A strategic approach: Maximising domestic generation capacity will be key to ensuring growth

Unlike many of its neighbouring countries and emirates, Ras Al Khaimah is not a large oil-and-gas producer. It has, however, established its own growing energy economy, ramping up capacity for electricity generation and water desalination, studying the potential of renewable energies – in particular solar power – and developing energy efficiency solutions.

Upstream Development

The emirate’s upstream companies, RAK Petroleum and RAK Gas, both contribute profits to the government’s balance sheet and play an important role in providing energy security for the emirate. The focus going forward is likely to be on the fast-evolving electricity sector, where additional capacity will be crucial to building on the economic success stories already achieved in the emirate’s industrial sector. Electricity demand has been identified as the largest potential constraint on economic growth, and the government is therefore looking for ways to address this issue.

The UAE’s federated structure requires that Abu Dhabi supply domestic electricity to residential consumers (and in practice some industrial ones get power as well) in the other six emirates. The supply of consumer fuels, such as those for transportation or cooking, also come at subsidised prices that are the highest within the GCC, but low in a global context. The country has significantly reduced subsidies in recent years, however, and must still use fuel imports to cover demand until domestic refining capacity is sufficient to cover all domestic needs.

Energy Independence

RAK enjoys a measure of energy security thanks to this federal-level arrangement, but the emirate wants to ensure even greater independence by boosting access to alternative sources for generating electricity as well as desalinating water, which is typically done in the same facility to maximise efficiency. Greater domestic capacity is an important element for ensuring continued industrial growth as Abu Dhabi’s obligation to provide power is not unlimited. Beyond meeting RAK’s domestic needs, another energy sector opportunity for RAK is to expand its reputation as an industrial centre for energy companies in the GCC. “RAK is in a position where it can harness solar energy,’’ JM Stevenson, the CEO of industrial-use batteries producer Eternity Technologies, told OBG. “There is a lot of potential here for companies like ours that make products that support the energy industry.’’ SECTOR PLAYERS:In developing its energy sector, RAK is likely to rely on a mix of government and private sector actors. RAK Petroleum is the emirate’s upstream oil company and has recently switched from an operator model to an investment-driven one. Plans for an initial public offering (IPO) on a stock exchange outside the UAE were announced in May 2013.

RAK Gas is an exploration-and-production company and is focused mainly on gas assets in Africa, including in the prospective areas off the continent’s eastern coast. The company also operates the emirate’s only processing facility. The oil and gas produced from the deposits RAK Petroleum and RAK Gas have stakes in are not, as a rule, intended for domestic use. They are instead sold on international markets and the proceeds used to meet domestic energy needs.

Other important actors in the energy sector include the Federal Electricity and Water Authority (FEWA), the UAE’s national electricity supplier which currently meets the bulk of demand in the emirate; the RAK Investment Authority (RAKIA), which owns two power plants serving industrial customers; a private utility called Utico, which serves as a third key producer;

Tata Power, a unit of the Indian conglomerate currently conducting a demand study in 2013 and a potential long-term investor; and the Swiss Centre for Electronics and Microtechnology (CSEM-UAE), which is in a joint venture with RAKIA to develop sustainable alternatives and efficiency techniques.

Upstream Oil

RAK Petroleum was founded in 2005 and is based in Dubai, with shares exchangeable on an over-the-counter basis through UAE brokerages. Since its formation, the firm has developed exploration and production assets in RAK, as well as offshore in Omani territorial waters and in Tunisia.

The company has been extremely active in recent years, restructuring its operations and focus. As an explorer and producer in the late 2000s it formed a working relationship with, and took a minority stake in, DNO International, a Norwegian explorer and producer. In July 2011 the two companies decided on an assets-for-shares merger. In the deal RAK Petroleum exchanged its assets for an increased stake in DNO – from 30% before the arrangement to 42.8% at the time of completion. It had reached 43.39% by the end of that year, according to DNO’s 2012 annual report.

Diversified Assets 

RAK Petroleum is the only shareholder in the company with a stake above 5%. US bank JP Morgan owned roughly 4% through the combined stakes of several subsidiaries as of the end of 2012. DNO’s total assets, meanwhile, stood at $1.25bn, according to its 2012 annual report.

An independent third-party valuation of the two companies’ balance sheets by Texas-based energy consultancy DeGolyer and MacNaughton showed the deal valued RAK Petroleum’s assets at between $250m and $400m, while DNO’s shares at the time were worth something in the range of $1.42bn to $1.73bn.

The combined entity has 18 licences in Yemen, Oman, RAK, Tunisia, Somaliland and Iraq. Total production was 38,354 barrels of oil or oil equivalent per day. RAK Petroleum’s chairman and CEO Bijan MossavarRahmani is now the executive chairman of DNO’s board and the merger was completed in January 2012. DNO said in its annual report that it was particularly attracted to RAK Petroleum’s assets as they are located in areas that have been relatively stable in recent years – the UAE, Oman and Tunisia. DNO’s assets, meanwhile, are in in Iraq, Yemen and Somaliland, which have been distinctly more volatile.

