After the Sheikhs

by Davidson, Christopher

  As with Kuwait, Qatar was closely tied to British oil concessions following the first drilling in 1939. Later offshore concessions in the 1940s were however granted to the American company Superior Oil and Central Mining and Investment, and in the 1950s to Royal Dutch Shell. In 1973, closely mirroring the Al-Saud’s decision to part-nationalise, the newly independent Qatari government took a 25 per cent stake in the country’s oil industry before choosing fully to nationalise the new Qatar Petroleum Company in 1976. In recent years, gas has become much more important to Qatar than oil, with the government-owned Qatargas being established in 1984. Following major discoveries, most of which were located in the massive offshore North Field shared with Iran, exports of liquefied natural gas commenced in 1997, and in 2001 a second government-owned gas company, Rasgas, was established.

  The development of the UAE’s hydrocarbon industry is a little more complex to understand, much like its state formation. Given that most of the original concessions were signed before the UAE came into being, the two principal oil-producing emirates of Abu Dhabi and Dubai had already entered into agreements with different companies. In Abu Dhabi’s case, following the discovery of oil at Umm Shaif in 1958, the original British concessions were mostly renewed, with the granting of concessions to British Petroleum. Many other concessions were granted though, with Campagnie Française des Petroles, Royal Dutch Shell, Exxon-Mobil, Total, and the Japan Oil Development Company all winning sizeable stakes, most of which have been renewed. Since independence in 1971 a national oil company—the Abu Dhabi National Oil Company (ADNOC)—has always held controlling stakes in the various concessions, but these have never exceeded 60 per cent.116 Similarly, Abu Dhabi’s gas industry has only been part-nationalised, with ADNOC holding stakes of 68 per cent and 70 per cent in the emirate’s two main gas concessions, while the remainder has been shared between British, American, and Japanese companies.117

  With oil discoveries in the early 1960s, Dubai followed a similar pattern to its neighbour with the government-owned Dubai Petroleum Company managing several international concessions from Britain, the US, Spain, France, and Germany. Production increased greatly in the 1980s before peaking in 1991. Since then, Dubai’s oil industry has been described as simply ‘ticking over’, with Abu Dhabi having accounted for over 90 per cent of the UAE’s oil exports over the past decade.118 After oil was discovered in the western province of Oman in 1964, the Omani government pursued much the same model as Abu Dhabi and Dubai, with its wholly owned Petroleum Development Oman taking a 60 per cent stake in the industry and granting concessions to Royal Dutch Shell, Campagnie Française des Petroles, and Partex. Production increased greatly throughout the 1970s, and eventually reached its peak in 2000, at the same time that Oman opened its first major gas plant at the port of Sur.

  Today, the Gulf monarchies produce a combined total of about 16.6 million barrels of crude oil per day,119 about 19 per cent of the global total, with the bulk being produced by Saudi Arabia, Kuwait, and the UAE—or more specifically Abu Dhabi. The six states also produce about 232 billion cubic metres of natural gas per year,120 about 8 per cent of the global total, with the bulk being produced by Qatar, Saudi Arabia, and the UAE. More importantly, perhaps, the Gulf monarchies account for 37 per cent of all known crude oil reserves and 25 per cent of all known natural gas reserves,121 with Saudi Arabia alone accounting for 25 per cent of global oil reserves122 and with Qatar accounting for at least 15 per cent of global gas reserves.123 As discussed later in this book, an important disparity between the six states has thus emerged, with a hydrocarbon-rich group—namely Saudi Arabia, the UAE, Kuwait, and Qatar—all of which have at least a few decades of supply remaining, and with a much poorer group consisting of Oman and Bahrain, the latter of which now has to import most of its oil given the depletion of domestic reserves.124

