Making the Most of the $100 Barrel
Posted on: Tuesday, 15 April 2008, 03:00 CDT
By Ford, Neil
OIL PRICES OF $90-100 a barrel have significant implications for the oil sector in the Middle East and North Africa. They can create a perception of greed in the industry and could encourage the development of alternate energy resources. However, record oil prices also provide huge financial resources to invest in new field development. In addition, high prices also make the development of almost any field economically viable, when sustained over a long period. Faced with a market that absorbs high output and offers massive returns, any public or private sector company in the region will be eager to develop oil resources at its disposal during the course of 2008. While some analysts doubt the official level of Saudi oil reserves, Saudi Aramco is confident that it is on course to boost national production capacity to 12m barrels a day (b/d) by 2009, but the company has experienced one recent setback. Production on the Khursaniyah oilfield, which is expected to yield 500,000 b/ d, was expected to begin in December 2007 but has now been delayed by several months. Aramco has not given any explanation for the delay but has indicated that water injection infrastructure, production wells, trunk lines and pipelines have already been put in place.
However, at an energy conference in Riyadh, Saudi Aramco's senior vice president of exploration and production, Amin Al Nasser, confirmed that all other projects were on course, as the kingdom seeks to maintain 1.5m to 2m b/d of spare production capacity. By the end of 2008, output from the Shaybah field should have been ramped up by 250,000 b/d; while a further 100,000 b/d capacity should have been added to the Nuayyim complex. In early January, a spokesperson for the firm announced: "Saudi Aramco stands ready to meet market demands with ample spare capacity, including Im barrels of Arab Light crude." In the longer term, the Kurais field should yield a massive 1.2m b/d, making it one of the biggest fields in the region. Nabilah Al Tunisi, the manager at Aramco's project support and controls department, commented: "This is the largest increase in crude production in Aramco's history."
Saudi Aramco is keen to calm any fears that it will be unable to increase production rapidly after 2010. The 900,000 b/d Moneefa field should come on stream in September 2011, while the company expects other substantial reserves to be developed thereafter, as it seeks to maintain its traditional role as the global oil market's safety valve. Total Aramco upstream and midstream investment between 2007 and 2012 is expected to reach $90bn. Al Nasser has also revealed that his firm plans to boost its recoverable reserves by 80bn barrels to 340bn barrels over the next 20 years even without the discovery of new fields, by employing enhanced oil recovery techniques. At present, Saudi Aramco recovers about 50% of all reserves but aims to steadily increase this to 70%.
One of the main reasons for the high global price of oil is the lack of refining capacity. Saudi Arabia can help to ease this bottleneck and also retain more of the profits generated by oil sales through investing in its own refining capacity. As a result, Aramco hopes to boost domestic refining capacity by 86% by 2012, giving the country the fifth largest refining capacity in the world at 3.9m b/d. New export refineries at Jubail on the Gulf and at Yanbu on the Red Sea will be complemented by the Ras Tanura and Petro Rabigh joint venture refining and petrochemical complexes.
The company's total global refining capacity, including its Motiva offshoot in the United States, should reach 6.5m b/d by 2012. All new capacity should produce refined petroleum products that will meet tighter environmental standards in the United States and Europe. Saudi Aramco also plans to boost gas production from 9.5bn cubic feet a day at present to 12bn cubic feet a day by 2011. A large proportion of new production will come from the Hawiyah field, while the 1.5bn cubic feet a day offshore Karan scheme is expected to come on stream in the fourth quarter of 2011.
Saudi Arabia is able to greatly boost production by retaining state control of most projects and allowing Aramco to form joint ventures with foreign firms on selected projects. This approach also seems to have borne fruit in other Gulf states, such as Kuwait and the United Arab Emirates (UAE) but Iran continues to fail to make the most of its hydrocarbon resources. While Tehran hopes to boost oil production over the next few years, it is the gas sector that offers the greatest potential for growth but unless the terms of investment for foreign investors are improved, the country could yet again fail to make the most of its natural resources.
Given that oil and gas reserves must support a population of 71m people, the Iranian government cannot allow state owned companies to reinvest more than a small proportion of oil and gas revenues in field development. In addition, foreign companies are barred under the Iranian constitution from directly controlling oil and gas fields. They are restricted to operating in Iran under the notorious buy back contracts, which must be signed with "local and foreign national persons and legal entities".
These require investors to provide all upstream development costs but must hand fields back to the state owned National Iranian oil Company (NIOC) after a relatively short period of time, often seven years. They therefore take on all the risk but the potential benefits are capped, usually at about 15% of production. While some companies, such as Eni-Agip, Statoil and Total, have dipped their toes in Iranian waters, foreign involvement has been much less than anticipated by Tehran and it seems unlikely that this situation will change in the near future.
Iran's huge gas reserves of 974 trillion cubic feet could be developed to supply domestic consumers, a string of export pipelines and one of the world's biggest liquefied natural gas (LNG) sectors. However, the government has conceded that it may fail to produce sufficient gas to supply both the Iran-Pakistan-India pipeline and also the Nabucco pipeline from the Caspian Basin to Central Europe. The phased development of the South Pars field, which contains 450 trillion cubic feet of natural gas and which is connected to Qatar's giant North Field, will continue through 2008 and 2009 but the pace of investment will continue to disappoint.
