Three Arab Oil Phenomena in 2008
Walid Khadduri Al-Hayat - 13/04/08//
The year 2008 has been characterized by three Arab oil phenomena with significant future implications. These are summed up in the noticeable expansion in crude oil and natural gas production capacity, the significant increase in the capacity of refineries, and the ongoing establishment of private Arab oil companies.
With respect to the first phenomenon, negotiations are currently underway with major international oil companies to explore new oil and gas reserves and to expand production capacity in Iraq, Libya and Algeria. If these negotiations succeed, it may be possible to increase crude oil production capacity by approximately half a million barrels per day in Iraq within one year only by improving the productivity of currently exploited fields, especially if the security situation stabilizes in the south.
Potential increases are also possible in Algeria where state-owned Sonatrach has been able to increase crude oil production from 750,000 barrels per day in the early 1990s up to almost 1.4 million barrels per day with the help of international firms. This is not to mention the noticeable increase witnessed in the production of oil fluids and natural gas. Sonatrach has been able to make these achievements despite the security apprehension dominating the country throughout the period.
In Libya, the Libyan National Oil Company is working on doubling production capacity from 1.6 million barrels per day which has been the capacity over the past two decades as a result of international blockade and embargo.
As it is known, it was extremely difficult and even prohibited for international companies to invest in these three countries until recently. The increase in production capacity will increase the collective importance of oil-producing Arab countries.
There are also intensive efforts by local oil companies to rent or acquire as many drills as possible to explore additional energy reserves, either to compensate the amounts of oil produced or to increase the overall reserves. This is already witnessed in most oil-producing Arab countries, especially in the case of Saudi Aramco which is diligently working on increasing its crude oil production capacity to reach over 12 million barrels per day by the first half of the coming decade in comparison to nine million barrels which is the current actual production level.
Both development and capacity increase in Saudi Arabia can bring an end to the hypothetical assumptions in the west about "peak oil" in Arab countries, assumptions that have triggered fears about oil drying up in the foreseeable future and consequently led to an irrational price hike.
Qatar Petroleum, meanwhile, is implementing plans to expand its production capacity of liquid gas to 77 million tons annually by the end of 2010.
The second phenomenon is depicted in the building of refinery plants in the same producing countries. Ten projects are under study involving the construction of new refineries and the expansion of existing plants in the Gulf States. The total capacity of these products is equivalent to 3.5 million barrels per day. These projects are allocated as follows: Three plants in Saudi Arabia in Jazan, Jubayl and Yonboh in addition to expanding the Ras Tanoura plant; the Zour plant in Kuwait; the Roweis and Fujairah plants in the UAE; the Msei'eid and Ras Laffan in Qatar; and the Duqm plant in Oman.
This phenomenon emerges at a time when construction costs are doubling from one year to another, not to mention the depreciation of the dollar which requires the continuous review of the feasibility of such massively expensive projects vis-à-vis their normal costs. The decision to build these refineries is made at the beginning of a global economic recession triggered by the loss of approximately a trillion dollars in the US sub-prime mortgage crisis. The impact of these losses on growth rates in industrial countries and hence on the levels of future energy consumption is yet to be seen.
However, these refineries are constructed at a time of record hikes in regional fuel consumption estimated at five percent annually, a rate that is close to the average annual rate of increased consumption in major industrial Asian countries such as China. The increase in Arab consumption is attributed either to the rise in living standards triggered by the rise of oil rents or fuel subsidization which keeps local prices relatively low in comparison to high global prices.
There is also the delay in constructing refineries in consuming western countries as a result of environmental and other factors which, among other consequences, has led to the rise in global oil prices.
It is expected that Saudi Aramco will lead local oil companies in the Gulf with respect to building new refineries in terms of total capacity for refineries intended for construction.
As far as the third phenomenon, the noticeable increase in establishing private Arab oil companies with Arab capital and Arab expertise in general, it is remarkable that most of these companies are enlisting their stocks in local bourses. The majority of these companies operate in the exploration and development of oil fields. Their operations are also characterized by high risk, especially in the case of smaller companies with limited capitals which specialize in oil exploration.
These new companies have attempted to benefit from the high monetary liquidity levels in Gulf countries and the financial bubble that followed in the regional stock markets, and hence they were established with high capitals. According to a survey by the weekly oil bulletin MEES, 18 private companies were established in the UAE, ten in Kuwait, eight in Bahrain, one in Qatar, and six in Saudi Arabia.
It is worth mentioning that among the first private oil companies in the Gulf is the Independent Petroleum Group which was established in Kuwait in the late 1970s and which specializes in the marketing of petroleum products and offering fuel-related services such as constructing reservoirs at ports and airports in addition to participating in the building of pipelines. The company, moreover, is registered in the Kuwait exchange market.
Among new companies, Dana Gas is the most famous. In recent months, the company has expanded its operations, acquiring assets in a foreign company that operates in Egypt and produces crude oil. It has also obtained a contract to produce gas from the government of Iraqi Kurdistan.
These private Arab oil companies are operating under very difficult conditions. On the one hand, oil and gas reserves are owned by the state companies, and hence they are difficult to compete against. On the other hand, the major international oil companies possess the technology and access to the markets which makes competition very difficult for private Arab companies.
These two obstacles, however, have not prevented private Arab companies from finding small and lucratively rewarding markets. They attempt to operate with other oil companies (which involves sharing the risks) in countries other than those where they were formed as the case is with the UAE company Aabar which is exploring for oil in South Asia after acquiring a foreign company operating there.
As it is well-known in the oil industry, each of these three phenomena requires many years of preparation, consultation and establishment, then negotiation and finally implementation. Hence, the year 2008 is nothing more than another juncture for these projects which, in the event of their success, will leave their marks on the future of the Arab oil industry. What matters most for this year is that the majority of these projects have reached the launching stage after years of preparation and planning.
*Energy Expert
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