CATEGORIZED | 2007, September/October

Middle East’s critical energy industry evolves under market influences, geopolitical changes

Posted on 28 October 2009

By Jeremy Cresswell, contributing editor

Where does one begin? My brief is to paint, in the context of drilling and related well services, a picture of the Middle East, which as we all know is hardly off TV screens, newspaper front pages or radio newscasts.

It’s been that way for years, with the writer first awakening to the incredible complexities of the region when the Yom Kippur War burst forth in 1973, sending oil prices rocketing; the Iranian revolution of 1978; Iran-Iraq War (1980-88); Saddam’s armies marching into Kuwait during August 1990, but being ejected by a Western coalition in Operation Desert Storm; a different Western coalition marching into Baghdad to depose Saddam in 2003 followed by occupation; endless West Bank troubles; and so it goes on and on.

Coupled with this seemingly endless stream of conflict is a complex, dynamic web of linkages, alliances and tensions that spans the globe, capturing both East and West in different and evolving ways. Many are negative and not at all helpful to business and industry, with Washington seeking to curtail trade where it suits its political/moral purpose.

Many of Drilling Contractor’s readers have direct experience with such dynamics, among the most notable being sanctions against Iran imposed by the US in 1980, though it has been widely reported in mainstream media that dozens of American companies have continued to conduct business in that country. However, the view is that this is carried out quite correctly through foreign subsidiaries.

That efforts have been made from time to time by different administrations in Washington to pressure European companies into pulling out of Iran by exercising the principle of extraterritoriality simply makes what is already complex, hideously so.

Yet, despite the turmoil that grips international headlines daily, the Middle East is a hugely important region economically and increasingly so. And of course it is utterly critical to the petroleum industry.

Hydrocarbon resources remain pivotal to the region’s prosperity, with Saudi Arabia still kingpin in terms of in-the-ground reserves and production, regardless of current debate about the Kingdom’s ability to sustain current output or build on it.

Bear in mind Saudi petroleum minister Ali Al Naimi’s insistence early in 2007 that the near-term plan was to lift oil production capacity from 9 million to 12.5 million bpd, yet growing skepticism that this might prove impossible and even that Saudi oil output may have turned the corner … peaked.

Of course, it is a well-known fact that Western petroleum majors have been barred from oil production in much of the Gulf Region since the 1970s. Even though it is said the doors to foreign investment are opening again, that is not necessarily the case, at least in the context of IOC participation.

ACTIVITY IN IRAQ

Iraq is an especially hot and controversial topic.

Assumptions are being made in the West about Iraq’s oil resources and intended participation by the IOCs that are likely to prove hollow. While the US and the UK, plus some in the current Baghdad government, are keen to see such participation, there is a sad inevitability that whatever agreements are put in place today, tomorrow or any time up to the final departure of Coalition forces, they may be terminated by the Iraqis.

A well-placed Middle East source that we cannot reveal told Drilling Contractor: “Will there be nationalization of the Iraqi petroleum industry? Yes, though it’s a gut feeling. Talking with Iraqis and reading what’s in the newspapers, they’re very nationalistic and they do have a lot of well-skilled people.

“I suspect also that the security environment will also be unstable so there won’t be many people keen to rush in. The only exception is in the north, in Kurdistan, but that’s almost a separate government,” said the source.

“It’s going to be a long and painful process before there is output restoration,” said the source.

In any case, history tells those who are prepared to listen that there will be a calling to accounts in Iraq, as there was in other Middle East states that nationalized their oil resources. In fact, the only core Gulf/OPEC member that allows foreign petroleum companies into its oilfields is the United Arab Emirates. This has been the case since even before the Gulf Arab state conglomerate was founded in 1971.

The approach to IOC participation in natural gas exploitation is less proprietorial and demonstrated by a number of multibillion-dollar, multi-partner ventures. But commercialization of the region’s vast gas reserves is in its infancy, relatively speaking, despite giant projects like Dolphin and South Pars.

