Fresh fuel shortages likely amid subsidy standoff

Analysts say lack of progress on fuel subsidies increases risk of petrol shortfall in 2012
Fresh fuel shortages likely amid subsidy standoff
The UAE has long subsidised fuel prices in an effort to cut living costs for residents
By Elizabeth Broomhall
Tue 13 Dec 2011 08:52 AM

The UAE could see more fuel shortages next year if no federal action is taken to help petrol retailers carry the cost of subsidising oil prices, analysts have said.

The Gulf state has dragged its heels over increasing the cost of petrol in the wake of the Arab Spring, despite $100 oil spurring more than six days of fuel shortages in June across stations.

Dubai-owned Emirates National Oil Co (Enoc) broke ranks in June to criticise the government-set petrol cap and to lobby for a change in the system. But analysts say negotiations on the issue have ground to a halt.

“The situation is at a complete standstill,” said a Dubai-based energy expert. “If international oil prices continue to rise in the next six months and no agreement is reached, there are likely to be [more] shortages.”

It was speculated Abu Dhabi National Oil Company (Adnoc) would take over Enoc petrol stations in the north after the summer’s fuel shortages, but this has not been confirmed.

“Enoc has continued to raise alarm bells by declaring its willingness to cut supplies to Dubai customers as it continues to burn through cash. The [only] change on the ground in the northern emirates is that Adnoc is enlarging its downstream presence,” the analyst said.

“All discussions are behind the scenes. Abu Dhabi has not issued any public proclamations as of yet. The status quo continues with petrol prices dictated by the federal government and retailers carrying the financial burden.”

Three of the UAE's four fuel retailers – Enoc, its subsidiary Eppco and federally-owned Emarat - have made losses for many years. Adnoc has been largely unaffected because its upstream operations and vertically integrated supply system allow it to absorb any potential losses.

Enoc said in June it could not continue to bear the shortfall between fuel prices and the heavily subsidised cost at the pump, arguing it was “not sustainable or viable for the company.”

The retailer expects an AED2.7bn ($735m) loss this year.

The UAE has long subsidised fuel prices in an effort to cut living costs for residents, at a cost of millions of dollars a year. The Gulf state increased prices twice at the pump between April 2010 and January 2011, but scrapped a third planned rise in the wake of regional political upheaval.

Dubai, which is recovering from its 2009 debt crisis, spent just over AED5.7bn on various subsidies including energy and other transfers in 2010, according to International Monetary Fund data. Abu Dhabi spent AED22.2bn - but its budget is more than four times the size of Dubai's.

The government has made efforts to offer short-term solutions to its retailers, including raising the capital of indebted fuel retailer Emarat by 50 percent to AED9bn ($2.45bn) in June.

But analysts warn cash injections or other short-term support will not be sufficient for retailers to maintain reliable fuel supplies over the next 12 months, particularly if oil prices increase.

“Unless oil prices fall sharply, this will definitely be a continuing issue as the financial burden on the petrol retailers is too great,” said UAE-based energy analyst Robin Mills.

“These retailers need some kind of government intervention - whether that is direct subsidy payments, price rises, ADNOC taking off some of their operations, or some other arrangement.”

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