Yearbook 2011: Energy outlook - Rising demand drives oil and gas plans

09 December 2010

National oil companies stand to capitalise from lower contracting costs

In numbers

12 million: Number of barrels a day Iraq plans to produce within six years

$70 a barrel: The predicted long-term price of oil

$1bn: Value of orders expected by Lamprell by the end of 2010

Source: MEED

Expanding natural gas production remains a priority for the region in 2011 as power and industrial demand continues to rise.

Countries across the Middle East were forced to scale back their ambitious plans two years ago as oil prices and revenues fell from record highs.

Oil prices of $147 a barrel are unlikely to be seen again, says Leo Drollas, chief economist at London-based Centre for Global Energy Studies (CGES). They are also unlikely to settle below $50 a barrel. He adds that prices are likely to settle at $70 a barrel in the long term.

Such a price range would satisfy many governments, who over the past year have come to terms with much lower project budgets. 

The fall in engineering, procurement and construction (EPC) costs since 2009 will help. Qatar delayed its Barzan gas development until late 2010 to cash in on falling costs. The project is unlikely to see its major on- and offshore contracts awarded until early 2011.

Iraq is definitely leading the Middle East in regards to demand

Halliburton spokesman

In Saudi Arabia and the UAE in 2011, state-run energy companies will award more than $12bn-worth of contracts, upstream and downstream, according to projects tracker MEED Projects. Qatar is set to award almost $5bn. Algeria is forecast to award $8bn, followed closely by Libya with $7bn.

Iraq oil

In terms of new projects, international oil companies (IOC) continue to look to Iraq. The country’s oil sector ambitions are beginning to take shape.

The bar has been set high. Iraq plans to raise oil production to more than 12 million barrels a day (b/d) within six years, from the current 2.5 million b/d. To achieve this figure, up to a dozen oilfields will be developed by IOCs, which are finalising their early or first-phase development plans.

Iraq is likely to be the major revenue driver for large oil field services companies in 2011. The Oil Ministry has prequalified only five firms to bid on its fields – the local firm Oil Serv and the US’ Halliburton, Weatherford, Baker Hughes and Schlumberger.

“Iraq is definitely leading the Middle East in regards to demand,” a spokesman for Halliburton told MEED in November. “Everyone working in oil field services will say that 2009 was a low point for the sector and it wasn’t just because of a decrease in production activity.”

UAE rig manufacturer Lamprell says it expects to see more than $1bn in orders by the end of 2010, with prices rising to pre-economic crisis levels next year.

With tight deadlines on technical service agreements, IOCs are under pressure to increase production at Iraq’s producing fields. To fast-track the process, the IOCs are subcontracting large tranches of work to the five oil field services companies working in the country. This is a risk the IOCs are willing to take to establish themselves in the market.

Within the next year, the IOCs working in the country are expected to resume their normal practices once the first phase of work is allocated, opening up the market for other firms. Hundreds of wells need to be drilled and connected to new pipes, new treatment plants and pumping stations. Raising production by 10 per cent by the end of 2010 may well be the easy part. Further ahead lies the challenge of building large-scale production, storage and export facilities. Some targets may well be modified in 2011.

Iran oil and gas projects

Its neighbour, Iran, faces a tough year. Western oil companies have all but abandoned the country and in their absence, Tehran has been forced to look east to energy-hungry China for partners. It has provided attractive investment terms to Chinese companies, but even here, doubts are emerging over their willingness to match signed agreements with actual investment. Chinese companies are slowing down their operations in Iran, and some sources even talk of a temporary halting to projects. 

Arresting the decline of production rates in its oil fields will take up much of Iran’s resources. In the medium term, gas shortages will become worse. While Tehran remains at loggerheads with the west over its nuclear ambitions, state-owned National Iranian Oil Company (NIOC) will struggle to realise its ambitions.

Kuwait oil sector

Next year will be a major test for Kuwait. Farouk al-Zanki, the former head of downstream Kuwait National Petroleum Company (KNPC), has been chosen to lead Kuwait Petroleum Corporation (KPC), the parent company that oversees the emirate’s oil and gas sector.

