The UAE is racing to diversify its economy away from hydrocarbons — and British companies are playing a starring role. Martin Clark reports.

The United Arab Emirates (UAE) is a federation of seven emirates located along the Middle East Gulf. Sandwiched between Oman to the east and Saudi Arabia to the south, the country also shares maritime borders with Qatar to the west and Iran to the north.

A federal absolute monarchy, the two best-known emirates are cosmopolitan city Dubai and its oil-rich neighbour Abu Dhabi. Both have developed an increasingly international profile in recent years, playing a key role in driving trade and investment between the region and the rest of the world.

This is no better reflected than in the UAE’s estimated 10 million population, of which only around 1.5 million are actual Emirati citizens, the rest being expatriates. Like other parts of the Gulf, the UAE (also known as the Emirates) attracts many skilled personnel from Europe and other parts of the world, but also invites huge numbers of manual workers from India and across South Asia.

The other, lesser known emirates comprise Umm al-Quwain, Ajman, Sharjah, Ras al-Khaimah and Fujairah, although these have also emerged as important trading hubs in their own right in recent times.

Today, parts of the UAE, notably Dubai, have become global hotspots for tourism, commerce and shopping to rival any other major international destination. It is a remarkably swift accomplishment too, with the UAE only declaring independence from the UK and uniting in 1971; the two countries remain very close allies. Just a few decades before that, this was little more than a fishing territory for the tribespeople that had settled there a century or so earlier.

Oil production

But it is oil and gas that have underpinned this meteoric rise to prominence during the last few decades, and continue to propel the country forward. The UAE is now among the world’s 10 largest oil producers and a member of the Organisation of the Petroleum Exporting Countries (OPEC), as well as the more recent Gas Exporting Countries Forum (GECF).

Proven oil reserves stand at about 98 billion barrels, ranking it seventh in the world league table, according to the US Energy Information Administration. Current production stands at about 2.8 million barrels of oil per day but there are plans to raise this to 3.5 million barrels daily by 2020, with a huge investment programme now underway, involving multinational investors and local entities.

It is an industry almost entirely concentrated in Abu Dhabi, which holds more than 90% of the nation’s total reserves, and is the headquarters for influential state oil champion, Abu Dhabi National Oil Company (ADNOC), which operates multiple subsidiary firms.

Indeed, Abu Dhabi is by far the largest of the seven emirates in terms of scale, making up about 87% of the country’s mass, with a mostly desert landscape that has seen a huge amount of oil drilling. Increasingly, this has also shifted offshore (Abu Dhabi also boasts more than 200 islands) in the quest to ramp-up oil output.

Energy strategy

Abu Dhabi is also a significant gas producer too, both to meet rising local demand and also sending shipments of chilled liquefied natural gas (LNG) to markets in the Far East.

This has become something of a priority area in recent years as local demand has outstripped supply, forcing the UAE to source more imports from other Gulf territories, notably Qatar, via the cross-border Dolphin Energy pipeline. Again in 2010, the Jebel Ali LNG terminal in Dubai was opened to bring in more foreign gas to meet soaring demand from industry, the residential sector and the power sector.

Given the UAE’s own huge gas reserves, and its historical position as an LNG exporter to Japan and other markets, this was deemed something of an embarrassment, with Abu Dhabi unable to meet local needs.

It means ADNOC has prioritised in the last few years the expansion of new gas production facilities and the roll-out of more pipeline infrastructure. The national oil champion is now pioneering in the development of more complex gas fields, such as the Shah gas project, which aims to tap into toxic sour gas reserves.

The longer-term energy strategy for the UAE, however, is to move into non fossil fuel areas, such as renewables and nuclear power.

Abu Dhabi again is leading the drive to expand renewable energy capacity. In 2012, it was selected as the world headquarters for the International Renewable Energy Agency (IRENA), a major coup for the emirate and another marker to put the UAE on the world map.

At the same time, to underpin power demand for many decades to come, the country is looking to commission four nuclear plants with a massive 5.6 gigawatts capacity, which would also erode demand for gas imports.

Services economy

In addition to the hydrocarbon economy, the UAE has become one of the world’s most important financial centres and is a major trading hub in the Middle East.

