Tuesday, September 16, 2008

Dubai Fujeirah shipping canal?: three articles

Dubai planning oil canal to bypass 'the Hormuz threat'

Business Intelligence Middle East 9 September 2008

UAE. Policymakers in the Gulf are turning to extravagant plans in their quest for an alternative shipping route for about a fifth of the world’s oil transported through the Strait of Hormuz.
Dubai, home of the Middle East’s largest-container port within the Gulf, is the latest Arab country to study projects to bypass the Hormuz shipping lane that’s vulnerable to Iranian attack.
According to a senior Dubai government official, planners have proposed building a giant canal across the desert that could handle the huge oil tankers and freight ships that currently sail through Hormuz. If built, the channel would rival the existing Suez and Panama canals as a major conduit for world sea-trade and crude oil shipment. But the costs of such a project, estimated by industry experts familiar with the plans to be in excess of US$200 billion, could be prohibitive.“


Many studies on this have been presented but nothing is solid,” said the senior Dubai-government official, who declined to be identified. But the fact that such a grand plan exists demonstrates how concerned Gulf leaders have become by the Iranian threat to their main trade route.The Islamic republic’s repeated assertions to close Hormuz if its nuclear research plants are attacked by Israel, or the US, have been a major factor in driving oil prices higher over the past year.

Crude oil is down about 25% since its US$147.27 peak on 11 July when tension between Iran and the US peaked. One of the world’s most important oil choke points, the 50 kilometre-wide Hormuz channel, conveys about 17 million bpd of Gulf crude, or roughly two-fifths of all oil shipped by sea. “It would definitely ease market concerns and would lower the insurance premium currently paid by tankers passing through Hormuz,” said Manoucheher Takin, senior analyst at the Center for Global Energy Studies in London. The premium for vessels carrying 300,000 metric tonnes of crude at a value of US$32 million from Kuwait through the Gulf to Europe is equivalent to US$24,000 for the entire voyage, according to Lloyds Underwriters.

Tensions are rising between Iran and the Gulf states amid a smoldering territorial dispute between Tehran and the United Arab Emirates over the ownership of islands in the Gulf. This builds on an already tense situation as Iran faces off with the US and its allies over the Islamic Republic’s quest to enrich uranium and develop nuclear power plants. “Iran has clearly stipulated its intention to close the Strait of Hormuz in case of a military conflict in the region,” said Mustafa Al Ani, a senior advisor at Dubai-based think tank Gulf Research Centre.

Defending the strait is currently a major preoccupation of the US Fifth Fleet in the Gulf, where the largest US naval force in the region has an armada of vessels including nuclear aircraft carriers ready to counter Iran. Iran’s military, the largest in the Gulf, presents a formidable adversary, however. Shipping in the Gulf is vulnerable to attack because of Iran’s long coastal waters, a fact painfully demonstrated in 1987 when the Islamic republic targeted commercial vessels with ease in what became known as the 'tanker war'.

Dubai isn’t alone in looking into building a canal to link the Gulf with the open sea. Neighbouring emirate Ras Al Khaimah, one of seven members of the UAE federation, considered a plan to build a shorter canal across the Hajar mountain range to the country’s east coast but was put off by its vast cost, according to a Dubai-based engineering consultant familiar with the proposal. Meanwhile, plans that emerged last year to build a storage centre for liquefied natural gas outside the Gulf and the Hormuz channel remain on the drawing board. People close to the proposed Dubai plans told Dow Jones that the canal would follow a route of about 180 kilometres from the Emirate’s northern Gulf coast to the East coast port of Fujairah.

The scale and cost of the canal venture is unlikely to deter Dubai’s rulers who have an appetite for vast infrastructure projects. These include the world’s tallest skyscraper; the construction of three palm-shaped islands in the Gulf that are visible from space and the world’s largest airport currently under construction. To be sure, the economics of such a canal are largely untested and the vast cost of building the link could make the project unfeasible, or as Global Energy’s Takin says: “It’s not certain if the benefits would justify the costs.” Pipelines could provide a more cost-effective alternative to Hormuz.

