Fujairah’s Position in a Volatile Oil Market
The port city continues to bloom with its unique geographic location as one of the leading oil trading and bunkering hubs in the world.
Fujairah has raised its profile as one of the world’s leading oil trading and bunkering hubs by building world-class terminal and port facilities. Though high oil prices over the past decade were an important factor supporting investment in new energy-related infrastructure, Fujairah has multiple competitive advantages that allow its oil-related industries to operate successfully through cycles of low and high oil prices.
Fujairah’s unique niche is based on services related to trading and moving of oil. Its advantages can be classified into ‘hardware’, such as location and infrastructure, and ‘software’, such as the regulatory environment and the sophistication of the legal and financial sectors of the UAE to meet the requirements of the shipping and oil trading sectors.
Even though oil price is low, more barrels of oil are being produced in the Arabian Gulf region – which is the target market of Fujairah’s storage and logistics terminals.
Fujairah’s position on the eastern coast of the Arabian Peninsula, adjacent to the Strait of Hormuz, is unique. The Port of Fujairah sits on a critical tanker and trade route linking Europe, Africa and Asia to the Arabian Gulf.
The port city is also the landing point for the 380 km Habshan-Fujairah crude oil pipeline, which provides Abu Dhabi with an export outlet on the Arabian Sea coast, thus cutting down travel time for tankers that would otherwise have to sail through the narrow and busy Strait of Hormuz to load their cargo.
The wider Arabian Gulf region holds the reserves of large national oil companies, which manage the world’s most attractive hydrocarbon reserves.
The Emirate of Fujairah benefits from utilisation of its infrastructure – comprising an oil tanker jetty and 8.8 million cubic metres of storage capacity to date and expected to climb to 14 million cubic metres by 2018. In this respect, it must compete with other world-class oil hubs for its customers, who are oil owners whose products are handled in Fujairah. These include 14,000 vessels, which anchor in Fujairah waters and the major national oil companies including ADNOC, ENOC, SOCAR, Sinopec that move physical oil in the region.
The Port of Fujairah is working with its oil terminal partners to construct a VLCC jetty that can accommodate the world’s largest tankers.
The Port of Fujairah is planning to invest $304m (Dh750m) over the next two years to expand and upgrade its oil-handling infrastructure. With the investment, the port supports the Fujairah government’s strategy to provide job opportunities to UAE nationals as well as help boost various economic sectors in the country.
Future projects planned for Fujairah include the construction of additional refining, petrochemicals, and LNG import terminals that can complement the existing energy-related infrastructure.
In addition to the world-class infrastructure, Fujairah has other characteristics conducive to the development of an oil hub such as a strong marine services market, which attracts fleet operators to bunker in Fujairah waters.
As part of the UAE, Fujairah is a respected safe haven that affords international oil traders confidence that their vessels, cargoes, and contracts will be protected within a stable legal and regulatory framework.
UAE’s sophisticated financial services sector is capable of meeting the large-scale working capital requirements of the shipping and oil trading sectors.
As oil prices have come down, global oil inventories have risen close to 3 billion barrels, according to the International Energy Agency. A ‘contango’ market that anticipates higher future prices also contributes to utilisation of oil storage infrastructure.
To navigate such oil price volatility going forward, the key for the owners of these oil stockpiles, who are also customers of Fujairah’s infrastructure, is risk management discipline. Build-up of inventories would be a speculative exposure.
Therefore, traders will have to protect themselves by balancing their physical positions with contracts to hedge price risk and lock-in acceptable margins with creditworthy counterparties.
Banks who lend to the energy industry must also understand the dynamics of their customer’s business and help clients actively manage risks through the market cycles. For example, National Bank of Fujairah’s treasury desk is active in helping its energy sector clients protect against price swing risks and structure inventories into hedged assets.
At the right place, at the right time
Oil price dynamics are difficult to predict, and investment decisions in the industry are examined very closely. Fujairah’s investment outlook is built on strong fundamentals. The world continues to consume more oil and the Arabian Gulf region also continues to produce more oil.
With its superb location, excellent oil infrastructure and increasingly sophisticated financial services sector, Fujairah will continue to raise its profile as one of the world’s leading oil trading hubs.
Fujairah is developing several government, oil and gas, infrastructure and housing projects. One of the most prominent is that of Dibba Fujairah Port. Two 650-metre docks with an 18-metre depth and cranes with a capacity of 4,000 tonnes per hour are being constructed.
“The development of the port at an overall estimated cost of Dh1.6 billion aims to facilitate the transportation of primary materials, to meet growing global demand and the requirements of all types of ships,” said His Highness Sheikh Hamad bin Mohammed Al Sharqi, Member of the Supreme Council and Ruler of Fujairah. The multi-purpose commercial port is expected to complete by the end of 2022.
The construction of the Dh1.9 billion Mohamed bin Zayed Residential City was completed last year. It will accommodate 1,100 residential villas equipped with advanced facilities, with the aim of providing housing for about 7,000 citizens. It will also include schools, mosques, parks, and commercial stores, community cultural centre and a men’s council.
The region is also anticipating the inauguration of the Etihad Rail project, which is expected to strengthen its economic sectors through the establishment of three stations starting with Khatmat Al Malaha Station that will link the UAE to Oman, Fujairah Station and Khor Fakkan Port Station.
The Ministry of Energy and Infrastructure in coordination with the local authorities in the Emirate of Fujairah recently opened, the Najimat tunnel, which will contribute to the smooth flow of traffic and raise the efficiency of Sheikh Hamad bin Abdullah Road.
The Fujairah F3 Independent Power Project was the winner of the Power Deal of the Year. The project includes the construction of a 2,400 megawatt combined cycle power plant. All generated power will be sold to the Emirates Water and Electricity Company under a 25-year power purchase agreement. It is due to start commercial operation in April 2023.
Khaleej Times, February 25, 2021