are carried out by its 15 subsidiaries.

In June 1988 the management of the oil industry in Abu Dhabi was reorganized. An 11-member Supreme Petroleum Council (SPC) was established to manage the Emirates’ oil affairs, and the Abu Dhabi Department of Petroleum which formerly had been responsible for policy formulation was abandoned. The formation of the SPC in effect consolidated the Department of Petroleum and the Board of ADNOC into one body.

34. Although exploration concessions have been granted in each of the other six Emirates, actual field developments have been limited to Dubai, Sharjah, and Ras al-Kaimah. Oil was discovered in Dubai in 1966 and in Sharjah in 1972. Ras al-Khaimah joined the ranks of the oil producing Emirates in 1983. While the scale of crude oil production in both Sharjah and Ras al-Khaimah has remained very modest, Dubai developed into a sizable oil producer during the 1970s. However, production has been falling since the 1990s due to the advanced depletion of the Emirate’s oil reserves.

35. The majority of crude oils extracted in the U.A.E. are considered light but sour. The sulfur content is particularly high in the case of the crude oils from the offshore fields. Therefore, these crude oils are traded at significantly lower prices than the leading benchmark crude oils from Texas (WTI) and the North Sea (Brent) (Table III.2).

Table III.2.

Characteristics of Main Crude Oils

article image
Sources: ADNOC; Energy Information Agency; McQuilling Services, LLC; http://www.mcqservices.com

API gravity: American Petroleum Institute measure of specific gravity.

In percent of weight.

Average export prices for U.A.E. crude oils; Cushing average spot price (fob) for WTI and Brent.

Institutional arrangements

36. The individual Emirates retain ownership and control of the country’s oil resources. The Federal Ministry of Petroleum and Minerals has only an advisory and statistical function, and the Minister represents the Federal government at OPEC meetings.7 As a result, there is considerable diversity in the extent of government control related to the production and marketing of oil and gas in the individual Emirates. The concession agreements granted by Abu Dhabi have traditionally conformed to the guidelines set by OPEC. These guidelines include arrangements for royalty payments, sharing of net company profits, and the option of relinquishment of concession areas. In contrast to most other countries in the region (the other exceptions being Oman and Qatar), the Emirates have not fully nationalized their oil industry during the 1970s. Also, recently there have been renewed efforts to increase the participation of international oil companies (IOC) in Abu Dhabi’s oil sector.

37. Production and pricing policies have varied greatly due to the differing sizes of the Emirates’ hydrocarbon endowments and their long-term development plans. Hydrocarbon-rich Abu Dhabi has traditionally based its production policies on maximizing the long-term benefits of its oil wealth, in most years adhering to OPEC agreements and regularly adjusting short-term production according to demand conditions and technical field management considerations. The other Emirates with their modest hydrocarbon endowments have instead followed a policy of maintaining production close to capacity in order to maximize short-term revenues. While prices of Abu Dhabi’s crude oil had been largely determined within the framework of OPEC agreements, Dubai marketed its oil on the spot market. This way, Dubai’s Fateh emerged as the most important crude oil in the Middle Eastern spot market as well as a reference crude oil price of worldwide importance.

Oil production

38. The U.A.E.’s total oil production increased rapidly after 1962, reaching a peak of more than 2 mbd in 1977. However, since 1975 ADCO and ADMA have been subject to production ceilings, which have effectively determined their annual production levels. Initially, production restrictions were introduced for conservation reasons. Abu Dhabi oil fields began to suffer from low reservoir pressure due to rising ratios of associated gas to crude oil, a development that threatened to damage the productive capabilities of the fields. Since 1981 the ceilings have reflected primarily the U.A.E.’s efforts as a member of OPEC to support elevated oil price levels. As Dubai has in general followed a policy of maintaining its production close to capacity, Abu Dhabi has thus served effectively as a swing producer within the U.A.E. absorbing the entire reduction in crude oil production in order to keep total U.A.E. production in line with the country’s OPEC quota commitments.

