United Arab Emirates Oil & Gas Report Q ISSN:

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1 Published by BUSINESS MONITOR INTERNATIONAL LTD United Arab Emirates Oil & Gas Report Q ISSN: Including 5-year and 10-year industry forecasts Business Monitor International Mermaid House, 2 Puddle Dock London EC4V 3DS UK Tel: +44 (0) Fax: +44 (0) subs@businessmonitor.com web: Business Monitor International. All rights reserved. All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd. All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content.

2 UAE Oil & Gas Report Q Including 5-year and 10-year industry forecasts by BMI Part of BMI's Industry Survey & Forecasts Series Published by: Business Monitor International Publication date: July 2009 Business Monitor International Mermaid House, 2 Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) Fax: +44 (0) subs@businessmonitor.com web: Business Monitor International. All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.

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4 CONTENTS Executive Summary...7 SWOT Analysis...9 United Arab Emirates Political SWOT... 9 United Arab Emirates Economic SWOT United Arab Emirates Business Environment SWOT UAE Energy Market Overview...12 Regional Energy Market Overview...14 Oil Supply And Demand Table: Middle East Oil Consumption (000b/d) Table: Middle East Oil Production (000b/d) Oil: Downstream Table: Middle East Oil Refining Capacity (000b/d) Gas Supply And Demand Table: Middle East Gas Consumption (bcm) Table: Middle East Gas Production (bcm) Liquefied Natural Gas Table: Middle East LNG Exports/(Imports) (bcm) Business Environment Ranking...21 Middle East Region Composite Scores Table: Regional Upstream Business Environment Rating Table: Regional Downstream Business Environment Rating Upstream Scores Downstream Scores UAE Upstream Rating Overview UAE Upstream Rating Potential Returns UAE Upstream Rating Risks to Potential Returns UAE Downstream Rating Overview UAE Downstream Rating Potential Returns UAE Downstream Rating Risks to Potential Returns Business Environment...26 Legal Framework Infrastructure Labour Force Foreign Investment Policy Tax Regime Security Risk Industry Forecast Scenario...32 Oil and Gas Reserves Oil Supply and Demand Gas Supply and Demand LNG Business Monitor International Ltd Page 3

5 Refining and Oil Products Trade Revenues/Import Costs Table: UAE Oil & Gas Historical Data & Forecasts Other Energy Table: UAE Other Energy Historical Data & Forecasts Key Risks To BMI s Forecast Scenario Long-Term Oil & Gas Outlook Macroeconomic Outlook...42 Table: United Arab Emirates Economic Activity, Competitive Landscape...45 Table: Key Domestic & Foreign Companies In The UAE Oil And Gas Sector Overview/State Role Table: Key Upstream Players Table: Key Downstream Players Company Monitor...49 Abu Dhabi National Oil Company (ADNOC) Dolphin Energy Ltd (DEL) Emarat Emirates General Petroleum Corporation Emirates National Oil Company Limited (ENOC) BP Summary Total Summary ConocoPhillips Summary ExxonMobil Summary Shell Summary Dana Gas Summary Occidental Petroleum Summary Japan Oil Development Co (JODCO) Summary Cosmo Oil Summary Abu Dhabi National Energy Company (TAQA) Summary Glossary of Terms...65 Oil & Gas Ratings: Revised Methodology...66 Introduction Ratings Overview Table: BMI Oil & Gas Business Environment Ratings: Structure Indicators Table: BMI Oil & Gas Business Environment Upstream Ratings: Methodology Table: BMI Oil & Gas Business Environment Downstream Ratings: Methodology Oil & Gas Outlook: Long-Term Forecasts...71 Regional Oil Demand Table: Middle East Oil Consumption (000b/d) Regional Oil Supply Table: Middle East Oil Production (000b/d) Regional Refining Capacity Table: Middle East Oil Refining Capacity (000b/d) Regional Gas Demand Table: Middle East Gas Consumption (bcm) Business Monitor International Ltd Page 4

6 Regional Gas Supply Table: Middle East Gas Production (bcm) UAE Country Overview Methodology & Risks To Forecasts BMI Forecast Modelling...77 How we generate our industry forecasts Energy Industry Cross checks Sources Business Monitor International Ltd Page 5

