Fujairah emerges as strategic oil hub

28 November 2012

Its’ crucial location on the Gulf of Oman is helping to rapidly transform the northern emirate of Fujairah into an important centre for oil storage and export in the UAE

Fujairah, the only one of the UAE’s emirates entirely located on the Gulf of Oman coast, is emerging as one of the region’s biggest oil supply hubs, with a raft of key projects completed or under way.

One of the main drivers of Fujairah’s progress is its location outside the Strait of Hormuz, the narrowest point of the Arabian Gulf, through which passes 20 per cent of the world’s oil trade and more than a third of the world’s seaborne oil shipments.

The strategic value of the emirate’s oil and gas infrastructure has risen following Iranian threats in 2012 to block the Strait of Hormuz , in retaliation for US-backed sanctions against Tehran’s oil industry and financial institutions.

Iran’s Major General Hassan Firouzabadi announced in July that the country had finalised contingency plans to close the shipping lane in the event of a US or Israeli attack on its nuclear facilities.

Export link via Fujairah

The recently completed Habshan-Fujairah crude pipeline has the capacity to transport Abu Dhabi’s entire onshore production to the east coast for export. The 370 kilometre pipeline, which is owned by state-owned International Petroleum Investment Company (Ipic), officially opened on 15 July, with the first crude shipment leaving Fujairah for Pakistan.

Costing in excess of $3bn, the facility can transport 1.8 million barrels a day (b/d) of oil, which is equal to Abu Dhabi’s targeted onshore output in 2015. The pipeline will initially target flows of 1.5 million b/d.

“The focus on Fujairah is in part geopolitical … and, specifically with the pipeline, about having another export route if there is any regional tension,” says Sean Wheeler, partner at US-based consultancy, Booz & Company. “They’re trying to get a secure route to market, and Fujairah is a great location. The additional route to market is valuable not just in a geopolitical sense. Even if the region remains stable, it is always valuable for suppliers to have multiple routes.”

The Habshan-Fujairah pipeline means that Fujairah will become one of the world’s largest oil supply hubs

Port of Fujairah spokesman

The pipeline scheme echoes a similar strategy adopted by Saudi Arabia to diversify the export routes of its Gulf oil output. Earlier this year, the kingdom reopened an old 1.65 million b/d pipeline built by Iraq in the 1980s to carry crude from its Gulf fields to storage facilities near Yanbu on the Red Sea coast.

In November, UAE Oil Minister Mohammad bin Daen al-Hamili said the pipeline would be fully operational by the end of the year and transport the majority of Abu Dhabi’s oil exports. “Our refineries also take crude from onshore so we have to cater for our two refineries and then what’s available will be exported through Fujairah,” Al-Hamili told reporters at a recent conference in Dubai.

Fujairah’s position to the east of the Strait of Hormuz has underpinned its growth as a hub for oil storage. According to the Port of Fujairah, the combined storage capacity for firms in the emirate is set to reach 4.83 million cubic metres by the end of 2012. This is set to more than double to 10.5 million cubic metres in the next two years, not including storage associated with the Habshan-Fujairah pipeline.

“The Habshan-Fujairah pipeline project is a very significant development,” says a spokesman from the Port of Fujairah. “As well as providing a Gulf product source avoiding the congestion of Hormuz, its product, for example, will provide part of the feedstock for a [planned] refinery project. This, plus the significant private investment in tank storage to cater for additional and established trading and bunkering facilities, means Fujairah will become one of the world’s largest oil supply hubs.”

In addition to oil storage growth, Fujairah is the third-largest ship bunkering centre in the world after Rotterdam in the Netherlands and Singapore. The port is ideally located as a stopping point to the almost 40,000 ships that pass to and from the Gulf every year.

“Historically, ships have stopped there, so this isn’t new from a bunkering perspective,” says Wheeler. “But from an investment perspective, more ships are going to stop there, so it becomes more attractive. If you know you are going to have traffic, the bunkering becomes a safe investment, like locating a shop on a busy street.”

Insurance premiums

Wheeler also says use of the Fujairah port as an alternative to facilities on the Gulf coast provides significant benefits in terms of insurance. Insurance companies are putting a premium on insuring ships passing through the Strait of Hormuz as geopolitical tension heightens the perceived risk of using the route.

“Insurance is a significant factor in exporting oil from Fujairah as opposed to Abu Dhabi since the risk factor is lower,” says Wheeler. “A terminal in Fujairah, by avoiding the use of the Strait of Hormuz, saves on costs.”

