Bypassing the Strait of Hormuz from Fujairah

The Oilholic recently found himself roughly 127 km east of Dubai in the United Arab Emirate of Fujairah for a speaking engagement at the Gulf Intelligence Energy Markets Forum 2015.

Among a plethora of crucial subjects up for discussion at a time of low oil prices, much thought in a new place one hadn’t been to before, went towards pondering over an old critical topic – crude oil shipping lanes in the Middle East.

The region's geopolitical tensions have threatened to disrupt oil shipping and other maritime movements at various points over the last five years and counting, even though an actual maritime disruption thankfully hasn’t take place (so far). But whether it’s the Suez Canal, Bab al-Mandab Strait and the Strait of Hormuz, through which a fifth of the world’s oil passes, the threat of naval affray will ever go away.

Back in 2013, barely 12 months on from an Iranian threat to block the Strait of Hormuz, the Oilholic examined nascent mitigation measures to bypass that threat from Oman. However, one got a sense, that Omani overtures also had much to do with challenging nearby Dubai's dominance as a commercial port on the 'wrong' side of the Strait of Hormuz and prone to the Iranian threats.

To this effect, the Omanis are pumping billions into four of their ports – Muscat, Sohar, Salalah and lately Duqm – all of whom face the Gulf of Oman and won’t be affected in the highly unlikely event of the Strait becoming strife and blockade marred.

Of the four, Duqm, an erstwhile fishing village rather than a port, stands to benefit from a new refinery, petrochemical plant and beachfront hotels. However, the UAE’s trump card appears to be its own hub in the shape of Fujairah; the only one of the seven emirates with a coastline facing the Gulf of Oman. With oil-rich neighbour Abu Dhabi as its backer, few would bet against Fujairah.

Indeed, the sleepy and quaint Emirate has woken up, as deliberated by EMF 2015 delegates, with new highways, hotels, supermarkets, ancillary infrastructure - the works! It isn’t just another maritime outlet for the oil industry; storage and petrochemicals facilities are directly linked with over two decades of efforts (and counting) in getting Fujairah to where it is today in infrastructural terms, according to one delegate.

Abu Dhabi’s International Petroleum Investment Company (IPIC), the owner of CEPSA and minority stakeholder in Cosmo Oil and OMV and brains behind the $3.3 billion Habshan–Fujairah oil pipeline, is busy enhancing the now operational pipeline’s onstream capacity from 1.3 million barrels per day to 1.5 million bpd to eventually 2 million bpd. The idea is to pump more and more crude for dispatch avoiding passage of ADNOC cargo via the Persian Gulf. 

Oil storage volume is set to undergo an increment too. Gulf Petrochem, a key player in oil trading world is spending $60 million to boost its storage facilities at Fujairah.

PIC’s Fujairah Refinery project, currently on cards, will process domestic crude oil, including Murban and Upper Zakum, with ready storage and dispatch facilities. And of course, those playing contango would wonder if Fujairah and rival Omani ports could (in the not to distant future) provide a Middle Eastern storage hub to rival onshore storage elsewhere. Discussions with key EMF 2015 delegates under Chatham House Rules point to a high degree of optimism on the subject of enhanced storage in Middle East whether or not contango plays pay-off.

The Oilholic’s feelings are quite clear on contango plays - as one wrote in a Forbes column back in back in February, there will be gains, but those hoping for returns on par Gunvor’s handsome takings from 2008-09 are in for a disappointment. In the strictest sense, what the Omanis and Emiratis are attempting has little do with the current round of contango punts.

Senior ADNOC, Gulf Petrochem, IPIC executives, policymakers and others told this blogger that what’s afoot in Fujairah is about future proofing and providing the region with a world class facility to process, store and ship domestic crude. Everything else would be secondary.

In any case, by the time planned works and storage enhancements come onstream, the current contango play might well be over and done with! That's all from the UAE folks. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo 1: Gulf of Oman shoreline. Photo 2: Town Centre, Fujairah, UAE © Gaurav Sharma, September 2015.

