Gas Diplomacy

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With the Iranians indicating that the deadlock over a natural gas pipeline between the UAE and Iran might soon be solved, the UAE may be one step closer to bolstering its gas supplies and energy for industrial zones.

According to the UAE local press, Dana Gas, the Sharjah-based energy company, will go to Tehran next week to settle the apparent pricing dispute that has delayed the exporting of Iranian natural gas to the emirate.

An Iranian oil ministry official said Dana would accept a revision to the gas price regime, which was agreed upon back in 2001, that the Iranian government claims is now below market value.

Amid Iranian threats to look elsewhere if it doesn't get a higher price, the reality is that both Iran and the UAE have already invested too much in this project to let it disintegrate. Barring a catastrophic event, both sides appear committed to gas deliveries by the first quarter of 2007.

A resolution to the dispute would certainly be good news for the UAE. Even though the country sits on the fifth largest gas reserves in the world, most of the gas is extremely sour and unsuitable for commercial use without expensive processing.

Consequently, useable energy supplies have been stretched by the country's world-beating economic growth and large population expansion. Forecasts predict the UAE gas demand will be double its supply by 2010 if consumption and production levels continue to develop at the same pace.

Dubai, which currently requires around 800m cubic feet per day (cuft/d) of natural gas, expects almost 20% energy growth in the next five years.

Ras al-Khaimah, with ambitious goals to double its GDP and population in the coming years, predicts it needs to more than double its gas feedstock - from 60m cuft/d in 2006 to 160m cuft/d - and plans to do so by 2007.

Sharjah, which is one of the few emirates that has significant gas reserves, is also growing rapidly and can no longer shoulder the needs of the northern emirates like it once did. Although it once exported large amounts of gas to Dubai, industry experts believe these deliveries have dwindled to a trickle or stopped altogether.

With the traditional sources of gas becoming exhausted, one of the major concerns is providing for the thriving industrial sector in the emirates. Sharjah has 21 industrial zones, with 20,000 companies, including 2200 factories.

Ras al-Khaimah is also is home to a notable industrial sector. Although its doesn't boast the same volume as Sharjah, the emirate has immense manufacturers, such as RAK Ceramics, the largest tile producer in the world; four cement companies, accounting for the largest clinker and cement output in the UAE; and several specialty foreign factories like the French-based glass manufacturer ARC International, with a plant capable of producing 40,000 tonnes per year of clear glass.

Massive amounts of energy are needed to fire the kilns for ceramics production, crush stone for cement and run the chillers and machinery for glass manufacturing.

For most of these northern emirate companies, a reliable supply of natural gas has been elusive. Only Arc International has been receiving regular supplies of natural gas in 2006, while other industries have relied on liquefied petroleum gas (LPG) or heavy fuels to run their operations.

"Sometimes we have shortages and have to use diesel," said one cement producer in Ras al-Khaimah, adding they get up to 60% of their energy needs from diesel, a commodity that almost doubled in price in the last two years.

Even gas-based products are cutting into companies' profits. In 2005, RAK Ceramics says it ran its operations on three months of natural gas and nine months of LPG, which is 15% more expensive. In 2006, it has fared only slightly better, getting natural gas again for three months, with promises of renewed supplies after the summer.

But even the occasional supply of natural gas is better than most companies receive in the UAE. For example, the Sharjah-based Hamriyah Free Zone (HFZ), a haven for more than 1700 companies mainly involved in heavy industries like steel and cement, is still running on LPG.

HFZ looks to benefit the most from natural gas supplies from across the border. The free zone will receive a direct pipeline from Sharjah's offshore Mubarak field, the future distribution point for Dana Gas's purchased Iranian gas. Zone officials expect to see many of its companies switch to natural gas.

More importantly, long-term gas flows are vital for encouraging more foreign investment, a cornerstone of the UAE's diversification process. In a region flush with hydrocarbons, companies expect to find energy costs that are lower than in other parts of the world.

If Dana Gas continues to find resistance in Tehran next week, the UAE will need to push other options. The Dolphin Energy Project, which will import gas from Qatar to the UAE, is set to begin deliveries by the end of 2006, and there is more potential to get additional cubic feet from Doha, albeit at a higher price than the first agreement. Also possible are different cross-border deals with Iran and Oman, and further down the line, the development of Abu Dhabi's vast - but extremely costly - gas reserves.

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