Energy goes into expansion programmes (1 of 2)

17 January 1997

WITH prices at their highest since the Gulf war in January 1991, Middle East oil exporters have started the new year on a high note. Brisk demand and the slower than expected expansion of non-OPEC supplies pushed the average price of the benchmark Brent to more than $20 a barrel in 1996. Most analysts expect a correction in 1997 but some detect a seminal shift into a new price band, with $20 a barrel being the new floor. Cold winter weather was the main influence keeping prices at about $23 a barrel in early January, but prices should be softer by the second quarter if trends remain true to past form.

Most Middle East producers are pursuing expansion plans with particular emphasis on developing gas resources. Some of the gas is for local use, as in Saudi Arabia and the UAE, while countries such as Qatar, Egypt and Oman are developing it for export as well. Downstream investment, whether in overseas refineries or gas-fired domestic industries, is also a feature of energy sector developments around the region. In this report, MEED writers outline the main developments which will generate new business in the oil and gas sector over the next 12 months in the Middle East:

EGYPT has been exporting oil since the start of the 20th century. Now it is poised to enter the next century as a significant exporter of gas. This year will see the start of an intensive period of gas field development, as preparations are made to start exporting liquefied natural gas (LNG) to Turkey from 2000.

The rise and rise of Egypt's gas industry has tended to overshadow the oil sector in recent years. Crude oil output started to fall in 1996, to a low of about 830,000 barrels a day (b/d) in the third quarter. However, the government says the previous level of around 870,000 b/d, which has held steady since the early 1980s, will be regained in 1997, as fresh output from the October field in the Gulf of Suez and from new fields in the Western Desert come on stream.

Gas output has reached a plateau of about 1,400 million cubic feet a day (mcf/d), and will not start to increase appreciably until 1999. But from then on, production will rise in leaps and bounds. In the first half of 1997, contracts are due to be let for an estimated $750 million development of Western Desert fields discovered by Shell Egypt, Repsol of Spain and Norway's Norsk Hydro. Shell's Obeiyed field will produce 300 mcf/d, and Repsol's Khalda field will be yielding 200 mcf/d. Norsk's Western Desert interests are less prolific, and have recently been taken over by Repsol.

At the same time, Amoco Corporation of the US and Italy's International Egyptian Oil Company (IEOC - part of the ENI group) will be starting work on an estimated $1,000 million development of the Baltim, Temsah and Ras el-Barr fields, off the east Delta coast. These fields are expected to be producing at least 1,000 mcf/d between them in 2000.

The two companies are also investing heavily in continued exploration in a string of concessions in this area. They estimate that they have discovered reserves of at least 5 trillion cubic feet (tcf) so far - the government's official figure for Egypt's total gas reserves is 24 tcf. Fresh discoveries are coming thick and fast, and analysts say it will not be long before Egypt's reserves reach 50 tcf.

The export deal to Turkey was announced in November at the Cairo economic conference. The decision to look at Turkey, rather than Israel, as the first foreign market for Egyptian gas appears to have been based on a combination of political and technical factors. Relations with Israel, which were starting to warm up until the election victory of Benjamin Netanyahu in May 1996, have become strained.

It was clear that the technical negotiations about a pipeline to Israel needed to be underpinned by solid political support from both governments. Without such support, the talks had little chance of success, and the Egyptians and their foreign equity partners in the fields earmarked for gas exports started looking seriously at alternatives.

The Turkey deal came in the form of a memorandum of understanding between Turkish oil and gas monopoly Botas, the Egyptian General Petroleum Corporation (EGPC) and Amoco. IEOC has said it could take part in the scheme, but it is still interested in further study on a subsea pipeline option. However, the LNG proposal is gaining momentum. EGPC and Amoco are working on plans to form a company to liquefy the gas, probably involving two trains of about 250 mcf/d (2.5 million tonnes a year - t/y) each. Botas will form a separate company to regassify the LNG in Turkey. The agreement specifies a target of 10 million t/y to be exported to Turkey in 2000.