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8 Executive Summary The latest United Arab Emirates (UAE) Oil & Gas Report from BMI forecasts that the country will account for 4.52% of Middle Eastern (ME) regional oil demand by 2013, while providing 11.36% of supply. Regional oil use of 8.24mn barrels per day (b/d) in 2001 rose to an estimated 10.86mn b/d in It should average 11.09mn b/d in 2009 and then rise to around 12.08mn b/d by Regional oil production was 22.87mn b/d in 2001, and in 2008 averaged an estimated 25.94mn b/d. It is set to rise to 28.99mn b/d by Oil exports are growing steadily, because demand growth is lagging the pace of supply expansion. In 2001, the region was exporting an average 14.63mn b/d. This total had risen to an estimated 15.18mn b/d in 2008 and is forecast to reach 16.58mn b/d by Iraq has the greatest production growth potential, followed by Qatar. As regards natural gas, the region in 2008 consumed an estimated 386bn cubic metres (bcm), with demand of 511bcm targeted for 2013, representing 32.3% growth. Production of an estimated 407bcm in 2008 should reach 625bcm in 2013 (+53.8%), which implies net exports rising to 115bcm by the end of the period. The UAE in 2008 consumed an estimated 12.44% of the region s gas, with its market share forecast at 12.35% by It contributed an estimated 14.26% to 2008 regional gas production and, by 2013, will account for 14.39% of supply. In terms of the OPEC basket of crudes, the average price in Q109 was an estimated US$45.78 per barrel (bbl), down 13% from the US$52.51/bbl recorded during the previous three months. During the second quarter, there has been little change to our view of oil market developments. BMI is forecasting an average OPEC basket price of US$51.30/bbl, with the March gains being retained in April, before further recovery to a possible US$57.00 is seen by June. For 2009, we are still assuming an average OPEC basket price of US$52.00/bbl (-45% year-on-year). The BMI full year forecast implies Brent crude at US$53.73, WTI averaging US$54.90/bbl and Urals at US$52.66 for For the whole of 2009, the BMI assumption for gasoline is an average US$56.89/bbl, with the price peaking at a forecast monthly average of US$64.75 in December The overall y-o-y fall in 2009 gasoline prices is put at 44.1%. For gasoil in 2009, the BMI forecast is for an average price of US$69.35/bbl, assuming a monthly high of US$94.48/bbl in December. The full-year outturn represents a 42.8% fall from the 2008 level. The monthly average jet fuel price is forecast to range from US$53.75 in February to US$96.76/bbl in December, proving an annual level of US$71.78/bbl. This compares with US$124.95/bbl in The UAE s real GDP is forecast by BMI to fall by 1.7% in 2009, following growth of 6.7% in We are assuming 3.9% growth in 2010, 4.8% in 2011, 3.9% in 2012, followed by 5.3% in We expect oil demand to rise from an estimated 468,000b/d in 2008 to 535,000b/d in 2013, lagging our underlying Business Monitor International Ltd Page 7

9 economic assumptions. State-owned Abu Dhabi National Oil Company (ADNOC) is the biggest national oil company, working in partnership with major international oil companies (IOCs) to deliver an estimated 2.80mn b/d of 2009 oil and liquids production, rising to 3.23mn b/d by the end of the forecast period subject to OPEC quota policy. Gas production should reach at least 90bcm by 2013, up from an estimated 58bcm in Consumption is expected to rise from 48bcm to 63bcm by the end of the forecast period, allowing exports of 27bcm. Between 2008 and 2018, we are forecasting an increase in UAE oil production of 24.0%, with volumes rising steadily to 3.70mn b/d by the end of the 10-year forecast period. Oil consumption between 2008 and 2018 is set to increase by 35.7%, with growth slowing to an assumed 3.0% per annum towards the end of the period and the country using 635,000b/d by Gas production is expected to rise from 58bcm to 110bcm by the end of the period. With demand growth of 83.4%, this provides export potential rising from 10bcm to 22bcm over the period. Details of BMI s 10-year forecasts can be found in the appendix to this report. UAE is ranked a relatively close second place in BMI s updated Upstream Business Environment rating, thanks largely to its significant oil and gas resource base, and investor-friendly climate. It stands seven points clear of Iraq, so appears secure at least over the medium term. It is unlikely, however, to mount a near-term challenge on Qatar, four points above it. UAE s score reflects the country s gas reserves, high RPR, plus non-state competition, established licensing framework and generally encouraging country risk factors. The country is well up the league table in BMI s Downstream Business Environment rating, with several high scores and further progress up the rankings possible over the longer term. It is ranked second behind only Turkey, thanks largely to high scores for oil and gas demand, refining capacity expansion, and nominal GDP. Business Monitor International Ltd Page 8

10 SWOT Analysis United Arab Emirates Political SWOT Strengths Standards of living are high for nationals, which has dampened any demands for greater political representation. The monarchy enjoys strong support nationwide. Weaknesses Lack of democracy poses long-term risks given trends towards greater popular participation elsewhere in the region. Sheikh Khalifa bin Zayed assumed the presidency after the death of Sheikh Zayed al-nahayan. He is equally conservative and is unlikely to make concerted efforts to address constitutional issues. The succession lineage is somewhat opaque, raising concerns about longerterm stability. Opportunities The UAE co-operates closely with other GCC states in security and economic policy. The UAE is typically a 'dove' within OPEC, sympathetic to the needs of consumer states, which is good for its relations with the West. Dubai enjoyed a smooth political succession following the death of former ruler Sheikh Maktoum bin Rashid al-maktoum in January 2006, with new ruler Sheikh Mohammed bin Rashid al-maktoum welcomed by most of the public. Threats There is a long-running territorial dispute with Iran, which continues to affect bilateral relations. Relatively poor living conditions among some foreign workers have led to strikes and demonstrations. Given the size of the expatriate community, this poses some threat to domestic stability. Business Monitor International Ltd Page 9

