Research and analysis

UAE: energy: ready to end energy subsidies May 2014

Published 13 May 2014

0.1 Summary

The UAE has vast energy endowments: its reserves of oil and natural gas both rank in the world’s top 10. A generous subsidy regime is in place but there is a desire to reduce the effects of this market distortion. Opportunities for us to offer our expertise. Detail

The UAE holds the 7th largest proven oil reserves in the world, with 98 billion barrels, is ranked 8th in oil production (2.7 million barrels per day - mbpd) and exports more than 2 mbpd. Additionally, the UAE is endowed with the world’s 7th largest gas reserves (215 trillion cubic feet). Such vast energy reserves and high oil prices paired with comparatively low domestic production cost (they used to be as low as $5 per barrel, although they are estimated to have increased to about $10 per barrel) were commonly quoted to justify subsidies. As a result, the UAE turned into a major energy consumer, with possibly the highest petroleum consumption rate per capita in the world (2012 figures for the UAE were 103 barrel per day per 1,000 people, which is four times the UK’s).

Despite its large gas endowment the UAE became a net importer of natural gas in 2008 (and is now importing 30% of its natural gas demand from Qatar through the Dolphin pipeline) for two reasons. First, the UAE re-injected a considerable amount of natural gas between 2003 and 2012 into its mature oil fields to boost production levels and exploit the known reservoirs more efficiently. Second, domestic demand has increased substantially, which coupled with a fast-growing electricity grid, is expected to more than double by 2020.

The level of subsidies remains high in the UAE…

While the UAE does not disclose the exact amount they spend on subsidies, the IMF estimates that subsidies accounted for 5.5% of the UAE’s GDP in 2012 (non-hydrocarbon revenues, for example, make up for 7.1% of the UAE’s GDP in 2012). Petrol is sold at AED1.72 (£0.28) per litre and the government pays around AED1.20 towards every litre of petrol sold. Furthermore, the country is said to subsidise electricity and water to the tune of nearly 85% for Emiratis and 50% for foreigners.

The UAE’s diversification efforts and competitiveness were in large part facilitated by low energy prices and initially focussed on energy-intensive industries such as aluminium (the UAE is home to Emirates Global Aluminium, which is set to become the world’s fifth largest aluminium company) and chemicals. Additionally, subsidies are seen as a means to redistribute wealth and also to avoid inflationary pressure.

…but there is an interest in doing something about it

Subsidies are known to inter alia be inefficient (oil and gas could be sold – at higher prices – elsewhere), to strain fiscal budgets (federal legislation stipulates that petrol is sold at subsidised rates), to encourage investments into energy-intensive industries, and to lead to excessive and wasteful consumption.

The UAE’s government has made efforts to address the issue. In 2010, it increased fuel prices twice to reduce the burden of subsidies on public finances and encourage more efficiency. Further increases in fuel prices were expected in response to a sharp rise in crude prices, but the government has indefinitely deferred plans for further increases. In 2012, the Federal Government set up a top-level body to review fuel subsidies and there have been calls to increase subsidies, e.g. by the Federal National Council, (the Government’s consultative body) and the Ministry of Energy.

0.2 Comment

The UAE aims for sustainable economic development while at the same time retaining its hard-won competitiveness and social stability. It is likely to focus in the short term on enforcing tighter energy-efficiency regulations and investing in renewable energy rather than making changes to the overall subsidy system. Nonetheless, the government is aware of the inefficiencies and distortions subsidies create and some adjustments can be expected. There are opportunities here for the UK.

0.3 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.