The developments in the gas sector in particular have encouraged firms to continue investing in exploration. The bid round that closed at the end of September attracted a strong response, and seven blocks are expected to be awarded out of 11 offered. The bid round showed the increasing interest of private Egyptian companies in getting involved in the upstream end of the industry, as well as in refining and petrochemicals. The government says it plans to offer seven more blocks in 1997. Petroleum Minister Hamdi el-Banbi has said that another eight concessions will be available in a new bid round this year.

The oil industry is gearing up for a series of new projects to increase capacity by about 10 per cent by the turn of the century. They are also intended to demonstrate Iran's ability to overcome US sanctions and develop its oil resources regardless of attempts to impede investment and access to technology. The National Iranian Oil Company's (NIOC's) plans partly depend on the co-operation of French and Far Eastern oil firms. The success or failure of the NIOC strategy should become apparent by mid-year.

The Oil Ministry put sustainable crude capacity in 1996 at about 4 million barrels a day (b/d), with the capability of increasing it to 4.2 million b/d for limited periods. This gives Iran, which has had an OPEC quota of 3.6 million b/d in recent years, spare capacity equivalent to about 10 per cent of current output.

However, most of the producing Iranian fields are mature and with higher world demand expected in the next decade, planners will not be comfortable unless there is a sustainable capacity of at least 4.5 million b/d by the turn of the century. There is even talk of restoring the pre-revolution capacity of 6.5 million b/d, although that would require massive investment and any such plans are very vague.

For the moment, attention is focused on half a dozen projects from a list of 13 announced since 1995. Viewed in its entirety, the project progamme is a wish list designed to gain a propaganda advantage over the US and to offer as tempting a target as possible for foreign companies.

The most concrete projects, which could be awarded by February 1997, are the Balal and Soroush offshore oil fields. Together, the two schemes could add 100,000 b/d to capacity. Bids were being considered at the turn of the year from Malaysia's Petronas and ETPM and Technip, both of France. Also in the running may be Premier of the UK, Neste of Finland and Canadian Occidental.

Four other schemes may be awarded by mid-1997, officials say. These are likely to include two natural gas liquids (NGL) plants. The Doroud field gas injection project, and the second and third phases of the offshore South Pars gas scheme are also under bidding. Royal Dutch/Shell is the leading bidder for South Pars, but Shell was indicating in late 1996 it first wanted to gauge potential US reaction.

The US put into effect secondary sanctions against Iran on 5 August 1996 which are designed to discourage non-US companies from investing more than $40 million at a time in Iran's hydrocarbons industry. Companies and European countries, who say they will not accept the US legislation, are waiting to see the detailed implementation rules, which are due to be published early this year.

The French oil company Total has been most conspicuous in its dismissal of US pressure. Having signed a $600 million contract to develop the offshore Sirri A and E oil fields in 1995, it took on Petronas as a 30 per cent partner in mid-1996 and awarded the main construction contract to a subsidiary of the French company ETPM. Another big contract for drilling operating wells is due in early 1997, and the first of an eventual 120,000 b/d should start flowing from Sirri in early 1998.

KUWAIT is aiming to boost production capacity to 3.5 million barrels a day (b/d) by 2005. Current production is 2 million b/d. At the forefront of these efforts will be the US' Parsons Engineering Corporation, which has had its project management contract with Kuwait Oil Company (KOC) extended until the end of 2001.

Production will be boosted by almost 400,000 b/d when China Petroleum Engineering & Construction Company finishes the construction of gathering centres (GCs) 27 and 28 in the western fields of Umm Gudair and Minagish. The project is for completion in 1998.

Bids to construct GC 25 in the Rawdatain field are due to be submitted to KOC in mid-January. The new GC will boost production at the field by about 250,000 b/d. Bids have also been invited for the construction and installation of water injection facilities at the Rawdatain field. Both projects are expected to be worth about $200 million each.