11 United Arab Emirates Economic SWOT Strengths The UAE is a member of the Gulf Co-operation Council, which, as well as being a common market, is targeting a common currency by The UAE has one of the most liberal trade regimes in the Gulf, and attracts strong capital flows from across the region. In common with most Gulf states, there are a high number of expatriate workers at all levels of the economy, making up for the otherwise small workforce. The UAE is progressively diversifying its economy, minimising vulnerability to oil price movements Weaknesses The UAE's currency is pegged to the dollar, giving it minimal control over monetary policy and reducing its ability to tackle inflationary pressure. The state's location in a volatile region means that its risk profile is, to some extent, affected by events elsewhere. US concerns about regional militant groups and Iranian WMD programmes could affect investor perceptions. Opportunities Oil prices are expected to stay high (by historical standards) over the forecast period. Economic diversification into gas, tourism, financial services and high-tech industry offers some protection against volatile oil prices. The construction, tourism and financial sectors are growing rapidly, driven by domestic and foreign investment. Threats Heavy subsidies on utilities and agriculture and an outdated tax system have contributed to persistent fiscal deficits in the past, although rising oil revenues have masked the problem in recent years. Some bottlenecks have been forming in the construction sector and there is a chance of delays in several high-profile construction projects. Business Monitor International Ltd Page 10

12 United Arab Emirates Business Environment SWOT Strengths The UAE is a member of the Gulf Co-operation Council, a six member common market, and has been a member of the WTO since The state has invested large amounts in infrastructure, and will continue to do so over the next 10 years. The UAE's diversified economy reduces risks from volatile oil prices. Oil and gas reserves are vast and under-utilised, providing a high reservesto-production ratio (RPR) that facilitates medium- to long-term production growth. Weaknesses Due to the state's federal nature, regulations can vary considerably across the emirates. The regional economy is oil-dependent. This has historically been very cyclical, which increases risks for long-term projects. Growth in oil production is subject to OPEC policy and substantial ongoing investment that can be guaranteed only with continuing IOC participation. Opportunities Large number of free trade zones offering tax holidays and full foreign ownership. Comparatively relaxed rules on expatriate employment. The UAE's social stability and relative prosperity means that there is far less concern for security than in some other Gulf states. The UAE is set to upgrade two refineries by end-2011 in order to meet rising domestic demand for refined products. Threats The state is bureaucratic relative to regional peers. Strong oil prices have massively increased liquidity in the region. This has resulted in strong financial inflows, increasing risks that projects of lower investment potential are currently being funded. Abu Dhabi in particular has less near- to medium-term oil and gas production upside potential than other Gulf States and investment opportunities elsewhere in the region could make IOCs less enthusiastic regarding longer-term UAE participation. Business Monitor International Ltd Page 11

13 UAE Energy Market Overview The collection of states that forms the UAE has proven oil reserves estimated at 97.8bn barrels (bbl) (BP Statistical Review of World Energy, June 2008), or nearly 10% of the world total. The same total is recorded in the December 2008 Oil & Gas Journal (OGJ) survey. It also houses the world s fifth largest natural gas reserves at 6,090bcm at end-2007 and exports significant amounts of liquefied natural gas (LNG) to Japan. It is also importing gas from Qatar. Abu Dhabi dominates the UAE oil and gas sector, with 94% of its oil (over 92bn bbl). Dubai contains just 4bn bbl of reserves, followed by Sharjah and Ras al-khaimah, with 1.5bn bbl and 100mn bbl respectively. The UAE is a member of OPEC and it has recently (March 2009) been producing 2.25mn b/d, against sustainable productive capacity estimated at 2.85mn b/d. Output was reduced in support of OPEC policy, with the December 2008 meeting allocating a quota of 2.22mn b/d to the Gulf producer. There are also significant volumes of gas liquids that are exempt from OPEC quotas. Foreign minister Sheikh Abdullah bin Zayed al-nahyan announced in April 2007 that UAE oil production capacity will increase to 5mn b/d by 2014, increasing the UAE s profile in the Gulf region. Given the probable impact of lower oil prices on spending plans, this target is unlikely to be met. There are five operational refineries providing end-2008 capacity of approximately 781,000b/d, according to the December 2008 OGJ annual survey. UAE oil consumption is estimated at 468,000b/d, while its gas demand of 48bcm falls short of production at an estimated 58bcm. For the UAE, gas was in 2007 the dominant fuel, accounting for 63.8% of primary energy demand (PED), followed by oil at 36.2%. Regional energy demand is forecast to reach 853mn tonnes of oil equivalent (toe) by 2013, representing 19.6% growth over the period since The UAE s estimated 2008 market share of 9.26% is set to climb to 9.70% by Electricity generation in the UAE is based on gas and oil. Gas provides an estimated 97.8% and oil 2.2% of generated electricity. It is estimated that the UAE electricity sector will require about US$8bn in investment over the next eight years to meet growing demand, and the government has plans to expand its approximate 10 gigawatts (GW) of installed capacity by more than 50% during the next decade. It is believed that Dubai alone will have to invest to boost its power generating capacity to 9.5GW by According to BMI calculations, end-2008 installed generating capacity in UAE was around 9GW, all of which came from conventional thermal sources. In 2008, UAE generated an estimated 78TWh and consumed an estimated 72TWh of electricity. Since 2000, electricity generation has risen by 50% and consumption by almost 70%. Business Monitor International Ltd Page 12

