Foreign aid substitutes for self-reliance

24 May 1996

Oil exploration is showing signs of coming back to life after a period of inactivity and there are big plans for the gas sector. Refining is also a priority although the lack of progress has been disappointing. In the power and telecoms sector there has been rapid expansion after a shortfall of investment in the 1980s. Industry is seeing some of the first fruits of deregulation.


Syria Shell Petroleum Development - which discovered a string of prolific fields in the 1980s - is to drill an exploration well this summer after a 3-D seismic survey of the Al-Walid area, in the Euphrates basin, north of Deir al-Zor. More significantly, negotiations are being held with a US European consortium about a new exploration licence in the Palmyra area. If this deal is concluded, it could mark a turning of the tide Over the past five years, Western oil companies have been leaving in a steady stream, and there have been no newcomers to replace them. This has left Shell, France's Elf Aquitaine and Tullow Oil of Ireland as the only oil companies active in the country.

They all are seeking new exploration deals, but have not yet agreed on terms.

The new consortium has been put together by Houston-based independent Transglobal. It has so far declined to reveal the identity of its European partner. It has been attracted by the good geological prospects in Syria, and an anticipated improvement in the terms Syria is prepared to offer to foreign oil companies.

The government has said it will increase the production share of the foreign operator, and improve the cost recovery terms.

Oil companies have also been permitted to use the market exchange rate for their local activities, rather than the overvalued official rate. Company officials say the changes are little more than cosmetic, and the Syrian terms are still harsh. However, they are encouraged that the government has at long last shown some flexibility, albeit limited.

Syria has not published an official estimate of crude oil reserves. Oil Minister Nader al-Nabulsi says this is not so much to do with secretiveness as with geological complexity. Production is now running at about 580.00 barrels a day (b/d). Al-Furat Petroleum Company, the joint venture between Shell, Germany's Deminex and the Syrian Petroleum Company (SPC), is producing about 380,000 bid, Elf about 60,000 b/d and SPC some 140,000 b/d. The Homs and Banias refineries take about 220,000 b/d, and the remainder is exported. The government has been earning about $1,500 million a year from these exports, after paying foreign operators their shares.

Crude oil production has now reached a plateau, and is even starting to decline. AlFurat is still the source of most of the new work for oil engineering companies. But much of this work is aimed at sustaining production, rather than developing new fields. A case in point is the Omar field, which has needed major investments in water injection to keep its output up at about 70,000 b/d. International contractors are now preparing to bid for the fourth phase of Omar's water injection programme.

Everyone involved in the industry agrees that more exploration is needed. If the Transglobal-led consortium succeeds in negotiating a reasonable deal, and Tullow decides to continue exploring after finding one promising field, other companies may be induced to have another look at Syria's oil prospects.


The government has big plans for the gas industry.

These include making gas the principal fuel for thermal power stations and expanding gas-based industries, such as fertilisers. Production has increased rapidly in the past two years with the startup of a number of new projects. They include Al-Furat's Omar associated gas project (about 200 million cubic feet a day - mcf/d) and an SPC gas scheme in the Palmyra area which started producing 70 mcf/d at the end of 1995, and will eventually produce some 200 mcf/d. The new schemes have lifted Syria's total gas output above 400 mcf/d.

SPC has invited bids from engineering companies to act as consultant for a new scheme, aimed at gathering associated gas from fields operated by Al-Furat. The scheme is estimated to cost about $250 million. The Arab Petroleum Investments Corporation (Apicorp) is likely to be approached for finance. The Saudi-based development bank has financed most of SPC's gas investments.


The modernisation of Syria's refining sector is one of the many projects in the country that are taking a long time to get moving. A report submitted by UOP of the US in 1994 recommended that the government should revamp the Homs and Banias refineries to produce a higher proportion of light products. France's BEICIP was appointed consultant for the project in early 1995. But there has been little progress since then.

Contractors say finance is the main stumbling block.