In the downstream sector, the long-running saga over the construction of an acid gas removal plant (AGRP) at Mina al-Ahmadi refinery has finally reached a conclusion. In September, South Korea's Sunkyong Engineering & Construction Company was awarded a $135 million design and construction contract, more than two years after submitting the original low bid for the project.

The contract involves building new process units for gas and petroleum condensates treatment. Work includes the design, procurement and installation of new process units with a capacity of 210 million standard cubic feet of gas and 44,000 barrels a day of condensates. Feed to the new units will be supplied from GCs 27 and 28.

A final decision about future involvement of foreign companies in the upstream sector has still to be made by the Supreme Petroleum Council, but there are few expectations that foreign involvement will stretch further than the current technical co-operation agreements. KOC currently has technical service agreements with Exxon Corporation, Conoco, The British Petroleum Company (BP), the Royal Dutch/Shell Group and the Chevron Corporation. It is also holding negotiations with France's Total.

Kuwait Petroleum Corporation (KPC) continues to sell off its overseas assets. In early December, Norway's Saga Petroleum overcame stiff competition to purchase Santa Fe Exploration for $1,230 million. The sell-off is part of KPC's strategy of focusing on its core functions of expanding crude production and refining capacity, upgrading refineries, and developing a petrochemicals industry. Another likely candidate for sale is Kuwait Foreign Petroleum & Exploration Company (Kufpec), which is making a profit for the first time in many years (Oil & Gas, MEED Special Report, 29:3:96, page 16).

The government has ambitions to keep pushing oil production upwards, aiming to hit 1 million barrels a day (b/d) by 2006. Production currently averages about 900,000 b/d. Petroleum Development Oman (PDO) produced an average of 854,000 b/d in September 1996, and just above 50,000 b/d comes from Oman's smaller producers, Occidental of Oman, Japan Petroleum Exploration Company (Japex), Elf Petroleum Oman and International Petroleum Bukha.

PDO's plans to increase production rest on the development of the Athel reservoir in southern Oman. The drilling of three wells has yielded encouraging volumes of good quality oil, but much will depend on developing the right technology to exploit the reserves. 'A number of technical challenges have to be resolved,' Petroleum & Minerals Minister Said Bin Ahmed al-Shanfari said in late 1996. Most of the reserves are under high pressure at great depth and activity at Athel is not expected to add much to production rates before 2000.

Exploration activity in other areas of Oman is expected to get underway in 1997 after new exploration and production agreements were signed in June 1996. The government awarded concessions to Japex, Partex (Oman) Corporation, and US companies Atlantic Richfield Company (Arco), Triton Energy Corporation and Phillips Petroleum Company. Shanfari has indicated that a further exploration licence will be awarded soon.

The liquefied natural gas (LNG) project will move into the construction phase in the year ahead. Contracts have been awarded for three packages being handled by PDO, for the upstream facilities, the interfield pipelines and the gas supply pipeline to the liquefaction plant. Work

will also start on Oman LNG's liquefaction plant, being built by the Japanese/

UK/local Chiyoda-Foster Wheeler & Company.

Most of the LNG has been accounted for, but marketing activity will continue to place the residual volume. Negotiations with the Petroleum Authority of Thailand are expected to lead to the signing of a sales and purchase agreement early in the year. Oman LNG will also be looking for customers for uncommitted volumes of about 2.2 million tonnes a year from 2000-2003 (see page 15).

The oil sector will pass a new milestone in early 1997 when output reaches 500,000 barrels a day (b/d) for the first time in almost two decades. With Qatar General Petroleum Corporation (QGPC) and its foreign partners planning further development work, installed production capacity is expected to climb to 700,000 b/d by the end of the decade.

Oil output has risen steadily from 390,000 b/d in 1995 and remains well above the OPEC quota of 378,000 b/d. The sharp rise in production over the past two years is a result of the government initiative to encourage foreign participation in exploration and development by offering more attractive terms. Indeed, by 2000, production by foreign ventures is set to have risen five-fold to an estimated 270,000 b/d.