Dubai’s richer cousin Abu Dhabi, holder of the world’s fifth-largest oil reserves, is building a pipeline linking its oil fields with Fujairah, conveniently bypassing Hormuz. The link will have the capacity to carry about 1.5 million bpd of crude oil and feed an export refinery.But this pipeline would only carry UAE oil, leaving producers such as Qatar, Kuwait, Saudi Arabia and Iraq still without an alternative shipping route to Hormuz.

See also: http://fujairahinfocus.blogspot.com/2008/09/dubai-to-fujairah-canal-would.html

The Strait's strategic significance

Daniel Brett

Al Arabiya news channel 16 Sept 2008

Dubai has announced that it is studying a new $200 billion mega-project that is intended to by-pass one of the world’s narrowest and strategically important shipping choke points, the Strait of Hormuz. The Emirati move to create a canal linking the Arabian Gulf to the Arabian Sea could destroy one of Iran’s greatest levers over the West: the control of a waterway that is the transit route for up to 17 billion barrels of oil per day, the equivalent of 40 per cent of the world’s traded oil. Yet with fears of an imminent conflict looming over the Middle East, the plans may come too late to avert a global oil crisis that will dwarf the crisis of the 1970s.The proposed plan has already attracted its doubters, with many believing it impossible that a canal routed through the Al Hajar Mountains will be able to cater to supertankers with a deadweight of over 200,000 tonnes, which would require enormous locks. Although the project is thought to be popular within the Gulf Co-operation Council (GCC), a decision is likely to be held up due to the complexity of engineering the project and the massive costs involved – $200 billion may be a conservative estimate, particularly given project cost over-runs in many other mega-projects in the Gulf.

The delays over the plans will ensure that, at least in the medium-term, Iran will have an option to close down the global economy if attacked by shutting down Hormuz, where the navigable waterway for oil tankers is as narrow as six miles wide: two two-mile wide navigation channels for inward and outbound traffic and a two-mile wide buffer zone between them. In an interview with the London Times, Mustafa Alani, of the Dubai-based think-tank Gulf Research Center, said: “Iran has clearly stipulated its intention to close the Strait of Hormuz in case of a military conflict in the region.” If Iran chose to act in retaliation, it would have control over the transit of 90 per cent of Gulf oil. Oil tankers have been a target in previous conflicts.

The ‘tanker war’ between Iran and Iraq during their conflict saw Iran exercise military attacks on tankers carrying oil from Iraq and other Arab states that supported Iraq. According to Lloyd’s of London, the war resulted in damage to 546 commercial vessels between 1984 and 1987. The conflict brought the U.S. into direct naval engagement with Iran, with the USS Samuel B. Roberts damaged by Iranian mines and the USS Vincennes’ highly controversial downing of an Iranian civilian airliner, mistaking it for an Iranian fighter jet. More recently in January U.S. and Iranian vessels came close to an engagement, although the details of the event remain shrouded in mystery. It is clear that Hormuz is already a flashpoint and the option of a trans-Emirates canal is unlikely to shift the geopolitical dynamic over the medium-term.

Pipeline routes provide a more viable alternative to the Hormuz. Currently under construction, Abu Dhabi’s 360km pipeline linking the Habshan oilfields to Fujairah, with a capacity of 1.5 million barrels per day from 2010, will not be enough to serve other oil-producers in the region, such as Saudi Arabia. At the maximum, it would reduce traffic through the Strait by just nine per cent. Another route is Saudi Arabia’s 5 million barrels per day Petroline from Abqaiq to Yanbu, but the Saudis appear to be reluctant to use spare capacity to transport Kuwaiti oil. Moreover, the spare capacity available at Petroline will still be far less than the amount needed to plug the deficit created by a shutdown of the Strait of Hormuz. The other option is piping oil to Oman’s Sohar port, which last year saw the opening of a new refinery and a container terminal with an 18 meter draught. Nevertheless, this still means constructing a pipeline across the Arabian peninsula, which would take years.