  Closely connected to the region’s hydrocarbon industry has been the channelling of surplus oil and gas revenues into long-term overseas investments by many Gulf monarchies. Conceived as a means of cushioning their domestic economies should the international oil industry falter, most of these sovereign wealth investments have been made through a handful of government owned authorities or companies. Today, their combined assets are thought to be in excess of $1.7 trillion,125 and were generating some 10 per cent in interest per year prior to the 2008 credit crunch.126 Although their operations remain fairly secretive, it is thought that they have historically favoured index-linked blue chip investments in the developed world along with mature western real estate.127 Following the Dubai Ports crisis of 2006, when a government-owned Dubai company that had already purchased Britain’s Peninsula and Orient Steam Navigation Company unsuccessfully attempted to take over operations in several P&O managed ports in the US, most of the Gulf monarchies’ sovereign wealth funds have been careful to keep their stakes in western companies and multinationals relatively small in order to assuage fears that their investments are being used to gain political influence, and to avoid future xenophobic backlashes. As discussed later in this book, it appears that the funds have now branched out significantly into emerging markets and Pacific Asia, with Kuwaiti and Saudi Arabian funds in particular having poured billions of dollars into China. Soon it is likely that the value of these Pacific Asian investments will exceed those in Western Europe and North America.128

  By far the largest of the funds is the Abu Dhabi Investment Authority (ADIA). Founded in 1976, it had accumulated $100 billion in overseas assets by the mid-1990s129 and about $360 billion by 2005.130 Now symbolically housed in the tallest building in Abu Dhabi, it was estimated that ADIA controlled nearly $900 billion in assets in early 2008131 and now it probably has about $600 billion following some losses, especially in the US.132 The second largest and the eldest of the region’s funds is Saudi Arabia’s SAMA Foreign Holdings. Founded in 1960, it now holds over $400 billion in assets. The Kuwait Investment Authority (KIA), founded in 1963, was for many years the largest of the funds, but after the 1990 Iraqi invasion of Kuwait and the subsequent costly rebuilding programme a number of its assets were sold. Nevertheless it still stands at over $200 billion, making it the region’s third largest fund.

  The other Gulf monarchies have more modest funds, reflecting their smaller hydrocarbon surpluses. The Investment Corporation of Dubai for example, may have about $20 billion in assets,133 but this is unclear given some of the below-mentioned controversies regarding the Dubai government’s ability to make debt repayments. Bahrain’s Mumtalakat Holding Company and Oman’s State General Reserve Fund are even smaller, perhaps less than $12 billion134—and with depleting oil reserves they are unlikely to grow much further. Instead, the fastest growing funds are likely to be the more recently established Qatar Investment Authority—founded in 2006 and now controlling about $60 billion in assets given its access to substantial gas export revenues—and the numerous other sovereign wealth funds in Abu Dhabi that seem to operate in parallel to ADIA. Notable among these are the Mubadala Development Company, which was founded in 2002 under the umbrella of the emirate’s crown prince and which now controls about $15 billion in assets, and the much older International Petroleum Investment Company (IPIC), which has recently been rejuvenated under the stewardship of one of the crown prince’s brothers135 and now controls about $14 billion in assets.136

  Nonetheless, despite these substantial overseas investments, there has been a keen awareness in the Gulf monarchies of the need to diversify their economic bases, not only in an effort to reduce their vulnerability to the vagaries of the international oil markets, but also to generate employment opportunities for their fast-growing indigenous populations and to cope with some of the other mounting pressures discussed below. Initially most of the diversification efforts were concentrated on building up heavy, energy-reliant export-oriented industries, all of which relied on the competitive advantage of having cheap abundant energy supplied by the state. Unsurprisingly, it has been the resource-rich states, notably Saudi Arabia, Kuwa
it, Qatar, and the UAE’s Abu Dhabi that have led the way, often by developing petrochemicals, metals, fertilisers and plastics industries. In Saudi Arabia’s case the biggest player has been the Saudi Arabian Basic Industries Corporation (SABIC), which was established in 1976 to produce polymers and chemicals. Today it is one of the world’s largest exporters of such products, and is also the region’s largest producer of steel.137 Established in 1997, Saudi Arabia’s Maaden was originally focused on developing the country’s gold mines, but has since diversified into the manufacture and exporting of aluminium and phosphate.138 Six new ‘economic cities’ have been inaugurated too, the largest being the King Abdullah Economic City on the Red Sea coast. Containing both a seaport and industrial zone, it is intended to become an attractive, integrated hub for foreign direct investment in Saudi Arabia’s manufacturing sector.139