14 Under the UAE s constitution, each emirate controls its own oil production and resource development. Although Abu Dhabi joined OPEC in 1967 (four years before the UAE was formed), Dubai does not consider itself part of OPEC or bound by its quotas. The UAE is considering revising its system of oil and gas concessions to spur technological development and introduce more competition into its upstream segment. Having concluded its sour gas licensing round with IOCs, it is expected that ADNOC will focus on reforming the concessions system as it seeks to boost production capacity. Several options are being considered for the concessions, including splitting them into their individual fields and issuing competitive tenders for the fields development. Although the concessions are not due to expire until 2014 at the earliest, it is expected that renegotiations will begin early. This may provide the opportunity for smaller players to get a toehold into the UAE s upstream segment and may open the door for national oil companies (NOCs), particularly from Asia, to get involved. Nevertheless, the UAE is unlikely to take any action which will put at risk its solid relationship with existing IOC partners. Pipelines The start-up of a planned 320km oil pipeline from the Habshan fields to the port of Fujairah has been delayed by two years, according to a May 2009 statement by Dieter Blauberg, the director of the project. The project was originally due to come onstream in 2009, but start-up had already been delayed until Blauberg said in early May 2009 that the project had now been pushed back to August The delays have been attributed to the current market conditions. The pipeline is aimed at bypassing the Strait of Hormuz. It will initially have a capacity of 1.5mn b/d, which could be increased to 1.8mn b/d at a later stage. The pipeline will be supplied with oil from the Habshan fields, which are operated by ADNOC. China National Petroleum Corporation (CNPC) signed a US$3.29bn deal in November 2008 with the IPIC to build the oil pipeline. Under the EPC contract for the Abu Dhabi Crude Oil Pipeline, CNPC s two pipeline engineering and construction units China Petroleum Pipeline Bureau (CPPB) and China Petroleum Engineering & Construction Corporation (CPECC) will jointly build the 48-inch diameter pipeline. The pipeline project will also include the construction of a 12mn bbl oil storage facility at Fujairah and export terminal facilities. Further, the construction of a refinery at Fujairah is also being considered by International Petroleum Investment Company (IPIC), but such plans are still at an early stage, according to Blauberg. Business Monitor International Ltd Page 13

15 Regional Energy Market Overview The Arabian Gulf states will continue to dominate oil supply, backed by huge and largely untapped reserves. Gas is another important export product for the region, mainly in the form of LNG. The Gulf plays a growing role in the supply of the world s gas. Large parts of the region remain off limits to IOCs, thanks to state control in the major Gulf states. Iraq is formulating oil laws that may result in foreign partnerships, however. Investment in Iran by IOCs has come under increasing pressure thanks to the nuclear standoff. Refinery investment opportunities do exist for IOC partners, with the region building a substantial surplus with which to meet demand growth in Asia, Europe and North America. Oil Supply And Demand Thanks to the Gulf producers, this remains the key region in terms of supply and has an increasingly significant role to play as a consumer of oil. Oil- and gas-based wealth creation has stimulated regional economies, triggering an unwelcome surge in fuel demand that could ultimately have a negative impact on the export capabilities of Iran and others. The recent fall in crude prices may undermine investment plans, with some risk of capacity expansion targets being missed. OPEC policy and a relatively high level of quota adherence points to a meaningful downturn in 2009 regional supply. Iraq remains the region s wild card, having medium-term production potential of at least 3.30mn b/d, with the government still targeting longer-term supply of up to 6.0mn b/d. For the immediate future, volumes look set to continue recovering in spite of the uncertain political climate as well as a lack of investment in developing new reserves. For the region as a whole, we expect to see output reach 28.39mn b/d by 2013, representing a gain of 9.04% over Apart from likely dramatic growth in Iraq, the big supply winner will be Qatar, with Egypt the most significant loser. With regional consumption set to reach 11.81mn b/d in 2013, the growing export capability is clearly vast. Some 16.58mn b/d is likely to be exported in 2013, up from an estimated 13.70mn b/d in Business Monitor International Ltd Page 14

16 Table: Middle East Oil Consumption (000b/d) Country e 2009f 2010f 2011f 2012f 2013f Bahrain Iran 1,625 1,621 1,675 1,670 1,687 1,712 1,738 1,772 Iraq ,024 Israel Kuwait Oman Qatar Saudi Arabia 2,005 2,154 2,218 2,240 2,285 2,354 2,401 2,485 Turkey UAE BMI universe 6,007 6,269 6,503 6,604 6,774 6,966 7,172 7,407 Other ME 4,319 4,336 4,345 4,345 4,358 4,371 4,384 4,406 Regional total 10,326 10,605 10,848 10,949 11,132 11,337 11,556 11,813 e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2008/BMI. All forecasts: BMI. Middle East regional oil use of 8.24mn b/d in 2001 rose to an estimated 10.85mn b/d in It should average 10.95mn b/d in 2009 and then rise to around 11.81mn b/d by The UAE accounted for an estimated 4.31% of 2008 regional consumption, with its market share expected to be 4.52% by Business Monitor International Ltd Page 15