Of inequalities, debt, oil & international finance

Rewind the clock back to the morning after the collapse of Lehman Brothers; the Oilholic remembers it vividly. The world's fourth-largest investment bank at the time ran out of options, ideas, saviours and most importantly - working capital - on that fateful morning in September 2008. However, when filing for bankruptcy, it committed one final blunder. The administrators and liquidators - spread as far and as wide as the investment bank's own global operations - failed to coordinate with each other.

Uninstructed, the London administrator froze the bank's assets and panic ensued as investors started pulling out money from all investment banks; even those few with no question marks surrounding them. It was the moment the US sub-prime crisis became a global financial malaise that nearly took the entire system down. 

Since the episode, several books have been written about the when, where, why and how; even what lead to the crisis and the inequity of it all has been dealt with. However, via his book Baroque Tomorrow, Jack Michalowski has conducted a rather novel examination – not just of the crisis alone, but also of our economic health either side of it, the proliferation of international finance and consumer driven innovations.

His claim about our present reality is a bold and controversial one – that virtually every element of the story of the past four decades points to a structural decline, one that's rooted, as in all other historical declines, in massively growing populations faced with declining innovation and lack of new energy converters or new cheap energy sources.

Drawing interesting parallels with what happened in Renaissance and Baroque Europe, Michalowski opines that the so-called Third Wave visions of mass affluence and broad technological progress hailed by Alvin Toffler and other futurists were just a fantasy.

In his book of just under 360 pages, split into four parts, Michalowski writes that in a world where political programmes last only until the next election; progress is flat or worse still non-existent. That all innovations are driven by returns on the money invested, and the major life-changing ones that propelled us onwards and upwards from the Industrial Revolution are already with us. What has followed in their wake are fads delivered to a consumer-led debt-laden world with rising levels of energy consumption. 

According to Michalowski, history proves that we were only rescued from decline and propelled along a new path by the invention of new energy sources and new energy converters – things like agriculture, sailships, windmills, iron ploughs, combustion engines, trains, cars and airplanes, or nuclear reactors – and never by invention of new information processing technologies. IT advances, he argues, usually come late in the historical cycle.

On reading this book, many would remark that the author is over-simplifying the complex issues of innovation, progress and prosperity (or the lack of). Others would say he is bang on. That's the beauty of this work – it makes you think. For this blogger – it was a case of 50:50. There are parts of the book the Oilholic profoundly disagrees with, yet there are passages after passages, especially the ones on proliferation of international finance centres, debt, hydrocarbon usage and pricing, that one cannot but nod in agreement with. 

Perhaps we are wiser in wake of the financial crisis and have turned a corner. That may well be so. But here's a tester – drive away from the glitzy Las Vegas Strip to other parts of the city where you’ll still see streets with plenty of foreclosed homes. Or perhaps, you care to visit the suburbs of Spanish cities littered with incomplete apartment blocks where developers have run out of money and demand is near-dead. Or simply check the inflation stats where you are? And so on.

In which case, is Michalowski wrong in assuming that there is a "de-education and de-skilling of the rapidly pauperizing middle class and dramatic polarization of the society between rich and poor. Very high levels of inequality are proven by history to be absolutely destructive. As malaise sets in, they become a major contributor to decline."

Some of the author's thoughts are hard to take; some of the dark quips – especially one describing Dubai as a Disneyland for grown-ups – make one smirk. None of his arguments are plain vanilla, but they make you turn page after page either in agreement or disagreement. You'll keep going because the book itself is very engaging; even more so in a climate of persistent inflation and stagnant real incomes. 

Michalowski says that unless current trends change dramatically, the next forty years will bring more of the same. If so, we are looking at an entire century of decline in incomes and living standards or a "true Baroque era." Now, whether one buys that or not, the way the author has used history to make a statement on the macroeconomics of our time is simply splendid and a must read.

The Oilholic is happy to recommend it to peers in the world of energy analysis, economists and social sciences students. Even the enthusiasts of digital media might find it well worth their while to pick this book off the bookshelves or download it on their latest gizmo.

