Abu Dhabi Exports First Pipeline Oil Bypassing Hormuz

Abu Dhabi started exporting its first crude from a pipeline that bypasses the Strait of Hormuz, shipping the fuel from the neighboring sheikhdom of Fujairah to a refinery in Pakistan.

The link, stretching from Abu Dhabi to Fujairah on the Gulf of Oman, began loading a shipment of about 500,000 barrels, Mohamed Al-Hamli, oil minister for the United Arab Emirates, said yesterday at the inauguration ceremony. International Petroleum Investment Co. spent $4.2 billion building the 423- kilometer (263-mile) link, Managing Director Khadem al-Qubaisi said at the ceremony in Fujairah.

Abu Dhabi, the U.A.E.’s capital and holder of more than 90 percent of its oil, built the export route for crude to avoid Hormuz, a narrow waterway carrying a fifth of the world’s traded oil that Iran has threatened to block in retaliation for sanctions targeting the country’s nuclear program. Construction costs were 27 percent higher than the $3.3 billion contract awarded to China Petroleum Engineering & Construction Corp. in 2008 and was delayed by 11 months.

“The pipeline will get used if they keep the price to load crude from Fujairah the same as loading from inside the Gulf,” said Robin Mills, head of consulting at Dubai-based Manaar Energy Consulting and Project Management. “It means that Abu Dhabi is just swallowing the cost of the pipeline, as it has been built for strategic reasons. If this was a commercial venture, they would have built it years ago.”

Political Maneuvering

An Iranian lawmaker, Mohammad-Hassan Asferi, said yesterday the pipeline’s limited capacity would keep it from obviating the need of regional suppliers to export most of their oil through the strait. The line is “propaganda and political maneuvering guided by the Western countries, especially the United States, which aims to reduce the strategic importance of the Strait of Hormuz,” according to state-run Press TV. Asferi serves on Iran’s national security and foreign policy committee.

The link can transport 1.5 million barrels a day of Murban crude from Habshan, a collection point for Abu Dhabi’s onshore oil fields, across a desert and mountains to Fujairah. The system can pump as much as 1.8 million barrels a day at periodic intervals, officials said yesterday. The U.A.E., the fifth- biggest oil producer in OPEC, pumped 2.61 million barrels a day in June, data compiled by Bloomberg showed.

The first oil exported from Fujairah is priced the same as Murban crude loaded inside the Gulf, three people with knowledge of the matter said this month. Abu Dhabi may later devise a separate formula including a premium to account for the cost of using the pipeline, said the people, declining to be identified because the matter is confidential. Abu Dhabi officials yesterday did not comment on pricing.

First Cargo

Abu Dhabi’s first export cargo from Fujairah is destined for Pak Arab Refinery Ltd., a joint venture between Pakistan’s government and IPIC, Al-Qubaisi said. IPIC owns a 40 percent stake in the plant, which regularly uses about 40,000 barrels a day of Abu Dhabi crude, of the 100,000 barrels it consumes daily, he said.

Abu Dhabi earlier shipped a test cargo from Fujairah to its own refinery at Ruwais, inside the Persian Gulf, said Abdul Munim Al-Kindi, general manager of Abu Dhabi Co. for Onshore Oil Operations. As the main oil producer at the emirate’s onshore fields, the company, known as Adco, will operate the pipeline and gradually ramp up capacity by year-end, he said. The network is designed to load tankers at three offshore buoys, he said. IPIC will likely charge Adco “a few cents per barrel” for use of the pipeline, Al-Qubaisi said.

Alternative Route

Al-Hamli, the oil minister, said the link gives buyers an alternative location from which to receive crude. It will allow them to fill very large crude carriers, or VLCCs, the largest class of tanker capable of carrying 2 million barrels of oil. Filling such vessels in the Gulf of Oman will reduce shipping traffic in Hormuz, he said.

“The pipeline is going to be beneficial because our clients will be able to lift bigger cargoes,” he said. “Currently you can only lift 1 million barrels a day from Ruwais. From Fujairah now our clients now can bring in VLCCs and lift more.”

IPIC’s al-Qubaisi said his company plans to $4 billion to $5 billion to build a refinery in Fujairah with a capacity of about 250,000 barrels a day to produce for local sale and export, further enhancing the port’s importance as a hub for the processing, storage and shipment of fuels. The company said in a bond prospectus in October the refinery would produce 200,000 barrels a day at a cost of about $3.5 billion.

IPIC is working with another state-owned investment fund, Mubadala Development Co., on a project for a terminal at the port for imports of liquefied natural gas. Fujairah is already among the world’s three biggest refueling ports for commercial ships, along with Singapore and Rotterdam. Fujairah is one of the U.A.E.’s seven sheikhdoms.

To contact the reporters on this story: Anthony DiPaola in Dubai at adipaola@bloomberg.net; Ayesha Daya in Dubai at adaya1@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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