17 Table: Middle East Oil Production (000b/d) Country e 2009f 2010f 2011f 2012f 2013f Bahrain Iran 4,388 4,401 4,300 4,100 4,200 4,250 4,300 4,450 Israel na na na na na na na na Kuwait 2,682 2,626 2,750 2,600 2,650 2,750 2,900 3,050 Oman Qatar 1,110 1,197 1,280 1,365 1,499 1,609 1,648 1,656 Saudi Arabia 10,853 10,413 10,830 9,850 10,100 10,500 11,000 11,350 Turkey UAE 2,971 2,915 2,985 2,800 2,850 2,950 3,100 3,225 BMI universe 22,848 22,359 22,964 21,532 22,119 22,875 23,758 24,525 Iraq 1,999 2,145 2,350 2,400 2,550 2,700 2,950 3,100 Syria Yemen Other ME Regional total 25,687 25,251 26,034 24,650 25,419 26,327 27,465 28,389 e/f = estimate/forecast. na = not applicable. Historical data: BP Statistical Review of World Energy, June 2008/BMI. Forecasts: BMI. Regional oil production was 22.87mn b/d in 2001, and in 2008 averaged an estimated 26.03mn b/d. It is set to rise to 28.39mn b/d by The UAE in 2008 accounted for an estimated 11.47% of regional oil supply, and its market share is expected to be 11.36% by the end of the forecast period. Oil exports are growing steadily, because demand growth is lagging the pace of supply expansion. In 2001, the region was exporting an average 14.63mn b/d. This total had risen to an estimated 15.18mn b/d in 2008 and is forecast to reach 16.58mn b/d by Iraq has the greatest production growth potential, followed by Qatar. Business Monitor International Ltd Page 16

18 Oil: Downstream Table: Middle East Oil Refining Capacity (000b/d) Country e 2009f 2010f 2011f 2012f 2013f Bahrain Iran 1,732 1,857 1,857 1,900 2,000 2,000 2,000 2,000 Iraq ,000 1,150 1,200 Israel Kuwait ,150 1,150 Oman Qatar Saudi Arabia 2,100 2,100 2,100 2,450 2,530 2,630 2,630 3,430 Turkey UAE ,000 1,000 1,000 1,000 1,150 BMI universe 7,390 7,536 7,847 8,770 8,950 9,650 10,230 11,267 Other ME Regional total 8,084 8,265 8,576 9,535 9,715 10,415 11,033 12,110 e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2008/BMI. All forecasts: BMI. Refining capacity for the region was 7.46mn b/d in 2001, rising gradually to an estimated 8.58mn b/d in Oman, Qatar, Iraq, Saudi Arabia, the UAE are all expected to increase significantly their domestic refining capacity, with the region s total capacity forecast to reach 12.11mn b/d by 2013 well ahead of oil demand, therefore implying substantial net exports of refined products. The UAE s share of regional refining capacity in 2008 was an estimated 9.11%, and its market share is set to rise to 9.50% by Business Monitor International Ltd Page 17

19 Gas Supply And Demand Table: Middle East Gas Consumption (bcm) Country e 2009f 2010f 2011f 2012f 2013f Bahrain Iran Iraq Israel Kuwait Oman Qatar Saudi Arabia Turkey UAE BMI universe Other ME Regional total e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2008/BMI. All forecasts: BMI. Business Monitor International Ltd Page 18

20 Table: Middle East Gas Production (bcm) Country e 2009f 2010f 2011f 2012f 2013f Bahrain Iran Iraq Israel Kuwait Oman Qatar Saudi Arabia Turkey na na na na na na na na UAE BMI universe Other ME Regional total e/f = estimate/forecast. na = not applicable. Historical data: BP Statistical Review of World Energy, June 2008/BMI. Forecasts: BMI. In terms of natural gas, the region in 2008 consumed an estimated 386bcm, with demand of 511bcm targeted for 2013, representing 32.3% growth. Production of an estimated 407bcm in 2008 should reach 625bcm in 2013 (+53.8%), which implies net exports rising to 115bcm by the end of the period. The UAE in 2008 consumed an estimated 12.44% of the region s gas, with its market share forecast at 12.35% by It contributed an estimated 14.26% to 2008 regional gas production and, by 2013, will account for 14.39% of supply. Business Monitor International Ltd Page 19

21 Liquefied Natural Gas Table: Middle East LNG Exports/(Imports) (bcm) Country e 2009f 2010f 2011f 2012f 2013f Iran na na na na na na na 10.0 Oman Qatar Turkey (5.7) (6.0) (6.5) (6.5) (6.5) (6.5) (6.5) (12.0) UAE Regional total e/f = estimate/forecast. na = not applicable. Historical data: BP Statistical Review of World Energy, June 2008/BMI. All forecasts: BMI. The leading LNG exporter by 2013 will be Qatar (+112.6% from 2008). Iran has significant longer-term gas export potential, although the first volumes have yet to flow. The country is signing gas supply deals, which point to rising LNG sales from Turkey is set to be a key gas importer, although LNG volumes will be modest as the country raises pipeline supplies from the likes of Azerbaijan and Iran. Business Monitor International Ltd Page 20