DNO reported a loss of $21.7m in 2012, thanks in part to the sale of an asset in Equatorial Guinea for $5.18m. It swung into the black in the first quarter of 2013, however, reporting a net profit of $28.8m on operating revenue of $100.34m.

Production for the quarter was at 29,061 barrels per day (bpd), down from 42,116 bpd in the first quarter of 2012. Proved and probable reserves reached 520m barrels of oil equivalent (boe), up from 149m at the end of 2009. Five drilling rigs were active as of March 31, 2013.

In May 2013 RAK Petroleum announced a plan to restructure and list on a stock exchange. Existing shareholders approved a plan in which the company’s assets would be transferred to a newly formed Dutch firm, with a parent shell company domiciled in the UK. Shares would subsequently be sold in an IPO, though the exchange has not yet been specified.

Domestic Reserves

The emirate has continued to maximise its domestic reserves. DNO produced 12,000 barrels of condensate and 100m cu feet of natural gas in 2012. As of the end of 2012, according to DNO, gross remaining recoverable reserves amounted to 13.8m barrels of oil, condensate and other liquids and 105.5bn cu feet of gas.

In early 2013 DNO announced it was seeking partners for the exploration of a block mostly onshore in RAK that covers about 884 sq km. About 200 sq km of the area is offshore with water at 20 metres or shallower. A zone at the south-west corner of the area is thought to hold between 128bn cu feet and 283bn cu feet of gas, and two other areas may contain as much as 185bn cu feet. DNO is seeking partners on a farm-in basis, by which it shares its ownership rights in exchange for exploration financing. Exploration rights are set to expire in November 2013 but can be extended for another three years.

Authorities are also focusing on the Saleh field, located 45 km offshore. The field has been productive in the past, peaking at 24,000 bpd of oil and 25,000 cu feet of gas in the 1980s, when RAK Gas had the rights. Production has since halted, however, as the field was until recently considered exhausted.

Rights were transferred from RAK Gas to RAK Petroleum in 2010. It now seems that with evolutions in FEWA power consumption & production, 2007-11 FEWA power consumption & production, 2007-11 technology, enhanced recovery techniques may give the field a second life. DNO began drilling in April 2013 for a period anticipated to last some 130 days. The well will test a previously undeveloped reservoir within the fallow field in hopes that existing infrastructure offshore in the area can be used in the extraction process. Results here will determine whether DNO will then drill in the nearby RAK B oil field.

Gas Supply

Gas has taken on particular importance in RAK and elsewhere because it is an ideal feedstock for electricity and for its relatively lower cost and emissions compared with other carbon-based options.

Even in the GCC, however, securing a steady supply is difficult. This is due to three main reasons. First, gas has been in high demand in the past decade because it has been seen as a route to economic diversification in the GCC. For example, many neighbouring countries have depended on and concentrated on developing industries for which a low-cost source of natural gas is a comparative advantage, building petrochemicals complexes, aluminium smelters and other heavy industries. As a result, Daily hours of sunshine – monthly avg. at RAK Airport, 2011 demand for gas has risen in many cases as fast as supply of the resource. RAK, on the other hand, has taken advantage of its varied landscape and has monetised natural resources like limestone, clay and silica, which are scarce elsewhere in the region, before turning its attention to developing the gas segment.

“Gas plays a fundamental role in supporting and strengthening the industrial sector in RAK, making it more attractive for investors. We expect our sector to grow stronger in the next decade, allowing us to continue assisting in the industrial development of the emirate,” Kamal Ataya, the CEO of RAK Gas, told OBG.

Youth Growth

A second driver of gas demand is population growth in the GCC: as the population increases, so does the number of electricity users. According to a report from the consultancy Booz & Company, half of Saudis and 31% of Emiratis are between 15 and 24 years old. Across the GCC, between one-third and one-half of the population is within that age range, and with electricity heavily subsidised in the region, a culture of efficiency and conservation has yet to take root.

Slowing Development

A third factor affecting gas supplies is Qatar’s decision to moderate the pace of development of its North Field. The country established a moratorium on new projects in the field in 2005, citing the need for proper and prudent reservoir management, and has yet to lift it. As Qatar has less gas to export, countries in the region find othQatar has in fact been seeking overseas assets as a way of boosting its reserves, and in April 2013 the state energy company Qatar Petroleum (QP) announced its initial purchase: 40% of gas fields in the Canadian province of Alberta that are expected to produce 250m cu feet of gas per day in 2013, according to Bloomberg. QP made the purchase along with Centrica, a UK-based supplier of energy to residential consumers, and the two paid $981m to Canadian producer Suncor Energy for the fields. Qatar remains the world’s largest exporter of liquefied natural gas (LNG), but is not considered likely to take on new obligations for export and may instead consider meeting some of its contractual obligations to supply UK customers with gas sourced in North America.