The increase will come from offshore acreage. At the Idd al-Shargi field, where the US' Occidental Petroleum has an innovative development and production sharing agreement with QGPC, production has already reached 70,000 b/d and it is expected to grow steadily to 110,000 b/d over the next three years.

Elsewhere, Denmark's Maersk is planning a major development programme at Al-Shaheen, which will double capacity from the current 25,000-30,000 b/d. The US' Arco has recently brought on stream the Al-Rayyan field at a rate of 35,000 b/d and is expected to decide next autumn on whether to expand production. At the Al-Khaleej field operated by France's Elf Aquitaine, production will begin in the first quarter of 1997 at an initial rate of 20,000-30,000 b/d.

Not to be outdone, QGPC is also stepping up its own investment. A four year programme, intended to raise capacity by 60,000 b/d to 330,000 b/d, is well under way at the onshore Dukhan field. Included in the programme is the ongoing $300 million Arab D gas recycling scheme and the upgrade of existing installations in the field. At the offshore Bul Hanine field, a gas recycling scheme is planned, along the lines of the one currently being carried out at Dukhan.

The world's biggest oil exporter benefited from higher than expected oil prices in 1996 to the tune of some $10,000 million in unbudgeted revenues. The windfall earnings have encouraged Saudi Aramco to move ahead with a number of projects faster than might have been expected.

Bids were submitted by four US firms in late December for the project management contract to upgrade the Rabigh refinery on the Red Sea coast. The estimated $2,000 million investment programme had been planned for a number of years but was delayed by disagreements between Aramco and its former joint-venture partner, Petrola of Greece. In spite of Aramco's earlier buy-out of Petrola the scheme was not expected to receive attention until the $1,200 million upgrade of the Ras Tanura refinery had been completed.

Work at Ras Tanura is scheduled for completion in early 1998 with Rabigh to follow in 2000. Capacity will be restored to 300,000 barrels a day (b/d) at Ras Tanura and 325,000 b/d at Rabigh. Future expansions at Ras Tanura may raise capacity to an eventual 1 million b/d. Aramco officials say that $7,000 million will be spent by 2007, creating 30,000 new jobs. If the project goes ahead, Saudi Aramco will become the world's largest oil refiner.

Bidding for the lump sum turnkey contract to modify the kingdom's domestic bulk handling plants is expected to open in early 1997. The work covers existing facilities at 22 sites throughout the kingdom: seven in the western region, eight in the central region, and seven in Eastern Province. It is likely to be split into three packages by area. Each package is valued at an estimated $50 million-100 million. The modifications have become necessary due to growing domestic demand for refined products.

Saudi Aramco's downstream expansion overseas is also expected to progress in 1997. Portuguese officials have said that Aramco will take a stake of 30-35 per cent in state oil firm Petroleos de Portugal (Petrogal). Negotiations are expected to be concluded early in the year. Petrogal has two refineries with a combined capacity of 304,000 b/d and controls over 80 per cent of Portugal's market for refined products. Crude oil imports from the kingdom - currently some 20 per cent of Petrogal's total requirement - are likely to rise if a strategic partnership is established.

Plans for a joint-venture refinery in India are also expected to advance in 1997. A feasibility study for a 120,000 b/d refinery in Punjab is due to be completed soon. Both Aramco and Hindustan Petroleum Corporation will take stakes of 26 per cent in the refinery, with the remainder to be opened to public subscription. Mechanical completion is scheduled for 2001.

The kingdom expects demand for refined products in Asia to continue rising over the next decade. By establishing joint-venture refineries in the region, Aramco hopes to secure outlets for Saudi crude at a time when non-OPEC supplies are likely to be rising.

The final quarter of 1996 saw Aramco launch the largest gas sector development for more than 10 years. The decision to go ahead with construction of a grassroots gas processing plant at Hawiya so soon after the award of the main construction contracts on the Shayba oil field development caught some analysts by surprise. However, soaring domestic demand for fuel gas and feedstock for the petrochemicals industry has made expansion of the master gas system (MGS) inevitable. The project management contract on the estimated $2,000 million scheme was signed with the US' The Parsons Corporation in early November.

