In 1937, decades before the UAE had been established, Dubai concluded its first oil concession deal with Petroleum Development Trucial Coast (PDTC), a British oil company. It was not until 1952 that the first drilling began, and not until 1966 that a commercially viable oil field was found.
Nearly 30 years having passed since that first concession; former leader Sheikh Rashid bin Saeed Al Maktoum aptly named the field Fateh, Arabic for “good fortune”. As time passed, subsequent discoveries were made at the South-west Fateh, Falah and Rashid fields. Production, in turn, continued to treble, peaking 25 years later in 1991, at around 410,000 barrels per day (bpd). Since then, production has come down to levels of around 50,000-70,000 bpd.
LONG-TERM VIEW: Although production has dropped from its peak in the early 1990s, Dubai is still the second-largest producer of oil in the UAE, after its southern neighbour Abu Dhabi. Dubai’s leadership, however, has long acknowledged the finite nature of its hydrocarbons resources. Throughout boom years, they set about to organise the sector in such a way that they could extract maximum value from oil and gas, while investing windfalls into projects that would provide payoffs long into the future.
In recent years, even as production numbers ease, these past investments are paying off. Dubai has built a unique energy sector in the region, one that relies more on efficiency and innovation than an abundance of resources. Increasingly, the emirate is exporting its expertise and services to contribute to local and international energy projects while providing more-than-adequate supplies for its own needs.
STARS OF THE SHOW: It was in 2007 that the government of Dubai officially acquired the emirate’s offshore petroleum assets. In April of that year, leaders concluded a deal to place the Dubai Petroleum Establishment (DPE) in government hands. The idea of the acquisition was to ensure that the use of current resources and exploration for new resources would stay in line with the leadership’s long-term goals. Now DPE is in charge of Dubai’s four offshore fields: Fateh, South-west Fateh, Falah and Rashid.
Another government entity, the Dubai Supply Authority (DUSUP), is responsible for gas supplies. Created in 1992 by Emiri decree, DUSUP negotiates long-term contracts – mainly with the Abu Dhabi National Oil Company and Qat ar’s Dolphin Energy – to ensure a steady supply of gas. It also manages the onshore Margham field, located 55 km outside of Dubai’s city centre. Key DUSUP customers include the Dubai Electricity and Water Authority (DEWA), Dubai Aluminium Corporation, Dubai Gas Company and Emirates National Oil Company (ENOC).
In addition to imports sourced from pipelines and onshore sources, DUSUP also constructed a floating liquefied natural gas (LNG) terminal in 2010. The project, which was completed in partnership with Royal Dutch Shell, now allows DUSUP to import LNG from virtually any port in the world (see analysis).
While DPE and DUSUP manage Dubai’s oil and gas supplies, it is ENOC that refines, processes and markets them. Wholly owned by the government of Dubai, ENOC’s history goes back to 1973, with the foundation of various oil and gas firms in the emirate. In 1993 the government created ENOC through mergers and acquisitions of these companies. Now the company has grown to include not only projects in Dubai but also regional and global operations.
REFINERY COMPLEX: On the supply side, ENOC owns and operates the emirate’s first petroleum refinery. Located in the Jebel Ali Free Zone (JAFZ), the 120,000-bpd complex refines condensate and light crude oil to produce naphtha, jet fuel, diesel oil, fuel oil and liquid petroleum gas for local and international consumption. Following an $850m upgrade in 2010, the refinery also began producing 102 octane reformate and ultra-low sulphur naphtha.
In addition, ENOC is building a 60-km jet fuel pipeline, the second such line to be built from the new bulk liquid petroleum terminal in JAFZ to Dubai International Airport and its associated storage tank farm. Horizon Terminals, the wholly owned subsidiary of ENOC focused on terminalling operations, signed the 10-year, $100m financing facility with Standard Chartered Bank, Emirates NBD and Noor Islamic Bank.
Meanwhile, ENOC’s gas arm, the Dubai Natural Gas Company (DUGAS), manages gas processing and sales. DUGAS’s business primarily consists of liquid products (propane, butane and condensate) for the local market, as well as methyl tertiary butyl ether, an unleaded fuel additive that it sells worldwide.
SERVICE CENTRE: Although the energy sector is working to maximise the value obtained from oil and gas, Dubai has other strengths. Indeed, the emirate has some important advantages for energy service operators, including ample port infrastructure, two well-connected airports, and free zones where equipment can be imported and re-exported duty-free.
Growing interest can be seen in the recent movements by energy majors to establish operations in the emirate. In February 2012 the state-backed Chinese National Petroleum Corporation (CNPC) announced the opening of a Dubai-based logistics centre. The 200,000-sq-metre facility, located in JAFZ, is set to extend supply lines and ensure necessary equipment is located closer to MENA region operations, according to a CNPC official quoted in the Chinese press. A few months later, the UK-based energy services consultancy Senergy opened its Middle East Knowledge Centre in Dubai. The centre is set to act as a base for Senergy’s activities in the Middle East, Africa and India.
