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Doubts over Dubai’s new refinery plan

dubai-china-sonangolDoubts are growing over the viability of Dubai’s recently announced plan to build a new oil refinery in the emirate with China Sonangol.

The region’s top financial hub last month signed a memorandum of understanding with China Sonangol International, a joint venture between Angola’s state-owned oil company, Sonangol and Hong Kong-based New Bright International Development, to build what will be its second oil refinery. The hope is to reduce Dubai’s reliance on imported fuels and allow the desert-city to export to international markets.

The proposed refinery’s capacity and a schedule for completion weren’t disclosed in the original announcement and a project consortium has yet to be created to oversee the front-end engineering design and green-field project financing.

“The plan is simply flying against the economic sense in the market,” Gulf-based industry source said. “China Sonangol is not known in the region, does not have experience here or any experience in refining. New Bright International Development may be well-connected in China but it is confusing why Dubai would opt for them. Maybe it is part of the positive news drive in the emirate as part of its bid to host the 2020 World Expo.”

Officials at the Dubai government weren’t immediately available for comment. A Sonangol spokesman and an Angolan oil ministry official couldn’t be reached.

Dubai has already one refinery at Jebel Ali which can process 120,000 barrels per day and is operated by Emirates National Oil Company, or Enoc. The United Arab Emirates, a federation of seven emirates that includes Dubai, has three other refineries and Abu Dhabi Refining Company is working to more than double capacity at its existing 415,000 barrels per day refinery at Ruwais. There is also unprecedented expansion in refining capacity in neighboring Saudi Arabia, Kuwait and Qatar despite high oil prices.

“It didn’t make sense to me to put a new refinery in Dubai,” a Dubai-based energy analyst said. “Lots of new refining capacity is coming up in the Middle East already, mostly in countries that need it to meet domestic demand, and Dubai doesn’t have the advantages of crude supply, cheap energy supply or cheap land.”

However, Kamel Al Harami, an independent oil analyst based in Kuwait, reckons any additional refining capacity would help the region.

“It is good news they are working on something that will help them meet their needs and they can secure fuel for the refinery from Abu Dhabi. I encourage any new capacity in the Middle East region, especially in the Gulf.”

Unlike Abu Dhabi, the wealthiest emirate in the U.A.E., Dubai has to import the bulk of its energy needs and is trying to find more sources for fuel since it has sharply reduced purchases from Iran in response to U.S. pressure. Because fuel prices are heavily subsidized throughout the U.A.E., Dubai has had to provide substantial subsidies to Enoc and Emirates Petroleum Products Company, another gasoline distributor in the emirate.

“The solution should be finding a group of suppliers to secure its needs not to build a refinery that does not make any sense economically,” the Gulf industry source said.-WSJ