Fujairah’s oil trading ambitions face hurdles, says Vitol dealmaker

Fujairah’s ambitious expansion plans are aimed at turning the port city into one of the world’s great oil trading hubs, like Singapore, but the market needs to be liberalised if those dreams are to be achieved, said the chief dealmaker at Vitol, one of the world’s largest commodities trading firms.

The Indian Ocean port city has grown massively since its relatively humble beginnings as a ship refuelling centre after the first Gulf War in the 1990s. In the past decade, oil storage capacity at the port has grown to 8.7 million cubic metres from 2 million cubic metres and there are projects under way to raise that to 13 million cubic metres by the end of next year, Salem Abdo Khalil, adviser to the Fujairah government, said this week.

Fujairah is also the landing point for the Habshan-Fujairah crude oil pipeline, allowing 1.5 million barrels per day of export crude to bypass the clogged Strait of Hormuz. The port is also the terminus for Qatari natural gas via Dolphin Energy’s pipeline from Taweelah. Now, in addition to the storage expansion, there are also plans to build more refining capacity, and petrochemical and liquefied natural gas (LNG) re-gasification facilities.

“That’s a massive, massive expansion,” said Chris Bake, the head of origination at Vitol. “You now have most of the elements in place to make Fujairah one of the world’s big oil trading hubs, like Singapore or [Amsterdam-Rotterdam-Antwerp] in north-west Europe.”

The optimism is shared by the UAE’s Minister of Energy, Suhail Al Mazrouei, who told a Gulf Intelligence energy forum this week: “Fujairah … is going to be a centre of gravity for energy, not only for the UAE but also for the region.”

Mr Bake added: “It is getting to the point where you have critical mass but it is still fraught with issues”.

To become a world class energy trading hub will require a more liberal approach to markets, particularly by the major oil companies in Abu Dhabi. This is in order to have the kind of balanced trading that is needed for a market to flourish.

“Historically it hasn’t been a fungible regional market as most of the oil is going out, sold by tender by the national oil companies,” Mr Bake explained. “The national oil companies also have to supply into the domestic market, mostly with some form of subsidy. But you need a balance between supply and demand on a wholesale basis, not only supply because then it is a permanently offered market and it distorts price. You need a facility where third parties can come in and compete in an equitable way but I can’t buy jet fuel and supply Dubai airport because it’s controlled by Enoc. I can’t supply Abu Dhabi because it’s controlled by Adnoc and they won’t let anyone into their system. In north-west Europe I can buy my way into a distribution system and participate in that market. The only option here is to buy from producer and take somewhere else.”

Mr Bake, who set up Vitol’s operations in the UAE in 2006, said that moves to liberalise the market could create a physical market for crude trading that could dovetail with the Dubai Mercantile Exchange by allowing it to develop crude futures contracts like the one it trades on Oman crude now. That, in turn, could boost trading on the DME significantly.

There are encouraging developments in the region, Mr Bake said. “You now have a big rebalancing going on in supply and demand as economies in the region grow, you’ve got growing demand in East Africa, you’ve got growing demand in and around the Indian subcontinent. You can start to put together a strategy of looking at this as a regional pricing hub.”

But to get there, Mr Bake said, “you need a lot more regional players and intermediaries – traders – actively participating in this market. I still think there is some education needed to understand the limitations that there are now”.

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