Chaos theory

This is an abridged version of the full article from Ng Weng Hoong, published in the October 2013 issue of World Pipelines, available for subscribers to download now.

A decade after the US and its allies invaded Iraq, the region’s 13 major countries have plunged further into one or more of these forms of organised conflicts: civil war, terrorism, ethnic, tribal and religious strife, separatism, jihad, suppression, rebellion, revolution, foreign invasion, inter-state war and turf battles among armed gangs and warlords.

Yet, the region’s economy as a whole has been growing and is performing far better than the depressed but more peaceful EU, Japan and the US.

The thread in this unlikely combination of political instability and economic growth is the region’s vast holding of oil and gas reserves. Oil, and now joined by natural gas, has long been a major source of conflict as well as economic growth in the Middle East.

The Middle East holds more than 48% of the world’s estimated oil reserves of 808 billion bbls and 43% of its 80.5 trillion m³ of natural gas reserves, according to BP. As global energy demand surges to a new high each year, the world will remain deeply dependent on this troubled region for its oil and gas supplies.

Collectively, the economies of the Middle East’s main oil exporting members, Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the UAE, grew more than twice the rate of the world’s 3.2% GDP expansion last year according to an estimate from the International Monetary Fund (IMF).

According to the US Energy Information Administration (EIA), three of the region’s six OPEC members, Saudi Arabia (US$ 311 billion), Kuwait (US$ 88 billion) and Iraq (US$ 83 billion), earned record oil export revenues last year while the UAE and Qatar had record earnings in 2011.

Iran alone has been reporting sharp declines in earnings. The estimated 28.4% drop in its export earnings last year was sufficient to pull down the combined revenues of the region’s ‘Big Six’ by nearly 2%.

Iraq, the surprise star performer
Iraq has been one of the world’s fastest growing economies since 2008. Even with the rapid deterioration of its internal security to civil war conditions, the IMF has declared that the Iraqi economy and oil industry are in their best shape in over 30 years.

In its latest assessment, the fund said the Iraqi economy grew by 8.4% last year and 8.6% in 2011 as oil production topped 3 million bpd with the added supply of around 600 000 bpd from the southern giant fields of Rumaila, West Qurna-1 and Zubair, and high oil prices on the world markets.

Crude production will increase by at least 10% this year with the start-up of four new southern oilfields at Majnoon, West Qurna-2, Garraf and Badra. The Shell-operated Majnoon field is expected to add 175 000 bpd in coming months.

The rise in Iraq’s oil production since 2003 has helped its GDP per capita rise from US$ 1300 in 2004 to US$ 6300 last year, said the IMF. Over the next five years, the economy is expected to grow by between 8.3% and 9% per year.

But the IMF report also paints a near hopeless picture of the country’s political future being wrecked by sectarian violence, growing threats from a spreading war in neighbouring Syria, and Baghdad’s worsening dispute with the restive Kurdistan region over oil revenues and territorial control.

Iraq’s domestic political conditions have worsened as a result of renewed sectarian violence, while the civil war in neighbouring Syria is threatening to spill over to the rest of the region.

“Tensions between the semi-autonomous Kurdistan Regional Government (KRG) and the central government remain high due to disagreements about sharing of oil export revenues and territorial disputes,” said the IMF, which observed that Iraq’s political instability has worsened since the withdrawal of US troops in December 2011. Iraq’s growing political instability is bound to dampen investors’ interest at a time when it badly needs to upgrade its inadequate infrastructure to boost water and electricity supplies to its main oilfields, and expand pipelines to facilitate the delivery of crude oil for exports.

By 2018, the IMF expects Iraq’s oil production to reach 5.7 million bpd, well below the government’s ambitious target of 7 million bpd while exports will top 4.75 million, not 6 million bpd.

Iran, Iraq aim big
Iran and Iraq are hoping that a new landmark gas supply agreement that they recently signed will provide the foundation for the development of the region’s economies.

In a four year deal signed in Baghdad on 21st July, Iran stands to earn a total of US$ 15 billion from piping 850 million ft³/d of natural gas to two power plant plants in Iraq starting later this year.

Tapping into Iran’s southern South Pars field, the proposed ‘friendship’ pipeline network will start at the port of Assaluyeh to deliver natural gas to Iraq, and eventually to neighbours Syria, Jordan and Lebanon. The agreement, which had been in the works since early 2011, was signed by Iranian Oil Minister Rostam Qasemi and Iraqi Electricity Minister Kareem al-Jumaili.

Construction of an initial 220 km pipeline to link Iran and Iraq started last year, with completion due around September.

The two governments have also agreed to look into jointly exploring and developing hydrocarbon reserves along their common borders.

In his last major act as Iran’s President, Mahmoud Ahmadinejad met with Iraqi Prime Minister Nouri al-Maliki, Vice President Khudayr al-Khuzai and other senior leaders in Baghdad to lay the foundation for enhanced bilateral economic and energy co-operation. Some 25 years since they last fought a bitter war, the two countries are turning to each other to try secure peace in the region and save their ravaged economies.

Iran needs the revenue in the face of tightening trade sanctions imposed by the West while Iraq needs the feedstock to overcome its unreliable domestic power supply. Among the country’s most battered infrastructure, Iraq’s power plants generate only around 8000 MW of the 14 000 MW it needs.

