UAE’s Twin Masterstrokes

The UAE may not be the largest economy in the region, but it is certainly capable of big, bold moves to stay ahead of the regional herd.

The Environment Agency – Abu Dhabi ( EAD ), the country’s environment regulator’s approval to build the Barakah Nuclear Power Plant Units 1 & 2 is groundbreaking as it has become the most advanced civil Gulf nuclear power project.

The Korean conglomerate of Korea Electric Power Corp. (KEPCO), Hyundai Engineering and Construction, and Samsung and Doosan Heavy Industries, as well as US firm Westinghouse can now proceed to build the USD20-billion facility.

While the Emirates Nuclear Energy Corporation ( ENEC ), which is ultimately responsible for the project, still needs to get a construction license from the UAE Federal Authority of Nuclear Regulation (FANR), the EAD approval is an important milestone.

“Nuclear energy is one of the ways in which Abu Dhabi is demonstrating its commitment to the environment, as nuclear energy plants emit almost zero carbon emissions during operations,” said Mohamed Al Hammadi, Chief Executive Officer of ENEC . “With four nuclear energy plants delivering electricity to the grid by 2020, we will be delivering 5,600 MW of low carbon electricity to the national grid. This will lead to a saving of about 12 million tonnes of carbon emissions in the UAE each year,” added Mr Al Hammadi.

ENERC hopes to complete the project by 2017 and supply 25% of the country’s electricity demand.

Earlier in the week, Abu Dhabi’s International Petroleum Investment Company inaugurated a much-delayed pipeline via Fujairah that completely bypasses the Strait of Hormuz.

As Iran faces tough sanctions, the Persian regime has threatened to block the Strait of Hormuz on numerous occasions, but Abu Dhabi’s moves not only helps calm global oil markets, but also ensures stability and security of the UAE’s oil production and exports to the world.

The U.S. Department of Energy calls the Strait the ‘most important oil chokepoint’ in the world, with close to 17 million barrels of oil passing through its waters every day.

“On average, 14 crude oil tankers per day passed through the Strait in 2011, with a corresponding amount of empty tankers entering to pick up new cargos,” notes the EIA. “More than 85% of these crude oil exports went to Asian markets, with Japan, India, South Korea, and China representing the largest destinations.”

STRATEGIC MOVES

The two strategic moves are excellent news for the global markets as well as the country’s own domestic energy demand.

Admittedly, the UAE provides 4% of global oil demand, but the country is the region’s trendsetter and, in any case, other Gulf states already have similar plans, said Said Hirish, Middle East Economist at Capital Economics.

“This is good news for the rest of the world. Although much remains uncertain and there is still a lot to be done, [the] announcement by the UAE and efforts in other Gulf countries should alleviate some of the concerns regarding future oil supplies,” said Mr. Hirish. “If these initiatives eventually materialise, upward pressures on oil prices in the long-term could start to fade.”

The UAE’s domestic oil consumption is second only to Saudi Arabia in the region, and it needs to find alternatives to keep the lights on without eating into its oil exports.

“Domestic consumption is heavily subsidised and this is unlikely to change soon given regional political conditions,” said Mr, Hirish. “To put this in perspective, the cost of oil extraction is under $5 per barrel, while the price of Brent crude has averaged over $75 per barrel since 2005. Accordingly, the opportunity cost of energy subsidies due to lost revenues dwarfs the actual spending.”

OPEC’s latest data shows the Middle East states will be consuming 7.7-million bpd of its own oil, with Saudi Arabia, UAE and Kuwait leading the consumption.

BUT IS NUCLEAR ENERGY SAFE?

Nuclear energy has earned a terrible reputation after the Fukushima nuclear plant meltdown in Japan last year, but data suggests that the energy source remain relevant. Germany and Switzerland may have abandoned their nuclear plans, but at least 60 nuclear power plants are under way in China, India, Russia, Korea, Finland and of course the UAE. Saudi Arabia, Egypt and Jordan also have civil nuclear energy ambitions, while Kuwait cancelled the plan, citing risks in the aftermath of the Japan incident.

