Dubai looks to boost local energy production to serve growing population

 

While upstream oil and gas revenue provided much of the financing for Dubai’s early development, the emirate’s road to modernisation has been built around economic diversification. In recent years the government has focused on the expansion of midstream and downstream industries, alongside fundamental changes to power generation. Having historically relied upon natural gas imports for its electricity, Dubai is gradually reducing its dependence on hydrocarbons imports by investing in a range of power generation projects. This includes a number of plans to develop renewable energies, particularly solar power, as the emirate seeks to position itself as a regional and global centre for clean energy solutions. In 2018 and 2019 the government made several long-term investments aimed at boosting its water and electricity output to support a growing population and rising demand.

Structure & Oversight

Although Dubai’s oil and gas reserves were first discovered and controlled by foreign companies, the sector was brought under government ownership in 2007. The Dubai Supreme Council of Energy (DSCE) is tasked with regulating and coordinating the activities of the oil and gas industry, and ensuring the security and sustainability of energy supplies. The council includes representatives from the Dubai Electricity and Water Authority (DEWA), the Dubai Nuclear Energy Committee, the Dubai Petroleum Establishment, the Dubai Supply Authority and the Emirates National Oil Company (ENOC).

These bodies are governed by the Demand Side Management Strategy 2030 to reduce energy and water demand by 30% by that year, and the Dubai Clean Energy Strategy 2050 to supply 75% of Dubai’s total power output from clean energy by 2050. The DSCE roadmap sets specific enablers such as the robust regulatory framework, local capacity and funding to deliver the planned targets. “Dubai has set progressive energy efficiency targets to promote sustainable development and a low-carbon economy,” Taher Diab, senior director of the DSCE, told OBG. “Clean energy projects, green building regulations, building retrofit, water resources management and green mobility strategies are some of the programmes that will drive sustainability in Dubai in the next 30 years.”

Performance & Size

While oil has traditionally formed the backbone of the UAE’s economy, hydrocarbon activity accounted for approximately 1% of the country’s GDP in 2017, and its share has been steadily decreasing due to economic diversification. According to the most recent figures from the Dubai Statistics Centre, electricity, gas, water supply and waste management accounted for 2.7% of the emirate’s GDP in 2017, with its contribution estimated to have remained the same in 2018.

Dubai possesses around 4% of the UAE’s oil reserves, or 4bn barrels, and 2% of gas reserves. Nevertheless, oil revenue remains an important component of government income, accounting for 6% of non-tax revenue in 2017. However, there has been a significant downward trend in this regard as a result of falling oil prices and government efforts to reduce the economy’s dependence on hydrocarbons. In 2013, before a major drop in global oil prices, the commodity accounted for 15.6% of government revenue, but this figure had fallen to 5.7% in 2015.

Despite a decline in oil revenue, sector stakeholders are confident in the growth of the gas sector. “Oil and gas have very different trends as the markets continue to grow apart,” Ali Vezvaei, group CEO of logistics and supply chain services firm Ecolog, told OBG. “Oil is likely to face headwinds going forward, while gas presents more promising long-term opportunities.”

Energy Consumption

The sector has seen promising growth in recent years on the back of rising demand and population numbers. According to the “Dubai Economic Report 2018” published by the Department of Economic Development, revenue from electricity and gas increased by 131.8% between 2009 and 2017, from Dh4.4bn ($1.2bn) to Dh10.2bn ($2.8bn). The sector’s contribution to GDP also rose from 1.5% to 2.5% in the same period.

DEWA, the emirate’s public utilities company, has seen its customer base expand significantly. Rising demand for water has resulted in an increase in desalination output in recent years. In 2018 the number of customers using DEWA’s water services reached 750,596, up 6.4% compared to around 705,400 in 2017. Average daily water consumption rose from 362m gallons in 2017 to 368m gallons in 2018. Similarly, the number of customers using electricity provided by DEWA increased by 6.1%, from roughly 796,300 in 2017 to 844,920 in 2018. In the same period average daily electricity demand grew from 8.2 GWh to 8.5 GWh.