Expansions are also underway at the kingdom's three existing gas processing plants at Uthmaniyah, Berri and Shedgum. Bidding for the estimated $140 million contract to debottleneck the Shedgum plant is due to close in mid-February. The $80 million contract to debottleneck Berri is expected to be awarded in early 1997. The $238 million contract to debottleneck the Uthmaniyah plant was awarded to Parsons and the local MS al-Suwaidi Establishment for Contracting in the autumn.

The new expansions will lift processing capacity of the MGS to about 6,300 million cubic feet a day (mcf/d) from the present 4,000 mcf/d. With crude oil production holding steady at about 8.1 million b/d, an increasing proportion of gas in the system is expected to be non-associated gas from the deep Khuff reservoir. Aramco aims to have some 13 drilling rigs at work on the reservoir by the end of 1997.

IT has been a long time since anything of major significance happened in the Syrian oil and gas sector. The advent of a new oil minister, Maher Jamal, in July 1996 has not changed matters much. Oil production continues at about 600,000 barrel a day (b/d), and gas production is starting to increase, as developments started two years ago come on stream. However, no new companies have come in to carry out exploration work, and the government's contract terms remain as uninviting as ever.

The dominant force in the industry is Al-Furat Petroleum Company, the joint venture between the Syrian Petroleum Company (SPC) and three foreign partners: the Royal Dutch/Shell Group, Pecten of the US and Deminex of Germany. Al-Furat produces some 380,000 b/d of crude oil from its 30 or so fields in the Euphrates Graben. Shell has an active exploration programme for the Al-Waleed area. Industry experts estimate Al-Furat's recoverable reserves at about 1,600 million barrels, out of a total of some 3,000 million barrels.

The only other foreign operators producing oil are Elf Aquitaine of France and Ireland's Tullow Oil. The former is producing some 60,000 b/d from the Jafra field; Tullow has brought on stream 15,000 b/d in the Kishma field. Syria's remaining oil output comes from older fields developed and operated by SPC.

While oil production is entering a phase of managed decline, the government is focusing its efforts on increasing gas output. Three new natural gas fields were brought on stream by SPC in the Palmyra area at the end of 1996, bringing total natural and associated gas production up to about 500 million cubic feet a day. Contracts for the development of a fourth field in the Palmyra area are under negotiation, and SPC is evaluating bids from consultants for a new project to develop associated gas from fields operated by Al-Furat.

However, negotiations with Marathon Oil Company of the US about developing gas it discovered in the 1980s have still not reached a conclusion.

Foreign companies say they hope an agreement can be reached with Marathon, leading the way to a more co-operative relationship between the government and foreign companies. Without such a change in atmosphere, prospects for major new exploration and development initiatives are dim.

1997 will be the year of the multi-million dollar gas project in Abu Dhabi, the UAE's dominant energy producer. With more than 500,000 barrels a day (b/d) of spare oil capacity, Abu Dhabi National Oil Company (ADNOC) is turning its attention to significantly expanding its upstream gas handling capacity in a $2,500 million crash programme aimed at meeting rising local demand.

UAE wellhead production has remained virtually unchanged over the past 18 months, ranging between 2.16 million b/d - its OPEC quota - and 2.2 million b/d. Similar production rates are expected over the next 12 months, although Abu Dhabi will be able to increase output from an estimated 1.9 million b/d if Dubai's production continues to slip.

In Abu Dhabi, new investment in the upstream oil sector is likely to be the lowest for almost a decade. Activity will be centred on completing the ongoing Sahil development scheme for Abu Dhabi Company for Onshore Oil Operations (Adco) and starting construction work on the offshore Delma field development for Abu Dhabi Marine Operating Company (Adma-Opco).

In contrast, ADNOC is all set to go on a spending spree in its gas fields, with three major development projects due for tender. Construction bids have already been invited for the $500 million-plus Asab gas development project. France's Technip Geo- production is nearing completion of the front-end engineering and design (FEED) package on phase two of the onshore gas development programme, which is expected to cost at least $1,000 million to implement.

