Syria, a late starter as a major oil producer, is in the grip of an accelerated decline in output and there is little it can do about it. In 2007, oil production fell by 6.5 per cent to 394,000 barrels a day (b/d), the first time in more than two decades that output had dipped below the 400,000-b/d mark. It is unlikely to reach such heights again. The days of 600,000-b/d production, last witnessed in 1996, are over.

In 2007, Finance Minister Mohammed Hussain conceded that the country was a net oil importer. The consequences of this are huge for an economy that is dependant on oil revenues for 25 per cent of its expenditure.

For more than 20 years, oil revenues have funded Syria’s large military and kept its public sector afloat while other sources of income have all but dried up.

Budget deficits

Considering the decline in production, the country faces unsustainable budget deficits by 2015 unless action is taken to secure alternative sources of income, according to the International Monetary Fund.

“The decline in oil production will have a tremendously negative impact on the budget and nothing can be done in the short term,” says Nabil Sukkar, head of Damascus-based Syrian Consulting Bureau. “Exploration is taking place, but there will be no major new finds.

It is a fact we have to live with. Syria is not an oil country. We had an oil windfall for 20 years but this is now exhausted. We will have to start living without oil as we did before the mid-1980s.”

The government is having to cut back crude exports to cope with the downturn in production. This summer, Damascus suspended exports of Syrian Light crude after they fell to 45,000 b/d, half the level of two years ago.

Light crude will now be used domestically to meet soaring local demand for refined products. There is some heavy crude still to be tapped but further discoveries of light crude are not anticipated.

The new finds are creating a trickle rather than a flow. The government expects the annual decline to be about 20,000 b/d, with the sharpest falls at the Jebisseh, Al-Thayyam and Omar fields. Output this year is likely to average 360,000-370,000 b/d.

The authorities have to make the most of a diminishing endowment. Syrian Petroleum Company’s (SPC’s) exploration and production efforts are focused on seven main regions, most of which are facing declines. The state oil company’s output now is estimated at 100,000 b/d.

The bulk of the country’s output is provided by foreign oil companies, headed by Al-Furat Petroleum Company, which includes the UK/Dutch Shell Group, India’s ONGC, and China National Petroleum Company.

The companies’ blocks cover 36 producing fields, expected to produce 170,000 b/d in 2008. Yet Al-Furat is reporting annual decline rates in the region of 12-15 per cent. Enhanced oil recovery techniques are being deployed, stemming decline rates to about 10 per cent, but arresting the slide in production is a struggle.

France’s Total is in negotiations with the Petroleum & Mineral Resources Ministry to renew its existing production-sharing agreement on the Deir el-Zour concession, which is due to expire in 2011. Current output from the field is estimated at 63,000 b/d.

The government has attempted to attract interest through a series of open licensing rounds, six of which have been held since 2001. The results have been mixed. The latest, an offshore round in 2007, received just one bid for one of the four blocks on offer, from a group led by UK minnow Dove Energy.

There is some hope that the Syrians could produce more from unconventional oil resources.

There are reported to be significant volumes of oil shale deposits in the Yarmouk Valley near Jordan, although a tender issued in February 2006 to develop the Darra oil shale deposit and Al-Bushri tar sands near Deir el-Zour yielded little interest from foreign oil firms. If Syria is to attract investors to oil shale, it will need to provide more attractive terms.

Smaller oil companies are engaging in low-level drilling campaigns, which are yielding small increases in production. UK-based exploration company Gulfsands Petroleum has completed drilling operations on its latest development well in the Khurbet East field and now has five wells capable of production from the reservoir, one of them at about 3,000 b/d of oil.

Procurement difficulties

Croatia’s INA Naftaplan has also found crude from a gas-prone block at its Hayan concession. “We are producing 3,000 b/d from the Jihar field and soon will increase oil production as we have discoveries we want to connect to the existing oil plant,” says Zeljko Mlinaric, deputy manager of INA’s Syrian operations. Oil production is likely to treble there, he adds.