While some foreign energy firms are building Dubai-based logistics centres, others are acquiring local companies to jumpstart their operations in the MENA region. In May 2012 Aker Solutions, a Norwegian firm, purchased Dubai’s NPS Energy for $350m. In addition to acquiring NPS, a subsidiary of Kuwait’s National Petroleum Services, Aker also assumed responsibility for the Dubai firm’s $110m in interest-bearing debt. The sale demonstrates the growing importance of Dubai for multinationals looking to grow their operations not only in the GCC, but in Middle East, Africa and Asia as well.
GAS CENTRE: With an increasing number of energy services firms starting up operations in Dubai, the leadership is also looking at ways to better integrate the emirate into the global gas trade. With its gas-rich neighbours, burgeoning financial services sector and some of the best logistics connections in the world, Dubai holds significant potential to make itself into a regional gas centre.
In March 2012 the authorities announced that they were in the process of reviewing plans that would utilise depleted oil wells to create storage for natural gas, furthering Dubai’s potential as a gas exchange point. “We are talking about the creation of a gas hub. We have the ability to import LNG, but not really the ability to export,” Paul Mason, the manager at DUSUP, said during the Dubai Global Energy Forum in 2011. “It may be the logical next step. Within 500 km lie 30% of the world’s gas reserves. By installing this LNG facility, we are opening up a world market which was previously constrained to pipelines.” These ideas for boosting gas storage are not entirely new, however. In March 2010 DUSUP constructed the emirate’s first floating gas terminal by converting an LNG tanker into a storage unit with capacity of 3m tonnes per annum. By late 2010 DUSUP began importing LNG, the company said. In addition, gas is already stored in Dubai’s Margham field and in the Jebel Ali Salt Dome.
A CAREFUL APPROACH: Increasing storage capacity could do much to cement Dubai’s role as a gas exchange point. Still, the authorities acknowledge that this transformation would require major investment, including a gas export terminal and a trading system on one of Dubai’s stock exchanges. They are therefore approaching the idea carefully, to ensure that the potential benefits would outweigh the costs. If such plans do come to fruition, Dubai would be able to extend its role in the international gas trade.
DOMESTIC ENERGY: Dubai has also witnessed some substantial changes in its own electricity situation over the past few decades. The emirate’s economy developed and prospered over this period, and its energy demand outgrew its domestic fuel supplies. As a result, the authorities have worked on arranging long-term contracts with GCC neighbours in order to help secure fuel for the future.
The main government player in the utilities sector is DEWA, the sole provider and distributor of electricity for the emirate. It was formed in January 1992 by a decree uniting the former Dubai Electric Company and Dubai Water Department, which had operated independently since 1959.
DEWA produces Dubai’s electricity from 10 power stations, three of which are located in Aweer and seven in Jebel Ali. Between 2004 and 2011, capacity rose 127% from 3833 to 8721 MW, according to the company’s statistics. In 2011, 6637 MW of that capacity, or just over three quarters of it, came from gas turbines, while the remaining 2084 MW came from steam turbines. Both the steam and gas turbines, however, are powered by natural gas. In fact, 99% of Dubai’s energy comes from gas, with 1% coming from power plants burning fuel oil.
By sector, commercial enterprises consumed by far the most energy, using 15,681 GWh in 2011, according to DEWA statistics. After commercial consumers came residential (9307 GWh), non-commercial establishments like mosques and schools (3111 GWh), power stations and desalination plants (2875 GWh) and industrial enterprises (2524 GWh). The fastest-growing consumption rate among these groups was that of non-residential establishments, which saw an increase of nearly 111% between 2006 and 2011. Industrial consumption, meanwhile, saw the slowest growth, at just 7.1% – an impressive feat, since the number of industrial enterprises in the emirate more than doubled during that period, according to the number of licences distributed by the Department of Economic Development.
Despite growing consumption across the board, installed capacity has remained comfortably above peak demand, even throughout the boom years preceding the global economic crisis. Between 2004 and 2011, peak demand grew by just under 87%, from 3228 to 6026 MW – far outpaced by installed capacity’s 127% growth from 3833 to 8721 MW, according to data released by DEWA.
POLICY DEVELOPMENTS: Given DEWA’s success in maintaining a significant margin between installed capacity and demand, the body has opted to delay the construction of any new power plants. Instead, the utilities provider plans to focus on improving the efficiency of existing plants.
Accordingly, DEWA announced in April 2012 that it would defer the construction of the Hassyan 1 independent power plant. The $1.3bn project was originally set to start contributing 1600 MW to Dubai’s electricity production by 2014. DEWA indicated that instead of building the plant as scheduled, it would focus its resources on rolling out grid improvements and increasing the operating efficiency of current plants. Doing so, the public utility contends, is more cost effective. “DEWA has succeeded in raising the efficiency and production capacity of its existing power plants at the Jebel Ali Power Station by around 450 MW, [through] innovation and the use of the latest technologies, for a fraction of the costs of installing new generating units of the same capacity,” DEWA said in an announcement explaining the rationale behind the Hassyan 1 deferral.