A FEED contractor is also due to be appointed in the first quarter of 1997 for the upstream and downstream elements of the Khuff gas development, the

estimated $800 million project aimed at transporting offshore Khuff gas to Jebel Ali.

In tandem with its gas development programme, ADNOC is expected to push ahead with the expansion of its downstream industries. Activity on the planned Ruwais petrochemical complex will be stepped up by ADNOC and its foreign partner Borealis. The relationship between the two could be further consolidated if Abu Dhabi succeeds in its bid to purchase the share in the Borealis joint venture currently held by Finland's Neste.

Dubai's focus will be on trying to reverse the steady decline in its oil production, which has dropped by 130,000 b/d to 270,000 b/d over the past five years.

In Ras al-Khaimah, the recently-formed RAK Oil & Gas Company is expected to complete a seismic acquisition programme in its onshore and offshore acreage in early 1997.

Crescent Petroleum Company is also stepping up exploration activity in Sharjah's Mubarak field, following the mid-1996 signing of an agreement with Enterprise Oil. Under the accord, the UK company agreed to spend about $25 million on seismic and drilling activities in the area in return for a 40 per cent share of any oil produced as a result of new finds.

AS the five-year economic reform programme enters its second year, Yemen will continue to rely on the oil and gas sector as a vital source of revenue. Oil production is due to increase this year and the government's share of production will rise by nearly 9 per cent to about 200,000 barrels a day (b/d).

Maximum oil production is estimated at 365,000 b/d, almost half of which now comes from the Masila concession operated by Canada's Occidental Petroleum (CanOxy). Average production at Masila for the first nine months of last year was 179,200 b/d, up by 5 per cent on the same period in 1995.

Continuing increases in production will come from the Jannah concession, operated by Hunt Oil Company of the US. Hunt began production in the Hawelah field in October at a rate of 15,000 b/d. Production is set to increase to 60,000 b/d by the end of 1997 and to 78,000 b/d by mid-1998. The contract to construct a stabilisation facility as part of the second-phase expansion is still under negotiation and is expected to be awarded by the end of February. The Athens-based Consolidated Contractors International Company is in a good position to win the work.

The Cayman Islands-based Nimr Petroleum Company aims to resume production in block 4 in Shabwa at a rate of about 3,000 b/d during the first quarter of the year, following parliamentary approval in late December of its amended production sharing agreement. Nimr will pay 3 per cent of its revenues to the government in royalties, take 70 per cent to cover production costs, and divide the profit oil equally with the government. Nimr has yet to conclude new exploration agreements for blocks 16, 29 and 33. However, it is currently carrying out a new seismic survey in block 16 and plans to drill one more exploration well in block 33 this year.

The government's five-year plan includes projected investment in the oil and gas sector of almost YR 390,000 million ($3,000 million). About 75 per cent of this is intended for the development of natural gas reserves in the Marib/Al-Jawf fields, which is to be led by Total of France. Technip, also of France, and Bechtel of the US are expected to complete the front end engineering design (FEED) for the scheme by March. The engineering, procurement and construction (EPC) contract is due to be awarded by mid- 1997. Total's partners in the Yemen Exploration & Development Company, the joint venture developing the gas fields, are Hunt, Exxon Corporation of the US, and South Korea's Yukong. Negotiations to determine the companies' respective shares in the scheme began almost a year ago, but a formal agreement has yet to be signed.

Natwest Capital Markets was appointed in late 1996 to arrange finance worth $180 million for the scheme to upgrade the Aden oil refinery. A consortium of the UK's Tarmac Overseas and ABB Lummus Global of the US received a letter of intent for the construction contract in August. The work is aimed at restoring capacity - about 100,000 b/d at present - to the design capacity of 170,000 b/d.

The financing is likely to involve a security package provided by the government and based on guaranteed oil sales. Natwest will arrange a syndicated loan and aims to complete the financing arrangements before the parliamentary elections in April.

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