If conflict with Iran is due to occur in the next 12 months, talk of canals and pipelines is largely irrelevant. Gulf states must, instead, focus on short-term risk mitigation. It is in the interest of Gulf states to ensure that the diplomatic route remains open, with the GCC perhaps acting as an arbiter between the U.S. and Iran. However, the Iranian strategy of brinkmanship, in which it draws out negotiations to their absolute limit and perhaps beyond breaking point, could derail any hope of a brokered resolution over the thorny issue of Iran’s nuclear programme. The final months of the Bush administration are unlikely to see any radical moves against Iran, so a U.S. response to Iranian delaying tactics will depend on the successor: Barack Obama or John McCain. Obama has appeared to be more dovish than McCain by US standards, but it is unclear how much of a break he would make with the previous regime. Even following the outcome of the U.S. presidential elections, the formulation of a U.S. strategy on Iran will take a few months and will no doubt be influenced by various powerful interest groups in Washington. At the same time, the Israelis will be going through their own electoral cycle, which would further postpone any potential Israeli attack on Iran. Consequently, any strike on Iran is unlikely until mid-2009, which coincides with Iran’s own presidential elections.

If the Israelis strike Iran in a pre-emptive move against its nuclear facilities, Hormuz is unlikely to be the logical point of retaliation for Iran since a blockade of the Strait would alienate Iran from potential allies or sympathisers in the Arab world. Iran will also be reluctant to bring Saudi Arabia into a conflict on Israel’s side, which would be the likely outcome of retaliation exacted on Hormuz. As such, Iranian response to an Israeli strike is likely to be limited to attacking Israel rather than widening the conflict to the Arab world. If Iran were to attempt a shut-down of the Strait in response to an Israeli strike, it would be able to raise oil prices to at least $200 per barrel, an act that could provoke the involvement of Asian states.

A more likely scenario is the steady deepening of the sanctions regime, with Iran targeting Hormuz in the event of a naval blockade on its ports. The tightening of sanctions is also more palatable to European governments than a military strike, although such a course would take at least a year until a naval blockade of Iran transpires.While the U.S. would see 17.5 percent cut in its oil supplies as a result of the closure of Hormuz, the worst affected country would be Japan, which relies on the Gulf for 75 percent of its oil supply and would be severely damaged by any cut in supply. The U.S. may release some of its strategic reserves to stabilise the oil market and plug the gap in demand. However, energy-hungry China and India do not have sufficient reserves to mitigate the effects of a shut-down of the Strait of Hormuz and are likely to use their influence at the U.N. to appease Tehran and resume oil shipments.

Such action by Iran would be a last resort, since a conflict over Hormuz would also cut off a major route for Iranian oil. Nevertheless, the situations in which Iran would consider last resort action to demonstrate its power within the global economy are unclear, with scenarios ranging from a strike on its nuclear facilities to a full-scale invasion. If Iran did decide to attack the shipping choke-point, it would be up against the world’s most powerful navy and the largest economy, the U.S. It is conceivable that the U.S. could eliminate a large part of Iran’s naval forces. Any conflict would be assymetrical, with the U.S. armed with cruise missiles and other highly advanced technology. The U.S. may use the opportunity to occupy Abu Musa and the Tunbs, a strategic group of islands claimed by Sharjah but currently occupied by Iran. This would be a major set-back for Iran, which has used the islands to exercise control over the UAE and shipping lanes.

Much will depend on the outcome of the June 2009 Iranian presidential elections. If the hardline incumbent Mahmoud Ahmadinejad wins the election, there will be a heightened risk of an immediate military conflagration in the Gulf. A return of the more pragmatic Mohammad Khatami, or someone similar, would make the lessen the danger of conflict in the Strait, giving Arab governments more time to establish land-based alternatives to Hormuz. If Supreme Leader Ayatollah Khamenei seeks to retain the leverage over the Hormuz, he may seek the re-election of Ahmadinejad or the election of a like-minded man to sustain political tensions with the West and draw out negotiations and heightening the potential for a closure of the Hormuz.

With the new U.S. President and his Israeli counterpart likely to have staked out their foreign policy by the time of Iran’s presidential elections, Iran could be placed in a highly vulnerable position. And like any cornered animal, desperation will increase the possibility of an aggressive and irrational response. As such, the situation in Hormuz this time next year is a complete unknown, ranging from more of the same to a major catastrophe.