The gas crunch in the region has been felt in RAK specifically through reduced supply from Dolphin Energy, an underwater pipeline that links Qatar to the UAE and is the first international gas-export line in the region. The pipeline was anticipated to send some 3.2bn cu feet daily to UAE users, but Qatar is sending just 2.2bn cu feet through the pipe, to be shared among all the emirates, RAK Gas told OBG.

In the UAE, Abu Dhabi has responded to the evolving gas market with plans for a floating LNG import terminal to be located off Fujairah, the emirate with coastline east of the Strait of Hormuz. Two entities owned by the Abu Dhabi government, Mubadala and International Petroleum Investment Company, are planning the terminal, which would float offshore and have an annual import capacity of 9m tonnes of LNG.

Local Response

All of these factors underscore the importance of RAK Gas. The company was founded in 1984 by the government and called the RAK Gas Commission. It was restructured in 2007 as a limitedliability corporation owned by the state, in charge of ensuring a reliable supply of gas to the emirate. Company operations include exploration and production ventures abroad, as well the importation and treatment of gas in a domestic facility, along with trading.

Investments Abroad

Currently none of RAK Gas’s foreign assets have reached the production phase, but there are several promising assets in Africa. RAK Gas has been investing in East African prospects since 2006 and those investments seem likely to pay off in the near future, as the onshore Rift Valley area has been home to several new oil discoveries in recent years and offshore explorations have yielded a number of gas finds. In Tanzania, the company has a 25% interest in the Nyuni Block where Aminex is the operator; a 30% interest in East Pande Block where Ophir is the operator; and 100% in Pembe Zanzibar Block where it is the operator. Elsewhere, in North Africa, a block in Upper Egypt, of which RAK Gas has a 20% equity interest and is the operator, is in the exploration phase and due to go into production in 2014, according to the company.

RAK Gas’s imports are fed through its processing facility at Khor Khuwair. The plant has two production trains, both of which can handle sour gas, so called because it contains impurities such as sulphur compounds. The plant carries out processes that include separating out impurities and further refining national gas into ethane and methane for use as feedstock; butane and propane, which can either be used by consumers as-is or liquefied and shipped out as liquefied petroleum gas (LPG); and condensates, which are hydrocarbons that exist in a gaseous state in reservoirs but later transform into liquid as conditions change, including when they are being removed from the reservoir and processed.

Khor Khuwair’s first train, Bukha, has a daily capacity of 60m cu feet of gas, 20,000 barrels of condensates, 120 tonnes of LPG and 500 barrels of pentane, a fuel component and solvent. Bukha can handle gas that is up to 4% sour. The second train, commissioned in 2008 and called Atlantis, has a daily capacity of 90m cu feet of gas, 800 barrels of condensates, 50 tonnes of LPG and 500 barrels of pentane.

Sour Prospects

Sour gas looks set to be a central part of the energy mix in the GCC region. Globally, this resource has been underutilised in the past in part because natural gas was only recently considered to be a commodity valuable enough to justify the cost of extraction and processing. Unlike crude oil, which can be shipped in its natural state, natural gas requires pipelines and LNG processing plants, all of which add to production costs.

Now that natural gas has become more popular, deposits of sweet gas, which are cheaper and easier to process, have risen up the extraction agenda, further reducing companies’ desire to process sour gas. However, in recent years sour gas has been receiving more attention thanks to growing demand worldwide. Price increases have also made it profitable – a positive development considering that most gas reserves in the region are sour.

The Abu Dhabi National Oil Company, for example, announced in April 2013 that it would develop a sourgas field called Bab in a joint venture with Royal Dutch Shell. Babin is forecast to produce a total of 1bn cu feet of gas a day by 2020, with local markets expected to be the main consumers.

In the downstream market, only a small portion of RAK Gas’s output goes to electricity generation and cement producers, according to the company. Al Ghail and Al Hamra, two power plants owned by RAKIA, use the majority of this supply, while the private utility Utico’s facilities and cement customers account for the remainder. The rest of the output goes predominantly to RAK’s industrial sector, which comprises customers such as RAK Ceramics and various glass and steelmakers, among others. RAK Gas is anticipating additional demand in particular from Al Ghail and Al Hamra. Indeed, the plant operators have reported that due to growing demand they will soon be producing at 80-90% of capacity.

Outlook

RAK’s economy has matured and grown to the extent that the future mandates a strategic approach to meeting electricity demand. While the emirate’s relationship with DNO should help to ensure the extraction of domestic resources, its overseas activities and domestic research into non-traditional approaches such as solar energy, clean coal and efficiency look set to contribute to future security.

In the meantime, the need for a more comprehensive approach in its domestic electricity market has been a factor behind creating a new domestic regulator, the RAK Electricity and Water Authority. RAK’s proactive approach should result in a greater degree of energy security as the regulator develops and new generation and transmission capacity come on-line.