UAE petrol retailers face the heat

09 June 2011

Margins squeezed further by rising oil prices and subsidies

Petrol companies in the UAE are feeling the after effects of the Arab uprisings, as fuel shortages are beginning to spread in the Northern Emirates and have started to reach Dubai.

Petrol began running out at Emirates National Oil Company (Enoc) and Emirates Petroleum Products Company (Eppco) stations in Sharjah and Ajman at the beginning of the week, and the spill over effect has seen pumps run dry and queues lengthen in Dubai.

The Enoc Group, which also owns the Eppco brand, has tried to explain the supply disruptions with upgrading work at fuel stations. Improved dispensing equipment is being installed in 84 fuel stations in the affected emirates, forcing their closure for two-three weeks, Enoc spokesman Khalid Hadi said in a statement last month. Once work is complete, 46 stations in Dubai will be upgraded, he said.

Analysts were quick to cast doubt on the official explanation, citing rising oil prices and fuel subsidies as the reasons for shortages.

“This is a price issue, not a technical issue,” said John Sfakianakis, chief economist at Saudi-based Banque Saudi Fransi.

Petrol retailers in the hydrocarbon-poor Emirates are seeing their margins squeezed by the rise in international oil prices and a government regulation that imposes retail prices far below the financial break even point.

Enoc said in April that price regulations cost it $400m last year, and it expects to lose over $700m in 2011. The company loses money on petrol sales once the price of crude rises above $45 dollar a barrel, according to chief executive Seed Khooray.

Crude priced spiked from around $75 dollar a barrel to around $100 a barrel since the start of the year. Petrol sells for less than 50 cents per litre in the UAE, while market prices in the Middle East and Asia have now topped 80 cents per litre, according to Platts. Other than Abu Dhabi, the emirates have to resort to the international market to cater for their fuel needs.

“They are at a point where they don’t want to continue losing money in this way,” says Sfakianakis.

Dubai’s government has relented twice over the past two years and allowed for an increase in petrol prices.

This policy was reversed in light of the political unrest that has gripped the Arab world, toppling regimes in Tunisia and Egypt and leaving governments in the GCC weary of cutting back on subsidies.

This has left gasoline retailers badly positioned. Discussions with the government had led them to believe that Dubai would allow for further significant price rises at the pump early this year, bringing them much closer to wholesale prices.

“They didn’t at all get what they had budgeted for, and they will be running out of money much quicker,” says Samuel Ciszuk, Mena energy analyst at IHS Global Insight.

The funding gap is will remain in place for now, as the pricing pressure on the supply side is unlikely to ease the in the short term. Opec failed to agree on production quotas for the first time in over 20 years at its summit in Vienna this week and production is unlikely to compensate for rising global demand.

“This year, we are not going to see any respite,” says Amrita Sen, an oil analyst at Barclays Capital.

At the same time, a scaling back of subsidies has become unthinkable. “Following the Arab spring, no government would touch price reform with a barge pole for the foreseeable future, which in politics is two to three years,” Ciszuk.

Traditionally, the funding gap between wholesale and retail prices has been bridged by government money. That Enoc, a Dubai state-owned company, is incurring losses while the government is seen to do nothing will not sit easily with the international financial markets. Memories of state-owned conglomerate Dubai World’s failure to meet its debt obligations in 2009 are still fresh. In spite of a bailout by Abu Dhabi and a subsequent restructuring of the debt, the emirate is still burdened with debts of $113bn, according to the IMF.

“A lot of the market will look at this and ask themselves how much confidence they have in Dubai when the main fuel provider is seemingly suffering from cash flow problems and is not getting its government cash injections,” says Ciszuk.

But Ciszuk believes the reason behind a slow government response could relate to the crisis in another way, as the financial crisis led to improved financial oversight.

“Perhaps it something to do with Dubai being an increasingly well regulated place today. There is due process to follow if you want to make an cash injection into a corporation, even if it is state owned.”

In the short term, Abu Dhabi might be required to bridge the gap. One way would be to supply additional fuel.

“Abu Dhabi supplying other emirates at cost of production could very well be a temporary solution,” says Sen.

The Emirates might prefer to provide funding instead, fearing disruptions to its distribution system and to be locked into longer standing supply agreements as a result of a short term problem. “If there is a deal, it would be primarily money,” says Ciszuk.

Sharjah Executive Council has meanwhile responded to the fuel crisis by issuing an ultimatum to the Enoc Group.

“The council discussed the need to end the petrol crisis and asked the Enoc group, which owns Enoc and Eppco retailers, to explain the real reasons they stopped their supplies at their stations, causing so much damage to the emirate and its residents,” the council said.

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