Mubadala Development is building a major gas terminal in Fujairah to eliminate the need for gas tankers to pass through the Strait of Hormuz.
On completion of the terminal, which Mubadala - a strategic investment company owned by the Abu Dhabi Government - expects by 2014, liquefied natural gas (LNG) tankers from outside the Gulf will be able to deliver their cargoes to Abu Dhabi without using the waterway that separates the UAE from Iran.
In recent weeks, Iran has threatened to close the Strait of Hormuz in response to economic sanctions imposed by the European Union and the United States.
Experts predict that the price of LNG will rapidly rise if the Strait of Hormuz is blocked. The bulk of LNG is sold in long-term contracts that are linked to oil prices.
Crude prices have soared since the latest tensions with Iran began and would rise further if the export route for 20 per cent of all traded oil became impassable. Because of the prominence of Qatar in the LNG market, about a third of all LNG shipments pass through the strait.
The project is run by Mubadala Oil & Gas, the subsidiary focusing on energy investments.
"Mubadala Oil & Gas can confirm it is working on a project with the aim of securing additional gas supplies to meet energy demand from the UAE's growing economy through the development of an LNG receiving facility located in the emirate of Fujairah," the division said.
The terminal highlights the growing demandfor gas in the UAE.
Natural gas is the primary feedstock used in power plants across the UAE and the Gulf, and also has increasing use in energy-intensive industries such as steel production and petrochemicals.
"There is a shortage expected in the UAE in the coming years. There is a growing discrepancy between domestic supply and demand, driven especially by electricity needs," said George Sarraf,a vice president at the consultancy Booz & Company.
Dubai has already built a floating LNG terminal at Jebel Ali and imports gas to cover its needs when electricity demand peaks during summer. Kuwait is also resorting to LNG imports to supply its power plants, and Bahrain and Oman are looking at importing gas.
Mainly because of the rapid growth in electricity consumption, the GCC has a gas shortage of about 46 billion cubic metres a year, according to a study last year by the Oxford Institute for Energy Studies.
The UAE imports gas from Qatar via the Dolphin gas pipeline, in which Mubadala holds a stake. But the pipeline is operating at only two thirds of its capacity because Qatar has so far refused to commit more gas to the UAE at prices far below what the world's largest LNG exporter fetches on the international markets.
Abu Dhabi, which exports LNG to Japan under long-term contracts, has taken steps to avert a gas shortage by starting to develop domestic sources of sulphur-rich, or sour, gas.
The US company Occidental won the contract to develop the Shah sour-gas field, which is set to start producing by 2014. A second sour-gas project at Bab is also likely to proceed.
Removing sulphur from domestic natural gas is expensive and puts pressure on the Government to raise tariffs for electricity and gas sold to industry.
"The input price, whether it comes from domestic sources or imports, is creating more pressure on the system to raise the price of gas, and therefore the price of power," said Mr Sarraf.
The production of unconventional gas in the US, and additional sources of gas in places such as East Africa, have freed up supplies of LNG. But demand will have caught up with additional supply within the next five to six years, estimates Mr Sarraf.
The technical feasibility of the terminal has already been established, and it could be an import facility by 2014. The terminal is to be built in two phases and have a total capacity of 1.2 billion standard cubic feet of gas per day, according to Bloomberg News.
"The project engineering phase has now commenced with the aim of delivering first supplies in the next 2-3 years," said Mubadala.
The International Petroleum Investment Company, another state investor that is building a refinery in Fujairah and owns a crude pipeline that connects Abu Dhabi's onshore oilfields with the northern emirate's emerging crude transport hub, is also involved in the project, writes Bloomberg News. The company did not respond to requests for comment.