uA03fig01

UAE: Annual Average Oil Production by Emirate

(in million barrel)

Citation: IMF Staff Country Reports 2005, 268; 10.5089/9781451801132.002.A003

39. Throughout the 1990s, the U.A.E. crude oil production remained high and stable. However, Abu Dhabi’s share in this total increased over time to offset declining production in Dubai. As a result of the intensive exploitation of Dubai’s oil fields in the past, the potential remaining production span of the most important fields in Dubai is expected to be limited. Since end-2002, Abu Dhabi’s production has picked up markedly to accommodate growing global oil demand and reached a new high in the first quarter of 2005.

uA03fig02

U.A.E.: Crude Oil Production and OPEC Quota

(in 1000 b/d)

Citation: IMF Staff Country Reports 2005, 268; 10.5089/9781451801132.002.A003

40. In addition to crude oil and natural gas, the U.A.E. has focused in recent years on developing the production, processing, and exports of condensates. Condensate production is outside the OPEC quota mechanism and therefore suitable to generate a sustained stream of additional export receipts. Total output is projected to reach 0.4 mbd in 2005, up from about 0.02 mbd in 1994.

Exploration and field development

41. Although ceilings on production levels had been imposed since 1975, the authorities in Abu Dhabi have maintained their efforts throughout the past 30 years to explore for additional oil reserves; to develop new oil fields; and to raise the capacity of existing fields through secondary recovery programs. While actual crude oil production fell rapidly during the early 1980s, production capacity was increased significantly during the same period, resulting in excess spare capacity of almost 2 mbd in the late 1980s. Under the impact of low oil prices, Abu Dhabi froze all exploration development programs. As a result, production capacity declined significantly in the early 1990s.

42. In 2004, industry and government sources estimated the U.A.E.’s total crude oil production capacity at about 2.5 mbd. Between 2000 and 2004 the U.A.E. invested over $8bn in the oil sector in order to maintain existing oil production capacity and to increase it in the long run. The U.A.E. is planning to raise its crude oil production capacity by about 1 mbd to more than 3.5 mbd by 2006, at an estimated cost of $1bn for each 0.1 mbd of additional capacity to be brought on line.8 0.3 mbd of this capacity increase is scheduled to come on stream in 2005, and the remaining 0.7 mbd will follow during 2006.

43. Indications are that the major oil reservoirs in the U.A.E. have been identified. Accordingly, priority is given to further developing existing oilfields and to maximize recovery ratios. Water injection has been increasingly replaced by gas re-injection in order to maintain optimal pressure in producing oil wells. Recent development efforts are relying more on the use of Enhanced Oil Recovery technologies, such as horizontal well drilling; three dimensional seismic analyses; and behavioral modeling of oil wells.

Refining, exports, and domestic consumption

44. The U.A.E. has five refineries with a combined capacity of more than 0.65 mbd. The build-up of refining capacity since the 1980s made the U.A.E. a sizable net exporter of refined products. The share of refined products in the total oil export volume, however, remains modest at about 10 percent. With the development of domestic gas production and transport infrastructure, more natural gas has been used for electricity production, thus freeing additional oil for exports. Most of the U.A.E.’s oil exports are shipped to Asia.

45. Energy subsidies were eliminated in the early 1980s. Since 1986, domestic retail prices of petroleum products have remained largely unchanged9 and were well above international ex-refinery prices throughout most of the late 1980s and 1990s. Correspondingly, average demand growth slowed significantly from about 13 percent annually before 1983 to just 1.3 percent per annum until the mid-1990s. While no recent data is available, domestic demand growth is believed to have accelerated in previous years driven by rapid population growth. Oil industry publications estimate U.A.E. domestic oil consumption in 2004 at 0.15 mbd.