But even in the UAE, the liberal attitude regarding oil is changing, with Abu Dhabi National Oil Company (ADNOC) saying that current production sharing contracts will have to be renegotiated and that this could begin as early as next year, though some existing tenures are scheduled to expire in 2010; in any case, not far off.

Bear in mind that Abu Dhabi controls 90% of the UAE’s petroleum resources and its Supreme Petroleum Council would make any final decisions about re-engineering PSCs.

One approach would be to re-allocate fields via a licensing round that would attract many more participants. Currently, two-thirds of Abu Dhabi’s concessions are held in partnership between multi-nationals and ADNOC. They are BP, ExxonMobil, Shell and TOTAL.

A key driver to the intended change is that the UAE is keen to boost oil output capacity to 3.5 million bpd by 2011-2012, from about 2.8 million bpd today.

The UAE’s intention caught the eye of the “Washington Post,” which carried an item on 12 August 2007. It quoted an ADNOC source as saying: “The UAE is considering all options with the concessions. That includes breaking them up and offering individual fields in competitive tenders.”

There was a further telling observation: “Are the world’s biggest oil companies really going to give their best technology in a shared concession? No, Abu Dhabi wants the best of the best. Not the best companies with the second-best technologies.”

Ibrahim Al-Alawi of UAE oilfield services group Al Mansoori confirmed the speculation.

“Everyone has seen what happened in Qatar once Maersk came into the al Sahaheen field,” Mr Al-Alawi said. “This field was originally discovered by Shell, but nothing was done with it, even by Qatar Petroleum.

“The government took it from QP and gave it to Maersk (1992). Now it’s on line to becoming the largest producing field in Qatar … more than half a million barrels per day by 1999.

“It’s a similar thing in the UAE where they’re looking for new, inventive ways of getting expertise into play in order to raise production and recovery rates.”

However, Abu Dhabi is not the first UAE member to move against the IOCs as, in August 2006, UK-Middle East oil-services group Petrofac was handed management of Dubai’s oil and gas resources after the Emirate ended an accord with companies, including ConocoPhillips and TOTAL.

It is not yet clear how such an action will impact UAE gas resources, bearing in mind IOC participation in investments such as the huge Dolphin project, in which TOTAL and Occidental each hold a 25% interest.

Which leaves Egypt as being the most liberal in its approach to hydrocarbon exploitation, witness the high level of Western participation, especially in the context of natural gas, on- and offshore.

Now, check out the monthly Baker Hughes rig count report, and it will be noted that there are currently around 270 rigs active in the Middle East, of which about 35 are marine units. But, as IADC members familiar with the Middle East know, that is not the whole story, bearing in mind the zeros recorded for countries like Iraq and Iran.

The challenging situation in Iraq doesn’t seem about to change soon, though there are of course high hopes that it will as Iraq represents an immense business opportunity for the West, for both IOCs and the supply chain.

Iran is more complex. Bear in mind that it was the Iranian Revolution that seeded the National Iranian Drilling Company (NIDC) set up late 1979 to handle most drilling and related service activities, plus manufacture of spares.

Astonishingly, more than 2,000 of the most common parts needed by the drilling sector in Iran have been manufactured in-country, with technical know-how for 1,500 parts transferred. It would appear that the system is geared up to attract only Iranian industry participation and a website set up for the purpose appears to be in Arabic only. A similar approach is taken to R&D and, in 2005, a drilling research center was launched at Shahid Chamran University of Ahvaz.

Since being established, NIDC has drilled more than 2,300 oil and gas wells in various parts of the country. Techniques applied include underbalanced, horizontal and air drilling.

But, in the same way that they have demonstrated significant pragmatism in terms of allowing IOC participation in hydrocarbon resource exploitation, or at least natural gas, Iranians have also employed the services of foreign drilling contractors and related services from time to time.

An excellent example is Abbot Group unit KCA DEUTAG. As the company recounts, it was in 1998 that the Iranian government introduced an initiative encouraging international oil companies to invest in the drilling and process facilities for the development of onshore and offshore oil and gas fields.

KCA DEUTAG rose to the challenge and was among the first Western drilling contractors to recognise the significant drilling opportunities arising, since when it has carried out drilling operations for AGIP, Hydro and TOTAL, and completed three-year jack-up management contracts for PEDCO and POGC.