Nevertheless, demand for both water and electricity is still well within the emirate’s installed capacity thanks to significant investment in desalination and electricity generation in recent years. Indeed, rising levels of electricity and water consumption have helped to boost DEWA’s revenue and profit. In 2018 the company generated Dh22.2bn ($6bn), with profit of Dh6.7bn ($1.82bn). This is a slight increase compared to 2017, when the firm recorded Dh21.6bn ($5.9bn) in revenue and Dh6.66bn ($1.81bn) in profit. While most of the company’s returns were from water and electricity, district cooling revenue exceeded Dh2bn ($544.4m) for the first time in 2018.

Fuel usage in Dubai remains considerably higher than the global average despite the government’s efforts in trying to reduce consumption, such as the removal of subsidies in 2015. According to the most recent data from ENOC, 249m barrels of fuel were sold in 2017, up 91.5% from 130m barrels in 2013. Zaid Al Quafaidi, managing director of ENOC Retail, told local media in May 2019 that on average each ENOC petrol station pumps 60,000 litres of fuel per day, compared to the global average of 35,000 litres per day. Consumption is expected to rise further following the announcement that ENOC plans to open an additional 47 petrol stations across the UAE in 2020, an increase of 33% to a total of 191. Demand has in part been driven by the need to meet the requirements of Expo 2020, which is expected to attract more than 20m visitors to the emirate.

Diversifying the Grid

The Dubai government has undertaken plans to diversify the emirate’s electricity grid by reducing dependence on gas and investing in clean coal, nuclear power and renewable energies. By 2030 the government aims to have a more sustainable energy mix, comprising gas (61%), solar energy (25%), nuclear (7%), and clean coal (7%). In looking ahead, there are increasing plans to have clean energy sources account for 75% of output by 2050. Although this is ambitious, sector players are confident that the authorities will be able to enact significant change in the coming years. “This target seemed surprisingly high, but the government has been delivering on it,” Fabrice Abalain, regional analyst at the Energy Industries Council, a trade association that monitors the global energy sector, told OBG. “The emirate is importing the latest technology to drive its innovative strategy,” he added.

Upstream

The UAE is a major player in the production of crude oil, accounting for 4.2% of global output in 2018. While the continued recovery in oil prices is expected to boost economic growth in the UAE, including Dubai, the national government has agreed to cut production following efforts by the Organisation of the Petroleum Exporting Countries to stabilise the global oil market.

According to the most recent figures, ENOC produced 83,952 barrels per day (bpd) in 2017, down from 90,301 bpd in 2016. However, this figure includes oil produced by both ENOC and international upstream operations – data specific to domestic production is not publicly available. Dubai’s onshore Margham dry gas and condensate field is the emirate’s largest.

Margham, which began operations in 1984, has three gas-bearing geological formations located over 10,000 feet below surface level. Since 2008 the site has also acted as a storage facility for imported gas to be re-exported. The Margham onshore field is connected to Margham plant, where raw gas is processed to produce retail condensate. Some of the leftover dry gas is sent to Jebel Ali Port, a major hydrocarbons trading hub in the emirate, via a 90-km natural gas pipeline. According to the most recent available figures, as of 2012 the Margham gas field – located around 55 km from Dubai – provided the emirate and fuel gas pipeline grid with approximately 4m cu metres of dry gas per day, while offshore fields contributed an additional 2.8m cu metres.

The natural gas from offshore oilfields is processed by the state-owned Dubai Natural Gas Company (DUGAS). Since 2017 DUGAS has had to tap into Margham’s gas storage facility more extensively to offset lower imports from Qatar. It has also signed several joint procurement, distribution, shipping and storage agreements in recent years, including with Japanese utilities giant Jera Company and Abu Dhabi National Oil Company, thereby enhancing its own liquefied natural gas (LNG) processing capacity in line with the UAE government’s strategy to develop its gas downstream infrastructure.

