Paying the price for economic stability
- Egypt's gulf of Suez concessions [17,609 bytes]
- Rigs in the Mediterranean and Central Asian region [31,135 bytes]
- India's licenses on offer [5,054 bytes]
The Middle East is the wealthiest region of the world in terms of oil income. However, the source of this wealth has been declining in value over the past year. Too much reliance on oil as the primary income base has left the countries of the region teetering on economic depression. And, with a major lack of cash reserves, most of which were used during the last oil bust, governments are scrambling to figure out ways to stabilize flagging economies.
Middle EastOnce the king of oil producing countries, Saudi Arabia, has seen its GDP plummet. Regardless of the severity in price collapse, the Saudis still have several options that leave them in a better position than most of their neighbors. The country's strongest position comes from its status as the lowest cost producer. This has allowed the country to compete on a price basis rather than production in the world market. Other alternatives, albeit drastic, include breaking its OPEC-installed production barrier.
- With the low cost production, the country could flood the market to capacity to compensate for its shortcomings caused by the drop in price.
- Another alternative would be the re-opening of its oil industry to foreign investment, which has been closed since the 1970s. This is also considered a highly unlikely scenario, and the government, which has recently had talks with foreign officials and companies, has made no official plans to open its industry.
Most of the Middle Eastern countries are blaming the current oil problems on the Saudis. Both Iraq and Iran have pointed the finger of blame at the kingdom for the drop in oil price. Iraq, in particular, has demanded that OPEC increase the Saudis production cut by an additional 1.5-2.0 million b/d of oil. The Iraqis also have claimed that the Saudis have used their export capability to coerce other OPEC members to comply with their demands.
More investment neededIraq has been hit extremely hard by low oil prices. The country is already under UN sanctions limiting its exports of oil to $5.2 billion over six months and production to between 2.5-2.6 million b/d. But the country maintains that times are so bad that it can only produce barely over $3 billion. Under its "oil for food" program, which ends in May, the country plans to target exports of 2 million b/d - a target the country feels they will be lucky to hit due to problems maintaining equipment, which it blames on the US and Britain. The country was producing 3.5 million b/d before it invaded Kuwait in 1990 and has estimated that in order to meet this capacity again, an additional $1 billion in investment will be needed.
Iran, on the other hand, is better off than most of its neighbors along the Persian Gulf. For the past several years, the country has focused on increasing non-oil exports and has had moderate success. This has added a modicum of insurance to the country's coffers to deal with oil price fluctuations.
Regardless, Iran retains a strong focus on oil. It has said that the country will need an average of $4 billion/year in investments for the next 20 years to keep oil production at the current level. To meet this demand, the country has allocated $5.4 billion for the National Iranian Oil Company (NIOC) to finance projects through the first quarter of 2000. This allocation is in accordance the country's heavy promotion of its "buy-back" projects.
The buy-back allows foreign companies to operate a concession until a set time, usually when production commences, at which time the government will reimburse the company for its work at a premium. This procedure is used to get around a law forbidding foreign equity in hydrocarbon fields. Iran offered some 40 onshore and offshore buy-back projects in July. One of these projects was recently signed by a consortium, which includes Shell and Lasmo for areas in the Caspian.
Kuwait has looked to outside help to compensate for its economic problems. The Oil Minister has invited foreign oil companies to develop its northern and western areas on a non-ownership basis. The country has already had talks with Chevron and Shell regarding these prospects. The government estimates that an investment of $7 billion would be needed to develop only the northern oil fields that would double the country's current output to 900,000 b/d. No estimates have been made on the western fields.
More focus on gasGas has also been an increasing focus of many Middle Eastern countries. Both Qatar and Oman plan on increasing their respective LNG exports. Qatar plans to increase LNG exports by 88%, while Oman plans to begin supplying 6.6 million tons per year in 2000 when its LNG project goes onstream. Egypt has also been rumored to be negotiating with Israel over the possibility of gas sales. A pipeline was planned some years back, but plans were halted due to peacekeeping problems.
Saudi Arabia is also beginning to turn its attention to gas. US officials recently began talks with the Kingdom over a US role in the country's hydrocarbon industry, specifically gas. The Saudi Oil Minister recently said that additional oil capacity is not a concern. He said that the country has 261 billion bbl of oil reserves and is only producing about 10 of 80 discovered fields. He added, "You tell me, do we need additional capacity to produce?"
On the activity side, the most notable action has been Total's Sirri E oil field off Iran. The company recently brought the field onstream and is expecting peak production to reach 100,000 b/d. This is the first of the country's buy-back agreements to come onstream.
Egypt has also been active on this front. Apache made a discovery off the country in the West Mediterranean with Alamenin West well and Pennzoil encountered success on the North July Block in the Gulf of Suez. Elf has also acquired interest off Egypt in the deepwater portion of the Mediterranean.
The Caspian SeaThe Caspian Sea region has sometimes been called the new Middle East, because of early reserve estimates. If the Middle East holds the greatest portion of the world's oil and gas reserves, and if the Caspian Sea region is next in line, then collectively the region should control the oil and gas industry of the world. So why don't they? The problem is not on the side of the "original" Middle East, the region's reserves are proven and its power real. But, the potential of the Caspian is questionable.
Technically, by location and culture, the Caspian region is more Middle Eastern than European or Asian. But, reserve-wise the likeness is hard to prove. The Caspian Sea has been thought to hold reserves of 178 billion bbl. However, several independent consulting firms have revised this figure to a more probable 17.8 billion bbl (one-tenth of what was estimated). As to which estimate is accurate, no one is certain.