Perhaps partly because of its far greater per capita wealth, the UAE has more ambitious plans for future oilfield development. Current production stands at 2.7m b/d and this is expected to reach 3.5m b/d by the start of 2011. Abu Dhabi alone plans to invest Dh100bn in new oil projects between 2008 and 2012, more than double the amount committed in the previous five year period. Although the emirate's economy has long been built on oil, the sector's importance to overall economic activity continues to rise: oil accounted for 44% of GDP in 2001 but this has now risen to 55.7% on the back of the record oil prices. Given the huge investment that has been made in property and other sectors in the emirate, the growing importance of the oil sector is startling. The UAE is also following Saudi Arabia in investing in greater refining capacity: total capacity is expected to rise from 600,000 b/d to 1.1m b/d by the same date.
Although restrictions are also placed on foreign firms operating in Libya, the contrast with Iran could hardly be greater. Given the lifting of international sanctions on the North African state, companies from the United States, Europe and Asia have flocked to invest in both oil and gas companies. A recent oil accord between the Libyan Investment Corporation (LIC) and British firm BP has been described as the biggest exploration investment in BP's history.
BP chief executive Tony Hay ward commented: "This is a welcome return to the country for BP after more than 30 years and represents a significant opportunity for both BP and Libya to deliver our longterm growth aspirations. It is BP's single biggest exploration commitment. With its potentially large resources of gas, favourable geographic location and improving investment climate, Libya has an enormous opportunity to be a source of cleaner energy for the world." The company plans to drill 17 exploration wells and shoot 30,000km of 3D seismic data.
Italian company Eni maintained its relationship with Tripoli during the long years of sanctions and this longevity is now yielding benefits. The company is jointly developing the Western Libya Gas Project with the state owned National oil Corporation (NOC). Gas is produced on the onshore Wafa field in Block 169 and the offshore Bahr Essalama field in NC 41. It is collected at the Mellitah gas hub for export to Italy via the Greenstream pipeline, which will soon have transmission capacity of 8bn cubic metres a year.
A new agreement has been reached between Eni and the NOC that is more favourable in some ways to the Libyan firm but which greatly strengthens the relations between the two. The chief executive of Eni, Paolo Scaroni, said: "The NOC asked to renegotiate the terms. With the new contracts, we have reduced the percentage of cost oil, the quota that repays investments, because the new margin is being applied to a higher price. Being able to consolidate our position for many years to come, in an environment that is again becoming competitive, is very important to us." The two firms are to jointly invest $14bn over the next 10 years in a range of different oil and gas projects. Their production sharing agreements (PSAs) have been extended to 25 years and the capacity of the Mellitah hub will be doubled to 16bn cubic metres a year. This will allow 11bn cubic metres a year to be piped through Greenstream, while the remainder will be used to supply an LNG plant that is scheduled to come on stream by 2014. The processed gas is expected to be shipped to Italy and the Italian minister of industry, Pierluigi Bersani, called the deal "an important step for creating energy security and diversifying energy supply sources for our country."
Indeed, the gas industry is becoming a more important source of revenue across North Africa. It is now a more important source of revenue than oil in Egypt, where the Spanish Egyptian Gas Company (SEGAS) and Egyptian LNG (ELNG) have developed LNG plants at Damietta and Idku respectively. The Idku facility with two production trains has been developed by a consortium led by BG and Petronas, which hopes to eventually construct up to four further trains at the site, one of which could be given the go-ahead this year.
Algeria has complemented its own LNG sector with a growing capacity to pipe gas under the Mediterranean to Europe. Two pipelines are already in place to Italy and Spain and another two routes to the same markets are planned. The final investment decision on the Galsi project from Hassi R'Mel to mainland Italy via Sardinia is expected by April this year, while talks on the Trans- Mediterranean (Transmed) pipeline are likely to continue. Sonatrach would like to be given "direct marketing and sales access" to the Spanish gas market in return for giving a stake in the venture to Spain's Gas Natural.
Yet Qatar remains the most vibrant gas producer in the region. The huge North field reserves give it the third biggest gas reserves in the world, after Russia and Iran, at 910 trillion cubic feet. Aside from domestic and regional projects, the gas is used to supply Qatargas and Rasgas LNG ventures, both of which are joint ventures between state owned companies and foreign investors. Both are developing new production trains that should cement Qatar's position as the world's biggest LNG exporter. This year should see the further growth of the gas sector across the Middle East and North Africa, yet the high oil price means that crude oil remains the premier target for investment and the biggest source of revenue.
IF YOU can pump it, we can sell it, oil market speculators boast. But Middle East producers have - while sinking millions of dollars into exploration schemes - maintained a measured response
THE IMPORTANCE of gas exports has already overtaken that of oil across North Africa
The UAE has ambitious plans for future oilfield development. Current production is 2.7m b/d and this is expected to reach 3.5m b/ d by the start of 2011
BP OF Britain has large-scale exploration plans under the terms of a deal described as the biggest of its kind in the UK firm's history
Iran's huge gas reserves of 974 trillion cubic feet could be developed to supply domestic consumers, export pipelines and one of the worlds biggest liquefied natural gas (LNG) sectors
THE WORLD'S unquenchable thirst for oil, gas and its derivatives mean producers have been able to put long-term production strategies in place
Copyright International Communications Apr 2008
(c) 2008 Middle East. Provided by ProQuest Information and Learning. All rights Reserved.
Source: Middle East
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