GCC exploring new growth horizons
Manama, January 5, 2014
By Robin Mills
Robin M Mills is head of Consulting at Manaar Energy, and author of The Myth of the Oil Crisis and Capturing Carbon.
The year 2014 may be one in which the course of the GCC’s oil and gas industry is driven by the fickle winds of international events rather than its own steering. The sails are set to withstand possible storms ahead. But there are new destinations to explore too - with three Gulf countries launching pioneering projects.
The last three years have been exceptionally good for the GCC oil producers. Prices have remained high and stable, due to disruptions elsewhere - the loss of supplies from Iran due to sanctions, and wars and insecurity in Libya, Syria, Yemen and South Sudan. Despite rising output from Iraq, and a flood of new US supplies from shale, Saudi Arabia, the UAE and Kuwait were all able to hold production at near-record levels. Oman’s production also continued its rebound, while even Bahrain’s minor output has doubled since 2008.
The exception, Qatar, continued to hold production steady from its maturing oilfields, while enjoying continued high liquefied natural gas (LNG) prices with a combination of strong Japanese demand and few new competing projects.
Despite rising budgetary demands, this meant that the four largest producers recorded healthy budget surpluses.
This year may be more challenging, though the real headwinds are not likely to start blowing until later in the decade. US crude could gain another one million barrels per day (b/d), according to its Energy Information Administration, while Chinese demand growth moderates. The call on Opec during the year might decline by about one million b/d.
Iraq, with important work on its Gulf export facilities complete, could gain between 0.3 to 0.5 million b/d. Sanctioned Iranian production might start to return to the market from the middle of the year, if a deal over its nuclear programme is struck. Libyan production, currently almost completely shut-in by protests, is a wild-card.
So the Opec swing producers - Saudi Arabia, Kuwait and the UAE - might by year-end have, collectively, to shoulder cuts of some two million b/d, or accept lower prices. Already US benchmarks have at times traded at heavy discounts to Brent crude, presenting Saudi Arabia, a major supplier and refiner on the US Gulf Coast, with a dilemma.
After three years of minimal new LNG capacity, new plants in Australia, Papua New Guinea and Indonesia should enter service, and this is just a prelude to a wave of massive projects from Australia, the US and perhaps East Africa in the rest of the decade. None of these expansions are anywhere in the Gulf, so Qatar will start to face more worldwide competition, that may erode its pricing power in Asia. Given its low costs, its LNG exports will remain very profitable, but not quite as lucrative as over the past five years.
In Qatar, the first train of the Barzan gas project with ExxonMobil should come online this year, with the second following the year after, totalling two billion cubic feet of gas per day. Most of this will be directed to the domestic power and industrial sector. This marks the final major development of the supergiant North Field, until and unless the moratorium on new projects is lifted. From this point on, the heady expansion of the early 2000s may ebb - Qatar will have to rely for growth on downstream gas industries and non-oil investments.
Gas is also a key theme elsewhere in all other GCC states. After several years of gas shortages, there are some moves to raise prices, notably in Oman. But most of the effort has concentrated on boosting supply, from new domestic developments and imports.
Abu Dhabi’s $10 billion Shah sour gas project, in partnership with US energy firm Occidental, is expected to begin producing at the end of the year, or perhaps more likely in 2015. This will help in easing a gas crunch expected until the emirate’s nuclear reactors begin to come online from 2017 onwards. The UAE also hopes for more gas via an expansion of the Dolphin pipeline from Qatar, as its LNG import project in the emirate of Fujairah will probably not be ready before 2017.
Saudi Aramco has stepped up its gas efforts in recent years, to meet soaring domestic demand for power and petrochemicals, and to try to keep the burning of crude oil for electricity in check. The first of the GCC’s three ground-breaking projects of the year is moving ahead, with plans for shale gas production in the north-eastern region around Tabuk.
Oman has the GCC’s second major innovative project of 2014, the Khazzan gas development, approved by BP last month. Some $16 billion will be spent to drill 300 wells into deep, tight reservoirs, with production starting in 2017 and reaching one billion cubic feet per day - essential for meeting domestic demand while sustaining the Sultanate’s LNG exports.