What is certain is that over the past few months 25 dry holes have been drilled in the South Caspian. This is enough to make some companies pack their bags. The international consortium, Caspian International Petroleum Company (CIPCO), for example, is planning to exit the region after the company's Karabakh Field off Azerbaijan came up 75 million tons short of reserve estimates. Another consortium, North Absheron Operating Company (NAOC), led by Unocal and BP-Amoco is also drilling on the same geological structure and has had a similar lack of success with two dry wells before encountering oil in a third. The economic value of the find has not yet been determined.
Success fleetingDespite the disappointments, drilling activities have been strong. Drilling recently resumed on the Shakh Deniz concession by a BP-led consortium following the upgrade of a much-needed rig. With the major disappointments on other prospects, the industry is keeping a watchful eye on Shakh Deniz as one of the last bastions of future hope for the region. The other chance for success lies in Kazakhstan Caspian waters. This is the 2,000 sq mile giant Kashagan Field, thought to have the potential of the Tengiz oil field (the region's largest to date). The first well is expected to be drilled this spring by an international consortium.
Azerbaijan International Oil Company (AIOC) has been the only company with Caspian success. The consortium drilled its seventh production well on the Chirag prospect. The well was drilled to 4,556 meters and is the first horizontal well on the field as well as the largest well deviation in the Caspian. The field is currently producing 102,018 b/d of oil from seven wells, well above company expectations. Four more wells are planned to be drilled on the field. Production from the field is estimated to reach 800,000-1,000,000 b/d of oil upon completion of full development. Regardless of this success, AIOC recently reported that it is cutting personnel and deferring some developments in the region.
Several new pipelines are also being planned for Caspian oil, despite worries of a lack of oil to fill them. The most notable pipeline being one from Baku to Turkey, of which the AIOC is a major participant.
The US government is also offering its hand in the region. A program is being designed to help Kazakhstan, Turkmenistan, and Uzbekistan further develop the laws and regulations needed to strengthen their oil and gas sectors. With major skepticism focused on the Caspian, next year will be crucial to sizing up its true potential.
The climate in RussiaRussia's constant struggle with its political and economic climate has forever had negative effects on its alluring oil industry, especially in terms of foreign investment. Now with the country falling further into economic collapse, the aid of foreign capital is needed more than ever.
The government has always maintained a strong position in limiting outside investment. The current production sharing agreement guidelines, which were put in place in 1995, limit foreign participation in the country's hydrocarbon resources to 10-20%. For years, legislation has been presented to increase participation, but has been subsequently rejected, due to clashes between the governing parties.
But last year, the new government of Prime Minister Yevgeny Primakov made a giant first step into not only opening the oil industry to outsiders, but in bridging the political gap. An amendment to the production sharing contract law was passed by the Duma (the lower house of the Russian parliament) that increased foreign participation to 30%. The passage of the bill proved that the new Prime Minister had established support within the Duma, a feat past governments were never able to achieve. While the bill still needs the approval of the upper house of parliament and the signature of the president, it does show a marked improvement in the political climate, which has further tarnished Russia's image to the international oil industry.
Primakov also has attacked indigenous oil companies in attempts to put an end to the country's famed corruption and break up the power of the Russian oligarchs. However, this attack spawned rumors of President Yeltsin triggering a new political shakeup, which could cost Primakov his job. This would cause a major setback pushing the country even further into economic collapse and keep the oil industry even further at bay.
On the E&P side, activity offshore Russia has been slow. The most notable development is off Sakhlin Island where reserves estimated at 700 million tons of oil and condensate and 2.5 Tcf of gas. Sakhlin Energy Investment Company's Sakhlin-2 project, attempting to tap into these massive reserves, is expected to come onstream this year. Shell and Marathon are both partners in Sakhlin-2, while Mobil and Texaco are involved in the Sakhlin-3 and Sakhlin-4 projects.
A pipeline is also being evaluated that will deliver gas from Sakhlin to Japan by 2005. If this goes into effect, this would give Russia a much-needed economic boost by tying its economy into the Asia-Pacific region. It is estimated that in order to fully develop the areas resources additional investments in the neighborhood of over $25 billion will be needed.
How India fits inIndia has one of the fastest growing populations in the world, and not enough resources to meet its growing energy concerns. The current growth rate of the country's demand for petroleum products is about 7%, of which local supply covers up to 37%. The government projects that the trend will continue and in the next decade indigenous supply will fall below 25% of demand.
In order to compensate for this growth in demand, the government finally approved the New Exploration Licensing Policy (NELP) to help bolster outside investment in the energy industry. Through this policy, the government opened its ninth round of licensing. Thirty-eight offshore blocks are on offer, 12 of which are in the deepwater. The terms of the NELP offer a much more "outsider-friendly" atmosphere and attempts to put indigenous companies at par with international players, even going so far as to allow 100% foreign participation. The NELP also offers a new model production sharing contract and petroleum tax guide as well as several incentives for the deepwater concessions. The government plans to have all contracts signed by the end of the year. The round will officially close on May 18.
The state oil companies have also been doing their part in helping secure energy for the growing population. The state-owned downstream oil major, the Indian Oil Corporation (IOC), and the state-owned upstream oil major, Oil and Natural Gas Commission (ONGC), have formed an alliance to create a "national oil entity" for domestic and international operations. The alliance will combine both companies resources to further add to India's oil security and create an oil major capable of competing in the international market.
A representative of the companies said that the alliance would operate through joint venture projects constituted as non-government companies. This will allow both companies the capital needed to enter into larger investment opportunities. The alliance also allows the two companies to participate in the NELP licensing round.
Copyright 1999 Oil & Gas Journal. All Rights Reserved.