CPGS/ Tahir Sher 1 EMERGING DYNAMICS OF ENERGY SECURITY OF THE GULF REGION: PROSPECTS AND CHALLENGES Tahir Sher Muhammad
CPGS/ Tahir Sher
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EMERGING DYNAMICS OF ENERGY
SECURITY OF THE GULF REGION:
PROSPECTS AND CHALLENGES
Tahir Sher Muhammad
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Summary:
The Gulf region bears the energy burden of almost the entire world, especially of
the Asian and European countries. The stability and peace of this region is vital for a
stable and sustainable World economy. The presence and influence of extra-regional
powers, owing to their huge energy needs and long-term geopolitical interests in the
region, have affected not only the regional stability but has also become a cause of
regular concern for the increasingly inter-dependent global economy.
The Gulf region energy giants like Saudi Arabia, United Arab Emirates and Qatar have
devoted their huge resources to meet the energy demands of the US, Europe, South and
South East Asia. Their contribution towards international economic and energy security
has increased considerably after the American-led economic sanctions on Iran, by raising
their oil and gas production and refining capacities. How much they have succeeded in
their efforts is a question, worthy of an in depth evaluation.
Saudi Aramco operates the world‟s largest single hydrocarbon network, the Master Gas
System. Its annual production is 7.6 billion barrels and it has managed over 100 oil and
gas fields in Saudi Arabia, including 279 trillion cubic feet of gas reserves. Saudi Arabia
has enhanced its industrial capacity by enhancing the petrochemical industry besides
metallurgy.
Iran, Iraq and Kuwait have larger proven oil reserves than UAE, but in case of liquid gas
products, pipelines, LNG and petrochemicals, UAE has progressed faster. The UAE also
is now one of the wealthiest nations of the world in the hydrocarbon sector with a per
capita GDP (purchasing power parity) estimated at U.S. $ 48,158 in 2011, ranking it
eighth in world in 2011 (directly behind United States). In addition, UAE has the 7th
largest proved reserves of both crude oil and natural gas in the world. Qatar, Oman and
Yemen are ranked after UAE in the Middle East oil reserves. However, Qatar ranks third
in World on natural gas reserves after Russia and Iran, but higher than Saudi Arabia and
the US.
Most of oil and recently even LNG (liquefied natural gas) in South Asia (India, Pakistan,
& Sri Lanka) is imported from the Middle East and mostly from the Gulf Region,
whereas Bangladesh imports oil from South East Asia specifically PETRONAS (the
Malaysian multinational). The imports of oil and gas by India are considerably higher
than Pakistan. However, the Indian performance in oil and gas sector is far better than
Pakistan. One of the major Indian achievements is by the Reliance Industry, which built
one of the largest refineries in the world at Jamnagar, which processes sour Iranian crude
and re-delivers gasoline to Iran. The US sanctions on Iran and backed Syrian uprising has
negative impacts on India‟s OVL and other companies which trade with Tehran.
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Thanks to the US-led Global War on Terror, which was initially only limited to
Afghanistan, but was later expanded to include Iraq, resulted in a direct negative impact
on the global and US economy, due to a very high price of both oil and gas. Besides the
oil industry, the U.S. Banking industry and mortgage sectors were also seriously affected,
with global consequences, including for the EU, East Asia and even China.
Consequently, it also affected the investments and growth of the Gulf region. This had a
direct impact on German investment in Dubai (UAE), especially related to real estate and
construction industries in Dubai, which led to their substantial shifting to Abu Dhabi.
The economies of China, Brazil and India managed to sustain their growth despite
external pressures, through enhanced trade and proficient strategic decisions, unrelated to
war. The total estimated U.S. debt on November 30th, 2012 is US$ 16.369 trillion. The
two largest foreign investors in US are Japan and China with financial investment of US$
1.1 trillion each.
However after withdrawal of the U.S. Troops from Iraq and a greater focus on the US
economy, the Obama Administration managed to improve the US GDP by 2.1%,
resulting in his successful re-election. The so-called “Arab Uprising” is deemed by the
famous Right-leaning U.S. Think-Tank, The Heritage Foundation, to be capable of
disrupting the Saudi oil production, with a possible impact on U.S. and Global Economy.
