Fujairah's position in a volatile market

In addition to the world-class infrastructure, Fujairah has other characteristics conducive to the development of an oil hub, says Bori Bariman

Bora Bariman is Head of Energy & Marine - Corporate & Institutional Banking Group at National Bank of Fujairah.
Bora Bariman is Head of Energy & Marine - Corporate & Institutional Banking Group at National Bank of Fujairah.

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 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 an advantage. 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, 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 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 8.8mn cubic metres of storage capacity to date and expected to climb to 14mn 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.

It is also working with its oil terminal partners to construct a VLCC jetty that could accommodate the world’s largest tankers.

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 3bn barrels. A ‘contango’ market that anticipates higher future prices is also part of this growing oil stock.

To navigate such oil price volatility going forward, the key for the owners of these oil stockpiles, which 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 which 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.

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 location, excellent oil infrastructure and sophisticated financial services sector, Fujairah will continue to raise its profile as one of the world’s leading oil trading hubs.

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Oil & Gas Middle East - January 2020

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