• Global : Impact of Financial Crisis on GCC Oil & Gas Projects
Global Investment House – Kuwait – Impact of Financial Crisis on GCC Oil & Gas Projects
The recent efforts to promote globalization have caused the worlds’ bigger financial & investment markets and economies to work in solidarity. Hence, the regional markets and economies have to create their developmental strategies according to these markets. The declaration of the US mortgage crisis has led bankruptcy and mergers between the big financial and investment players. Moreover, the global financial turmoil and higher crude oil prices had caused a slowdown in influential economies of the world that has directly caused a slowdown in the activities of global large-scale manufacturing industry, due to supply-demand concern. Consequently, we have revised our expected demand of refined crude oil from previous forecasted level of 32.1bn barrels (89.2mn barrels per day) to 31.9bn barrels (88.6mn barrels per day).
Chart 01: Forecasted World Crude Oil Consumption (bn barrels)
Source: BP Statistical Review 2008 & Global Research
MENA Region Expansion Plan
According to Arab Petroleum Investment Corporation (APICORP), regional governments are requiring investments of US$243bn for developments and expansions in the oil and gas supply chain. Of these US$153bn is required for downstream projects. This implies that the regional intention is more towards the development of the downstream sector, which will help the region to diversify its economic dependence from crude oil revenue.
Table 01: MENA Major Upstream Projects
Project Name Country Expansions* Due dates Cost (000 US$)
Aramco - Jack-up Barge Saudi Arabia - 1Q2010 180,000
Aramco - Khurais Development Saudi Arabia 432,000,000 3Q2009 12,000,000
Aramco - Khursaniyah Field Development-Condensate Saudi Arabia 28,800,000 4Q2008 -
Aramco - Khursaniyah Field Development-Condensate Saudi Arabia 28,800,000 4Q2008 -
Aramco - Manifa Oilfield Redevelopment-Oil Saudi Arabia 342,000,000 4Q2011 -
Aramco - Nuayyim Oil Field Development Saudi Arabia 36,000,000 4Q2008 1,000,000
Aramco - Offshore Facilities (Maintain Potential Facilities Programme) Saudi Arabia - 2014 250,000
Aramco - Safaniya, Marjan, Zuluf Oil Fields - Offshore Production Saudi Arabia 54,000,000 3Q2008 400,000
Aramco - Shaybah Oil Field Development Saudi Arabia 90,000,000 4Q2008 1,500,000
ADCO – Bab Oil Field Gas Compressor Stations UAE 36,000,000 2010 300,000
ADCO - Phase 1 Development Programme UAE 144,000,000 2010 1,500,000
ADCO – SAS Field Development UAE 21,600,000 2010 1,400,000
ADMA OPCO - Abu Dhabi Offshore Pipeline Replacement UAE - 2010 900,000
ADMA OPCO - Nasr field Development UAE 36,000,000 2012 2,000,000
ADNOC Sour Gas Fields Development - Shah Field UAE - 2012 10,000,000
ZADCO - Umm Al Dalkh Full Field Development UAE 2,520,000 2012 650,000
Dana Gas - Western Offshore Exploration-Oil UAE 117,000 4Q2009 -
ZADCO - Upper Zakum Major Projects UAE 72,000,000 2015 1,500,000
KOC - Early Production Facilities (EPF - Phase 2) Kuwait 43,200,000 2012 400,000
KOC - Lower Fars Pilot Project (LFPP) Kuwait 180,000 2010 100,000
KOC – Water Injection Plant Kuwait 10,800,000 2Q2008 -
KPC - Project Kuwait Kuwait 108,000,000 2030 9,000,000
Occidental Mukhaizna EOR Oman 50,400,000 2011 2,350,000
PDO - Al Burj Water Re-injection Facilities Oman - 2010 51,000
PDO – Fahud EOR Oman 25,200,000 2010 -
PDO - Harweel Cluster Development (Phase 2A/B) Oman 360,000,000 2010 960,000
PDO - Mabrouk Oil Field Development-Oil Oman 7,200,000 4Q2009 -
PDO - Nimr Karim Oil Fields Project Oman 6,480,000 2012 -
PDO - Qarn Alam Enhanced Oil Recovery (EOR) Oman 10,800,000 2010 1,000,000
Pearl GTL Offshore Qatar - 2011 1,200,000
QP - Al-Shaheen Offshore Development Qatar 102,600,000 2009 5,000,000
Dana Gas - Egypt Exploration and Development Program Egypt - n/a 170,000
NALPETCO - Abu Sir & El King Fields-Oil Egypt 1,440,000 4Q2011 -
NOC - Sirte and Ghadames Oilfields Exploration and Production Libya - 2011 2,000,000
Eni Oil - Bu Attifel field Water Injection Systems Upgrade Libya 50,400,000 1Q2009 5,000
Algeria - El Merk Oil Field Development Algeria 85,680,000 2010 4,000,000
Total Expansion in Barrels 2,186,217,000 59,816,000
Source: Zawya & Global Research
* Barrels Oil
Expected Delays & Dropouts
The sub-prime mortgage crisis has led the regional governments to revisit their developmental projects, which could lead to delays or dropouts, especially in the downstream sector. This is mainly because of
• Decline in global demand.
• Threat of oversupply of the products like, fertilizer, petrochemicals & refined petroleum products.
• Decrease in the margins because of decline in prices and fixed feedstock prices.
