Dubai Denies Neighbors Fuel in Struggle to Pay Debt: Arab Credit

Dubai Denies Neighbors Fuel in Struggle to Pay Debt
A customer fills his vehicle with fuel at a gas station in Dubai. Photographer: Charles Crowell/ Bloomberg

Dubai, the second-largest of seven sheikhdoms in the United Arab Emirates, has stopped supplying gasoline to its neighbors as subsidies on fuel prices squeeze the city’s ability to service and repay debt.

Emirates National Oil Co., a Dubai government-owned refiner and operator of service stations, closed filling points in neighboring Sharjah and restricted supplies to other northern emirates last week. Dubai has $16 billion of publicly held debt maturing later this year, International Monetary Fund data show. The emirate plans to cut “subsidies and transfers” by 50 percent to 2.67 billion dirhams in 2011 from a year ago, according to a government forecast.

“Below-market retail prices -- without a way to make up the losses -- is an unsustainable situation,” said Rachel Ziemba, a Middle East analyst at Roubini Global Economics LLC in London. “The Dubai government continues to be cash-strapped, and this is one of the reminders that just because its companies are restructuring, it doesn’t mean that Dubai Inc. is out of the woods yet.”

Dubai borrowed at least $129 billion to turn itself into a tourism, trade and financial services hub, according to Credit Suisse Group AG. It had to seek help from neighboring Abu Dhabi after the global credit crunch dragged property prices down by more than half from their peak in 2008 and forced some state-owned companies to seek changes to payments.

The yield on Dubai’s 7.75 percent dollar bond maturing October 2020 climbed 16 basis points this month to 7.02 percent yesterday, according to prices on Bloomberg.

Wary of Discontent

Last week’s move came after authorities in the federal capital Abu Dhabi, wary of stoking discontent amid popular uprisings in the Middle East this year, refused to let gasoline retailers raise prices. ENOC said last month it may have to spend 2.7 billion dirhams ($740 million) this year to cover the cost of selling gasoline and diesel at prices below the market. Oil prices have risen to their highest since peaking in 2008.

Gulf monarchies have boosted social spending this year in the hope of staving off the unrest that toppled regimes in Tunisia and Egypt and led to armed conflict in Libya. Oil prices averaged $94.60 a barrel in the first quarter compared with $78.88 in the same period last year and $43.32 in 2009. Crude in New York hit a 2 1/2 year high of $114.83 last month.

“International oil prices have been increasing and so has domestic consumption, hurting ENOC’s cash-flow, yet Abu Dhabi refuses to lower subsidies,” said Thad Malesa, an independent energy analyst based in Dubai. “There have been no price increases in the Gulf since the Mideast protests began, as governments want no cause for similar opposition at home.”

Fixing Prices

The U.A.E. federal government fixes retail prices for gasoline and diesel at prices that are below retailers’ costs. It has left prices unchanged this year even as crude rises to 2 1/2 year highs. Last year, the government allowed two increases in pump prices.

Regular gasoline now sells nationwide in the U.A.E. for 1.72 dirhams, or 47 cents, a liter, or $1.88 a gallon. By comparison, the average price in the U.K. was £6.18 a gallon ($9.88), according to a June report from the Automobile Association, and $3.65 a gallon in the U.S. as of June 20, according to the Energy Information Administration. Saudi Arabia, the world’s biggest oil exporter, charges 17 cents a liter at the pump.

An ENOC spokesman declined to comment when contacted by Bloomberg. The Dubai government didn’t immediately comment, and an official in Abu Dhabi National Oil Co.’s public relations division didn’t answer calls to his office and mobile phone.

Adnoc’s Advantage

Fuel in Abu Dhabi, the largest of the country’s seven emirates, is sold exclusively by state-owned Abu Dhabi National, known as Adnoc. Abu Dhabi holds more than 90 percent of the U.A.E.’s oil reserves and refines and sells its own crude. Adnoc can offset losses at home by selling crude in other countries, while ENOC must buy fuel at international market prices and sell it locally at a loss.

The extra yield investors demand to hold Dubai’s 10-year bond over Abu Dhabi’s 6.75 percent bond maturing in April 2019 widened nine basis points from a record low on June 2, to 296 yesterday, according to Bloomberg data.

Abu Dhabi collected 270 billion dirhams ($73.5 billion) from sales of oil and gas in 2009, almost half of its gross domestic product, according to statistics in a prospectus for Waha Aerospace BV, a unit of leasing company Waha Capital PJSC, released last year. A separate prospectus for a Dubai government bond shows that the mining, quarrying, oil and gas sector contributed only 5.37 billion dirhams, or less than 2 percent, to that city’s GDP that year.

Widening Spread

The spread between the cost of securing Dubai government debt for five years against default with that of Abu Dhabi widened 31 basis points since an 18 month-low on June 7. The gap was at 253 on June 24, according to prices from CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt.

Emirates General Petroleum Corp., the third of the U.A.E.’s three gasoline retailers, is restructuring and needs loans to fund its sales at below-market price, Chairman Obaid Humaid al-Tayer said in January. Emirates General, known as Emarat, had a debt of 1.9 billion dirhams at the end of 2009, according to a report distributed by the State Audit Institution. Emarat is a federally-owned retailer with no oil of its own and has to buy everything it sells from the international market.

The federal government increased Emarat’s capital by 50 percent to 9 billion dirhams, state-run Emirates News Agency reported today.

Struggling Refining Business

Emarat agreed to buy at least 100,000 metric tons of regular gasoline for supply this summer to help cover the shortage in Sharjah, two people familiar with the transaction said. Emarat will buy four cargoes of gasoline from Total SA for delivery from next week through September, said the people, who asked not to be identified because the sales are confidential.

“Some refining businesses are struggling to make money as oil rises, especially if domestic oil product prices are much lower than those in the international market,” said Scott Darling, a Dubai-based analyst at Nomura Holdings Inc. “Dubai entities are now penny-pinching, compared to during the 2008 boom, so cannot afford to sell at a loss.”

Investor trust in Dubai’s ability to repay its debts has improved this year. The cost of securing Dubai government debt for five years has fallen 61 basis points this year to 354 basis points yesterday. The yield on Dubai’s 10-year bond has fallen 158 basis points this year.

Offsetting ENOC’s Losses

ENOC has defrayed its losses on gasoline with sales of naphtha, jet fuel and diesel, which it refines in Dubai and trades at market prices. It also owns 51.5 percent of Dragon Oil Plc, a Dubai-based energy explorer focusing on projects in Turkmenistan.

Still, ENOC spent 1.5 billion dirhams in 2010 to cover the gap between its cost for gasoline and the retail price it was allowed to charge. The company needs oil prices of at least about $45 a barrel to break even on gasoline sales, Chief Executive Officer Saeed Khoory said in a January 2010 interview with local newspaper Al Ittihad.

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