Petrol price hike on the cards as Enoc flounders

Fuel retailer appeals to UAE as government-set petrol prices squeeze margins
Petrol price hike on the cards as Enoc flounders
The UAE has long subsidised fuel prices in an effort to cut living costs for residents
By Elizabeth Broomhall
Sun 16 Oct 2011 12:47 PM

The UAE is under fresh pressure to close the gap between fuel prices and the heavily subsidised cost at the pump after state-backed retailer Enoc said it expects an AED2.7bn ($735m) loss this year.

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 Enoc stations.

The Dubai-owned fuel retailer said Saturday that the cost of providing subsidised fuel to customers was “not sustainable or viable” and called on the government to address the shortfall.

“The announcement really pertains to Enoc increasing the rhetoric on how long it can sustain operations,” said Thaddeus Malesa, an independent energy analyst in the UAE.

“This is a continuing discussion between Enoc and the federal authorities. Enoc is saying ‘we should all be operating like private companies’, and the Abu Dhabi government is saying ‘no’, especially in light of the Arab Spring and inflationary forces coming from food prices.”

The low cost of fuel is hampering the ability of state-backed fuel retailers to grow their operations and maintain their balance sheets, he said.

“Prices should be following market forces - this gives the right type of incentive to encourage investment in production and refineries. The optimum solution would be where you have direct compensation for people who really are struggling.”

The UAE, the world's third largest exporter of crude oil, has long subsidised fuel prices in an effort to cut living costs for residents, a move that costs the state millions of dollars a year.

Enoc and rival state-owned retailer Emarat have suffered from rising oil prices because they buy fuel at market prices and sell it at government-set rates.

The UAE has hiked gasoline prices twice since April 2010 – though fuel remains well below market prices – but a third increase was scrapped in the wake of widespread social unrest in parts of the Middle East.

Emarat blamed an April petrol shortage on logistical problems, though industry sources said a supplier, trading house Vitol, had refused to discharge a fuel cargo at port because Emarat had delayed a payment.

In January, chairman Obaid Humaid Al Tayer said the company was restructuring and needed bank loans because it must sell gasoline at below-market prices.

“Things have reached a breaking point – something has got to happen,” said Robin Mills, a Dubai-based energy analyst. “There has been pressure on increasing the prices for quite a while. The price was raised a couple of times last year, but since then the world oil price has gone up a lot and there haven’t been any more price rises so that gap has opened up again.

“There are only two solutions to this. Either the government has to increase the prices, which will have to be quite substantial, or some part of the government has to provide a direct subsidy or a direct payment [to the petrol retailers] for these losses.”

UAE authorities in June raised the capital of the indebted fuel retailer Emarat by 50 percent to AED9bn ($2.45bn). In January, the UAE's Federal National Council (FNC) passed a bill allowing Emarat to borrow the equivalent of up to 50 percent of its capital. Emarat had debt of around AED1.9bn, the FNC said in January.

“This is a wealthy country, people can afford to pay market prices for fuel,” said Mills. “And when you have this cheap fuel it just encourages congestion, waste and pollution.”

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