DUBAI: With the signing on May 3 of an agreement to take Qatari natural gas, Dubai finally laid to rest speculation that negotiations on the $3.5bn Dolphin Project had run into an impasse.
It was the Dubai Supply Authority (DUSUP) that signed up to the massive project, which is as ambitious as it is expensive. It involves the strategic development of Qatar's North Field, the world's largest non-associated gas field.
The project plans on having sub-sea pipelines transport 90m cu metres per day of refined gas from Qatar to the UAE, with the eventual goal of supplying gas on to Oman. The whole concept involves piping energy across international borders - something that has never before been attempted between the Gulf Cooperation Council (GCC) states.
Despite the obvious challenges then, the project had got off to a good start. Companies in Abu Dhabi and Fujairah signed long-term sales agreements with Dolphin Energy in October 2003. Yet already there were some concerns, as Dubai was conspicuously absent from any negotiations at this time.
A number of unexplained delays characterised the months that followed, highlighting the complicated political matters that have lingered around this project. Some reports indicated that Dubai was playing hardball, holding out for a more competitive price from the Qataris and threatening to turn to Iran or other suppliers if a low price wasn't offered. Dubai has, in the past, received subsidised gas from its neighbouring emirates, and has grown accustomed to paying below-market gas prices.
Other sources indicated that Dubai was slow in signing on because DUSUP did not have obvious overlapping interests with the management of the Dolphin project. Abu Dhabi and Fujairah had close ties with the Dolphin project's management, while DUSUP did not have clear connections.
Whatever the reasons, Dubai drew out the process. But now, with the signing of the deal with the DUSUP, Dubai has been officially brought onboard, more than one-and-a-half years after Abu Dhabi signed its contract, and more than five years after Dubai signed a Memorandum of Understanding (MoU). Under the current agreement, the DUSUP has agreed to buy 19.8m cu metres per day, which will begin delivery to Dubai's Jebal Ali in 2007. Currently, Dubai consumes 25.5m cu metres per day.
But some might ask why the UAE, lords of the world's fifth-largest natural gas reserves, would be so desperate to take in gas from other countries. One problem is the rising need for gas in a number of different economic areas in the Emirates. This is led by Dubai's rising gas needs, which are estimated to be growing at 5% per year, but in actuality could be expanding at as high a rate as 10%. Indications are that utilities are mainly to blame for large jumps in demand stemming from the growth of the population (set to double by the end of the decade), the continued break-neck speed of construction, and the expansion of the industrial sector.
Natural gas will also be vital in high-tech oil recovery strategies. Dubai has long known that its oil would not be able to fuel the economy forever, and has aggressively pursued diversification in tourism, real estate and industry. Dubai has seen the amount that oil contributes to the GDP drop below 10% due to this aggressive policy of diversification. But even with its reduced importance, oil remains a solid source of income.
Compared to Abu Dhabi's estimated 92.2bn barrels of oil reserves, Dubai has only around 4bn barrels. As the fields age and outputs continue to decline, Dubai has turned to enhanced oil recovery (EOR) methods. The most attractive way for Dubai to boost production in declining fields is gas injection, which maintains the pressure on the wells to keep daily production numbers up. With gas important to many parts of Dubai's continued meteoric rise, securing long-term supplies is vital.
But it isn't just Dubai that is going to be using Qatari energy. Gas demand in all of the UAE is expected to increase from 107m cu metres per day in 2003 to 382m in 2030. Even Abu Dhabi, with its huge gas reserves, is quite keen to sip from Qatar's wells.
This is partly to do with keeping gas prices at levels acceptable to investors.
"Sheikh Hamad has to be able to guarantee that new industries will have electricity and at [a certain] price," Ahmed al-Sayegh, CEO of Dolphin Energy Ltd., told OBG recently. "Dolphin allows him to do this. It is very important for Abu Dhabi."
Oman is also part of the Dolphin master plan. In January 2004, a pipeline was completed connecting Oman to the UAE and delivery of Omani gas soon followed. The remote emirate of Fujairah is the beneficiary of the deal, receiving 3.8m cu metres per day for its Union Water & Electricity Company (UWEC). Fujairah, not blessed with the enormous energy reserves of some other emirates, needs natural gas to fuel electricity generation and water desalination, vital for providing the northern emirates with power and potable water. The natural gas from Oman now drives UWEC's 656 MW power station and its 100m gallons per day desalination plant.
"Supplying Fujairah was an important strategic decision - both in terms of developing the emirate, but also in leveraging the UAE's relationship with Oman, making it stronger through mutual commercial interest," said al-Sayegh.
On May 15, Dolphin announced that the northernmost emirate of the UAE, Ras al-Khaimah, had also started to receive an average of 1.1m cu metres per day of natural gas from Oman, which would continue for a period of approximately two years, making it the second emirate to receive a supply of Omani gas.
Under the terms agreed with Dolphin Energy, Oman would deliver gas to the UAE until the Qatari-UAE pipeline was completed - at which time the pipeline would be reversed and Qatari gas would flow to the UWEC and then to Oman.
As power demands in the region continue to rise, a GCC network of natural gas is going to be important to many countries, especially the UAE. But as the delays with the Dubai deal demonstrate, it is not all easy going. Thorny political issues always loom under the surface of any GCC deal that involves energy and interregional economic agreements.