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.


Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin, Russell L. Smith, Caroline G. Cooper, Mark Reiner, Jean-Marc F. Blanchard and Kumar Amitav Chaliha



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