Government oil receipts

46. The individual Emirate’s external oil receipts are made up of royalties and income taxes paid by the oil producing companies and of net receipts from participation oil, which is proportional to the government’s interest in the oil companies. Royalty and income tax rates, as well as the extent of government ownership have differed between the Emirates in the past, however, no such information has been available for Dubai, Sharjah, and Ras al-Khaimah in recent years.

47. In Abu Dhabi, the royalty payments are calculated at 20 percent of posted oil price and paid on the volume of exports. ADCO, ADMA, and ZADCO pay income taxes at the rate of 85 percent of taxable income. The smaller, fully foreign owned companies, as well as ADNOC are subject to an income tax rate of only 55 percent. Royalty and income tax rates have been unchanged since 1974. ADNOC receives the proceeds from the sale of oil based on its participation in ADCO; ADMA; and ZADCO, and pays royalties and income taxes on these sales to the Abu Dhabi government. The international shareholders of Abu Dhabi’s main producing companies receive a fixed one-dollar-per-barrel profit share. Therefore, they do not participate in the gains from recent high oil prices.

C. Natural Gas

Background

48. The U.A.E.’s proven natural gas reserves are estimated at 212 trillion cubic feet(Tcf), ranking fifth in the world (after Russia, Iran, Qatar, and Saudi Arabia) and amounting to almost 4 percent of the world total. Most of these reserves (196.1 Tcf) are located in Abu Dhabi, while Sharjah, Dubai, and Ras al-Khaimah contain smaller reserves of 10.7 Tcf, 4.1 Tcf, and 1.2 Tcf, respectively. A large share of the natural gas found in the U.A.E. is associated with crude oil. Most of the gas is sour, which makes it comparatively costly to process. Therefore, the optimal use for associated gas has long been to reinject it into oil fields to enhance oil recovery.

49. The development of gas reserves has become a priority in the U.A.E. due to the fast rising domestic gas demand, which has been growing at about 7 percent annually during the past decade. Up to the late 1970s, between 85 and 95 percent of the large amounts of gas that were produced in association with crude oil were flared, while the remainder was used as fuel in electricity generation and water desalination. However, during the 1970s and early 1980s, large investments were made in order to reduce the proportion of associated gas that had to be flared. Unassociated gas, which had long remained unutilized, began to be developed to secure a steady domestic gas supply independent of volatile crude oil production volumes; and to build up additional potentials for exports.

uA03fig03

U.A.E.: Dry Gas Production and Consumption

(in Tcf)

Citation: IMF Staff Country Reports 2005, 268; 10.5089/9781451801132.002.A003

Main natural gas ventures

50. In 1973, the Abu Dhabi Liquefied Gas Company (ADGAS) was set up by ADNOC and a consortium of four foreign companies to utilize the country’s large offshore gas resources, thereby greatly reducing the need to flare gas from ADMA’s offshore oilfields.10 The ADGAS LNG plant came on stream in1977, with most of the output exported to Japan’s TEPCO under long-term sales agreements. Productions of LNG and LPG increased significantly over time and have reached 8 million tons, resulting in annual sales exceeding $2bn since 2003. No further expansions of LNG operations are currently planned. With the current facilities aging, all future capital expenditures will be used to maintain production capacity.

51. In 1978, the Abu Dhabi Gas Industries Limited (GASCO) was established to utilize associated gas from Abu Dhabi’s onshore oil fields.11 The new company began production in 1981. Most output of NGL is exported, while the remaining processed gas and residual dry gas are used domestically as fuel and petrochemical feedstock. In 2001, Abu Dhabi Gas Processing Company (ATHEER) was integrated into GASCO, which made GASCO one of the largest gas processing companies in the world. During the past years, several large-scale natural gas projects substantially increased the scope of GASCO’s operations. These projects are mainly designed to produce gas for power generation, condensates, and NGL.

uA03fig04

Onshore Gas Processing

(in Bcf)

Citation: IMF Staff Country Reports 2005, 268; 10.5089/9781451801132.002.A003

Source: ADNOC’s Five Year Achievement Report 2004

52. The Dubai Natural Gas Company (DUGAS) started production of LPG in 1980. While a small part of output has been locally bottled and consumed, most is exported to Japan under long-term contracts. With oil production in Dubai declining, the domestic supply of gas regularly fell short of the company’s processing capacity. Currently, the LPG plant is running at only about 22 percent capacity utilization. However, in 1995 DUGAS diversified into the production of MTBE, a gasoline additive.