Midstream

ENOC has expanded its footprint in the global supply of jet fuel in recent years, and much of its midstream infrastructure investment has been focused on supporting this. The company has taken steps to establish itself as a major player in the global aviation sector, with 70% growth in its international presence between 2012 and 2017.

In Dubai itself, ENOC has been strengthening its jet fuel pipeline infrastructure to meet demand for aviation services ahead of Expo 2020. The firm is in the process of building a 16.2-km jet fuel pipeline linking its storage terminals in Jebel Ali to Dubai World Central airport in Dubai South. The pipeline is scheduled to be operational in the first quarter of 2020; and by the end of 2018 it had passed the 20% completion mark. Upon completion, it will be able to transport around 2000 cu metres of jet fuel per hour and is expected to meet demand until 2050.

Elsewhere, ENOC has focused on expanding its gas and jet fuel storage capacities. Rotary Engineering Fujairah, a Singapore-owned company, is currently building 12 new storage tanks at ENOC’s Jebel Ali refinery to store jet fuel, naphtha and gasoline blend stocks, with the project slated to conclude at the end of 2019. The geopolitical fallout caused by tensions between the US and Iranian governments and resulting escalation in sanctions against Tehran has also prompted ENOC to increase its storage of jet fuel to ensure supply to Dubai’s airports. In September 2018 the company chartered two large tanker vessels to store oil products with a combined capacity of approximately 100,000 tonnes of jet fuel.

Downstream

In recent years Dubai has focused on increasing its refining capacity as part of a strategy to focus more on higher-value-added downstream products and reduce reliance on imports of petroleum, diesel and fuel oil. In 2016 ENOC announced that it planned to spend $1bn on expanding the emirate’s main refinery in Jebel Ali, adding a new condensate processing train and several hydrometers to the site, among other enhancements. The facility currently has capacity to process 140,000 bpd of refined fuel products. The expansion project, which is scheduled to be completed by the end of 2019, is set to raise total capacity to 210,000 bpd.

Increased refinery capacity will be essential for the emirate to keep up with growing demand in its distribution networks. According to figures from ENOC’s most recent annual review, the company’s sales of petroleum products reached a record 249m barrels in 2017, a slight increase on 243m in 2016 and a significant rise compared to 160m in 2013.

To this end, expanding its retail network to support growing fuel consumption is one of ENOC’s key strategies in the years ahead, with 26 new petrol stations scheduled to open in Dubai before the end of 2020. Through its lubricants subsidiaries Emirates Petroleum Products Company and Emirates Gas, ENOC has kept production of lubricants and liquefied petroleum gas (LPG) high with 878.5m gallons of aviation fuel output, 3.8m barrels of diesel and 254,744 tonnes of LPG cylinders in 2017, the most recent year for which government data is available.

Water Treatment

With a rapidly growing population and some of the highest water consumption levels in the world, Dubai’s government has continued to make long-term investments in desalination projects. Water consumption per capita across the UAE currently stands at around 550 litres per day, considerably higher than the global average of 170-300 litres. According to DEWA, water consumption in Dubai reached an average of 368m gallons per day in 2018, still considerably lower than the company’s installed capacity of 470m gallons per day.

Nevertheless, in order to ensure that DEWA is able to support rising demand for water in the longer term, the government announced plans in 2019 to build a large solar-powered desalination plant. As the emirate looks to diversify away from natural gas as its main source of energy supply for desalination production, the new solar-powered facility will be able to produce a further 120m gallons per day upon completion in 2024. DEWA aims to eventually power the emirate’s desalination plants entirely from clean energy, a move that is expected to save the government approximately $13bn between 2019 and 2030.

In November 2018 DEWA also announced that it was developing a reservoir in Al Nakhali with the ability to hold 120m gallons of water, raising the utility’s total storage capacity to around 1bn gallons.

Imports & Exports

While Dubai is gradually moving towards energy self-sufficiency, the UAE has historically relied on LNG imports from Qatar through the Dolphin gas pipeline and Dubai has also relied on condensate imports from Iran. However, as a result of political tensions between Qatar and the UAE since 2017, and the reimposition of US sanctions on Iran, there has been a decrease in the UAE’s LNG and condensate imports in recent years.