Indeed, Saudi Arabia has the most ambitious civil nuclear energy plans in the region. In June 2011, the government stated its intention to develop essential atomic energy to meet the Kingdom’s growing requirements.

The King Abdullah City for Atomic and Renewable Energy (KACARE) said that it plans to construct 16 nuclear reactors over the next 20 years at a cost of USD80 billion; the first two are expected to come on line in 10 years and then two more per year up to 2030, to generate about 20% of Saudi Arabia’s electricity.

“The emerging non-OECD countries are expected to dominate future growth,” notes a World Energy Council report on nuclear energy. “Since these countries need to utilise all options to meet their rapidly growing electricity demand and secure certain levels of economic growth, it would be potentially very costly for them to rule out the option to increase their use of nuclear power.”

The IAEA also argues that Fukushima has not led to a significant retraction in nuclear power programmes outside Europe, except for Japan. Progress in several national programmes, especially in countries new to nuclear power, has been delayed, especially with regard to near-term decisions to start such programmes.

“Generally, however, these countries have not shown any indication that their pursuit of nuclear power has declined after Fukushima. It seems likely that greater attention will be paid to issues of safety and regulation, including education, and that ambitious construction timelines may give way to more realistic schedules,” notes the WEC in its report.

PIPELINE POLITICS

Equally significant move on the UAE’s part was the much-needed alternative to the Strait of Hormuz. The 360-kilometre pipeline would allow 60% of Abu Dhabi’s 2.5-million barrels per day of oil to be shipped without touching the politically-charged waters of the Hormuz.

Similarly, Saudi Arabia has also reportedly converted a natural gas pipeline into an oil pipeline and can potentially ship five million bpd across the breadth of the country via the Red Sea to global markets.

These are no doubt responsible developments on the part of key OPEC producers which should help soothe the nerves of oil-consuming nations and oil markets.

The UAE and Saudi moves have taken the sting out of the Iranian threat of blocking the Strait of Hormuz. Analysts estimate that a prolonged blocking of the oil trading chokepoint could send crude prices above USD200, which could wreck global economic recovery and put oil-exporters long-term oil revenues in jeopardy.

ECONOMIC COMPULSION

The two major projects will also help the UAE cushion blows from a global economic slowdown or even catastrophe (i.e. an escalation of a conflict with Iran).

While the UAE has done well since the Arab Spring crisis and during the global economic slowdown, the economic growth is widely seen as ‘fragile’, and another shock to the global system would be tough to absorb for the Emirates.

“In contrast to neighbouring Saudi Arabia, we do not sense UAE has a strong appetite for boosting public spending to combat weakening external demand, or accelerating the overhaul of domestic infrastructure,” notes Simon Williams, an analyst at HSBC Middle East. “Domestic credit growth also remains very weak, while the UAE’s relatively high reliance on foreign capital suggest it is vulnerable to global market dislocation. The importance of Europe as a trade partner, particularly as a source of demand for Dubai’s tourism industry, also suggests growth may start to lose speed.”

In Abu Dhabi, capital spending appears to be firming after a multi-year deceleration, supported by strong public finances and renewed commitment to core infrastructure and industrial projects, notes HSBC. In Dubai, the pick-up in activity has been more pronounced, driven primarily by gains in services exports rather than increases in public outlays.

Those gains, led by the tourism and transport sectors, have fed through to firmer domestic demand, supporting gains in retail spending and even a rally in residential property prices. But much of it remains precarious and in danger of reversing very quickly.

While HSBC’s Williams expect the UAE to absorb the shocks thanks to its impressive reserves, it could lead to a pullback in projects which would hurt the economy.

CONCLUSION

Projects like the Fujairah pipeline and nuclear power plant sets the UAE apart from the rest of the region. The Emirates has always punched above its weight and been conscious of protecting its weaknesses. Over the years, it has also done extremely well in identifying gaps in the market and finding ways to diversify its revenue streams.

Such strong and far-sighted measures will ensure the government can manage global headwinds and domestic demands.

Zawy