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Fruitful
Year Predicted for Foreign Oil and Gas Firms in the Middle
East
by
Kumar Amitav Chaliha
NEW
DEHLI (KWR) After a slow 2004, this year could prove to be
a period of progress in oil and gas developments in the Middle
East, with the conclusion of many large deals for upstream
developments and a greater role for foreign companies in
the region, according to UK consultants Wood Mackenzie (Woodmac).
Spiraling oil prices in 2004 brought to light the scarcity of global spare
capacity as OPEC producers pumped oil at maximum rates to cool markets. But
while several deals were completed, there was "little progress with the
'big oil' opportunities in Iraq, Kuwait, Abu Dhabi and Iran," said a recent
report by Woodmac. Major projects were delayed by factors such as security
in Iraq, political wrangling in Kuwait and protracted negotiations in Iran.
With sustained growth in oil demand and high oil prices, 2005 shows signs of
being a more successful year for the Middle East in terms of concluding contracts,
said the report. This year could "be the year which sees the international
majors assume a more pivotal role in the growth of OPEC production capacity," Woodmac
predicted.
"Based on current status of negotiations and the perceived desire for progress,
we expect the Yadavaran project in Iran, the Upper Zakum development project
in Abu Dhabi and Project Kuwait to proceed to contract agreement in 2005," Woodmac
said. Other pending contracts include liquefied natural gas ventures in Iran
and gas projects in Syria.
Still, Woodmac stopped short of unbridled optimism, cautioning that regional
or global events could "intervene to dictate otherwise."
Domestic politics remain "the primary influence" on the progress
of expansion projects, the report said, "whether it be parliamentary wrangling
in Kuwait, presidential elections in Iran or the new ruler in Abu Dhabi. While
developments in the oil market and the prevailing oil price will influence
considerations, it is policies which will dictate the pace. This makes forecasting
developments in 2005 a precarious business."
In Saudi Arabia, state Saudi Aramco has the technology to maintain and increase
capacity, so the question is one of cost rather than capability, noted Colin
Lothian, senior Middle East energy consultant at Woodmac. Saudi Arabia late
last year confirmed its intention to increase capacity to 12.5 million barrels
per day.
Manouchehr Takin, upstream analyst at the Center for Global Energy Studies
in London, noted that: "History has shown that plans can change, depending
on events and unknown factors," but he also agreed that the Middle East
should progress this year in the development of its vast hydrocarbon resources.
As an example, "Iran needs to open and expand its oil and gas industry. … Even
the most conservative in Iran recognize that business needs to be pragmatic
and de-politicized," Takin suggested. "The environment in Iran and
in other Middle Eastern countries needs to be more geared towards business."
Of the significant deals signed in 2004, most were gas projects. In Saudi Arabia,
three gas exploration licenses were awarded to Russian Lukoil, China's Sinopec
and an Eni/Repsol joint venture, with Aramco taking 20% of each deal. These
contracts followed the award of the South Rub al-Khali exploration block to
Royal Dutch/Shell and Total in 2003.
In Qatar last year, Shell signed an integrated development and production sharing
agreement for the Pearl gas-to-liquids (GTL) project. The deal signed in July
2004 will see the installation of gas production facilities with a capacity
for 140,000 barrels per day (bpd) of GTL products. The first phase of the two-stage
project is expected to be completed in 2009.
Elsewhere, Iran awarded the South Azadegan block to a Japanese consortium led
by Inpex as well as three exploration blocks -- the Tousan Block to Brazil's
Petrobras, and the Iran-Mehr and Forooz Blocks to Repsol.
Petroleum Development Oman -- in which Shell has a 34% interest -- saw its
concession extended for a further 40 years. PDO is 60% owned by the government,
with Total holding 4% and independent Partex the remaining 2%. The concession
that covers nearly 114,000 square kilometers accounts for more than two-thirds
of the sultanate's production.
However, ongoing security issues, domestic politics and poor regulatory and
fiscal systems in Iraq, Kuwait and Iran, respectively, continued to hold up
the finalization of major projects, Woodmac said.
"The buybacks offered in Iran limit rates of return and do not offer the
international investor entitlement to oil production," said Woodmac consultant
Lothian.
"Top managers in the National Iranian Oil Co. feel handicapped in negotiating
more attractive terms for foreign investors for fear of being reprimanded by
the politicians," another analyst said.
Iraq is a different case, in that security issues are the greatest hindrance
to utilizing its vast resources more effectively. However, observers are watching
the development of its contractual terms and fiscal regime, according to Woodmac.
"They have a model contract which is very similar to the Iranian buyback
called the development and production contract, which was modified in 2000," said
Lothian. "It will be interesting to see if they will use this model or whether
they will revert back to the production sharing agreement to attract inward investment."
In Kuwait, the long-awaited Project Kuwait, which would enlist foreign companies
to develop crude production in the north, has been the subject of intense political
debate in parliament. Woodmac does not see approval being given before mid-2005.
Success stories are apparent in Oman and Qatar, however.
"Qatar recognized an opportunity and grabbed it firmly with both hands.
They developed fiscal terms which were sufficiently attractive to international
companies to invest under and have seen this approach bear fruit," Lothian
said.
Likewise,Oman's contractual models have been modified several times over the
years, noted Lothian, who believes that the Omanis' willingness to talk to
international companies sets a good example for neighboring countries.
Oman's latest initiative is to offer alliance contracts -- structured as service
agreements giving a high degree of autonomy to the contractor -- to operate
17 small fields within the Nimr-Karim cluster in the south of the sultanate.
The cluster currently holds 70 million barrels of oil yet to be recovered,
with current production of 16,000 bpd.
Further ahead, there is a possibility that Oman will relinquish some of its
acreage in the medium term to help reverse the country's decline in production,
observers say.
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