22 Business Environment Ranking Middle East Region This updated regional Business Environment scoring system incorporates many more industry-specific elements and a more sophisticated approach to political and economic risk assessment. The enlarged scoring matrix is broken down into Upstream and Downstream segments, providing a more detailed analysis of the growth outlook and market conditions for both major elements of the oil and gas industry. The Middle East region comprises 10 countries, including all key Gulf states. State influence remains very high, with limited privatisation activity. Oil production growth for the period to 2013 ranges from a negative 34% for Turkey (where absolute numbers are already small) to a positive 54% in Iraq, while oil demand growth ranges from 6% to 46% across the region. Increases in gas output range from zero to 240% across the region over the period to The spread of gas demand growth estimates ranges from 10% to 64%. The political and economic environment varies, depending partly on market maturity and specific factors such as the uncertainty in Iraq and the nuclear-inspired stand-off in Iran. Composite Scores The UAE and Saudi Arabia now occupy the top and bottom slots of the regional league table. The composite Upstream and Downstream combined scores are 62 points and 45 points respectively, out of a possible 100. Qatar now shares first place with the UAE, having as expected retaken Turkey. Turkey remains well clear of the midfield pack, which comprises Iraq, Israel, Oman and Iran. Iraq is clearly capable of moving much higher once licensing terms have been established and IOC activity picks up. Kuwait has remained ahead of Saudi Arabia near the foot of the table. Bahrain has eased away from the bottom slot, but still appears vulnerable. Business Monitor International Ltd Page 21

23 Table: Regional Upstream Business Environment Rating Limits of Potential Returns Risks to the Realisation of Potential Returns Upstream Market Country Structure Limits Industry Risks Country Risk Risks Upstream Rating Rank Qatar UAE Iraq Turkey Iran Oman Israel = Bahrain = Kuwait Saudi Arabia Scores are out of 100 for all categories, with 100 the best. The Upstream Business Environment Rating is the principal rating. It comprises two sub-ratings 'Limits of potential returns' and 'Risks to realisation of returns', which have a 70% and 30% weighting, respectively. In turn, the 'Limits' rating comprises 'Upstream market' and 'Country structure', which have a 75% and 25% weighting, respectively. They are based on the oil and gas resource base/growth outlook and sector maturity (Upstream) and the broader industry competitive environment (Country). The 'Risks' rating comprises 'Industry risks' and 'Country risk', which have a 65% and 35% weighting, respectively, and are based on a subjective evaluation of licensing terms and liberalisation (Industry) and the industry's broader country risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across all the industries for which BMI provides Business Environment Ratings, and is designed to enable clients to consider each rating individually or as a composite. For a list of the data/indicators used, please consult the Methodology section at the end of the report. Source: BMI Business Monitor International Ltd Page 22

24 Table: Regional Downstream Business Environment Rating Limits of Potential Returns Risks to the Realisation of Potential Returns Downstream Market Country Structure Limits Industry Risks Country Risk Risks Downstream Rating Rank Turkey UAE Israel Oman Qatar Saudi Arabia Bahrain = Iran = Kuwait Iraq Scores are out of 100 for all categories, with 100 the best. The Downstream Business Environment Rating is the principal rating. It comprises two sub-ratings 'Limits of potential returns' and 'Risks to realisation of returns', which have a 70% and 30% weighting, respectively. In turn, the 'Limits' rating comprises 'Downstream market' and 'Country structure', which have a 75% and 25% weighting, respectively. They are based on the downstream refining capacity/product growth outlook/import dependence (Downstream) and the broader socio-demographic and economic context (Country). The 'Risks' rating comprises 'Industry risks' and 'Country risk', which have a 60% and 40% weighting, respectively, and are based on a subjective evaluation of regulation and liberalisation (Industry) and the industry's broader country risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across all the industries for which BMI provides Business Environment Ratings, and is designed to enable clients to consider each rating individually or as a composite. For a list of the data/indicators used, please consult the Methodology section at the end of the report. Source: BMI Upstream Scores Qatar and Saudi Arabia remain the best and worst performers in this segment, showing that the overall pecking order is quite different to that for combined scores. The UAE is a comfortable second, itself having a useful seven-point lead over Iraq. However, Iraq has the long-term potential to overtake the UAE. Turkey, Iran and Oman vie for the middle ground, with Iran having the greatest potential to break free if the risk outlook improves. The foot of the table is dominated by Bahrain, Kuwait and Saudi Arabia, in spite of the epic hydrocarbon resources of two of these state-dominated laggards. Saudi has accumulated less than 60% of the points allocated to Qatar. Downstream Scores Turkey and Iraq still bracket the remaining eight ME states in the Downstream rankings, with the former driven by the size of the fuels market, privatisation moves and the competitive landscape, plus a reasonable Country Risk rating. Israel has slipped back behind the UAE, in spite of its privatised and Business Monitor International Ltd Page 23