53. The Sharjah Liquefaction Company (SHALCO) was set up in March 1984 as a 60 percent government-owned undertaking12 to produce LPG based on associated gas. Dry gas from SHALCO is supplied to the Northern Emirates for power generation. Until recently, Sharjah has also supplied Dubai’s entire gas requirements. Since the completion of the Maqta pipeline between Abu Dhabi and Dubai in May 2001, the Emirate also receives gas from GASCO.

54. The Dolphin project is one of the largest trans-border energy developments in the Middle East. It aims at supplying dry gas from Qatar’s giant North field via pipeline to Abu Dhabi, from where it will be further distributed to Dubai, Fujairah, Ras al-Kaimah, and Oman. The project was launched in early 1999, and a natural gas sales agreement between Dolphin Energy Limited (DEL)13 and Qatar Petroleum signed in 2001. First gas deliveries to the U.A.E. are expected by end-2006. DEL also operates a pipeline supplying a Fujairah gas and desalination plant with natural gas from Oman since January 2004. Eventually, Qatari gas will be supplied both to Fujairah and Oman. In May 2005, DEL and the Dubai government signed a 25-year supply contract, which had been long-delayed due to protracted price negotiations.

D. Policy Issues

The hydrocarbon sector and the non-oil economy

55. The correlation between oil export receipts and non-oil growth in the U.A.E. continues to be relatively high. The main channels for transmission of shocks from the oil sector to the non-oil sectors are through government expenditures and the availability of gas supplies for energy-intensive or gas-processing manufacturing industries in the non-oil economy.

56. The most immediate impact of adverse oil market developments on the non-oil economy is through government expenditures. U.A.E. government finances still rely heavily on hydrocarbon revenues, which have a share of about 80 percent of consolidated revenues. Investment incomes from hydrocarbon-related savings also make a significant contribution to government revenues. Furthermore, although not all hydrocarbon revenues are channeled through the Emirate or Federal budgets, these revenues are used to finance a diverse range of local projects.

uA03fig05

Hydrocarbon Sector and Non-oil Growth

Citation: IMF Staff Country Reports 2005, 268; 10.5089/9781451801132.002.A003

57. As most gas is produced in association with oil, reductions of oil production due to OPEC quota ceilings, technical restrictions, or depletion of reserves (in the case of Dubai) have repeatedly constrained U.A.E. gas production and processing in the past. Shortages of gas supplies in turn have had repercussions on the manufacturing sector, in particular the petrochemical and aluminum industries. Natural gas demand is projected to keep growing rapidly in the future. Therefore, the further development of domestic gas production and the guaranteed supply of non-associated gas through the Dolphin project will be important to insulate to some extent the non-oil economy from developments in the oil sector.

Global oil market stability

58. The oil-rich Emirate of Abu Dhabi has an important role towards maintaining price and supply stability in the international oil market, as the Emirate is one of only very few oil producers worldwide which has traditionally maintained spare production capacity in order to react flexibly to changing market conditions. The Emirate has followed a policy of fostering a stable international oil market, and has repeatedly contributed to ensuring oil market stability by compensating for production shortfalls in other countries and by accommodating growing global demand for oil.