The gas-supply deal and the proposed development of a region-wide pipeline network, along with promise of further co-operation, offer a concrete plan forward for both countries, but the prospects look bleak amid the continuing political strife throughout the region.

Saudi oil output, exports and reserves reached record high in 2012
Saudi Arabian Oil Co., or Aramco, said it achieved record levels of oil production, exports and reserves last year.

In its annual review for 2012, the state-owned company said it produced 9.506 million bpd of crude last year, compared with 9.067 in 2011. Refined products output climbed 2.1% to 1.385 million bpd.

To maintain its world-leading export position, Aramco began producing from Manifa, the world’s fifth largest oilfield, in April this year, as it seeks to raise production capacity to 12 million bpd.

The Saudi economy will grow at a slower rate in 2013 compared with last year on account of reduced oil production and a weaker oil price, said the IMF.

“Private sector growth is expected to be strong, but oil production is likely to be below 2012 levels while government spending growth may slow. With oil prices and production expected to be lower, fiscal and external surpluses, while remaining large, are projected to narrow this year,” said the fund’s executive board.

Importantly, the oil-component of the Saudi GDP is expected to shrink by 3.3% this year, after rising 5.5% in 2012 and 11% in 2011. The non-oil sector will expand by 5.9% this year compared with 5% in 2012.

As a result of oil’s reduced contribution, Saudi government revenue is expected to slide from US$ 46.8 billion last year to US$ 41.7 billion in 2013, while earnings from crude and product exports are expected to fall 5.4% from US$ 388.4 billion to US$ 367.3 billion, said the IMF. Oil’s share of government revenues will slip to 90.9% from last year’s 91.7%.

It will probably be the first time in memory that Saudi Arabia’s oil-dependent economy will be driven entirely by infrastructure building, construction, tourism, telecommunications, banking and services, according to research by Riyadh-based Jadwa Investments.

Its analyst expects Saudi oil production to slide to 9.6 million bpd in 2013 from last year’s 9.8 million bpd, with the per barrel price dropping significantly to US$ 99.4 from US$ 108.1.

Qatar challenges unconventional gas developers
Qatar said it has found a large natural gas field to add to its already massive 900 trillion ft³ of proven reserves, the world’s third largest.

The recent find of a reservoir containing 2.5 trillion ft³ of low cost, accessible gas portends of more to come, sending a clear warning to aspiring producers of unconventional gas that Qatar will bury them in a shoot-out.

Almost disdainfully, the world’s largest LNG producer and exporter hardly comments on the emergence of new competition from Australia, and potential ones from China, the US and Canada, who all claim to have some of the world’s largest hoards of unconventional gas reserves.

Unlike Qatar, these producers face a long list of hurdles to tap their unconventional gas reserves, ranging from regulatory and environmental uncertainties to the high cost of building pipelines and ports as well as gaining the confidence of buyers in Asia.

Qatar has always insisted that it has access to even more gas reserves than it needs to develop to meet the world’s growing energy demand. Until recently when natural gas prices had been hovering below US$ 10 million BTU in Asia, the tiny Middle East emirate had no reason to open up more fields for development.

In March, state-owned Qatar Petroleum announced that it, Germany’s Wintershall AG and Japan’s Mitsui & Co. will jointly develop the reservoir in the 544 km² block 4N located off its northern coast in the Persian Gulf. Energy Minister Mohammed Saleh Al Sada said the consortium plans to start production over the “next few years”.

Qatar is also encouraging other investors such as Royal Dutch Shell Plc, China National Petroleum Corp., France’s Total SA and Japan’s JX Nippon Oil & Gas Exploration Corp. to find new reserves in some of the country’s largely unexplored offshore and onshore areas.

Oman’s oil and gas export revenues to reach record high
Oman’s hydrocarbon-powered economy will grow by 5.1% this year after expanding 5% last year and 4.5% in 2011, said the IMF. Oil and gas exports will bring in record high revenues of US$ 36.4 billion this year, just slightly higher than 2012’s level and US$ 33.4 billion in 2011.

Using enhanced recovery techniques, Oman produced 930 000 bpd in the first half of 2013, up 1.3% over the same period last year, said the Oil and Gas Ministry.

Buoyed by increased spending in the public and services sector, Oman’s non-oil sector is also expected to do well, growing by 5.5% this year after expanding by 5.8% in 2012 and 2011.

Unlike other Middle Eastern economies, Oman will not experience strong inflation with its consumer price inflation seen edging up to 3.1% this year from 2.9% in 2012 and 4% in 2011.

“The fiscal balance is estimated to remain in surplus in 2012, as high hydrocarbon revenue has offset the cost of the recent fiscal expansion. Revenue from exports of crude oil and LNG in 2012 is expected to bring the current account surplus to 11.6% of GDP,” said the IMF

This is an abridged version of the full article from Ng Weng Hoong, which was published in the October 2013 issue of World Pipelines.

Read the article online at: https://www.oilfieldtechnology.com/special-reports/16102013/chaos_theory_the_middle_east%E2%80%99s_diverging_realities/