Procuring technology is difficult for a country that is still enduring the impact of US sanctions. Syria has become dependent on former Soviet companies that lack the most modern equipment and training.

Extensive bureaucracy is another issue. “Procurement of materials is difficult due to all the regulations, and we are losing time,” says one local operator.

Despite these hurdles, SPC is embarking on ambitious new projects. Improving political relations with Ankara, for example, is yielding co-operation in the oil and gas sector overseas. Turkey’s state oil company, TPAO, announced in July that it was preparing to establish a joint company with SPC to develop oil fields in Syria, Turkey and elsewhere.

Syria’s natural gas exploration, although modest, presents a more encouraging outlook. The country boasts 10.17 trillion cubic feet of gas reserves. Production in 2007 was 183.6 billion cubic feet, down 5 per cent on the previous year. Syrian Gas Company (SGC) is confident that it can start to increase gas output on the back of domestic exploration and procurement efforts.

In 2007, SGC reported a gas find with probable reserves of at least 177 billion cubic feet at Brig, north of Damascus, following a significant discovery at Al-Bureij, which it says contains an estimated 1.8 trillion cubic feet of gas reserves in total.

By 2010, the country expects to bring on stream an extra 194 billion cubic feet of gas through projects undertaken by INA at its Hayan concession, Russia’s Soyzneftegaz and Stroytransgas at north and south Palmyra, and Petro-Canada at the Al-Shaer and Al-Sharifa fields. Petro-Canada is investing up to $660m in the two gas fields and is committed to producing 79.8 million cubic feet a day of gas by 2010.

A boost to Syria’s gas infrastructure is also under way. UAE-based Petrofac International won a $477m contract this year to build a gas treatment plant in Ebla.

The plant, located on the Al-Shaer field, will produce 88 million cubic feet a day (cf/d) of gas, and 150 tonnes a day of liquefied petroleum gas and some condensate, which it will feed into the Syrian gas pipeline network. Under the deal, Petrofac will take a 10 per cent stake in the Ebla production-sharing contract operated by Petro-Canada.

In 2009, Stroytransgas is due to complete a gas processing plant with capacity of 105-140 million cf/d as part of the north middle area gas project, near Palmyra, sourcing gas from the Abu Raba, North al-Faid and Qomqom fields.

The state forecasts local demand will reach 10 billion cubic metres a year within two years.

If Syria’s growing gas demand is to be met, it must secure additional sources of supply.

Securing gas supplies

At a time when Syria is struggling to stem the decline in its own hydrocarbons production, the recent advent of gas supply from Egypt is a useful boost. Imports began in July 2008 at 2.5 million cubic metres a day through the Arab gas pipeline.

The pipeline is being extended to Homs and Kilis on the Turkish border, widening the link to send the gas on to Turkey. A 76-kilometre-long section will be built from Aleppo - already connected to the Syrian gas grid - to the Turkish border. Another pipeline will carry gas from Palmyra to Homs. Lebanon is also set to receive gas from Syria, to feed the Beddawi power station.

Iraqi gas is another supply possibility. Under the Euro-Arab Mashreq gas project, a link from the Akkas gas field in western Iraq could supply Syria with 50 million cubic feet a day (cf/d) of gas. Iranian gas is another long-term option under consideration.

More gas may be needed before then through the Arab gas pipeline, but Cairo may not want to send additional supplies considering its own expanding domestic needs. Egypt recently increased the prices of gas to large industrial customers, reducing the incentive to export its gas since it is now getting close to a commercial price from its domestic users.

Officially, the Egyptians say there is enough additional gas in the tank to send on to Syria and other end-users of the pipeline, but it is a controversial issue.

Syria and other downstream users cannot allow themselves the luxury of imagining they will be in line for additional gas.

Although Syria is bound to rely on its neighbours in the short term, if it wants security of supply, it needs to ensure there are incentives to invest in domestic exploration.