Heritage Foundation recommended to the US administration that the U.S. should
continue to maintain large military force to project US power in the Gulf and Saudi
Arabia in these uncertain times. It also predicted that Russia and Iran as oil-producing
states are likely to exploit the crisis to increase their power around the world while
undermining U.S. influence. The US considers the Strait of Hormuz as a vital world oil
Transit choke point with a daily oil flow of 15.5 million barrels of oil (2009), which
peaked at 17 million bbls/day in 2008. This represents 33% of all seaborne trade. A
conflict in the Persian Gulf between West and Iran or Iran and GCC states will
compromise the flow of oil and gas from Middle East to world, through the Strait of
Hormuz. Feeling the pulse of pending conflict, the UAE has now planned the land –
based Abu Dhabi Crude Oil Pipeline (ADCOP) from Habshan to Fujairah. Once this
pipeline is operational, the sea transportation through the Strait of Hormuz will be
reduced, reducing the risk it poses to the world energy security in case of a conflict in the
region.
The world in general is not in favor of wars and their impact on economy. Saudi Arabia,
besides being a vital ally of the US, has improved its relations and specially trade with
China, while attempting to move forward in improving its relationships with Russia. The
Chinese Companies Fujian Refining and Petrochemical Company (FRPC) and Sinopec
SenMei (Fujian) Petroleum Co. Ltd. (SSPC) have invested considerably as joint ventures
with Saudi Government Companies.
The complex interplay of geopolitics, energy politics, alliance politics and foreign
policies of major powers in the Middle East, has negatively affected the energy security
of growing regional economies. The US sanctions on Iran, have had negative impact on
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China, India, Japan, some EU countries and Pakistan, specifically on the Iran-Pakistan
gas pipeline. This is legally unacceptable and practically unfeasible if the US promotes
the TAPI pipeline from Turkmenistan, which has to go through the troubled Afghanistan,
instead of Iran-Pakistan pipeline, which ensures easy, cheaper and sustainable supply of
gas. It is ironic that Iran too imports gas from Turkmenistan. However, the pipeline path
is much easier.
This paper attempts to envisage the complex interplay of the policies of major extra
regional powers in the Middle East and its repercussions for World economy in general
and Pakistan economy in particular. A stable Gulf region means an un-interrupted, cost-
effective, and secure supply of energy to the World. The paper will also offer some
recommendations in end for the policy makers, how to ensure cheaper, and sustainable
energy supply from the Middle Eastern countries, in the back drop of Iran-West tension
and the future of energy market in the Gulf region.
Introduction:
The Gulf region includes Saudi Arabia, Iran, Syria, Kuwait, Iraq, Bahrain, Qatar, UAE,
Oman, and Yemen. Generally speaking the area is predominantly desert, although, there
are some green and hilly areas. The Zagros Mountains and Hills cover the northern part
and extend from Iran to Syria through Iraq (where the area is part of the Kurdistan Area
in which Western & EU E & P companies are operating originally, without a formal
approval from the current Iraqi Government).
In this paper, the discussion on Gulf States focuses on the oil and gas sector and the
major producers are Saudi Arabia, UAE, and Qatar, which have a significant impact on
the current world economy and trade. Although Iraq, Kuwait, Oman, Syria and Yemen
also produce oil and gas, but this paper emphasizes the role and significance of the major
players only. Although the Gulf States export oil gas products including LNG (liquefied
natural gas), NGL (natural gas liquids), petroleum and petrochemical products to Japan,
and China, various South East Asia and South Asian countries, the US and the West in
general enjoy an overwhelming economic and political influence over the Gulf region.
From a petroleum geology perspective, there are three main areas which are significant in
terms of oil and gas, which are the Persian Gulf Basin, the Zagros Organic Belt (although
Iran has the Caspian and Turkmenistan related petroleum geological areas as well) while
Oman and Yemen have their own unique sub-basins. The reservoirs are Eocene to
Paleozoic aged. It is interesting to note that additional exploration in Iran, Iraq and even
Saudi Arabia could add considerable reserves. Unfortunately, the latest exploration in
UAE has been unsuccessful, although the optimized enhanced oil recovery (EOR) has
allowed production to be enhanced, while UAE has added significant infra-structure such
as pipeline and gas processing facilities and projects. The Dolphin Project jointly shared
with Qatar and Oman, adds export value of NGL and LNG for export to the Asian
market.
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Middle East OIL and GAS FIELDS, FACILITIES and INFRA-STRUCTURE:
Figure-1 shows oil (green) and gas (red) fields in the Southern Gulf region, which is also
called the Rub-Al-Khali Area. Additional exploration could add value in the coming
years. The biggest and the most significant oil field discovered and still producing in
Saudi Arabia is the Ghawar Oil Field. Several other major Saudi oil fields are Dammam,
Abqaiq, Qatif, Ain dar, Haradh, Uthmaniyah, Shehedgum, Hawiyah, Qatf, Safaniyah,
Khurais, Khafji, Abu Hadriyah, Fadhili, Manifa, Khurasaniyah, Abu Safah, Berri, Zuluf,
Marjan, Hawtah,Shaybah and Nuayyim (discovered as early as 1938 to 1990). The field
development and production on another field started in 2009.
