‘Before 1981 international oil companies [IOCs] dominated the retail sector through franchises,’ explains Al-Shamsi. ‘But in 1979, when oil prices went up, they had no other option than to pass on their costs to the consumer. People were not happy because the oil is extracted from their backyards, so the government put back prices and subsidised the IOCs’ losses. Eventually an agreement was reached and the IOCs sold their distribution assets but retained bunkering, aviation and lubricant rights. Emarat was formed from this and we continued to sell subsidised fuel up to 1985.’
While turnover from the company’s 185 service stations and gas distribution business to power stations in the northern grid grew to $681 million in 2002, high oil prices bit into the bottom line. Profits slipped by 12 per cent to $93 million. With crude fluctuating above $35 a barrel, and likely to go even higher should a conflict break out in Iraq, the omens do not look encouraging for the rest of the year. Al-Shamsi is philosophical, however.
‘Sometimes we make a lot of money and sometimes we make very little. The problem starts when oscillating supply costs are not integrated into our business correctly – then we have real problems. But we base our investment plans on a five-year moving average to absorb these fluctuations in price. Whatever we do, this sector is not easy to predict, so we don’t intend to expand our service stations beyond our existing site network.’
Streamlining the supply chain is also vital if Emarat is to peg back its mounting costs. This was the thinking behind an agreement signed in January with the UK’s BP and Trafigura of the Netherlands to build a dedicated petroleum products blending facility in Jebel Ali.
Under the terms of the deal, BP and Trafigura will each take a minority 20 per cent stake in the $26 million plant, to be supplied exclusively by BP with 80,000 barrels a day (b/d) of petroleum products from the planned Sohar refinery in Oman. Supplies from Sohar will eventually replace the company’s existing offtake contracts with Abu Dhabi National Oil Company (ADNOC) and Vitol Holdings of the Netherlands.
Emarat has agreed to take 60 per cent of the blending plant’s output, which is expected to meet demand for unleaded gasoline in the northern emirates following the mandatory introduction in January of the environmentally friendly, but more expensive fuel. ‘We have launched two grades of unleaded priced at AED 4 and AED 5 [$1.09 and $1.36] respectively, which is about 20 fils more than fully leaded. We expect 90 per cent of domestic consumption to be for the lower grade, leaving only a very small margin for the premium 98-octane fuel. We were planning to offset the increased costs of buying unleaded against the sale of 98, but this has not been the case,’ says Al-Shamsi.
Pump prices in the UAE are fixed by the government. Coupled with increasing competition from the likes of Emirates National Oil Company (ENOC) and its subsidiary Emirates Petroleum & Products Company (EPPCO), this has encouraged Emarat’s management to either radically restructure the business or look further afield for a complete change in direction.
‘There is increasing competition in the UAE, which has eroded our market share. To continue in the petrol business we have to optimise our existing stations and rationalise between building new outlets and closing old ones located in quiet areas from where traffic has migrated,’ says Al-Shamsi.
One option has been to look for opportunities overseas. The company is in final negotiations to establish a network of roadside service stations in Egypt. Under the terms of the deal, a joint venture will be formed with a local partner to own and manage a network of 35 service stations to be built over the next five years. Al-Shamsi is adamant that Egypt will not be the company’s only cross-border retail venture.
‘We are looking at more opportunities overseas for growth in the retail business. It is a field we have perfected and it is very close to our hearts. We have the experience, infrastructure and resources to apply in neighbouring markets in the Middle East and the GCC. But we have also examined opportunities in Turkey and Cyprus,’ he says.
Developing its gas business is an enticing alternative to marketing gasoline. Emarat operates a 250-kilometre pipeline network that branches out from a central compression facility at Sajaa, near Sharjah. But since supplies of natural gas were exhausted and replaced by deliveries of liquefied petroleum gas (LPG), this network has remained largely unused.
However, the prospect of abundant sources of Qatari gas becoming available from 2006/07 onwards has prompted the company to open negotiations with Abu Dhabi-based Dolphin Energy (DEL). ‘We were dominant in gas distribution throughout the 1980s and we want to regain our position as the primary supplier in the UAE once gas becomes available in large quantities through the Dolphin project. I see our future in gas, this will allow us to go forward.’ says Al-Shamsi.
Average gas demand from the Federal Electricity & Water Authority (FEWA), United Water & Electricity Company (UWEC) and Ras al-Khaimah in the northern emirates stands at 207 million cubic feet a day (cf/d). This increases to 286 million cf/d during peak months. And Emarat wants to capitalise on this market, which is forecast to grow by 6 per cent over the next five years.
Additional volumes of gas may also come from Umm al-Qaiwain. The company is in talks with Abu Dhabi-based UAE Offsets Group to take an equity stake in the project to develop a gas field in the emirate, which could deliver a further 150 million-300 million cf/d of natural gas. Bringing both supplies on stream will require significant investment in new pipeline infrastructure and capacity. A 23-kilometre pipeline is envisaged to interconnect DEL’s Maqta-Al-Ain-Fujairah pipeline with Emarat’s existing network near Fujairah. Even so, this additional infrastructure may not provide sufficient capacity if demand increases at the forecast rate.
‘In the event that we don’t have Umm al-Qaiwain gas, our only source of feedstock will be from the DEL line, which has a limited capacity. If SEWA [Sharjah Electricity & Water Authority] requires additional volumes of gas by 2007, then we will need to secure another supply route to meet demand. We have proposed bringing in an additional supply of Dolphin gas from Jebel Ali direct to our Sajaa plant for re-compression and distribution. However, we may be able to share the existing 24-inch-diameter pipeline that is being used by BP to supply Dubai,’ says Al-Shamsi.
Once it has the gas, Emarat plans to market it aggressively. ‘We are examining the option of supplying natural gas to vehicles at least for public transport. Beyond 2006 we are also looking at supplying gas to households in Dubai through a domestic pipeline network, which is already working very well in Sharjah,’ adds Al-Shamsi.