HUGE EXPLORATION IN SAUDI ARABIA

As for Saudi Arabia, just about anything capable of drilling holes or carrying out workovers is required as Saudi Aramco battles to build production. Of course there are new projects and new finds, but the accent is on brownfield … keeping elderly fields such as Ghawar producing significant volumes of oil (and, of course, vast quantities of water).

Ibrahim Al-Alawi’s opinion on where the real action in the Middle East is as direct as any: “It’s in Saudi Arabia … mostly the oilfields … working to increase sustainable capacity. Their goal is to reach 12 million bpd, and I think they want to have a 1.5 mmb cushion.

“But with producing all that oil, they also have to replace it, so the exploration is huge. That’s going to keep the market moving for well beyond the next five years.”

So who’s getting the drilling contracts?

“Whoever has rigs; it’s that simple,” Mr Al-Alawi said, adding that the Saudi land-rig count was roughly 130, including workover units.

His hope is that, now Al Mansoori is the owner of Target Energy of Aberdeen, the group of which his father Nabil is a co-founder, will break into that market sub-set.

There is plenty of evidence of contract renewals too, such as Saipem signing a three-year contract extension in July with Aramco for the ongoing charter of five marine drilling units that have been working in the Gulf since 2000.

Saipem has also been awarded a contract by International Egyptian Oil Company (IEOC), which will use the Italian company’s Scarabeo 4 semisubmersible off of the coast of Egypt for 28 months with work starting Q4 2007.

EGYPT IS ABUZZ

Which brings this review on to Egypt, widely considered an attractive market by drillers and other service companies in similar measure.

Egypt, regarded as both a Middle East and North Africa player, is buzzing, attracting huge interest among service companies, and offering plenty of work to boot. Among the well-regarded Western brands out there is PathFinder Energy Services, where Mahmoud El-Kady runs the company’s Cairo office.

He sees the current boom persisting and that there is a shortage of drilling/workover capacity. In Egypt, for example, Mr El-Kady reckons the market could absorb 10 drilling rigs — four offshore (one third-generation or better semisubmersibles and three jackups) and the balance land rigs of 1,500-2,000-hp capability.

The mid-2007 active rig count for Egypt alone was more than 100 units, including 26 marine units.

“Everyone is working flat out … all the rigs are busy,” he said, adding that the busiest sectors are the Western Desert but that the mid-sea deepwater HPHT programme “is key.”

“For us (PathFinder) in Egypt, it’s the Med that’s the most attractive. We have about 20% of Egypt’s total market and we see it as a place for future expansion … a long-term market.”

Mr El-Kady pointed out that PathFinder is now expanding into the wider Middle East, with work carried out in Qatar, Saudi Arabia and Kuwait. The company currently also has an office in Saudi Arabia. “Operationally we’re just starting in the Gulf. We did a project with Dolphin Energy in Qatar; a few months ago we started pre-qualifying with KCO; and we have a contract with Aramco.”

He describes the Middle East/North Africa as technology hungry, with a growing need for the latest directional drilling, MWD and LWD equipment. There is no shortage of opportunity whatsoever across much of the region. Really, the issue is one of company resource and the risk of taking on too much. “It’s important that we don’t stretch ourselves too thinly,” he added.

Success stories like PathFinder’s are being repeated time and again, whatever the size of the service company.

However, UK energy economist Tony Mackay, managing director of Mackay Consultants, is cautious.

“While I believe the Middle East market will be one of the best in the world over the next decade, the opportunities for the multi-nationals (IOCs) and other upstream companies are limited, however, because of the dominance of NOCs such as Saudi Aramco,” said Mr Mackay.

“High oil prices and revenues have given them more confidence in their abilities and reduced the need to involve other petroleum companies. Iran and Iraq probably offer the best opportunities, but there are massive political problems in both, of course.

“The situation is much better for foreign drilling companies and other oilfield services players. The NOCs need their expertise so there are many opportunities for them throughout the region.”

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