By Neil Barnett.

One of the curious features of the six Gulf Co-operation Council (GCC) countries is the low level of intra-GCC trade; they mainly sell oil and gas outside of the GCC, and import goods and services from outside the GCC, but do remarkably little trade with each other. This tends to limit the potential for further integration of the GCC into a regional trading bloc, as without significant trade between member countries, there is little incentive to harmonise taxes, tariffs and regulations.

The $8-10 billion Dolphin pipeline project, which will bring natural gas from Qatar's North Field to Abu Dhabi and Dubai in the UAE, and then on to Oman, and subsequently Pakistan, is therefore a major step towards better GCC co-operation and trade. Its impetus comes from the government of the UAE through the UAE Offsets Group (UOG), which is increasingly diversifying away from pure defence offsets. Funding will come from governments, private-sector partners, equity offerings and debt.

Like any pipeline project, Dolphin joins a gas surplus with a gas deficit. Qatar has the third-largest natural gas reserves in the world, with at least 380 trillion cubic feet, overwhelmingly found in its massive offshore North Field. It has two liquefied natural gas (LNG) plants, but still has plenty of capacity to export more. Dubai, Abu Dhabi, Oman and Pakistan, meanwhile, all face rapidly growing gas demand for utilities, industry, oilfield re-injection and, to a small extent, domestic use (see demand projection table). Most independent gas demand estimates agree with Dolphin's projections or exceed them.

The sheer size and ambition of the project has attracted great media interest in the Gulf, helped by a slick public relations operation (see www.uaedolphin.com). The project was launched to the public in March 1999, and is still in its initial stage. The main effort now is bringing in governments and the private sector as strategic partners, as Hatem Fawzy, Dolphin's Egyptian-born director, emphasises: "We have been making Dolphin known in the public domain and sharing our vision with governments in the region. Now we are at a stage where we are very close to finalising strategic partners...and when all of these are in place negotiations will begin to take forward initial agreements." He cannot give an estimated date for gas to start flowing from Qatar to Abu Dhabi, but that may seem prudent given the level of complexity involved. "When these agreements are signed then there will be more definition, clear timelines and we will then communicate our contract strategy."

So far most of these strategic agreements exist in memorandum of understanding (MoU) form. Qatar General Petroleum Corp (QGPC) has signed a 'statement of principles' to supply three billion cubic feet/day of natural gas. In recent months all of the main gas users have also signed MoUs. The Abu Dhabi Water and Electric Company (ADWEC), which faces increasing demand for electricity and water desalination, signed an MoU on 16 November making Dolphin its exclusive gas supplier. ADWEC currently uses around 700 million cubic ft/d, which is expected to grow to at least 1.1 billion cubic ft/d by 2005. Industry sources suggest that piping gas from Qatar to ADWEC will be cheaper than taking local gas from the Abu Dhabi National Oil Company (ADNOC), which is sour and requires treatment and expensive corrosion-proof pipes. The Dubai Supply Authority's MoU covers 200-700 million cubic ft/d, and the government of Oman's 300m-600m cubic ft/d.

The second phase of Dolphin, not included in the $8-$10 billion figure, should see the pipeline extended from Oman to Pakistan. The government of Pakistan has signed a MoU for 1-1.5 billion cubic ft/d. However, the sea between Oman and Pakistan, unlike the shallow Gulf waters, is very deep with an irregular seabed, making construction and maintenance of a pipeline a daunting proposition. The projected cost of this is $3 billion, but Dolphin is confident that technical challenges can be overcome.

The UOG has also signed an 'initial gas supply contract' with Mobil Oil Qatar, with an option to participate in Qatar's enhanced gas utilisation project. Several more companies are expected to become partners at the secondary level. Some in the oil and gas industries are hesitant in their enthusiasm for Dolphin because they do not see how profit will be distributed along the whole upstream, midstream and downstream chain. Again Hatem Fawzy points out that it is too early to release such details to the industry, but that "every element of the project will be economically viable in its own right, and we do not need one piece to support the other".

As part of the drive to create sustainable wealth, the downstream part of the project also envisages 'industrial clusters' of energy-intensive industries along the pipeline's route. Here the involvement of the UOG is especially felicitous, as it is handling several such industrial developments. These include Sina'at, a petrochemicals and basic industries plant, and Tabreed, an Abu-Dhabi-Dubai joint venture in industrial cooling systems. It is also expected that the easy availability of cheap gas will attract more industry, further increasing demand, as seen in the proliferation of aluminium smelters in the Gulf.

Dolphin may also bring significant political benefits for the smaller states of the southern Gulf. Qatar, Oman and the UAE have, in varying degrees, impressive arsenals of modern weaponry, yet their very small size compared to potential adversaries means that a purely military approach to security is unlikely to prove adequate. In addition, these states must improve their bonds with regional and international allies so that, in the event of trouble, their situation will not be regarded with indifference. One of the surest ways to achieve this is to deepen economic links, giving other countries a direct interest in their security. The UAE's ongoing negotiations with the US for 80 F-16 fighter aircraft, valued at $8 billion, reminds the US that the UAE is an important partner, and not to be forgotten. The offset system, which obliges defence contractors to invest in the local economy, further deepens links.

The Dolphin project may improve this inter-reliance at the regional level, but perhaps the obvious potential aggressor - Iran - poses less of a threat to southern Gulf states than is sometimes thought. Iran has an antiquated arsenal and no credible way to bridge the Gulf, especially with the US Fifth Fleet in the way. The local behemoth Saudi Arabia, although it has ongoing border disputes with Qatar and the UAE, is even less likely to display aggression towards its neighbours. This is fortunate, since there are no natural barriers between it and the UAE and Qatar. But if the present order in Saudi Arabia were to change as a result of popular disgruntlement - living standards have plummeted in the last 20 years - its successor might seek to export its brand of government to its smaller neighbours, at the same time easing its economic problems by increasing its access to oil and gas. It is this scenario that concerns the southern Gulf states. Furthermore, Saudi Arabia's recent rapprochement with Iran has done little to improve confidence, especially in the UAE, which has an ongoing dispute with Iran over the occupied Gulf islands of Abu Musa and the Tunbs.

The Dolphin project is reputedly under the personal patronage of Sheikh Mohammed bin Zayed Al Nahayan, the chief of staff of the UAE's armed forces. Oil and gas matters are normally the province of the crown prince, Sheikh Khalifa bin Zayed Al Nahayan, and the involvement of Sheikh Mohammed may indicate the wider significance of Dolphin.

Furthermore, while the UOG is undoubtedly involved as a result of its experience in managing large projects, Dolphin fits well with its brief to fuse economic development with security in the wider sense. However, Hatem Fawzy dismisses the suggestion that defence contractors will be offered the opportunity to meet their offset commitments by investing in Dolphin. "Contractors are rewarded for making things happen. We do not need them to make this happen. Gas industry players will play an active role in running Dolphin and contributing equity." he said.

The Dolphin project has its sceptics, but then so did Dubai's phenomenally successful Jebel Ali port in its early years. It is hard to see how Dolphin could fail. First, and fundamentally, the market for gas in the UAE, Oman and Pakistan is growing strongly, and a solution to this must be found. Second, the political will behind it is very strong, and in the case of Abu Dhabi is backed up by estimated reserves of at least $150 billion. There are indeed some dubious schemes at large in the Gulf, but the Dolphin project, at least, is more than just gas.