Average oil production of Saudi Arabia in 2009 was 10.2 million barrels/day with 1.8
million barrels per day of NGL (natural gas liquids), with the onshore Ghawar (the
largest oil field in the world) producing 5 million barrels / day and the offshore (in the
Persian Gulf) Safariya Field producing 1.5 million barrels/day.
It is possible that Saudi Arabia might remain the biggest oil producer till 2030, as its
output is projected to climb to 14.4 million barrels/day in 2015. The numbers include
NGL (natural gas liquids) as well as EOR enhanced production. However several oil
fields are expected to decline at a rate of 2% per year after assured well layouts, design,
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and extraction patterns. Enhanced oil recovery using water flooding and CO2 injection is
keeping production in Ghawar Field optimized, which allows it to produce 5 million
barrels of oil per day and 25 billion cubic feet of gas per day. There are considerable
horizontal holes as well in which analysis and design for hydraulic fracturing is also
being planned and designed. The green and red colored lines are pipelines and it can be
viewed that some pipelines are cross-country.
Figure-2 covers the Northern Persian Gulf Basin and the Zagros area (although the
Tehran Area fields are related more to the Caspian Petroleum Play). The oil and gas
fields in Iran, Iraq and its Northern Kurdistan can be seen besides the gas pipeline
(colored red) connecting Iran to Turkmenistan. The Background Paper (2012) authored
by Ariel Cohen et.al. mentions that Saudi Arabia has improved relations with Russia and
this one-sided propaganda advocating a war against Iran has not helped the global
economy. Saudi Arabia with good trade relations with China and India cannot benefit by
antagonizing its important trade partners which maintain strong trade ties with Iran. What
is understandable is that additional oil will certainly be found in both Saudi Arabia and
Iran as well, besides Russia and other countries. The Iran-Pakistan-India gas Pipeline
should not affect the volume of hydrocarbon exports by Gulf States towards South Asia,
since oil and gas demands and uses are distinct and separate.
Figure-3 provides a zoomed image of Qatar and UAE, which covers both the land-based
and the marine Persian Gulf. One of the world‟s largest gas field (shown in red) is the
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North Field, which extends into the Iranian marine Persian Gulf border and is known as
South Pars. Qatar globally exports LNG from the North Field while the delays on the
Iran-Pakistan-India Pipeline are not extracting gas from South Pars. Figure-3 shows
details of oil and gas fields but the pipelines have been extended and upgraded shown in
Figures-8.
Figure-4 is a zoomed map on Qatar including processing facilities on islands in the
Persian Gulf and Oman. Ras Laffan is one of the biggest LNG Facility in the world,
which has been enhanced under the Dolphin Project. LNG is a complete global industry
but LNG ships play a key role in it. To bypass Choke Points poly-phase pipelines are
constructed. LNG generally targets itself for industrial sectors such as Electrical Power
Generation.
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The alternatives are of course nuclear, Solar and Wind Power. Denmark has made a key
role in Wind Power over the Danish Sea on the edge of the North Sea. India‟s Suzlon
Energy has set up Wind Power Plants in the Jaisalmir Desert Area, where interestingly
the wind direction is from Pakistan, which has not built anything on its side. India‟s
Jamnagar Refinery as part of the Reliance Industry trades sour oil from Iran and in return
exports gasoline to Iran while having a separate trade with Saudi Arabia, UAE and other
Gulf States. Figure-5 shows the giant Ghawar Field with three satellite images, which
present a number of wells with drilling rigs deployed.
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Figure 6A shows a generalized geological cross-section across Saudi Arabia and Qatar
(partly covering the Ghawar Field), which shows depth and the geological age of multiple
reservoirs with oil and gas at varying depth and ages. The variation in the geology and
the petroleum system is shown with similarity and some difference between Saudi Arabia
and Qatar.
What is significant is that oilfield in Saudi Arabia are larger in size while the North Field
in Qatar is quite large while size of oil fields in Qatar territorial waters reduce in size. The
North Gas Field is very significant for the world LNG market. The Dolphin Project
expands the market capacity by not limiting the LNG to the Qatar ports only. The
pipeline in the Persian Gulf connects UAE on land, across UAE land to the Arabian Sea
and on land Oman, bypassing the Hormuz choke point. One of the biggest LNG importer
is the Japanese power sector.