Kuwait’s troubled Al-Zour refinery project, which has been plagued by spiraling costs, remains in limbo. The scheme ran into difficulty in 2007, after parliamentary critics complained that refinery deals were not tendered through the Central Tenders Committee, which evaluates and approves most public-sector contracts in the country. Through 2010, technical committees have assessed the viability of retendering the refinery, but no decision from KPC has been made.

KPC and the oil ministry now appear to be gearing up to increase capacity, as well as projects to modernise the sector.

“It seems that the government is keen to push ahead with its plans, and has brought Al-Zanki in to sell them to parliament,” says a former top KPC executive. “He doesn’t pull punches and is ready to take politicians on. He is a real technocrat as well, so he will be well versed in the details of all of KPC’s plans.”

Saudi Arabia has fully turned its attention to its new natural gas reserves, after a decade-long push to increase oil production by 4 million b/d.

The state-owned energy giant hopes to meet its domestic gas shortages through the exploitation of unconventional gas reserves, which could double to more than 500 trillion cubic feet (tcf), from 275 tcf currently. 

The Empty Quarter (Rub al-Khali) has so far proved a disappointment, but UK-Dutch oil major Shell and Saudi Aramco are now launching their second-phase exploration programme, drilling three new wells. The first phase of the joint venture, South Rub al-Khali (SRAK), was one of the few concessions to see any discoveries with gas in two zones. 

Exploration in the Empty Quarter is costly. A major obstacle to turning these discoveries into commercially viable reserves is the tight terms under which IOCs enter the kingdom’s nationalised upstream sector, says Samuel Ciszuk, senior Middle East analyst at IHS Global Insight. The companies are free to monetise only condensate and natural gas liquid (NGL) reserves, while gas will be sold to the state at a set price of $0.75 a million BTUs.

“There have been rumours that Saudi Arabia might consider improving the gas price, given its need for development of any reserves it can identify and an increasing realisation that gas production costs will be on the rise over the long term,” Ciszuk adds.

Oil and gas in the UAE

Abu Dhabi has seen costs come down on its Shah gas project from more than $13bn to $10bn. In July, state-owned Abu Dhabi National Oil Company (Adnoc) signed contracts for four EPC packages, worth a total of $3.6bn, with Italy’s Saipem, South Korea’s Samsung, Spain’s Tecnicas Reunidas and India’s Punj Lloyd. Another $4bn is yet to be awarded.

In April, the emirate lost its joint venture partner on the project, the US’ ConoccoPhillips, which had already delayed a final investment decision on the sour gas development for more than a year. Lacking an experienced IOC, Adnoc may struggle to get the project launched on time. So far, it has managed well, but the scheme is technically challenging and it will be keen to avoid a repeat of cost over runs and delays.

The companies had planned to produce 1 billion cubic feet a day (cf/d) of raw gas, yielding 540 million cf/d of processed gas for Adnoc’s distribution network. But the gas is sour, containing nearly 30 per cent hydrogen sulphide.

This decision could have far-reaching implications for similar joint venture schemes in the Gulf, making both sides more cautious about entering into partnerships. In the case of ConocoPhillips, Abu Dhabi and Saudi Arabia must now find suitable technically skilled partners for their projects, or alternatively push on with them alone.

Algeria oil exports fall

Algeria faces a third consecutive year of falling exports. The Algerian Finance Ministry forecasts a 4.5 per cent dip in the value of oil and gas exports in 2011, from $44.2bn to $42.2bn.

The fall in revenues will be down to reduced volumes. Algeria has maintained its crude oil price forecast at $60 a barrel for the year, the same estimate for 2010.

The country has failed to attract foreign investment into its oil and gas sector, the dominant contributor to government revenues. Its resurgent nationalist mood has been further undermined by the paralysis that has followed since corruption allegations earlier this year.

To regain momentum, Algeria launched its 10th upstream licensing round at the end of September, which will close in March 2011. Signing up new IOCs will be a priority for new energy minister Youcef Yousfi and Nordine Cherouati, head of state-owned energy firm, Sonatrach.

Despite the challenges, the year ahead could be a period of revival for some of the North African energy producers.

So long as oil prices remain relatively high and governments continue to launch new projects, the outlook for the Middle East and North Africa energy sector is positive for 2011.

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