We believe that the chances of delays or dropouts are mostly associated with the projects, which are (i) under initial execution stages i.e. bidding round and (ii) expected to execute after 2010, whose status is still unclear. It is worth mentioning that the middle and downstream projects of gas expected to remain unhurt since the lack of gas infrastructure in the region has maintained the demand for gas.
Our estimations regarding the delay and keeping the oil-related downstream projects are also getting support from the following actions taken by the two leading petrochemical companies in the region and the Saudi Arabian government, while considering the ongoing global economic situation:
• The management of Saudi Basic Industries Corporation (SABIC) has expressed the expectations of early completion of (i) Yanbu National Petrochemical Company and (ii) Saudi European – Ibn Zahr Company; moreover, there has been no announcement of delay in the upcoming production capacity from Industries Qatar (IQ), especially where the investment has been incurred.
• The Saudi Arabian government has announced a delay in Saudi Arabian Yanbu Refinery, which was expected to commence its operation in 2013. The refinery is designed to refine 400,000 barrels of oil per day.
Upstream Sector
Contrary to the downstream sector, the attitude of MENA countries’ government is quite positive to bring about important upstream developmental projects, while taking advantage of decline in developmental costs. However, the chances of delay and dropouts from high cost fields could not be ruled out. The efforts of regional governments to get stability in crude oil prices could not be linked with the dropouts or delay in upstream projects as the recent production cut is mainly executed from the existing fields. We believe that the positive attitude of regional government towards upstream projects is mainly due to the following reasons:
• The existence of basic demand for crude oil and gas. The growing economies in Asian region i.e. India and China are requiring crude oil and gas to stabilize the growth in their economies. The combined demand from India and China is expected to increase at a CAGR of 2.4% and 2.1% during 2007-08 respectively as compared to the world’s demand CAGR of 1.3%. More interestingly, these countries are heavily rely on the imports of hydrocarbon from Gulf region. The major demand of hydrocarbon is mainly generated to fuel their industrial plants. Moreover, the rising demand of electricity due to the recent expansion in industrial sector has further nurture the demand of oil and gas.
Chart 02: Indian & Chinese Oil Demand (mn barrels)
Source: BP Statistical Review 2008 & Global Research
• Forecasted rebound in the prices of crude oil from current low levels and stabilize in between the levels of US$75-80 per barrel. The expected depletion in the crude oil reserves from major oil fields will lead to a natural decline in crude oil production and have long-term impact on crude oil price. The impact of reserve depletion is expected to begin after 2011. However, we perceive the recent cuts in production from existing field will halt the production on short-term basis. This will result in the widening of oil demand-supply gap from 1.1bn barrels of oil in 2008 to 1.8bn of barrels in 2009. In addition, at present the world does not have excess capacity to refine the petroleum so any extraordinary event like hurricane could further inflate the crude oil price in short-term.
Chart 03: Prices of OPEC Crude Oil (US$ per barrel) Chart 04: Demand-Supply Gap (bn barrels)
Source: OPEC & Global Research Source: BP Statistical Overview 2008 & Global Research
• Low exploration cost per barrel will attract the foreign players to increase their E&P activities in the region. The exploration cost per barrel in the region is estimated in the range of US$5-10 per barrel, which is far below than the other parts of the world. The past increase in crude oil prices had led to speed up the exploration activities in countries, where the cost of exploring oil is high like Canada, US, UK and Australia. Most of the oil exploration and production activities in these countries, particularly Canada, are carrying out on oil shale, which require huge amount of initial capital investment and only viable when crude oil prices will be on higher side. Hence, the average production cost per barrel from these countries remained on higher side and lead to more rely on the imports or carry out their E&P activities outside their boundaries, particularly in Middle East region. According to the survey conducted by RAND Corporation, the cost of producing a barrel of oil from retorting shale complexes of Western US and Canada would range in range in between US$70-95 per barrel, based on the levels of extraction efficiency. Moreover, the study suggests a reduction of 30-70% in the cost of production, when the complex first reach at the production level of 500mn barrels. The production from these complexes is expected to further lower down to US$30-40 per barrel once the production touch milestone of 1bn barrels. In addition, Royal Dutch Shell has declared that their Colorado project would remain competitive at price over US$30 per barrel. The RAND corporation study suggests the exploration cost per barrel in Australia would range in levels of US$11.5-12.4 per barrel.
In addition, we further have supported our expectations for a continuation in regional upstream activities, through the recent actions of the regional governments, which are as follow:
• Saudi government has re-launched the tender of US$10bn for Manifa oil project, which is expected to add 900,000 barrels of oil per day by 2011.
• The investment of US$1.2bn to increase the production from Dammam Oil Field, Saudi Arabia, by 100,000 barrels per day.
• The preference of Saudi government to spent its fund for local support rather than giving it to IMF for global bailout program.
• Qatar government has signed 25-years deal of exploration and production of oil and gas with the Germany’s Wintershall Holding AG, which covers the development of new offshore block close to the world’s largest natural gas field.
• Dana Gas PJSC, a UAE based company, has recently declared the successful commencement of production from Kurdistan Region Iraq (KRI) and Egyptian concession. In addition, Dana Gas PJSC has also announced five years plan targeting acquisitions and increased oil and gas exploration & production (E&P) activities.
• Abdu Dhabi’s International Petroleum Investment Company (IPIC) and Total SA are planning to cooperate in the development of local oil and gas projects.