25 deregulated oil market. Oman is now only one point clear of Qatar in fourth place, with the latter under long-term threat from Saudi Arabia below. There is currently little to choose between Bahrain and Iran, although either could ultimately be displaced by Kuwait. UAE Upstream Rating Overview UAE is ranked a relatively close second place in BMI s updated Upstream Business Environment rating, thanks largely to its significant oil and gas resource base, and investor-friendly climate. It stands seven points clear of Iraq, so appears secure at least over the medium term. It is unlikely, however, to mount a near-term challenge on Qatar, four points above it. UAE s score reflects the country s gas reserves, high RPR, plus non-state competition, established licensing framework and generally encouraging country risk factors. UAE Upstream Rating Potential Returns Upstream Market: On the basis of upstream data alone, UAE ranks fifth, just behind Kuwait, in the ME region. The country ranks fifth and fourth respectively in terms of proven oil and gas reserves. Its oil and gas production growth outlook are third and fourth, while the oil and gas RPR are third and fifth respectively. Country Structure: Influencing UAE s third place in the Limits to Potential Returns section is the third-placed country structure, behind Qatar. UAE ranks third by the number of non-state operators in the upstream sector, and equal third in terms of state ownership of assets. UAE Upstream Rating Risks to Potential Returns Industry Risks: UAE is ranked fifth in the Risks to Realisation of Potential Returns section of our ratings, behind Turkey. Its fifth position for Industry Risks is due to a joint first-placed licensing environment and fifth-placed privatisation trend. Country Risks: Its broader Country Risk environment is more impressive, ranking UAE equal third with Oman. The best score is for long-term policy continuity, while corruption fares relatively well. Would-be investors are also faced with respectable scores for physical infrastructure and rule of law. UAE Downstream Rating Overview The UAE is well up the league table in BMI s Downstream Business Environment rating, with several high scores and further progress up the rankings possible over the longer term. It is ranked second behind only Turkey, thanks largely to high scores for oil and gas demand, refining capacity expansion, and nominal GDP. Business Monitor International Ltd Page 24

26 UAE Downstream Rating Potential Returns Downstream Market: On the basis of downstream data alone, the UAE ranks fourth among the region s 10 countries, behind Iraq. This score reflects the region s fifth-ranked refining capacity and oil demand, third-placed gas consumption and third-placed refining capacity expansion plans. Country Structure: UAE ranks equal fourth with Qatar in terms of the Limits to Potential Returns section, although its Country Structure holds equal sixth place in the region, alongside Kuwait. Population and nominal GDP rank the country sixth and fourth respectively, while growth in GDP per capita is the third-highest. State ownership of assets is ranked equal fourth. UAE Downstream Rating Risks to Potential Returns Industry Risks: In the Risks to Realisation of Potential Returns section of our ratings, UAE is ranked fifth, behind Bahrain. Its fifth place for Industry Risks reflects the fifth-placed regulatory regime and fifth-ranked score for privatisation of government-held assets. Country Risks: Its broader Country Risk environment is good, ranked fourth just behind Oman. The best and optimum score is for short-term economic external risk, followed closely by short-term policy continuity. High scores are awarded for rule of law, short-term economic growth risk and physical infrastructure. Operational risks for private companies are raised only by the state s legal framework. Business Monitor International Ltd Page 25

27 Business Environment Legal Framework The UAE legal system is based on civil law concepts and common law principles such as adopting previous court judgments as legal precedent are usually not recognised. The legal system follows the federal structure of the UAE, but the constitution acknowledges the right of individual emirates to opt out of the federal court system, which Dubai and Ras al-khaimah have done. These two emirates have their own court systems, which are not subject to the federal Supreme Court. There are three main branches within the court structure: civil, criminal and shari a law. The court structure comprises the following: The Court of First Instance which includes the Civil Court, the Criminal Court and the shari a Court. This hears all claims, including commercial matters. Commercial disputes involving foreign parties tend to come before the civil courts, although shari a law is applicable in all kinds of cases involving both Muslims and non-muslims. The Court of Appeal. The Court of Cassation whose judgment is final. Dubai has its own Court of Cassation. The 1971 constitution established the independence of judiciary. However, in practice, independence is minimal as all judges are appointed by the government. The five judges of the Federal Supreme Court, for example, are appointed by the Supreme Council of Rulers, while other judges are appointed by the Ministry of Justice. Furthermore, judges decisions are subject to review by the executive, meaning that any politically unpopular rulings can be overturned. Commercial disputes involving foreign companies are usually heard before the federal civil courts, with a panel of three judges presiding. All cases involving banks and financial institutions must be heard by civil courts. In Abu Dhabi, all non-arbitration commercial disputes are first taken to the Abu Dhabi Conciliation Department and if the parties cannot settle, they start legal proceedings in the court of first instance. With the UAE now firmly established as a regional business hub, arbitration is now the preferred mode of dispute resolution involving foreign companies. Yet dispute resolution can be an arduous and uncertain process and enforcing arbitration judgments can be difficult since court certification is also required. The judicial process can sometimes take years to conclude. Some companies are reportedly unwilling to resort to arbitration out of concern that it could affect their future business opportunities in the UAE. Business Monitor International Ltd Page 26

