Cooperation between the UAE and in the Oil Market: Can it go beyond Political Considerations? Nikolay Kozhanov

Gulf Insights Series Nº 38 – November 2020 Gulf Insights Nº 38 – November 2020 Cooperation between the UAE and Israel in the Oil Market: Can it go beyond Political Considerations? Nikolay Kozhanov

Introduction tonnage of tankers able to pass it while the existing political regime in is The Israeli-Emirati Memorandum characterized by a certain degree of of understanding and cooperation on instability. The alternative route implies the use of storage capacities and the need to circumnavigate the African pipeline infrastructure of Israeli Europe- continent, which increases the delivery Asia Pipeline Company (EAPC) (first of time and transport costs accordingly, all, the Eilat- oil pipeline) will although allowing the use of tankers of undoubtedly benefit both Abu Dhabi a larger tonnage. As market analysts and . However, this agreement sometimes joke, for the Arab is unlikely to have a strong impact on monarchies of the Persian Gulf, the the oil market currently stated by the Cape of Good Hope gives no hope. signatories. Under these circumstances, the Israeli The agreement on normalization pipeline infrastructure provides a of relations signed between the UAE certain alternative to both the route and Israel in September this year is bypassing Africa and the , gradually becoming the cornerstone of thus, helping exporters save time and the legal and contractual base for the cut freight costs, as well as reduce the development of the future Israeli- political risks associated with the Emirati relations. During the bilateral internal situation in Egypt. The Eilat- business summit held in Abu Dhabi in Ashkelon pipeline's capacity in the the second half of October 2020, the European direction is estimated at 1.2 two countries managed to sign a million barrels per day. If the UAE number of important documents, provide Israel with promised including a Memorandum on the use investments into the pipeline and development of the EPAC oil and development, this figure can even be oil products infrastructure. According to increased in the future. In addition to the the Israeli and Emirati press, this step pipelines themselves, the UAE will also should open the UAE wide access to get access to oil storage facilities in Eilat the European oil market. However, such (8.8 million barrels) and Ashkelon (14.5 statements may still be somewhat million barrels), which, in theory, will inconsistent with reality. contribute to more effective regulation of Emirati oil supplies to the European Can It Fly? market. Finally, the pipeline system has links to Israeli refineries in and Indeed, at first glance, the Eilat- , which potentially makes Tel Ashkelon pipeline provides the UAE Aviv one of the potential consumers of with a number of important advantages. Emirati oil. Traditionally, when exporting oil to European and American countries, Not Really… geography was the curse of the Gulf oil producers: the Suez Canal has a limited However, in practice, the capacity in terms of the number and prospects for using the above- 2

Gulf Insights Nº 38 – November 2020 mentioned opportunities by the much the UAE will be able to save on Emirates are much more limited. logistics. Significant savings on the Indeed, either due to the market operation of pipelines like Sumed or situation or some political concerns, Eilat-Ashkelon are possible for the GCC Israel is actively diversifying the sources states when the country has an oil of its oil supply, moving away from the loading infrastructure on the exclusive reliance on the oil imports (such as the Saudi Yanbu terminal). from the Kurdish regional government. Otherwise, the benefits are somewhat This opens up certain opportunities for reduced. the UAE to enter the Israeli market. However, in terms of capacity, it is not What’s It All About? so large, and the level of profitability leaves much to be desired. Moreover, The practical effect of the Emirati there are other players who wants to access to the EAPC infrastructure will dominate it, including, for instance, be much less than the declared one. It Russia. will be fair to notice, however, that the An even bigger question is UAE can have certain interest in using whether the UAE actually needs the not the oil pipeline but the other EPAC Israeli pipeline for the transit of its oil transport infrastructure for the transit of exports to Europe and does it have Emirati oil products to Europe and enough customers in the EU to fill it in. America, the stable UAE customers. It is important to keep in mind that the Yet, even in this case, the potential region already has the infrastructure to export volume is small and cannot bring pump a much larger volume of oil much profit: 100 – 160 thousand barrels without using the Suez Canal of per day. Another potential benefit for the navigating through the Cape of the UAE is connected to the fact that Eilat- Good Hope. Moreover, the UAE owns a Ashkelon pipeline runs in both 15% stake in the company that controls directions. Thus, the Emirates gets this pipeline. We are talking about the control over the flow of oil that can come Egyptian Sumed oil pipeline connecting from the US and Europe (Black sea and Ain-Sukhna oil facilities at the Red Sea Caspian regions) to Asia. with Sidi-Kerir infrastructure at the However, Israel receives far Mediterranean. However, at least since greater benefit as with the UAE May 2018, Emirati oil has not been participation it will be able to use this delivered via this route due to limited pipeline in many ways more openly. supply volumes exported by the Previously, information about the Emirates to the EU. Currently, the deliveries that passed through Eilat- European direction is not a priority for Ashkelon pipeline and the names of the the UAE oil producers. Their main parties in whose interests they were market is in Asia that accounts for up to carried out was classified. On the one 98% of deliveries. Currently, there are hand, Israeli clients feared the wrath of no prerequisites for a significant Iran that owned 50% of this pipeline's reorientation of the Emirati oil exports to shares before the Islamic revolution of Europe. 1979. Tehran was extremely unhappy Apart from the question on the that Israel expropriated its stake in the Eilat-Ashkelon pipeline’s feedstock, 1980s. On the other hand, until recently, there is also no consensus on how there was an unspoken warning from

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Gulf Insights Nº 38 – November 2020 the United Arab Emirates and Saudi pressing regional issues written by the Arabia that tankers exporting oil and GSC/GSP faculty, staff PhD and MA petroleum products from Eilat should students, as well as guest scholars, and forget about access to the oil terminals they can be between 1,200 to 1,500 of the Arab monarchies. Now, at least words. from the Emirati side, the ban will be All articles published under “Gulf lifted, meaning that business can be Insight” series have been discussed done relatively openly. internally but they reflect the opinion and views of the authors, and do not How is to benefit? reflect the views of the Center, the College of Arts and Sciences or Qatar All in all, the main effect from the University. Emirati-Israeli MoU remains political rather than economic. For the first time, a GCC country gained access to Israel's oil infrastructure. It is probably expected in Israel that this should symbolize the clear benefits of establishing ties with Tel Aviv for the Arab States and encourage other countries to follow the example of the UAE. Consequently, the main beneficiary is not the Arab Emirates, but Israel and the United States whose leadership stays behind the Israeli-Emirati agreement on normalization of relations. Only time will tell how great the benefits from this documents will be for Abu Dhabi.

About the author:

Nikolay Kozhanov is a Research Associate Professor at the Gulf Studies Center, Qatar University. He is also a non-resident fellow at the Middle East Studies Center of the Institute of World Economy and International Relations (IMEMO) under the Russian Academy of Science.

About the Gulf Insights series:

The "Gulf Insights" series is published by the Gulf Studies Center on a weekly base with the aim to promote informed debate with academic depth. The Gulf Insights are commentaries on

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