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo: Front Cover – Baroque Tomorrow © Xlibris / Jack Michalowski

Oil rich Abu Dhabi’s 'benign' shadow over Dubai

The Oilholic thinks there is certain poignancy about a street sign in the Dubai Marina area. The sign (pictured left) points to different directions for Abu Dhabi and Dubai city centre – while the macroeconomic direction for both Emirates is anything but following on from the 2008-09 domestic real estate crisis. As if with perfect metaphorical symmetry, the sign’s current backdrop is coloured by construction conglomerate EMAAR’s flags, the odd logo of another construction conglomerate Nakheel and ongoing building work; some of which is a little ‘behind schedule’ for good reason.

 

In March this year, the UAE’s oil production came in at 2.7 million barrels per day (bpd) with attempts on track to increase it to 3 million bpd. Of this, Dubai’s production on a standalone basis has never accounted for more than 70,000 bpd at any given point excluding barrels of oil equivalent in offshore gas findings. It is Abu Dhabi that holds 95% of proven oil reserves in the UAE.

 

With Dubai’s oil reserves set to be exhausted within a few decades bar the emergence of a significant find, a decision was taken in the late 1990s, by the powers that be, to diversify towards finance, tourism and manufacturing. The decision made sense but the approach was not sensible. By 2008, construction, real estate, trade and finance and not oil & gas had become the biggest contributors to Dubai’s economy.

 

Dubai was to be the go to capital market of the Middle East, so ran the spiel. Along came the construction of some of the tallest skyscrapers in the world such as – the Burj Dubai (renamed Burj Khalifa later for a reason), Palm Islands, Emirates Towers and the Burj Al Arab hotel. However, the global financial crisis that was to follow laid bare the fact that some of tall buildings downtown were built (or about to be built) on a mountain of debt covered by a cone of opacity. A global credit squeeze hit debt laden Dubai where it hurt – its brash, inflated property market.

 

The Oilholic distinctly remembers a wire flash from December 2008 when Mohammed al-Abbar, CEO of Emaar, told the world’s scribes that his company held US$350 billion in real estate assets and US$70 billion in credits. Concurrently, industry peer Nakheel declared US$16 billion in debts.

 

As speculators ditched the Dubai real estate market, property values tumbled, construction stalled and unemployment spiked. Inevitably, both Nakheel and Emaar were left with a pile of defunct assets, angry investors, homeowners defaulting and many dodging service charges. One contact recollects an instance where a fresh development lost 63% of its marked pre-crisis value. While Emaar was holding firm, Nakheel owned by Dubai World was imploding.

 

Absence of organic growth and the end of a debt fuelled boom had Dubai staring into the abyss. With the credit rating of the entire UAE being threatened, a miffed white knight came along on December 14, 2009 in the shape of Abu Dhabi. The oil rich emirate had decided to bailout its beleaguered neighbour on the day to the tune of US$10 billion.

 

Not only that, Abu Dhabi then went on to provide Dubai with US$25 billion in the shape of buying Dubai bonds. Local independent commentators say the actual figure may never be known but a 2010 calculated guess puts Dubai’s debt to Abu Dhabi in the range of US$80 to US$95 billion. When asking for an official confirmation, yours truly was told to “enjoy the sunshine!”

 

However, a most polite spokesperson on the Abu Dhabi side says it took remedial action needed at the time in good faith and to this day the UAE central bank is firmly committed to domestic banking institutions exposed to the real estate crisis of 2009, bringing about institutional reforms and learning from it.

 

Yet, transparency never comes easy for Dubai even after facing a financial storm it never envisaged. In March this year, Richard Fox, head of Middle East and Africa sovereigns’ ratings at Fitch, summed it up best while speaking in London. “Ratings agencies have no plans to give Dubai a credit rating because its government has not asked to be rated, and the lack of transparency would make a credit assessment difficult,” he said.

 

Three years later both Nakheel and Emaar are thought to be in a much happier place according to local media outlets. This is particularly true of Emaar which builds its domestic projects on land that is provided free in the main and uses migrant labour on little more than US$8 to US$10 a day based on anecdotal evidence and the Oilholic’s own findings! Despite recent attempts by the government to rectify the manner in which Dubai’s property market is hitherto disconnected from conventional market ground rules, not much has changed.

 

One thing is certain, Dubai will never be disconnected from its ‘benevolent’ oil rich neighbour Abu Dhabi. Some complain that Abu Dhabi’s crude help must have come with strings attached; something which was strenuously denied by both sides in 2009.