  Since the founding of the Shuaiba Industrial Zone in 1962, Kuwait’s heavy industries have followed a similar pattern of development.140 Most have concentrated on the exporting of petrochemicals, with others focusing on the production of ammonia, fertilisers, and cement.141 Some of these industrial projects have either stalled or collapsed, often as a result of the aforementioned vibrancy of debate within Kuwait’s parliament. Most notably, in 2008 a multibillion dollar joint venture between Kuwait’s Petrochemical Industries and the American Dow Chemicals—expected to position Kuwait as the world’s greatest producer of polyethylene—was cancelled.142 Qatar’s heavy industries have likewise concentrated on petrochemicals, fertilisers, and steel, with most activity taking place close to the main gas-exporting centres of Ras Laffan and Mesaieed. Most production is in the hands of Qatar Steel, the Qatar Primary Material Company, and Industries Qatar—which are second in the region only to SABIC. Abu Dhabi’s most prominent downstream industrial companies are Fertil (established in 1980 and co-owned by ADNOC and Total),143 the Abu Dhabi Polymers Company (established in 1998),144 and Emirates Aluminium (EMAL). The latter now operates the world’s largest aluminium processing facility on Abu Dhabi’s manmade Taweelah island.145 Over the next few years the sector is set to expand further, with both Mubadala and the Abu Dhabi Basic Industries Corporation (ADBIC) planning to build massive new aluminium plants.146 And by 2013 Abu Dhabi’s IPIC will have built a new Chemicals Industrial City: capable of producing 7 million tonnes per year of aromatics and ammonia derivatives, it will be the world’s largest such complex.147 The government has put its full weight behind these developments, having increased spending on industrial infrastructure by over 400 per cent over the past decade. By the end of 2012 it promises the completion of the $7 billion Khalifa Port and Industrial Zone on Taweelah148 and has committed a further $8 billion for other sector-specific infrastructure projects. A new unit—ZonesCorp149—has been set up to administer these new districts, provide organisational support, and build residential camps for labourers.150 Combined, it is expected that the new projects will account for 15 per cent of Abu Dhabi’s GDP by 2030.151

  In parallel to these heavy, energy-related industries, many export-processing zones have been set up in the region. Again there has been significant variation, with most being in the Gulf monarchies which no longer have the competitive advantage of abundant hydrocarbon resources. By providing integrated industrial zones, mostly geared towards small manufacturers and branches of foreign companies, these states have sought to attract foreign direct investment and kick-start import-substitution industries while also creating diverse employment opportunities for their citizens that are not directly tied to oil, sovereign wealth funds, or government services. Crucially, as specially designated ‘free zones’ in most cases they have allowed companies to circumvent the described kafala sponsorship system, and have thus proved popular with multinationals seeking bases in the region unrestricted by domestic legislation.

  The pioneer of this strategy is Dubai, which launched its Jebel Ali Free Zone in 1985. Within a few years the zone had attracted several hundred companies, many of them from Europe, North America, and Asia. In 2007 it even became the primary headquarters of the formerly Texas-based multinational, Halliburton. Since then Dubai has set up other zones, many of which have been sector-specific and similarly popular. In 2000 the Dubai Internet City and Dubai Media City were launched, respectively for IT and media-related companies. And in 2003 Dubai Healthcare City was set up to serve as a base for foreign medical companies and services, including the Harvard Medical School,152 while Dubai Knowledge Village was established to house branches of several international universities, most of which concentrate on offering postgraduate degrees to the emirate’s substantial expatriate population. Other UAE emirates, including Sharjah and Ra’s al-Khaimah, have followed Dubai’s lead, having established smaller versions of Jebel Ali. And elsewhere in the Gulf there has been the Bahrain Logistics Zone, the Salalah Free Zone in Oman, and the Qatar Science and Technology Park, among others.

  Similarly pioneered by the more energy-scarce Gulf monarchies have been the region’s tourism, financial, and real estate industries. With regards to tourism, Dubai was again the frontrunner, with dozens of luxury hotels having been built over the past fifteen years, including the iconic, seven star Burj Al-Arab. Since then millions of tourists have been attracted to the emirate, most of whom have favoured the winter sun, tax-free shopping festivals, and a range of sports and music events—many of which are world-class. In 2010 the government claimed that nearly nine million visitors had stayed in the emirate’s hotels.153 Some other Gulf monarchies have followed suit, notably Oman, Bahrain, Qatar, and Abu Dhabi, the latter having opened its lavish Emirates Palace hotel in 2005 and claiming to have hosted nearly two million tourists in 2010.154 Although Kuwait was the first Gulf state to develop a significant financial sector, it was really Bahrain that set up the region’s first international financial centre—now housed in Manama’s Financial Harbour. Established in 2004, the Dubai International Financial Centre signalled the UAE’s first major attempt to challenge Bahrain’s position. Envisaged as a potential bridge between the time zones of other leading financial centres such as London, Hong Kong, and Singapore, the DIFC has also served as something of a free zone, with multinational financial companies locating their Middle East branches within its jurisdiction. More recently, recognising the economic benefits and prestige associated with hosting such centres, other Gulf monarchies have also attempted to develop financial hubs, albeit along more limited lines. In 2005 the Qatar Financial Centre was set up, primarily to provide a link between energybased companies and global financial markets. And in the near future Abu Dhabi’s presently modest financial centre will move to a much larger Mubadala-constructed campus on Sowwah Island.