As a close ally to the UK, the UAE is also expected to be keen to bolster relations in the post-Brexit era, an idea welcomed by British Prime Minister Theresa May at the World Economic Forum in January. British ministers and officials have made several visits to the Gulf region since the Brexit vote last June, and the UAE has been high on their priority list.

Certainly, the scope for further trade between the two countries is immense.

Investment in non-energy sectors, such as infrastructure and technology, along with a lucrative but volatile real estate sector, continue to provide the UAE with insurance against oil price swings and fragile economic growth.

Activity in the country’s housing and commercial property sector has been relentless, especially in Dubai — and it continues, despite the ups and downs of the market. Earlier this year, UK-based contractor Kier Group said it had secured a £75m contract in Dubai to deliver a new staff accommodation project on behalf of Nshmi, a local developer. This project is being funded via support from UK Export Finance.

And in the glitzy tower blocks of Dubai, there are further plans for the shifting of the established world commercial order, as business moves from the west, out of Europe and North America, and into the east, as India and China power ahead.

All of these moves underscore the government’s desire to further diversify the economy away from hydrocarbons in a bid to secure the UAE’s long-term future.

Global hub

The UAE’s transport sector alone has seen incredible investment in recent years. It is estimated that a third of the world’s population live within a four-hour flight of the UAE, and two-thirds within an eight-hour flight — which explains why a country with such a modest population has seven international airports.

Year-on-year, Dubai International Airport’s passenger and cargo traffic increases by between 10–15% and it is predicted to soon overtake Heathrow as the world’s busiest airport.

A similar high-level growth is also being seen in the freight segment.

The newer Al Maktoum International Airport aims to service by 2050 a staggering 220 million passengers each year. Across the border, Abu Dhabi’s International Airport is also catering for rising traffic and seeing continued investment.

Flag carriers Etihad and Emirates have also become heavyweights among the world’s airlines, leveraging the UAE’s excellent geographic position and infrastructure.

It is a similar story in the maritime industry with four hugely popular ports in the UAE: Jebel Ali, Khalifa and Ras Al Khaimah Ports (on the Gulf Coast) and Fujairah Port, just outside the Strait of Hormuz.

Indeed, the Jebel Ali Free Trade Zone is the largest in the world and hundreds of British companies have a base at the facility because of its ease of access and connections. They include Unilever, where it operates its largest tea packing facility, and temporary power plant provider, Aggreko.

Away from these main hubs, Khalifa and Ras Al Khaimah’s ports are also important and growing trade routes for these emerging emirates.

And a lot of investment has gone in the other direction too. DP World, for example, which operates Dubai’s ports, acquired P&O Ports and spent £1.5 billion developing London Gateway with the aim of making it the busiest container terminal in Europe.

Into the future

Awash with oil money, Abu Dhabi in particular has blazed an investment trail across the world in recent years, including some very high-profile ventures.

These include the takeover of English soccer club Manchester City by Sheikh Mansour, a member of the Abu Dhabi ruling family, with a net worth estimated at $17 billion; the family’s collective net worth is estimated at more than $1 trillion.

This wealth is making a visible impact with the club now playing in the renamed Etihad Stadium and achieving success on the pitch with the windfall bringing in new players.

And yet, so far, it is not yet able to restore the country’s high-growth rates seen when oil prices were riding high. The collapse of oil prices in the past couple of years has hurt the UAE, like all other major oil and gas producers in the Gulf and elsewhere and recovery is proving tricky.

The UAE’s economy is expected to grow at 2.3% this year, according to the latest data from the Central Bank, a little less than the 2.6% rate for 2016.

The hope is that as trade, finance and services grow, and as Dubai, Abu Dhabi and the other emirates further establish themselves on the global commercial map, the country will be able to power ahead regardless of future commodity market fluctuations.

It’s certainly something that tourists have picked up on, with many thousands of British visitors heading for Dubai’s guaranteed sun and easy living each year, and more starting to discover Abu Dhabi and the other territories.

These are heady days for the Emirates as it redefines itself and its place on the world stage — and the UK is well placed to play a role in the future look of this small, but dynamic and strategically vital nation.

Last reviewed 8 May 2017