With oil prices relatively high and a sense that the worst of the global economic slowdown has passed, the energy industry is in far better shape than it was a year ago.
Energy firms had a difficult start to the year, with oil prices at just $35 a barrel in January 2009. The price had slumped in just six months from a peak of $147 a barrel in July 2008 and there was little expectation that any large, new projects would go ahead. National oil companies (NOCs) across the region were reining in expensive projects that no longer appeared feasible.
But the Middle East’s energy dependent countries are approaching 2010 in a strong position. Global oil demand started to increase in November 2009, after falling for a year and a half, and that growth helped to boost oil prices above $80 a barrel in November.
The marked falls in engineering, procurement and construction (EPC) costs over the course of 2009 have also helped. Following a period of rising costs for several years, lower EPC prices have encouraged governments to press ahead with new projects.
French oil and gas contractor Technip estimates that by October 2009, construction costs in the Gulf’s oil and gas sector had fallen by more than 45 per cent from their peak in July 2008. For EPC deals, oil and gas contractors charged just $40 a man-hour in October 2009, compared with $75 a man-hour at the peak of the market in July 2008. Gulf governments have also benefited from a 60 per cent drop in the cost of piping and equipment over the same period.
- $62 – Average price of a barrel of oil in 2009
- $38.9bn – Value of projects planned in Kuwait, Qatar and Saudi Arabia
- 45 per cent – Fall in construction costs in 15 months to October 2009
Those low costs led to NOCs in Saudi Arabia and the UAE awarding contracts worth a total of $28.2bn in the first nine months of 2009, according to regional projects tracker MEED Projects.
The current hopes for global economic recovery mean that spending is likely to continue in the year ahead. Data from MEED Projects shows that in the UAE alone, state-run energy companies will award $18bn worth of contracts in the first half of 2010 as they take advantage of low prices.
|Middle East oil market|
|Source: International Energy Agency|
|Middle East gas market|
|(billion cubic metres)|
|Source: International Energy Agency|
Technip estimates that Kuwait, Qatar and Saudi Arabia together will award a further $38.9bn worth of deals between now and the end of 2012.
“We have seen countries move out of that danger zone where the oil price was low and projects were being put on hold as a matter of course,” says Samuel Ciszuk, Middle East energy analyst at US consultant IHS Global Insight. “The expectation from clients that contractors would quickly supply lower bids created some problems, but now we have moved on from that and the bulk of projects are going ahead.”
In terms of new projects, much of the focus for oil majors and energy contractors over the next 12 months is on Iraq. In early November, Baghdad signed three upstream deals, which between them have the potential to boost its oil output by 4.8 million barrels a day (b/d) by 2015.
On 2 November, Iraq signed a 20-year deal with a consortium led by Italy’s Eni to develop the southern Zubair field, near Basra. One day later, Iraq’s cabinet approved a $15bn technical service contract with the UK’s BP and China National Petroleum Corporation to develop the Rumaila oil field. And on 5 November, the Oil Ministry awarded a 20-year contract to the US’ ExxonMobil Corporation and the UK/Dutch Shell Group to develop the West Qurna oil field in Basra province.
One international oil company (IOC) executive working in Iraq says that although significant challenges remain for the successful bidders, including doubts about security and political stability, the new-found spirit of compromise between IOCs and Baghdad, following a period of failed negotiations, is encouraging.
“We were at loggerheads with the oil ministry just months ago and now we have real, firm deals on the table,” says the executive. “2010 will be the year when we discover whether we can turn these into reality.”
Several more major deals are due to be agreed in the coming weeks and months, which will show how good the relationship between Baghdad and the oil majors really is.
“We were at loggerheads with [Iraq’s] oil ministry just months ago and now we have firm deals on the table”
International oil company executive
Bids from oil majors for a second licensing round covering 10 oil and gas fields, including the highly prized Majnoon field in Basra province and West Qurna phase 2, were due to be submitted on 11 and 12 December as this yearbook went to press.
Tenders for a series of short-term contracts to increase prod-uction at the Nasiriyah, Nahr bin Umar, East Baghdad, Tuba and Rafidain fields are due to follow in 2010.
“I think now is a good time for the IOCs to take a gamble on Iraq,” says Ciszuk. “There is not enough time between now and the January [parliamentary] election to sink money into Iraq, so you may as well use the government as a guarantor and gamble on it now.”
Major contracts in more secure and better established Gulf markets, including Saudi Arabia and the UAE, will also be put out to tender in 2010.
