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UAE aims to balance its diversification books

The UAE's ambitious plans to sustain its petrodollars while evolving as a green pioneer will not come cheap. Is the capital available?

The UAE is attempting to craft a new energy identity for the first time since the discovery of oil in 1958. Its focus on gas and renewables is more in step with the global energy transition. But it is also keen to maximise oil production.

The UAE Energy Strategy 2050 targets an energy mix of 44pc clean energy, 38pc gas, 12pc ‘clean’ coal and 6pc nuclear. Simultaneously, the national oil company (NOC) Adnoc plans to increase oil production capacity from 3.5mn bl/d at the end of this year to 4mn bl/d by the end of 2020 and 5mn bl/d by 2030—14pc and 43pc rises respectively. The UAE government has allocated over $163bn by 2050 to meet growing energy demand. Private sector funds are also integral to hitting ambitious targets.

“Investors want to see proof of diversification and maturation in the financial architecture. As a first mover in the region, the UAE is making several positive steps—this momentum must continue,” says Leila Bengali, chief economist at Arab Petroleum Investments Corporation (Apicorp).

So far, so good. The UAE was one of the first in the region to reduce energy subsidies, introduce VAT and restructure the value chains of its national oil companies (NOCs) to promote trading and international downstream operations. Government guarantees to purchase electricity generated by UAE-based solar projects is increasing the appetites of both black gold and renewables investors. The determination of energy minister Suhail al-Mazrouei to push the country higher up the global energy league tables—in terms of market size, technology, innovation and influence—is increasingly attracting investor attention.

Stable politics and robust economic growth are also coveted by investors, especially those keen on emerging market assets. The UAE’s GDP growth of 2.8pc this year is the highest in the GCC and, at 3.3pc, is predicted to be second highest next year (Oman leapfrogs to 6.2pc in 2020), according to the International Monetary Fund.

Solar/nuclear success

Among several solar power projects under way in the UAE is Abu Dhabi’s 1.2GW Sweihan solar power plant—which will be one of the world’s largest on completion next year. The UAE’s Barakah nuclear plant highlights what positive sentiment—not least from the financial community—can make politically possible. Barakah alone will supply up to 25pc of the electricity needs in the UAE, home to 9.4mn people.

“Investors want to see proof of diversification in the financial architecture” Bengali, Apicorp

Abu Dhabi remains attractive for oil investments, too, as most recently illustrated by a $4bn pipeline infrastructure partnership between NOC Adnoc and private equity heavyweights KKR and Blackrock. This is the first midstream infrastructure partnership by leading global institutional investors and a Middle Eastern NOC, says KKR.

The economics of gas are still evolving. “The development costs for new sour gas projects are estimated to be at a range of $2-5/mn Btu for Abu Dhabi. But a recent decision by the ministry to hike domestic gas prices to around $5/mn Btu will encourage the international oil and gas companies to participate in the new development projects,” says Siamak Adibi, principal consultant and head of Middle East gas team at consultancy Facts Global Energy.

But the UAE is not a risk-free bet. Threats lurk, from US-Iran tension to strong competition to win Asian capital. It will not be easy sustaining a steady and large flow of cash to fulfil its ambitious targets. But with so many aces, the UAE should be in a strong position to succeed.

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