EFFICIENCY GAINS: Recently, the company’s drive for increased efficiency has gained additional momentum. During the first half of 2012, DEWA constructed two 400-KV substations and 12 132-KV substations, projects valued at Dh900m ($245m) and Dh1.8bn ($882m), respectively. Other upgrades are under way. The scheduled construction of two new 400-KV substations and 132 km of associated transmission lines is set to cost Dh1.68bn ($457m). Meanwhile, upgrades to the 132-KV network, including 27 new substations and 340 km of transmission cables, carry a price tag of Dh3.1bn ($843m).
Demand management is also a key part of DEWA’s energy strategy. The company has implemented a series of power demand best practices to encourage conservation and decrease waste. One of these best practices is a slab tariff, a pricing system that raises costs for high-use customers. So far, initiatives have been met with positive results. In 2011, even in the context of a 5% boost in registered electricity and water accounts, power demand growth increased just 3%, half of the 6% growth rate expected for that year (see analysis).
BROADER STRATEGY: DEWA’s infrastructure upgrades and demand management fit well into Dubai’s Integrated Energy Strategy 2030, as articulated by the Dubai Supreme Council of Energy (DSCE). DSCE was formed in August 2009 under Law 19 of 2009, issued by Sheikh Mohammed bin Rashid Al Maktoum, the vice-president and prime minister of the UAE, and ruler of Dubai. The council seeks to ensure that the emirate’s growing economy will have sustainable energy while preserving the environment. DEWA, meanwhile, is developing alternative and renewable energy sources for the emirate, while increasing energy efficiency to reduce demand.
DSCE members include important energy stakeholders like DEWA, the Department of Petroleum Affairs, Dubai Aluminium Company, DUSUP, ENOC, DPE, Dubai Nuclear Energy Committee and Dubai Municipality. The Dubai Integrated Energy Strategy (DIES) 2030 was developed by DSCE in 2010 and deployed in 2011 to set Dubai towards securing a sustainable supply of energy and enhancing demand efficiency in water, power and transportation fuel.
Central to the DSCE’s strategy is diversifying the emirate’s fuel mix to include clean coal, renewable energy and nuclear energy. Like DEWA, DSCE also seeks to decrease power demand in coming years. The body announced in June 2012 at the Rio+20 Earth Summit that the DIES is targeting a 30% reduction in energy demand in Dubai by 2030, with the aim of easing the emirate’s dependence on fossil fuels in favour of greener sources of generation (see analysis). Indeed, renewables and other non-gas energy sources are a growing priority for the government. DIES 2030 plans to source 1% of energy production from solar power by 2020, increasing to 5% by 2030. An additional 12% will be generated from nuclear power and 12% from clean coal. The remainder will come from gas.
SOLAR: Dubai’s climate offers significant potential for solar energy projects. Even during winter months the emirate enjoys an average of more than eight sunshine hours per day, according to Dubai Meteorological Services. That number increases to 11.5 hours during the peak months of summer. To harness this potential, DEWA has unveiled plans for the 1000-MW Mohammed bin Rashid Al Maktoum Solar Park, which is set to be at full capacity by 2030.
NUCLEAR: Nuclear power is also set to take on an important role in Dubai’s energy mix. The current goal is to produce 12% of Dubai’s future energy needs from nuclear energy by 2030, Saeed Mohammed Al Tayer, the managing director and CEO of DEWA, announced in September 2011. This would not come from a plant in Dubai, but from neighbouring areas that operate nuclear power plants.
In 2008 the UAE’s federal government released its Policy on the Evaluation and Potential Development of Peaceful Nuclear Energy. The following year, the government enacted the Federal Law Regarding the Peaceful Uses of Nuclear Energy. The Emirates Nuclear Energy Company was subsequently founded and began working out the details for a UAE plant with its partner, the Korean Electric Power Corporation. The fruits of their labours came in the form of plans for a four-unit power plant, to be located in Braka, near the western coast of Abu Dhabi. The project’s groundbreaking took place in early 2011, and the first of the 1400-MW reactors is expected to come online in 2017. The three subsequent reactors will be added in 2018, 2019 and 2020, respectively.
OUTLOOK: Like other energy importers, Dubai faces challenges, including potential price fluctuations. By investing wisely when domestic supplies were abundant, however, much has already been accomplished to solidify the emirate’s position even as oil and gas production decline. DEWA’s forward-looking tariff policies, the creation of DSCE and investments in infrastructure all point to a changing course for the emirate’s energy sector. As these plans are executed, opportunities are likely to increase for producers of energy-saving technology.
Likewise, more investment in renewable energy, particularly solar, could bring about positive changes for the sector. Although the government enjoys secure gas supplies from neighbours and allies, it is already mapping steps to lead Dubai – and the region – to a more sustainable, post-fossil-fuel future.
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