Strategy Note /

UAE-Qatar: Gas finds make detente less likely

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    3 February 2020
    Published byTellimer Research

    The UAE has announced new conventional natural gas discoveries in recent months, which potentially expand its proven reserves by c65%. If commercial production ultimately were to match this expansion, then this could establish self-sufficiency in gas (even allowing for continued consumption growth) and eliminate the need for imports of gas from Qatar via the Dolphin Energy pipeline (which cater for c25% of UAE gas consumption). This may have two medium-term regional implications: a less likely detente between the UAE and Qatar, and more gas supply for Oman.

    UAE-Qatar relations

    This may give the UAE even less incentive to repair its diplomatic and trade relations with Qatar (which is negative, albeit not a new negative factor, for Qatar and regional hub Dubai). The cause for this rift is mainly geopolitical division (in terms of policies regarding the Muslim Brotherhood, Egypt, Iran, Libya and Turkey). The trade link via gas may have incentivised the UAE to countenance a long-term normalisation of relations in the event it sees sufficient compromise by Qatar on these areas of disagreement. 

    See Qatar: GCC split is about regional risk, not Qatar alone, 7 June 2017, and Dubai dichotomy: completed real estate vs Emaar off-plan, 2 January 2020. 

    Oman supply of gas

    This may free up capacity in the Dolphin Energy pipeline to supply more gas to drive industrial growth in Oman, which currently consumes 70% of its gas production (and exports the remaining 30% mainly to South Korea and Japan on long-term contracts). The Dolphin Energy pipeline extends from Qatar to the UAE and then through to Oman, but Oman currently receives merely 10% of the Qatari gas pumped through it. Should Oman receive all of the current flow of gas through Dolphin, this would increase its gas available – obviously with the associated cost – for domestic use (ie non-export) by c80%. 

    See Oman: New Sultan faces serious challenges, 11 January 2020. 

    Question mark over UAE gas output growth 

    There is uncertainty over how well UAE gas production growth might match its recent reserves growth. In the past, the UAE has not achieved self-sufficiency in gas because of:

    • Rapid consumption growth (economic development and population growth); 
    • Use of about 25% of its gas for enhanced oil recovery (gas is injected into the oil field to increase oil output); and 
    • High sulphur content of much of its gas (which has historically required costly and inefficient processing to turn it into commercially viable gas).

    Equities in neither UAE or Qatar are that compelling: Cheap Dubai stocks for choice

    MSCI UAE is up 3% in the last 12 months (driven by banks FAB and DIB, as well as real estate plays ALDAR and EMAARMLS, outweighing the drag from bank ADCB, telco ETISALAT and port operator DPW). By contrast MSCI Qatar is down 5% (driven down by petchem IQCD and utility QEWS outweighing the positive performance of banks like QNBK, QIBK, MARK, CBQK, and QIIK).

    There is someway to go for MSCI UAE to close the valuation gap relative to historic average multiples. MSCI UAE is on a 20% and 12% discount to the 5-year median PB and PE, respectively. MSCI Qatar is on c7% premium to the 5-year median PB and PE. 

    Across the more liquid parts of the UAE and Qatar equity markets, we see a struggle for a combination of compelling value and growth: 

    • "Dubai-hub" stocks, in pockets, are offering the most attractive valuation, but are generally suffering from anaemic global growth, pressures on regional high net worth capital, uncompetitive cost of living, and, near-term, from coronavirus risks to travel;
    • "Abu Dhabi Inc" stocks are at risk of restrained public spend in a lower oil price environment; and
    • "Qatar Inc" stocks are either exposed to excess real estate supply risks and a construction overhang once the FIFA World Cup ends in 2022, or are not exposed directly enough to the planned resumption of gas output expansion.