Gulf & North Africa

Opec secretary general Abdalla el-Badri had some grave news to announce on 9 February. The oil cartel’s member states had, he said, collectively postponed 35 drilling projects that were in various stages of development. As a result, Opec would not be in a position to increase production capacity by the 5 million barrels a day (b/d) that was anticipated.

Across the region, the biggest producers are delaying upstream developments as lower oil prices chip away at the commercial viability of potential new wells.

It is not just the producers’ problem. International oil companies (IOCs) are constraining their exploration and production spending against a backdrop of oil being sold for less than $50 a barrel. The traditionally tough terms on offer in the most promising Middle East and North Africa areas make the economics even less enticing for the foreign companies.

Algeria has encountered at first hand the shrinking appetite of the oil majors. The country’s seventh international oil and gas licensing round, in December 2008, drew bids for just one-quarter of the concessions on offer.

Officials’ claims that low oil prices had undermined the bid round are not wholly convincing. The robust terms being offered by Algiers and arcane bidding criteria also dissuaded several IOCs from submitting bids.

Contract revisions

Attention may now shift to neighbouring Libya, whose famously tough conditions have, to date, failed to put off IOCs. Such has been their interest in Libyan acreage that the National Oil Corporation (NOC) was able to progressively tighten bidding terms in four main exploration and production sharing agreement (Epsa) rounds since 2005, known as Epsa IV. The share of production allocated to IOCs was eroded from up to 40 per cent in the early rounds to below 20 per cent.

More recently, in late 2008, NOC announced that changes to its contract with four foreign companies -Italy’s Eni, the US’ Occidental Petroleum, Austria’s OMV and Petro-Canada -would slash their production shares to 10-15 per cent of total output.

In November 2007, NOC chairman Shukri Ghanem pointed out that oil prices above $100 a barrel made it imperative for Libya’s partners to invest more, and introduced several contract revisions to deals that were already signed.

There was little alternative for oil companies but to agree to an increasingly confident NOC’s terms. Eni, Occidental, OMV and Petro-Canada were all forced to renegotiate their contracts to ramp up investment, increase recovery rates and adapt to the tougher terms. Their share of gross production fell sharply.

More recently, in February this year, NOC redrew a pair of deals at Al-Jurf and Mabruk with France’s Total to give the state firm a bigger share of production.

But while the Libyans have skillfully tweaked their negotiating stance to mirror oil market fluctuations, these were all accomplished when prices were moving up. It remains to be seen if NOC negotiators will be as willing to adapt the terms on offer to the price falls since mid-2008.

It would be a surprise if they did. “If you look at the history of fiscal and commercial terms in the region, they have not really fluctuated in line with oil prices,” says Raja Kiwan, analyst at US consultant PFC Energy.

“Look at Abu Dhabi. It has had stringent and inflexible terms since the 1970s, and that has not changed as IOCs have recognised the value of having access to these reserves.”

The Epsa IV terms in Libya may no longer be feasible in the current climate, say IOCs.

Attracting investment

Others have proved more successful at enlisting upstream investment. In January, Egyptian General Petroleum Corporation (EGPC) signed a deal worth more than $3bn with Italy’s Edison to develop the offshore Abu Qir gas field. Egypt’s comparative attractiveness has been reinforced by a series of discoveries in recent months in the Gulf of Suez, the Nile Delta and the Western Desert.

But the picture in the Gulf’s major producing areas is less encouraging. Kuwait’s political logjam continues to stifle Project Kuwait, an unloved experiment that has satisfied neither IOC executives nor members of the National Assembly (parliament).

“It is a stalled process and there is no sign of the contracts ever being awarded,” says Alex Munton, analyst at UK-based energy consultant Wood Mackenzie.

Qatar is focusing its exploration efforts on gas prospects in the pre-Khuff fields adjacent to the giant North field, which is still under an exploration moratorium. Germany’s Wintershall took the first of a four-block offering in late 2008.

It is no accident that these offerings are gas-prone, since Qatar, like many Middle East countries, is experiencing a shortage of gas supplies and needs to prioritise its development. “If there are going to be any opportunities for IOCs, it is going to be on the gas side as the balances are getting tight,” says Kiwan.

Saudi Arabia is locked into a series of major oil expansion schemes that will leave the kingdom with 4.5 million b/d of spare capacity by the middle of the year.

State oil giant Saudi Aramco says it will have reached a sustained production capacity of 12 million b/d by late 2009, compared with about 11.3 million b/d in mid-2008. In the third quarter of 2008, the 500,000-b/d Khursaniyah development was brought on line, while the smaller 250,000-b/d Shaybah and 100,000-b/d Nuayyim fields are due on stream in the first half of 2009.

The kingdom has still found time to slow down some key projects, such as the 900,000-b/d Manifa scheme. In November 2008, Aramco announced it would be re-evaluated along with the Karan gas development.

Forthcoming awards

The Gulf’s non-Opec producers are displaying more eagerness to attract international investment to their upstream sectors. Oman plans to award five exploration licences to international producers this year, and is promoting a slate of capital-intensive enhanced oil recovery (EOR) initiatives. Yemen has also attempted to stir up interest from energy majors.

But it is the smallest Gulf producer, Bahrain, that has surprised the market by attracting some of the world’s largest oil companies. Eighteen IOCs prequalified for Manama’s February bid round for onshore deep gas exploration, including the UK’s BP, the US’ Chevron and ExxonMobil Corporation, and the UK/Dutch Shell Group.

Last year, ExxonMobil joined Occidental and Denmark’s Maersk Oil in bidding to overhaul the Awali oil field, aiming to double output at the 35,000 b/d field, a contract that was eventually awarded to Occidental.

The presence of these large IOCs is a reflection of the slim pickings that generally confront companies in the region. “Bahrain never normally gets on the super-major radar,” says Ross Cassidy, analyst at Wood Mackenzie. “It was quite a surprise that the redevelopment contract attracted an IOC the size of ExxonMobil.”

More substantive offerings are expected in Iraq, where IOC executives recently gave feedback to Oil Ministry officials over the terms of Baghdad’s first licensing round since the US-led invasion of 2003. The companies were not overly impressed with the terms on offer in the original contract, which required them to bid on the basis of the cost per barrel of maintaining the same output over a 20-year period, and the cost per barrel of raising output.

Baghdad seems to be listening. After meetings between IOCs and Oil Ministry officials in early February, Baghdad relaxed its terms.

IOCs have managed to extract some significant changes to the operating companies’ structures, including the opportunity to take a 75 per cent interest in the joint ventures, leaving the local regional operating company with a 25 per cent holding.

“Iraq needs to simulate activity in the oil sector and there is a desperate need for capital investment,” says Munton.

Iraq has long been seen as holding the most lucrative of the world’s untapped hydrocarbons reserves. But many of these offerings are still distant, and Baghdad is not yet prepared to auction undeveloped large fields.

For the IOCs surveying a distinctly mixed selection of properties, there is still little motivation to stretch fiscal resources for prospects that will not make a material difference to their reserves positions.

As yet, there are few signs of cracks in the edifice of Middle East states whose resource nationalism has increased in recent years. Developments over the next few months will tell if the advantage will shift back towards foreign investors.