59. Currently, an ambitious plan to expand oil production capacity is underway, enabling production levels to increase in line with expected world oil demand. The government’s intention in expanding production capacity is for the U.A.E. to regain its capability to react flexibly to market developments by maintaining a sizeable spare capacity to increase the country’s role in the world oil market.14

60. In order to further promote oil market stability, the U.A.E. is encouraged to enhance transparency in information related to petroleum production, capacity, and reserves. Such data is crucial for investment planning and market forecasting, and the high volatility of oil prices in the recent past was at least partially attributable to a lack of oil market data transparency in an environment of tight production, refining, and transport capacity as well as an unusually high number of individual supply shocks.

References

  • Abu Dhabi National Oil Company, 2004, “ADNOC’s Five-Year Achievement Report”.

  • APS Review Oil Market Trends, 2005, “Abu Dhabi–Oil Series: The Abu Dhabi National Oil Co.; The ADNOC Structure; Gas Pipeline & Dolphin Project; The Decision Makers”, Vol. 68, Issues 1–4.

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  • Economist Intelligence Unit, 2004, “U.A.E.—Country Profile, 2004”.

  • Energy Information Administration, 2005, “U.A.E.—Country Analysis Brief”.

  • Gilles, Valentin, and Ayse Hazir, 2004, “Alladin’s Cave?” Oil & Gas Investor, August 1, 2004.

  • Husari, Ruba, 2004, “U.A.E. Draft Plans for Extra Capacity”, The Oil Daily, October 1, 2004.

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  • Kiwan, Raja, 2005, “Abu Dhabi Poised for Capacity Additions”, International Oil Daily, January 27, 2005.

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  • Platts Oilgram Price Report, 2004, “U.A.E. Can Raise Output by 500,000 b/d, but is Hampered by Environmental Legislation”, Vol. 82, No. 107, June 7, 2004.

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4

Prepared by Holger Floerkemeier.

5

The other shareholders of ADMA-OPCO are Japan Oil Development Company (JODCO, 12 percent), British Petroleum (BP, 14.66 percent), and Total (13.33 percent). The remaining shares of ADCO are held by ExxonMobil, BP, Shell, and Total (9.5 percent each), and Partex (2 percent).

6

The government’s share in ZADCO was 88 percent until spring 2005, when ExxonMobil acquired a 28 percent share. The other shareholders are JODCO and Total.

7

Abu Dhabi became a member of the Organization of the Petroleum Exporting Countries (OPEC) in 1966. While the other oil producing Emirates never formally joined the ranks of OPEC, Abu Dhabi transferred its membership to the U.A.E. when the Emirates federated in 1971.

8

Comment by U.A.E. Oil Minister Al-Nasseri on an energy conference in Abu Dhabi (Platts, Oct. 11, 2004).

9

With the exception of diesel fuel prices, which were raised in 1996.

10

ADNOC initially owned 51 percent of equity. After a restructuring of ADGAS’ ownership in April 1998, ADNOC’s capital share increased to 70 percent, the remainder held by Mitsui (15 percent), BP (10 percent), and TotalFinaElf (5 percent).

11

GASCO’s shareholders are ADNOC (68 percent), Shell and CFP (15 percent each), and Partex (2 percent).

12

Other shareholders are Amoco (25 percent); C. Itoh and Tokyo Boeki (7.5 percent each).

13

DEL is 51 percent owned by the Abu Dhabi Offsets Group (shares were transferred in 2004 to the Abu Dhabi government-owned investment group Mubadala). The original foreign partners were TotalElfFina and Enron with 24.5 percent of the shares each. Enron gave its share back to UOG in 2001, which sold them to Occidental Petroleum in June 2002.

14

In principle, Abu Dhabi could to some degree increase crude oil production further in the short-term, however, it is also constrained by strict environmental laws and its efforts at implementing its zero gas flaring rules. As the capacity of gas transport, storage, and processing facilities are limited, raising oil production would necessitate the lifting of restrictions on flaring of natural gas extracted in association with crude oil.

United Arab Emirates: Selected Issues and Statistical Appendix
Author: International Monetary Fund