The pipeline’s owner, Ipic, has decided to move ahead with plans to complement the supply route with a new 200,000 b/d oil refinery in Fujairah – set to be the second largest in the UAE after Abu Dhabi Oil Refining Company’s (Takreer’s) facility in Ruwais. Ipic plans to invest an estimated $3.5bn in the facility, which is expected to be completed in 2016. It will enable the UAE to export refined oil products from its east coast, adding value to the crude transported from Abu Dhabi’s onshore fields.

In September, Ipic awarded the front-end engineering and design (feed) contract for the refinery project to France’s Technip, which won the deal ahead of several other bidding engineering groups, including US-based Fluor.

The feed phase is likely to be completed in early 2013 before Ipic tenders the engineering, procurement and construction (EPC) deal later that year. Ipic awarded the project management consultancy contract to US group Stone & Webster, which also carried

The GCC is producing more oil, so you need to be able to store that at various points along the value chain

Sean Wheeler, Booz & Company

Ipic will be hoping the development runs more smoothly than that of the emirate’s smaller existing refinery, which has had a chequered history. Completed in 1996, its original owner, Greece’s Metro Oil, went bankrupt. The government then established the Fujairah Refinery Company (FRC) in 1998, assuming control of the 82,000 b/d plant. In 2003, however, it was once again shut down after FRC incurred large losses.

The refinery remained closed until 2007 when Dutch firm Vitol purchased a majority stake in FRC. Following maintenance, the facility restarted operations in late 2007, with capacity of 20,000 b/d but it has since ramped up to full capacity.

LNG terminal

Another Abu Dhabi project moving ahead is a floating liquefied natural gas (LNG) storage and regasification facility. The joint venture between Ipic and state-owned Mubadala Development Company is aiming to complete the first phase of the scheme by the end of 2014, having awarded the feed contract to Technip in the third quarter of 2012.

The project covers the construction of floating storage and regasification units with a capacity of 4.5 million tonnes a year (t/y) of LNG, the equivalent of about 600 million cubic feet a day (cf/d) of gas. Phase two will add another floating storage terminal with onshore vaporisation capacity, which will also be able to receive 4.5 million t/y of LNG.

The terminal will be used to meet gas demand from population growth and the expansion of energy-intensive industries. Gas consumption in the UAE almost doubled in the 10 years to 2010 to 60.5 billion cubic metres, with domestic production lagging behind at 51 billion cubic metres.

Technip is aiming to complete the feed by March 2013, with the EPC award expected before the end of that year. Abu Dhabi is looking to import LNG all year round, with the bulk of the gas used for power production by Abu Dhabi Water & Electricity Company (Adwec).

Fujairah has seen a significant increase in investment in oil storage projects in recent years, with an estimated $500m forecast to be spent on EPC contracts in 2012-13 alone. The significant expansion in storage capacity to 10.5 million cubic metres by the end of 2014 will be underpinned by eight different expansions and new projects.

Oil storage demand

“There is a need for more oil storage because production is increasing,” says Wheeler. “The GCC is producing more oil, so logistically you need to be able to store that at various points along the value chain. You have to store efficiently in different locations to maximise return and minimise risk.”

Among the largest projects are the 1.3 million cubic metres being added by VTTI Fujairah Terminals and 855,000 cubic metres by Vopak Horizon Fujairah (VHFL) – respective subsidiaries of Dutch groups VTTI and Vopak – while Singapore-based Concord Energy plans to build a 1.125 million b/d oil storage plant by 2014.

As of late November, VHFL had yet to award the estimated $200m in EPC contracts on its seventh-phase expansion project, having received several bids in September.

Meanwhile, Concord awarded Singapore’s Rotary Engineering the $250m EPC award on its expansion in October 2010, but construction is not expected to start until the end of 2012.

Local group Primestar Energy is set to establish a 640,000 b/d terminal in 2013 through a joint venture with India’s Infrastructure Leasing & Financial Services. In November, the partners awarded an $82m EPC contract to India-based IOT Infrastructure & Energy Services to complete the terminal by mid-2014.

Further expansion projects will be backed by Dubai’s Emirates National Oil Company (Enoc), US-based Chemoil, Sharjah-based Gulf Petrochem and Azerbaijani-Swiss joint venture Socar Aurora.

Key fact

An estimated 40,000 ships pass to and from the Gulf every year transporting oil

Source: MEED

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