In order to boost production and reduce the UAE’s reliance on imports, Abu Dhabi’s government is investing heavily in the development of local gas reserves, which is expected to have a knock-on effect on Dubai’s own LNG sector. In the short to medium term, however, Dubai is expected to continue to import natural gas from Qatar until at least 2032, according to current contracts between the two governments. With its own gas reserves constituting around 2% of the UAE’s total deposits, Dubai imports 56.6m cu metres of LNG per day – or around 70% of its supply – from Qatar to meet its energy needs.

Despite this, Dubai has established itself as a significant exporter of refined petroleum products. The chemical terminal in Jebel Ali caters to the largest range of bulk liquid chemical products handled in the region, both for inland consumption and re-exports. ENOC currently exports jet fuel, naphtha and other gasoline blend stocks. The company’s jet fuel exports have increased significantly in recent years; by the end of 2018 ENOC had extended its jet fuel supply exports to India, Djibouti, Egypt, Mauritius, Georgia, Thailand and Italy, among others, covering a total of 143 airports across 23 countries.

Investment

In line with its 2017-21 growth strategy, ENOC has undertaken an asset expansion programme targeting three main areas: refinery capacity; the service station network; and storage capacity. Having already invested $1bn in boosting the capacity of Jebel Ali refinery, ENOC is set to spend Dh2.2bn ($598.8m) on expanding its retail network across the UAE and Saudi Arabia by 2020. It is also eyeing further regional and international growth of its upstream and midstream operations, having recently purchased a Gulf of Suez oil concession in Egypt from BP through its subsidiary Dragon Oil for more than $600m. Elsewhere, ENOC also signed an agreement with the government of Bangladesh in February 2019 to develop a $2bn LPG gas terminal in the country.

While state-owned entities continue to drive growth and investment in the oil and gas sector, Dubai’s government is looking to private providers to help expand its electricity and water generation capacities, and thereby ease pressure on the public sector. Since a 2011 amendment to regulations governing private participation in power and water provisioning, Dubai has encouraged private sector investments in electricity generation using the public-private partnership model.

According to data provided by the Energy Industries Council, there were 17 large-scale electricity projects in progress or under proposal in Dubai in 2019, which were worth a combined $16.5bn. The current projects, which are all slated to be completed by 2024, will add 8.7 GW of capacity to Dubai’s grid, including 3.2 GW of renewables power generation capacity.

Renewables

Reducing the emirate’s dependence on gas for power generation and achieving the emissions reduction targets outlined at the COP21 UN Climate Change Conference in Paris in late 2015 are two of the Dubai government’s major policy priorities. At the conference the UAE government affirmed its plans to generate 24% of the country’s electricity from clean energy sources – defined as nuclear and renewables – by the end of 2021.

Dubai’s own progress on renewables projects has exceeded expectations. As part of the Dubai Clean Energy Strategy 2050, which aims to incrementally increase the emirate’s share of clean energy sources on the grid to 75%, the government has set a shortterm target of generating 7% of its total energy from solar power by 2020. According to local media, Dubai is expected to exceed this target, reaching 8% in 2020. Notable projects to boost capacity include the Mohammed bin Rashid Al Maktoum Solar Park – the third phase of which is expected to be completed in time for Expo 2020 in October of that year – bringing an additional 800 MW on-line.

Outlook

Dubai is quickly establishing itself as a regional leader in clean power development and is on track to achieve its ambitious green energy goals. Alongside the Al Maktoum development, which is set to be the GCC’s largest solar park, Dubai is also constructing the region’s biggest waste-to-energy plant, which is slated for completion by the second quarter of 2020 at a cost of Dh2bn ($544.4m). While the emirate plans to increase its use of renewables and clean energy, recent large-scale investments in midstream and downstream capacity indicate that conventional oil and gas resources will still play an important part in the energy mix in the coming years.

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The Report: Dubai 2020

Energy chapter from The Report: Dubai 2020

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