Abu Dhabi Paymasters Fund Fujairah Oil Hub to Bypass Hormuz

The emirate of Abu Dhabi, having spent billions last year bailing out glitzy neighbor Dubai, is turning to more distant Fujairah to ensure safe, quick passage for its oil exports and improve the nation’s food security.

The capital of the United Arab Emirates, the fourth-largest crude producer in the Organization of Petroleum Exporting Countries, is bankrolling infrastructure projects in the easternmost emirate, Fujairah, to gain direct access to the Indian Ocean. Abu Dhabi is investing in an oil-storage terminal and a $3.3 billion pipeline and is building the country’s biggest power and water treatment plants as well as a facility to store imported grain.

The U.A.E.’s richest emirate is taking advantage of Fujairah’s location to bypass the Strait of Hormuz, a chokepoint at the mouth of the Persian Gulf for a fifth of the world’s oil supplies. Iran has threatened to block the waterway if attacked because of its nuclear program. In July, a Japanese tanker was bombed in the Strait, heightening concern that energy supplies from the Gulf are insecure.

“Abu Dhabi is thinking long term and strategically,” said Mustafa Alani, a regional security expert from the Gulf Research Center, a Dubai-based institution not affiliated with the U.A.E. government. “We’ve had about 60 statements from Iran in the last four years saying they would interfere with freedom of navigation in the Gulf or close the Strait, so Abu Dhabi is now realizing the value of Fujairah.”

‘Tanker War’

Iran’s warnings are an echo of the disruptions to regional oil shipments during the Iran-Iraq War of the 1980s. In that conflict both sides fired missiles at one another’s tankers in the Gulf, and the attacks spread to target Saudi and Kuwaiti vessels in what became known as the “Tanker War.” In 2008, Iranian attack boats confronted three American warships sailing through the Strait. The U.A.E., like neighboring Qatar, has close military links with the U.S.

The U.S. and Britain yesterday called for a United Nations response to Iran’s launch of a missile with technology they said could be adapted to carry nuclear weapons. Iran, which says its nuclear program is for peaceful purposes, test-fired the third generation of its short-range Fateh 110 surface-to-surface missile, the state-run Fars news agency reported on Aug. 25, citing Defense Minister Ahmad Vahidi.

By banking on Fujairah, Abu Dhabi is pursuing a strategy similar to that of Saudi Arabia, the world’s biggest oil producer, which diverts a quarter of its crude exports through the Red Sea port of Yanbu and imports 60 percent of its goods at nearby Jeddah.

‘Strategic Location’

“There’s no doubt Fujairah has a strategic location, being outside the Strait, but let’s say the threat of Iran wasn’t there, we would still benefit,” Sharief al-Awadhi, director- general of Fujairah Freezone Authority, said in an Aug. 25 interview. “It’s better to put utilities here as the water intake is straight from the ocean. And it’s safer as you reduce the number of ships you send through a single waterway.”

Fujairah is a largely mountainous area where the main business of selling rocks, for land-reclamation projects such as Dubai’s palm-shaped islands, was affected when the financial crisis stymied construction in much of the U.A.E. The emirate hopes now to strengthen its economy by becoming a center for the trading, storage and transshipment of crude.

Fujairah is already the world’s third-biggest bunkering port, after Singapore and Rotterdam. Bunker oil is the main fuel used to power commercial ships, and the port hosts storage tanks owned by companies such as Royal Vopak NV and Vitol Group.

Crude for October delivery fell $1.20, or 1.6 percent, to $74.82 a barrel at 4 p.m. London time.

Bunker Port

“Fujairah used to be just a hub for bunkering, now, most of the storage tanks are for oil products,” Salem Abdo Khalil, a technical adviser to the government, said in a Sept. 5 phone interview from Fujairah. Storage capacity will more than double to 8.3 million cubic meters in 262 tanks by the end of 2012, from 3 million cubic meters in 121 tanks now, he said.

Some tanks are being built for Abu Dhabi National Oil Co., which will export half its crude from Fujairah starting next year. China National Petroleum Corp. is building the 370- kilometer (230-mile) pipeline that will transport 1.5 million barrels of oil a day across the country’s rugged interior. Abu Dhabi has the capacity to produce 2.7 million barrels of crude oil a day, more than 95 percent of the U.A.E.’s total.

Abu Dhabi Water and Electricity Authority built the country’s biggest power and water plant, valued at $2.8 billion, in Fujairah. The utility will import natural gas from Qatar through a $418 million pipeline built by Dolphin Energy Co. The crude oil pipeline is funded by the International Petroleum Investment Co., a government-run fund that is also considering building a refinery in Fujairah.

Grain Terminal

Abu Dhabi is thinking of setting up a grain terminal for “time and safety reasons,” al-Awadhi said.

In addition to avoiding what the U.S. says is the world’s most important bottleneck for oil supply, tankers will save time and money by loading and offloading at Fujairah instead of having to sail more than 400 kilometers (250 miles) along the coast to Abu Dhabi. Companies chartering a very large crude carrier could save $37,500 a day, according to data provided by London-based Drewry Shipping Consultants Ltd., based on the average one-year charter rate during Aug. 16-27.

This will save buyers such as Exxon Mobil Corp. and BP Plc, partners in Abu Dhabi’s onshore crude production, two days of sailing time.

‘Spread Your Risk’

“It still involves costs -- pumping oil needs storage either end, and the pipeline will need maintenance and security in the desert,” said Leo Drollas, deputy director of the Centre for Global Energy Studies, a London-based consulting firm. “With Iran’s potential weapons, it’s not like you can escape completely, but you can spread your risk.”

The benefits of Abu Dhabi’s east-coast investment strategy became evident in July when a tanker owned by Mitsui O.S.K. Lines Ltd. was damaged near the Strait in an incident the U.A.E. government called a terrorist attack. The Brigades of Abdullah Azzam, a militant jihadist group linked to al-Qaeda, claimed to have attacked the ship, according to Maryland-based Site Intelligence Group, which tracks terror activity.

“This happened outside U.A.E. waters, but we want to make sure something like this doesn’t happen in our territories,” the U.A.E. ambassador to the U.S. Yousef al-Otaiba said Aug. 16.

To contact the reporter on this story: Ayesha Daya in Dubai at adaya1@bloomberg.net;

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