UAE aims to become oasis of stability in the Middle East
The UAE’s energy plans are well-braced to help sustain investor confidence in the face of political and economic winds
Well before its 50th birthday on 2 December, the UAE is taking its place alongside the upper echelons of power on the global energy stage. Harnessing and leveraging investors' confidence is key to sustaining this pace. This means the UAE's energy ambitions must cope with some unwelcome issues: fractious regional politics and whispers of financial discomfort.
Each month that diplomatic ties remain frozen between Saudi Arabia, UAE, Bahrain and Egypt—the 'Arab quartet'—on the one side, and Qatar on the other, the tighter investors' due diligence gets. This increasingly powerful microscope will inevitably restrict some funds. This trend is unlikely to reverse without political softening.
The UAE's property and inflation outlooks have also furrowed some brows, especially among small business owners. The Global Residential Cities Index tracks the movement in average home prices across 150 cities worldwide. By this Index, Abu Dhabi fell by 7.2% in the first quarter of this year—the sharpest drop worldwide. To the north, Dubai's real estate prices could slide by 10-15% up to 2020, according to S&P Global Ratings. Meanwhile, the International Monetary Fund said the introduction of VAT from 1 January 2019—a positive move in the UAE's economic maturation—means inflation will rise by 3.5% this year.
The IMF's macro outlook should reassure many-particularly in light of population growth that looks set to reach 11m in 2030. The UAE's overall growth is expected to hit 2.95% this year and a healthy 3.7% in 2019, amid rising government spending and oil production. Adnoc alone plans to increase production capacity by 200,000 barrels a day to 3.5m b/d by year end. Capacity at the Jebel Ali Refinery is also being expanded by 50% to 210,000 b/d by the fourth quarter of 2019.
The $1bn project comes quick on the heels of the expansion at Ruwais refinery, which now has capacity of 800,000 b/d. And UAE-based Borouge Petroleum and Gas Investment is flexing its financial acumen with plans to raise $400m in an initial public offering in London, while multiple international energy partnerships are being firmed up in Asia and beyond. China, South Korea and Malaysia are on the list.
"The UAE's credentials as a global energy player major speak for themselves. Notwithstanding ongoing challenges in the external environment, our expectations are that the UAE will continue enticing investors in pursuit of its overarching energy goals in line with Economic Vision 2030 targets," Ehsan Khoman, Director, Head of MENA Research and Strategy at the Dubai office of MUFG Bank tells Petroleum Economist.
The UAE's infrastructure and maturing financial market also makes it a strong starting point for more oil pricing changes in the Gulf. Oil products have historically been based on the Singapore swap: prices derived in Singapore minus freight. As trade between east and west increasingly flows in both directions, independent pricing that better reflects Middle Eastern supply-demand dynamics makes sense. Establishing a new benchmark can take more than five years, from identifying market demand to fine-tuning trading and compliance. So, successfully launching such a benchmark signals faith in the region's long-term prosperity and in turn helps harness the myriad of trading professionals required to bolster liquidity.
Sentiment is also buoyed by the market's faith in one man and his team: Suhail al-Mazrouei, UAE energy minister and 2018 Opec President. With the unenviable task of shepherding the agreement among the Opec+ grouping, Mazrouei plans to institutionalise a deal that has survived longer than anyone expected. His calm but firm demeanour enables him to keep a ship that is frequently springing potentially paralysing leaks—most recently, strife in Venezuela and pending Iran sanctions—afloat in unchartered waters.
The $20bn Barakah nuclear power project, scheduled to come online by 2020, is an oft-underappreciated pièce de résistance in the UAE's energy history. As the Gulf's first nuclear power plant, it's a global sign of confidence in the country's stability. Again, gold dust for attracting investors. The UAE may have a few twists and turns to navigate, but investors' enthusiasm will be spurred, rather than dented, by its track record.