The project will cost an estimated $800 million. The government has also received bids for a new hydroskimming refinery in Deir al-Zor, which is to produce 60,000 b/d. However, there is no immediate prospect of a contract being signed.

The scheme has been criticised on the grounds that the site chosen for the refinery is a remote area, a considerable distance from the main consumption centres.


Thanks to the munificence of Kuwait, Japan and Saudi Arabia, Syria's power sector is now in reasonable shape. At the start of the 1990s, it was a disaster area, with lengthy power cuts virtually every day. Installed capacity has now reached 4,000 MW, and is projected to rise to 7,500 MW by 2003.

Peak demand is set to reach 4,000 MW in 2000. Kuwait provided the finance for a string of quickly-installed gas turbine generators, mostly supplied by FiatAvio of Italy. Japan's Mitsubishi Heavy Industries (MHI) has just completed one major power project, financed by Japan, and is working on a second, with finance from Saudi Arabia. The first was the 600-Mw Jandar plant, south of Homs, for which Japan's Overseas Economic Co-operation Fund (OECF) provided a $410 million loan. Even MHI's rivals concede that the Japanese company did an outstanding job in completing this plant according to an extremely tight schedule. The second is the 1,000-MW Aleppo power station which MHI is building for $530 million, with finance from the Saudi Fund for Development.

Bids have also been invited for a new 600-MW plant at Al-Zara, near Homs. The OECF has agreed to provide a $440 million loan for this project, which industry sources say could work in favour of MHI.


The fate of Syria's telephone system has mirrored that of electricity. It was starved of funds in the 1980s when Syria was in the dog days of pariah nation status. But funds began to flow in the 1990s. mainly from Kuwait, and the telephone system is as good, or bad, as most in the region. Siemens of Germany has done much of the work, including a 1-million-line programme that is nearing completion. The government says it plans to invite bids soon for a global standard for mobiles (GSM) system, that will be operated by the state telephone agency.


The government is concentrating its efforts on developing the textiles sector, to take advantage of the dramatic increases in cotton production since the deregulation of Syrian agriculture in the late 1980s. Two large new cotton yarn plants, financed by Kuwait and Abu Dhabi, have opened in Idleb and Latakia, and contracts are being negotiated for two more, at Latakia and Jebla. The combined value of the two new projects is more than $300 million.

Finance is coming from the Abu Dhabi Development Fund. The yarn will be used mainly by private sector textiles and clothing firms, which have mushroomed since the passage of Investment Law 10 in 1991.

The private sector has also become involved in the cement sector for the first time in modern history. The Syrian Saudi Cement Company, owned by a group of prominent Jeddah businessmen, with local partners including Rami Makhlouf, has placed a $78 million contract with Denmark's FL Smidth & Company to build a cement plant in Hama. It will produce 1 million tonnes a year (t/y). The founders have put in 31 per cent of the $197 million capital, and are in the process of raising the balance through public subscriptions in Syria, Lebanon, Egypt and the Gulf. If successful, this could encourage other investors to take a similar approach. However, the reliance entirely on equity is a reflection of a basic weakness in Syrian project finance: the absence of loan finance, other than that provided by development agencies.

The Kuwait Fund for Arab Economic Development is lending $70 million to finance a public sector cement project in Hama, also aiming to produce 1 million t/y. Bids are under evaluation from France's FCB, Germany's Kloeckner Humboldt Deutz and South Korea's Han Jung Corporation. The need for new cement capacity is clear. Production is now only 3.2 million t/y. barely sufficient to meet 50 per cent of demand. By 2000, demand is forecast to reach 10 million t/y.

A number of ambitious industrial schemes, including an iron and steel plant and a phosphatic fertiliser complex, have been suspended, despite the availability of finance. The underlying reason for the failure of these projects to progress appears to be shortcomings in the public sector's management capabilities. The private sector has not yet been given a real chance to show whether it could do better.

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