Gulf states may soon need coal imports to keep the lights on
The Emirates were built on oil and provide fuel to the world but already they need other sources of energy
They are countries so rich in oil and gas that they would never want for fuel to drive their booming economies and the lavish lifestyles of their rulers.
Now, however, in a role reversal that makes selling sand to Saudi Arabia look like a sensible business transaction, the oil-rich Gulf states are planning to import coal.
An acute shortage of natural gas has led to the city states of the United Arab Emirates seeking alternative fuels to keep the air cool, the lights on and the water running.
Abu Dhabi is working with Suez, the French utility company, on a nuclear power project but coal is emerging as the best quick fix to avert blackouts as the world’s biggest hydrocarbon exporters struggle to cope with high prices for oil and natural gas, infrastructure weakness and a development boom. Some of the world’s biggest oil exporters may soon find themselves reliant on imported fuel from a leading coal exporter, such as South Africa.
As a result, Taqa, Abu Dhabi’s national energy company, plans to take a half share in a proposed £500 million coal-fired power plant, while Dubai Electricity and Water Authority (DEWA) hopes to start work on a clean-coal project this year.
Oman Power and Water Procurement Company indicated in December that a planned 700-megawatt power and water desalination plant may need to be fuelled by coal instead of natural gas.
The dramatic transformation is taking place because, for the first time, the Gulf states are beginning to feel the burden of the soaring cost of fossil fuels. In March Dubai introduced an electricity pricing system that increased tariffs for heavy users. The new tariffs apply only to foreign businesses, expatriates and foreign-owned businesses. Emiratis are exempt.
The sudden gas shortage has caught the Gulf states by surprise at a time when demand for power and water desalination is increasing annually at double-digit percentage rates. Investment in infrastructure has lagged behind the region’s population expansion and construction boom. Anecdotes abound of apartment complexes left empty because there is not enough capacity in the local electricity grid.
According to Wood Mackenzie, the energy consultancy, the UAE’s demand for gas will double within a decade if power consumption continues to grow. Dubai’s peak power consumption rose by 15 per cent last year, according to DEWA’s statistics.
“Demand for natural gas is rising at 12 per cent per annum. In the summer the UAE is burning liquid fuel [fuel oil and diesel] for peak power generation,” said Peter Barker-Homek, Taqa’s chief executive. “Should there be alternatives [to burning oil], such as coal and nuclear? Probably, yes. If you have a product worth $120 per barrel, you want to sell it. The question about coal is always the environment. It is definitely cheaper than using crude oil.”
Last summer Abu Dhabi’s oil output fell by 600,000 barrels per day as natural gas was diverted from injection into oil wells to power stations to meet peak demand for electricity.
The Emirate has substantial reserves of gas but much of this is earmarked for injection into wells to maintain pressure and to improve oil output. With the crude oil price reaching $125 (£64) per barrel, the diversion of gas into local power stations is a huge cost to the country.
Meanwhile, the price of natural gas in the Gulf has soared amid shortages and increased global demand. Local gas resources in the Emirates have dwindled, and Abu Dhabi and Dubai are already importing gas by pipeline from Qatar.
Iran, which holds some of the world’s biggest gas reserves, is another option, but relations between the Western-friendly Emirates and Iran are uneasy. A project led by Dana Gas, a private sector company based in the Middle East, to bring Iranian fuel across the Gulf to Sharjah has been locked in pricing disputes.
In a desperate attempt to avert power and water shortages in the summer, Dubai entered into a 15-year contract with Royal Dutch Shell last month to supply liquefied natural gas in the summer period from 2010. However, this is an expensive fuel, and the Emirates have built their economies on gas at almost nil cost.
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