The Crown Prince Sheikh Mohammad bin Zayed al-Nahyan wants to develop other revenues, including tourism, before its oil resources are used up. Abu Dhabi currently has 9.2 percent of the world's proven reserves, the Times of London reported.
The deal is a coup for Abu Dhabi at a time when Arab states all want to become tourist destinations.
The state has no public art galleries and little experience in Western art. The Guggenheim's director, Thomas Krens, said curators would remove works that might offend Islamic sensibilities such as nudes, but thought few would be affected.
Frank Gehry, the architect who designed the Guggenheim in Bilbao, Spain is commissioned to create a dramatic new building that rivals his previous achievements.
"I don't think I have to be conservative because they're asking for something really special," Gehry said.