The Oilholic thinks strings weren’t attached; Abu Dhabi quite simply now holds most of the strings! So it was fitting that on January 4, 2010, when Emaar inaugurated the world tallest building (pictured right) – its name was promptly changed from Burj Dubai to Burj Khalifa in honour of Sheikh Khalifa bin Zayed bin Sultan Al Nahyan, the Emir of Abu Dhabi.

 

For oil producing nations, the challenge has always been to establish a viable non-oil sector which counters the impact of a resource driven windfall on other facets of the economy. Dubai had every chance, not to mention a more pressing need than its neighbour to do this and messed it up spectacularly. Au contraire, Abu Dhabi has managed the challenge rather well as it seems.

 

For an Emirate which holds 9% of global proven oil reserves and 95% of that of the UAE, Sheikh Khalifa’s Abu Dhabi sees around 44% of its revenues come in from non-oil sources. Abu Dhabi Investment Authority, the Emirate’s sovereign wealth fund rumoured to have nearly U$900 billion in managed assets, leads the way.

 

Ratings agencies may grumble about Dubai’s opacity but all three major ones do rate Abu Dhabi. Fitch and Standard & Poor's rate Abu Dhabi 'AA' while Moody's rates it 'Aa2'. Sheikh Khalifa is actively looking to increase the share of non-oil revenue in Abu Dhabi to 60% within this decade if not sooner.

So maybe the several streets signs in Dubai pointing to the route to Abu Dhabi and the imposing Burj Khalifa (a structure that’s hard to miss from practically most parts of Dubai) have a metaphorical message. And probably there is envy and gratitude in equal measure. Cosmopolitan Dubai is now increasing reliant on black gold dust from Abu Dhabi. That’s all for the moment folks; more from Dubai later! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: A street sign on the Dubai Marina, UAE. Photo 2: Burj Khalifa, Dubai, UAE © Gaurav Sharma 2012.

Talking global 'crude' capex in the Emirates

It is good to be back in the Emirate of Dubai to catch-up with old friends and make yet newer ones! In the scorching heat of 41 C, sitting inside an English Pub (sigh…someone tell these guys yours truly just got off the plane from England) at a hotel right next to ENOC’s Bur Dubai office, new research of a ‘crude’ nature has thrown-up plenty of talking points here.

 

It seems that a report published this morning by business intelligence provider GlobalData projects capital expenditure in the global oil & gas business to come in at US$1.039 trillion by the end of December 2012; a rise of 13.4% on an annualised basis. However, no prizes for guessing that E&P activity would be the primary driver.

 

GlobalData predicts Middle Eastern and African capital spend would be in the region of US$229.6 billion. The figure has been met with nods of approval here in Dubai though one contact of the Oilholic’s (at an advisory firm) reckons the figure is on the conservative side and could be exceeded by a billion or two.

 

North America is likely to witness the highest capex with a US$254.3 billion spend; a 24.5% share of the 2012 figure. GlobalData reckons that renewed market confidence is a direct consequence of the increasing number of oil & gas discoveries (which stood at 242 over 2011 alone), high (or rather spiky) oil prices and emerging and cost effective drilling technologies making deep offshore reserves technically and financially viable.

 

So the ‘All hail shale brigade’ and ‘shale gale’ stateside along with Canadian oil sands would be the big contributors to the total North American spend. The Asia Pacific region could pretty much spend in the same region with a capex of US$253.1 billion.

 

However another facet of the GlobalData report fails to surprise punters at the table wherein it notes that National Oil Companies (NOCs) will lead the way in terms of capex. Though there were some “Hear, Hear(s)” from somewhere. (We try not to name names here of loyal NOC employees, especially if they’ve just walked in from a building next door!)

 

Only thing is, while the Middle Eastern and Chinese NOCs are in the predictable data mix, GlobalData notes that for the 2012–2016 period it is Petrobras which ranks first for capex globally amongst NOCs. As a footnote, ExxonMobil will be atop the IOC list. That’s all for the moment folks! More from Dubai later. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: View of city skyline from Jumeriah beach, Dubai, UAE © Gaurav Sharma 2012.