Riyadh is planning exploration activity in the Red Sea, while EPC packages will be tendered for gas projects at its Shaybah and Manifa fields. With spare capacity of 4 million barrels a day of oil, the kingdom will focus on exploiting its gas reserves to meet surging domestic demand, which is growing at a rate of 7 per cent a year.
But it has also been trying hard to keep costs under control. After successfully trimming $2bn off the cost of the Jubail export refinery in 2009, which is being developed by Saudi Aramco and France’s Total, a similar price cut is expected when contractors file EPC bids for a new facility at Yanbu in January 2010, which is being developed with the US’ ConocoPhillips.
A final investment decision is also due by the end of 2010 from Aramco and the US’ Dow Chem-ical Company for the Ras Tanura integrated petrochemicals project, although sources close to the scheme say it could suffer further delays.
Gulf petrochemicals producers are finding market conditions tough. While 15 million tonnes a year of new ethylene capacity is due to come on line in the region over the period from August 2008 until March 2010, global demand is at its lowest level in three years and overcapacity is likely to keep prices low for some time.
The difficulties facing petrochemicals firms contrast with growing optimism in oil and gas.
After a rapid series of tenders in 2009, Abu Dhabi is expected to award contracts worth as much as $10bn on two major oil and gas schemes before the end of 2009: a major refinery expansion at Ruwais and a scheme to boost the emirate’s onshore oil production by 400,000 b/d.
Construction bids are also due in December on the emirate’s $10bn-plus Shah sour gas development, with contract awards due in the first quarter of 2010.
After a year of focusing on delivering new liquefied natural gas (LNG) capacity through its Qatargas and Ras Laffan Liquefied Natural Gas Company (RasGas) subsidiaries, Qatar Petroleum will switch to tendering its Barzan gas development scheme and the long-awaited Al-Shaheen oil refinery in 2010. Both were put on hold in late 2008.
But such progress is not expected everywhere. Iran, for example, continues to face significant problems because of its inability to attract oil majors to invest while US and UN sanctions remain in place. On his appointment in September, Iran’s Oil Minister Masoud Mir-Kazemi estimated that Tehran faced a $16bn funding shortfall in 2009 to finance its outstanding gas projects. With National Iranian Oil Company only holding about $100m in cash reserves, up to $40bn more is needed just to complete the next phases of the development of the South Pars gas field.
“Iran needs to prioritise,” says Ciszuk. “There is talk that only about 15 per cent of its projects will go forward, and the fight against declining rates in its oil fields is taking up most of its resources now. It means that, over the medium term, gas shortages will become worse.”
“Iran needs to prioritise. There is talk that only about 15 per cent of its projects will go forward”
Samuel Ciszuk, IHS Global Insight
Progress has also been slow in Kuwait, with plans to increase production to 4 million b/d by 2020 dented by political opposition to foreign investment in the country’s energy sector.
Rumours persist that the country’s $15bn, fourth refinery project at Al-Zour will finally be tendered in 2010 after a series of postponements. A $17bn petrochemicals joint venture with the US’ Dow Chemical Company could also be resurrected.
Bahrain and Oman, relative minnows in the Gulf energy market, are also pressing ahead with important exploration efforts. Bahrain has lured the US’ Occidental Petroleum and Abu Dhabi’s Mubadala Development Company to develop its sole oil field in 2010, while Oman expects to boost production to 805,000 b/d from 756,000 b/d in 2008 with the help of a series of enhanced oil recovery schemes.
The year ahead could also be a period of revival for some of the main North African energy producers. Algeria, in particular, which attracted strong investment in 2008, has struggled since the economic downturn hit the region late that year.
But with international investment badly needed, Algiers has been making concessions to international companies. It has prequalified 87 companies for its next licensing round, which is due to take place in December 2009, and has abandoned its policy of requiring IOCs to hand over stakes in their overseas energy projects in exchange for exploration and production licences.
In Libya and Egypt, the situation is more uncertain. Libya, unsettled by the resignation in September of Shokri Ghanem, chairman of the National Oil Corporation, and his surprise rehiring a month later, is reviewing its oil production targets. Cairo, which appears less concerned than many others about appeasing oil majors, continues to alienate them by prioritising gas supplies to its domestic market above exports.
But despite the challenges, the overall outlook for the Middle East and North Africa energy sector is positive for 2010, and with oil prices relatively high, governments are expected to continue to launch new projects.