Daniel Brett is a freelance journalist and publisher specialising in emerging markets and geopolitical issues, working with a number of leading business intelligence and security organizations.

Is Dubai's $200bn canal plan watertight?

David Robertson

Emirates Business 24/7 September 16, 2008

Nothing is done half-heartedly in Dubai so when the city decides to build a skyscraper, it builds the world's tallest. When it needs a new airport, the world's largest is built. When more beachfront is called for, enormous island constellations are constructed off the coast. The ambition and vision of Dubai can be breathtaking – although you wouldn't want to take too deep a breath for fear of choking on the dust thrown up by all this construction.

When London was booming in the 19th century it too created a whole series of iconic buildings such as Big Ben, the Houses of Parliament and Tower Bridge with which to show off its prominence. While these buildings are still loved by Londoners and tourists, perhaps the most important construction undertaken in those boom years was the 13,000 miles of brick sewers built under the city, which cleaned up the streets above and enabled them to flourish.This sort of infrastructure project is less immediately impressive than a Big Ben or Burj Dubai and their benefits can take decades or even centuries to be fully appreciated. However, without them no city can truly become great.

Take, for example, Dubai's metro system, which I've heard a number of residents question in terms of cost and requirement. The cost-benefit analysis may be difficult to make at present but the establishment of a public transport network will be more important to the city's long-term development than super skyscrapers or mega hotels. No city can grow without the right foundations.

Similarly, it emerged last week that Dubai was considering building a canal from the Gulf to the Arabian Sea, which would cut off the tip of Arabia and allow ships to avoid the Straits of Hormuz. I gather there was a degree of scepticism about the value of the project last week and I'm not surprised. The mooted cost is more than $200 billion (Dh735bn), which even to the booming economies of the Gulf is a staggeringly large sum.The actual benefit of such a canal also seems limited when compared to Suez and Panama. These canals were built so ships could avoid entire continents and their construction created short cuts that benefited world trade immeasurably.

But the Dubai-Fujairah canal would reduce journey distances by about 200km and the passage, across the Hajar Mountains, would probably take more time than using Hormuz.The canal's real benefit would be allowing Gulf countries to avoid Iran, which controls the northern shore of Hormuz. The Iranians have repeatedly threatened to target tankers using Hormuz if their country is challenged, which is not only problematic for oil consumers but also a potentially expensive loss to oil producers.About 17 million barrels of oil, or 40 per cent of the world's traded supplies, pass through Hormuz every day. That equates to roughly eight 300,000 tonne supertankers a day and each must pay an insurance premium for using Hormuz. Lloyds of London estimates that premium to be $24,000 per ship.On purely commercial grounds, Dubai's canal could, therefore, charge at least $24,000 per ship to avoid Hormuz. With eight ships a day paying $24,000 it would take a mere 2,700 years to pay off the canal's construction costs. During more troubled times, the canal's fee could obviously be increased but even if the charges rose 10-fold, it would still take 270 years to pay off the construction costs. Not even an Olympic Games take that long to pay off.

So, how about passing the costs onto end users rather than shipping companies? After all, every time there is concern about Iran's influence over the 90 per cent of Gulf oil exported through Hormuz the price rises dramatically. A $1 levy on every barrel of oil leaving the Gulf would be a lot cheaper than the $10s that are added whenever relations with Tehran become strained. A $1 levy would raise $6.25 billion a year, allowing the canal to be paid off in 32 years, which would be a pretty good repayment period for this type of infrastructure project.

A financial case can, therefore, be made in support of Dubai's canal and it would certainly be an impressive piece of infrastructure. But would it be as vital to the city's future as a sewer system or a public transport network would be? I think not. Ultimately, it is a $200bn insurance policy, which is a lot of money to spend on avoiding a difficult neighbour. It would be better to invest that money in diplomacy, which not only protect Hormuz shipping but also the other wonders of Dubai.

The writer is Business Correspondent of The Times of London

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