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Thu 16 Jun 2011 08:38 AM

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In search of fuel in oil-rich UAE

Refining capacity, financial strain of subsidies to blame as world's third largest exporter faces fuel shortage

In search of fuel in oil-rich UAE
OIL EXPORTER: UAEs petrol consumption is estimated to be around five million litres per day (Getty Images)
In search of fuel in oil-rich UAE

Rashed Al Ali spent two hours hunting for petrol before ditching his car. He then walked to a highway to hail a taxi to try to find any place where he could fill his jerrycan with fuel.

His story is part of what has become a typical morning rush hour routine for hundreds of workers in the UAE, where petrol stations ran dry last week.

"Between searching and getting through the traffic at the stations, sometimes it takes me two and a half hours to get fuel," said Ali, 25, who lives in the UAE's northern region and works in Dubai to the south.

"This problem is making people waste time. I have to wake up extra early to fill gas at a petrol station before I can go to work in Dubai."

The UAE is the world's third largest oil exporter, now pumping 2.5 million barrels per day, and its petrol consumption is estimated to be around five million litres per day.

But it lacks sufficient refining capacity in the face of rapidly growing demand with rising population and has to import nearly 1 million tonnes of gasoline a year to meet demand from its citizens, most of whom drive a car.

The authorities have struggled to explain what has become the third fuel shortage in the past 10 months and is now in its third week. It began in Sharjah before spreading to other northern emirates like Umm Al Quwain.

They first blamed it on maintenance work. But analysts say the problem lies in government subsidies, which look increasingly unsustainable as soaring oil prices drive up the cost of supplying fuel to customers at a cheaper, fixed price.

"It is a problem that has been in existence for several years," a Dubai-based independent analyst said on the condition of anonymity. "This was going to happen at some point.

"[It's happening now] because the demand is getting higher and the very sharp run up of oil prices since the start of the year."

Gasoline is heavily subsidised in the UAE, like other Gulf states, with the federal government setting the price cap. Fuel retailers import their needs from the international market where oil hit a high of $127 a barrel earlier in the year.

Three of the UAE's four fuel retailers - Dubai-owned Emirates National Oil Co (ENOC), Emirates Petroleum Products Co (EPPCO) and federally-owned Emarat - have been making losses for years. The fourth is Abu Dhabi National Oil Co (ADNOC).

"In general the government is not routinely covering these losses," the analyst said. "So it's not really a subsidy because the government is not providing a payment at a regular time.

"If anything, the company is providing the subsidy and then making a loss."

Continued on next page…

ENOC said in May it would have to meet an additional AED2.7bn ($735.3m) in 2011 to cover the cost of providing subsidised fuel. Last year, it paid out AED1.5bn.

But the government help does not appear to be enough.

Dubai, which is slowly recovering from a 2009 debt crisis, spent nearly AED5.4bn on various subsidies including energy, and other transfers last year, government data showed.

In contrast, Abu Dhabi planned to spend AED20.2bn on subsidies and transfers last year. The emirate, whose fuel retailer Adnoc has faced no interruptions, has an annual budget six times larger than that of Dubai.

Emarat, the federally-owned retailer, said in January it was being restructured to try to return to profit. The UAE's Federal National Council passed a bill to allow Emarat to borrow up to 50 percent of its capital earlier this year.

"At the end of the day Emarat belongs to the federal government and the federal government stands behind Emarat," an Emarat source said. "Otherwise, the company cannot survive."

Like other oil-rich Arab exporters such as Saudi Arabia, the UAE is a net importer of gasoline.

"In some cases, like the UAE, it is a question of using incremental crude to cover for their gasoline shortage," one Gulf-based trader said.

UAE's Ruwais refinery, located west of oil-rich Abu Dhabi, is the country's largest, with its 415,000 barrels per day capacity and is operated by Adnoc's refining arm Takreer, which has another refinery with some 90,000 bpd capacity.

ENOC's Jebel Ali refinery with just over 100,000 bpd and Vitol's Fujairah refinery with 80,000 bpd are other UAE refineries. Takreer plans to more than double its capacity by the end of 2013, but demand is growing faster, leaving the OPEC member reliant on gasoline imports for now.

The government has raised gasoline prices by 26 percent since April 2010 to try to phase out gasoline subsidies.

But that plan is unlikely to proceed after popular unrest struck the Arab world. "Given the Arab Spring, this is no time for price hikes," a Gulf-based energy analyst. "It's politically very difficult at the moment."

But as vexing as higher fuel prices would be, the population is likely to be more angered by the total lack of fuel, he said.

"I'm sure there will be a short term solution with somebody... writing a cheque."

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Louie Tedesco 8 years ago

The poll attached to this article is meaningless as it does not address all available options. This self-imposed government fuel shortage isn’t a matter of cost at the pump, nor driving less or rationing the amount one can purchase.

Fuel is the lifeblood of any economy and it must be available at reasonable cost - reasonable cost being dependant upon the level of income within the particular country. Increasing the cost of fuel in the UAE to adjust to the stated price of over AED 3 per litre would be like raining the cost of fuel in the UK to GBP 3. It will bring the economy to its knees as only a small portion of the population in either country could absorb such an overnight cost increase.

The real issue is a lack of local refining capacity. This should have been addressed many years ago when it became obvious that the population was increasing in line with the desired expansion of the economy.

Jack Sparow 8 years ago

Thanx to someone with an intelligent comment in this post, agree with you 100% Louie!