  More problematic has been the nascent real estate sector. For some years it was a major contributor to the non-oil related GDP of several Gulf monarchies, but following the 2008 credit crunch the sector contracted sharply due to limited credit and considerable oversupply. As the pioneer, having allowed foreign nationals to purchase real estate since 1997 on the murky basis of long leases and then ill-defined freehold status,155 Dubai has since experienced the greatest reversal of fortunes, with its over-extended real estate sector and more than $170 billion in cancelled projects156 now likely to hamper the emirate’s economic development for years to come. The tipping point came in late 2009, when its largest real estate developer—Nakheel—was unable to service substantial debts. This led to plummeting international confidence in the government of Dubai’s ability to rescue state-backed developers, with the situation only stabilising following a substantial $20 billion loan package from Abu Dhabi.157 Symbolically, Abu Dhabi’s assistance appeared to be delivered with political strings attached, as when Dubai’s much vaunted Burj Dubai—the world’s tallest skyscraper—was finally opened in early 2010, its name was abruptly changed to Burj Khalifa to honour Abu Dhabi’s ruler, Khalifa bin Zayed Al-Nahyan. Recent indications are that Dubai remains in trouble, with even the ruling family-backed Dubai Holdings having had to restruct
ure $2.5 billion of debt in early 2012.158 Meanwhile other Gulf monarchies have also experimented with real estate, although on a much smaller scale, with both Bahrain and Qatar launching projects in recent years, Oman seems to have gone furthest in supporting full freehold ownership for foreigners, following fresh legislation in 2006.159

  As with the variance in hydrocarbon exports and sovereign wealth funds, the numerous diversification efforts and their relative performances have further underlined the important economic differences that now exist between the Gulf monarchies. The non-oil sector in resource-scarce Bahrain now accounts for nearly 90 per cent of its GDP,160 while in the UAE’s case it is approximately 70 per cent, mostly as a result of Dubai’s efforts.161 In contrast, the non-oil sectors in Saudi Arabia and Oman account for about 55 per cent of GDP,162 and in both Kuwait and Qatar the non-oil sectors account for less than 50 per cent of GDP.163 The varying levels of foreign direct investment in the Gulf monarchies also reflect the differing approaches to diversification, with Saudi Arabia’s economic cities and other developments being responsible for attracting close to $193 billion in investments in recent years, and with the UAE’s various projects—again mostly in Dubai—having attracted $76 billion. In comparison, both Qatar and Bahrain have attracted less than $20 billion in foreign direct investment, while Kuwait—again encumbered by political instability—has only managed $130 million in investments.164

  Overall, the significant economic differences between the six states are clearly reflected by the widening gap in GDP per capita in the region. With a total population of less than one million and with substantial gas exports and sovereign wealth, Qatar’s GDP per capita now stands at $179,000—the highest in the world. Although more modest, with a population of about five million, the wealthy UAE also has a high GDP per capita of about $50,000, which is about the same as Kuwait, which has a population of just over 2.5 million. At the lower end of the scale, resource-scarce Bahrain, with a population of 1.2 million, has a GDP per capita of $40,000, while Oman, with a larger population of three million only has a GDP per capita of $25,000. Despite its sizeable hydrocarbon revenues and large sovereign wealth funds, Saudi Arabia’s GDP per capita is now actually the lowest in the region—$24,000—mostly due to its considerably larger population of 27 million.165 This means that the Gulf monarchies, despite so many obvious similarities, are becoming an increasingly unusual cluster of countries with half of the group being well within the world’s top ten—in terms of GDP per capita—while other members remain firmly outside the top fifty, and can at best be considered middle income economies.