Oil and gas are the commodities driving the GCC economic machine. Underpinned by crude reserves conservatively estimated at a joint 500 billion barrels and gas at 40 trillion cubic metres, the GCC is in the fortuitous position of including the most aggressive producers of hydrocarbons among its ranks.
That the region’s collective GDP now stands at about $800bn, compared with $180bn in 1990, is largely down to the rapid expansion of all six member states’ hydrocarbons sectors over the past five years.

According to the International Energy Agency (IEA), 70 per cent of the 5 million barrel-a-day (b/d) increase in Opec crude capacity to 38.4 million b/d due by 2012 will come from Saudi Arabia alone. And the UAE will add a not insubstantial 500,000 b/d by that time.

At the same time, the GCC states have few formal cross-border energy ties. The 1981 charter instructs member states to “formulate unified oil policies and adopt common positions vis-a-vis the outside world”, but the key relationships in the energy field are the supplier-producer ties of the main producing states. For example, Saudi Arabia keeps the US and other key markets furnished with crude, while Qatar feeds the East Pacific industrial engine with massive natural gas exports. The main area for GCC members’ co-ordination related to oil production is within the framework of Opec.

Critical relationships

This shadows the GCC’s wider strategic relationships, where energy and politics are bound together. “The GCC is a critical relationship for Saudi Arabia, but the most important one is with the US,” says Neil Partrick, a Gulf-based political analyst.

The advent of the first gas through the Dolphin energy pipeline in July this year is changing the equation. The onset of 2 billion cubic feet a day (cf/d) of gas through the subsea pipeline from Ras Laffan to Abu Dhabi has given two of the region’s key states a tangible inter-dependent relationship. “If the Dolphin link wasn’t there, the lights would be going out in the UAE’s shopping malls,” says Partrick.

A mothballed scheme to transport 800 million-1.4 billion cf/d of natural gas from Qatar to Kuwait – vetoed by Riyadh since it traversed its maritime borders – may also be revived if the improved relations between Saudi and Doha are maintained.

Closer ties

Given the GCC’s asymmetric gas endowment, more schemes like the Dolphin pipeline will tie the member states ever closer. The Dolphin gas supplies will only give transitory relief to gas-starved Abu Dhabi, and Qatar is reluctant to sanction further increases as it keeps a close watch on its North field. The UAE’s prospects for obtaining Iranian gas have been hampered by political and technical hitches. Saudi Arabia is relying on gas discoveries from the Rub al-Khali (Empty Quarter) basin, but the early soundings suggest the drilling programme has come up dry – presenting a major headache for both the Saudi authorities and the oil majors exploring in the basin.

Strategic considerations will also propel cross-border energy schemes, though there is still hesitancy over sanctioning politically inspired projects. Saudi Arabia is particularly cautious about schemes such as Abu Dhabi-owned International Petroleum Investment Company’s plans for a 360-kilo-metre pipeline from its Habshan oil fields to the port of Fujairah, pumping up to 1.5 million b/d and, more importantly, circumventing the sensitive Strait of Hormuz. The proposed pipeline could eventually link the Ras Tanura oil terminal in Saudi Arabia to Fujairah.

Analysts say the kingdom is still wary of undertaking measures that could incur Tehran’s wrath, reiterating that the success of such projects depends on clement political conditions. Riyadh’s past objection to various pipeline schemes, from Dolphin to the Qatar-Kuwait gas link, reflects the continued primacy of national strategic sensitivities.

But Gulf energy producers are joining up in other, more nuanced ways. The emergence of a new breed of energy company in the Gulf over the past two years has opened up innovative areas of collaboration across GCC borders. Abu Dhabi National Energy Company (Taqa) in October 2007 formed a partnership with Kuwait Energy Company (KEC), an independent exploration and production company, to seek oil and gas upstream opportunities in Egypt, Oman, Yemen, Syria, Iraq, Kazakhstan and Iran – an example of the more flexible relationships that will drive future energy sector investments in the region. Groups such as Taqa and the private Aabar Petroleum are also homing in on the Gulf region, traditionally reserved for the state oil companies. These could provide competition for the oil majors still knocking anxiously on Gulf doors.

Though all GCC states face different energy challenges – such as Oman’s difficult geology, Bahrain’s minimal reserves base and Kuwait’s uncertain investment climate – there is at least a growing sense of common purpose among the Gulf’s energy strategists.

A focus on capitalising on the region’s competitive advantage is increasingly evident in driving investment plans. “The GCC is today creating energy service industries with a growing number of locally based service players,” Ibrahim al-Muhanna, adviser to Saudi Arabia’s Petroleum & Mineral Resources Minister Ali al-Naimi, told a GCC meeting in Amsterdam in October. “Service companies are moving to base themselves here. Halliburton is headquartered in Dubai now, and Schlumberger has set up a research and development centre in Dhahran.”

Al-Muhanna highlighted plans to create an indigenous Gulf-based services company, capitalising on improving research and development facilities and a wealth of capital willing to invest. In May this year, the UAE’s Mubadala Development Corporation announced it was preparing to launch an oil field services unit, focusing on opportunities in the Gulf and elsewhere. The Gulf’s renewed focus on oil services companies could be bad news for traditional oil majors, such as the UK/Dutch Shell group and France’s Total, whose dry wells in the Rub al-Khali have worsened corporate moods over their Middle East futures.

The official line on big oil’s prospects in the GCC remains upbeat. “What they offer is different from what we offer,” says Malcolm Brinded, head of exploration and production at Shell. “We focus on technology integration; they offer a breadth of services in the short term. We can leverage our global contracts with these companies about how to get the best out of these capabilities.”

GCC authorities say the playing field is open to all comers. But some are more equal than others, and it is the Gulf states’ growing sophistication that will ensure homegrown outfits reap the richest pickings from the world’s most prospective exploration region.