28 In 2006, the UAE ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards one of the last countries in the region to become a signatory to the convention. This enables UAE courts to enforce arbitration decisions made in a foreign country. However, the federal Supreme Court says that a foreign arbitration clause in a registered commercial agency agreement is invalid, since the Commercial Agency Law states that UAE courts have jurisdiction over commercial agency disputes. Nevertheless, smoother arbitration should ensure that disputes are handled more quickly than in the court system. Although investment laws and regulations are undergoing a period of evolution and becoming more conducive to foreign investment, at present the regulatory and legal framework still favours local over foreign nationals. Foreign ownership of land and stocks is restricted, although specific rules vary between emirates. Dubai and Abu Dhabi have opened up some areas for freehold and leasehold property investments. Ras al-khaimah also offers freehold land to offshore companies in designated areas. In Abu Dhabi, non-gcc nationals can own buildings in certain investment areas but cannot own the land. However, investors should be aware of impediments to the exercise of rights over property. In Dubai, for example, foreign owners of freeholds cannot register titles with the Dubai Land Department, which would allow them access to the full range of legal protections and transactions that property ownership requires. Freeholds are a new phenomenon in Dubai and very few court precedents exist, so there is still considerable ambiguity concerning property rights and inheritance laws. The UAE is a regional leader in the protection of intellectual property rights (IPR), with improving enforcement of copyright, trademark, and patent laws. Anecdotal evidence suggests that the federal government is enforcing these laws, which were passed in The rate of software piracy in the UAE is regarded as one of the lowest in the Middle East. However, enforcement of anti-piracy measures can vary between emirates, with Dubai seen as the best performer. More could be done in other emirates, while the UAE still remains a major centre for the trans-shipment of counterfeit goods. Corruption is not endemic to UAE business life and the country ranks 35th out of 180 states in Transparency International s 2008 Corruption Perception Index, second only to Qatar in the Middle East. Nevertheless, large state-owned enterprises continue to control large swathes of the economy and are not subject to extensive scrutiny. Furthermore, those convicted of corruption have often escaped effective punishment in 2001, the former head of the Dubai Customs and Port Authority was convicted of corruption and embezzlement and sentenced to 27 years in prison, but was quickly pardoned by the Dubai government and released. A law passed in 2005 now stipulates minimum sentencing requirements for public officials found guilty of corruption. Under its WTO membership obligations, the UAE has undertaken measures to reduce red tape surrounding the foreign investment approval process. Investors are now exempt from obtaining a Ministry Business Monitor International Ltd Page 27

29 Infrastructure of Labour card in addition to an Immigration Department visa and investors no longer need to appear in person to inquire about the status of business applications; a new automated service allows them to receive information about their business licences over the telephone. The UAE has around 1,000km of paved roads linking all the emirates, mainly along the coast. The motorway between Abu Dhabi and the Al-Ain oasis has been upgraded and sections of the road linking Abu Dhabi and Dubai are also being upgraded. Road is the major means of transport between the emirates given that there is no railway system. However, much of the UAE s international trade is done by sea and all seven emirates have modern port facilities. Dubai dominates the cargo and re-export markets thanks to the size of its two ports, Port Rashid and Jebel Ali Port. The former is one of the busiest ports in the Gulf region and has 35 berths, while the latter has 63 berths and is part of a free economic zone. Abu Dhabi s Mina Zayed port has been upgraded to 21 deepwater berths, which has helped eliminate waiting times. All three aforementioned ports have warehouse facilities that provide storage for imports, with no storage charges for the first 20 days. Other emirates are seeking a share of the re-export business, although their facilities are currently smaller than those available in Dubai or Abu Dhabi. Sharjah is the only emirate with ports on both the Persian Gulf and the Indian Ocean, which offers it significant advantages; international cargo ships can save around 24 hours in a trip from East Asia to Europe by not having to join the queue to enter the busy Gulf. Avoiding the Gulf also results in significant insurance savings. The UAE is home to two major airline carriers; Gulf Air (owned jointly by Abu Dhabi, Bahrain, Oman and Qatar) and Emirates Air (owned by Dubai). The latter flies to around 80 destinations across Europe, the Middle East, Australia, Africa and the Indian subcontinent. Labour Force Mobile phone use in the UAE is among the highest in the Middle East and indeed the world, with services provided by two carriers: Etisalat and newcomer Du. Fixed-line services are less popular and although it is now gaining in popularity broadband penetration grew from under 3% in 2005 to 5.1% in 2006 broadband networks are not as developed as in some neighbouring states, such as Bahrain. Customers have complained of high prices and poor service quality, although this should improve as Du expands its services nationwide (the newcomer is currently present only in the free zones). The total population exceeded 5mn in A census has been carried out which will determine the actual size of the labour force, but estimates put it at about 60% of the total population. Business Monitor International Ltd Page 28