By contrast, Kuwait’s domestic gas projects - the deep, sour Jurassic gas in north Kuwait, and the shared Dorra field with Saudi Arabia - appear shelved due to political infighting. Consequently the LNG import terminal is likely to be expanded: a cleaner and cheaper solution than the country’s heavy burning of fuel oil, but still expensive.
In Gulf oil, the picture is quieter, with most concentration on sustaining output. Abu Dhabi has the boldest production growth plans, though its target of 3.5 million b/d capacity is likely to slip back from 2017 to 2020. The key event in 2014 should be the restructuring of the Adco [Abu Dhabi Company for Onshore Oil Operations] concession, if not further delayed. The existing partners - Shell, Total, BP and ExxonMobil - are contending for a stake in the renewed concession with a variety of competitors, including Norway’s Statoil as well as various Russian, Chinese, Japanese and Korean companies.
But the third of the region’s ground-breaking projects is also underway here - the carbon capture project from the Emirates Steel Plant, the world’s first commercial-scale carbon capture and storage (CCS) project from an industrial site. The carbon dioxide will be used for enhanced oil recovery, with the additional benefit of freeing up re-injected gas.
Though much smaller, Oman and Bahrain continue to make steady progress on boosting oil output. Oman is by far the most innovative of the GCC producers, using steam injection at the Occidental-operated Mukhaizna heavy oilfield, plus a variety of other enhanced recovery methods and continuing exploration.
Saudi Arabia continues to manage its production around 9.6 to 10 million b/d, with adjustments to meet disruptions elsewhere and its own seasonal domestic demand. With no major new fields planned after the completion of Manifa, the main story will be a ‘rebalancing’ towards lighter oil output by expanding the Khurais and Shaybah fields, adding 550,000 b/d by 2016-17.
And, despite continuing near-record production, little further progress appears likely in Kuwait towards the country’s four million b/d target, with dates for heavy oil output repeatedly pushed back, and Kuwait deciding not to pay its share of expanding the joint Khafji field with Saudi Arabia.
Qatar’s oil projects concentrate on sustaining output - as in the $3 billion redevelopment of Occidental’s offshore Idd El Shargi field. The accession of Shaikh Tamim in June 2013 has so far not led to dramatic changes in the country’s petroleum policy.
Progress in oil refining appears more dramatic than in the upstream. All the Gulf states are seeking to cover domestic demand, to produce cleaner and higher-specification products, and in many cases to boost exports of refined fuels.
During 2014 and 2015, these projects will dramatically turn around the GCC’s refined product balance. The region will almost eliminate gasoline imports, while massively boosting exports of diesel, and also of kerosene and fuel oil. But this will demand the region’s oil companies step up their marketing capabilities, as they seek to compete with new refineries in China, an over-saturated European market, and a US refining sector energised by cheap shale oil.
Outward investment, especially by state-owned entities, is becoming increasingly important. On the one hand are overseas investments in refining and LNG. Saudi Arabia and Kuwait have sought to strengthen their market position both in Asia and the US; Saudi Arabia’s Sabic [Saudi Basic Industries Corporation] to take advantage of low-cost US gas for petrochemicals; and Qatar to be involved in US LNG export projects.
On the other hand are strategic regional investments by sovereign wealth funds. Abu Dhabi National Energy Company (Taqa) has added to its assets in the UK, Netherlands and Canada by buying into oil development in the Kurdistan region of Iraq. Most notably, Abu Dhabi’s Mubadala, Oman Oil Company and Qatar Petroleum are reported to have teamed up for a 40 per cent stake, worth some $8 to $10 billion, in Occidental’s Mena unit. As well as Libya, Iraq and Yemen, this includes a share of four major strategic projects: the Dolphin pipeline, Mukhaizna in Oman, Shah in Abu Dhabi, and the Bahrain oil and gas field.
So most of the GCC countries are making measured investments to maintain their role as the world’s oil suppliers, while meeting domestic needs for gas and refined products. Some major investments in unconventional gas and enhanced oil recovery are vital for pointing the way ahead. But, without reform of gas markets and pricing, the gas sector is likely to continue falling short of potential. And 2014 may be a year when the Gulf has to make progress against stiffer headwinds - particularly in the oil market. – TradeArabia News Service
This feature appeared in the January 2014 edition of The Gulf.