Figure-6B shows projected hydrocarbon production profile and predicted decline from
2008 to 2028 (while the peak year was considered to be 2011). The predictive analysis
takes into account of all expanded and growth projects including sour gases and
hydrocarbons (including Khuff and the Shaybah Expansion, Figure-8).
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SAUDI ARABIA’S PETROLEUM SECTOR AND ECONOMY
Saudi ARAMCO has increased the production capacity through rapid development of the
fields and enhancement of processing plant facilities, non-conventional reserves
assessment, hydraulic fracturing, and enhancement of production. The operational
planning for hydraulic fracturing of horizontals wells may have already started. The
Western Greco seismic company has taken a 40,000 channel seismic acquisition crews
for enhanced 3D anisotropic seismic for Saudi ARAMCO to locate hydrocarbon “sweet
spots” for exploration and development of non-conventional reservoirs, such as the
“Bakken Shale” for oil shale hydraulic fracturing and production.
In 2009, the US was the 22nd
largest trading partner with Saudi Arabia but 2010 the US
became the 12th
largest trading partner. The total bilateral trade was around US $ 39
billion, in 2010 increased by 31% since 2009. The total US exports to Saudi Arabia rose
to US $ 10.4 billion, whereas the Saudi export to US reached US $ 28.5 billion due to
high oil prices, with a 42% increase in a year. The Saudi growth in the manufacturing
sector is led by the petrochemical industry with a western company role with major
export to China and South East Asia.
Figure-7 shows cumulative proven crude oil reserves by country in 2012 in billions of
barrels. In the world and the Gulf States Saudi Arabia is ranked number 1, Iran ranks 4th
while UAE ranks 7th
. Russia is ranked 8th
(but there is additional unproven potential of oil
in Russia) and Libya ranked 9th
. The source of information although credible is from the
US Energy Information Agency (EIA) of the US Department of Energy (DOE).
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Figure-8 shows a picture of the Shabab-2 Pipeline which will transport Shaybah Oilfield
GOSP-4 oil to Abqaiq Refinery via the Shabab-1 pipeline.
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One of Saudi Arabia‟s biggest oil customers is Japan with an export of 1.2 million barrels
per day, with South Korea importing 850,000 barrels/day and China with 839,000
barrels/day. Saudi Aramco‟s subsidiary is the 6th
largest supertanker company called Vela
International Marine Ltd.
UAE OILFIELDS, PRODUCTION, LNG, NGL, ECONOMIC & TRADE IMPACT
Despite having the most diversified economy in the Middle East, the UAE remains
largely dependent upon hydrocarbons sector for economic growth. The total GDP (PPP)
was US $ 258.825 billion (IMF), per capita $ 48,148, GDP (nominal) $ 380.136 billion,
and per capita $ 67,008 (IMF).
What is interesting is that the total population ethnicity is only 16.6% Emirati citizens
with 23 % (other Arabs), 42.3% South Asian (predominantly Indian, Pakistani, and
Bangladeshi people, 12.1% (predominantly Chinese, Filipino, Thai, Iranian, South
Korean and Afghani (Pashtun) people.
As of 2011, the UAE reserves of oil were 97.8 billion barrels (which is 7% of the global
reserves). As part of proficient production strategy, UAE has enhanced its oil recovery
(EOR). The international companies in joint operations with UAE companies are: BP,
Shell, Total, Exxon Mobil, Oxy, Petrofrac and Partex.
The UAE operational companies are Abu Dhabi National Oil Company (ADNOC),
Zakum Development Company (ZADCO), Abu Dhabi Company for Ocean Operations
(ADCO) and the Abu Dhabi Marine Operating Company (ADMA-OPCO). In 2010 in
Sharjah a new company by the name Sharjah National Oil Corporation (SNOC) was
created.
Oil production in 2009 was 492,000 barrels per day, which increased to 2.81 million
barrels per day in 2010. The UAE gas reserves are 214 trillion cubic feet (TCF) while
total gas production in 2009 was 1.725 TCF while export as NGL and LNG with total
domestic consumption of 2.1 BCF (2009).
Strategically the most significant development is the addition of investment on cross-
country pipelines with Chinese Companies, primarily China Petroleum Engineering &
Construction Corporation (CPECC), which has been constructed by August 2011. It can
transport 1.5 million barrels/day of oil from the ADCO‟s Habshan Facility to the Fujairah
export terminal right on the Arabian Sea edge. This allows half of UAE‟s exports to
bypass the strategic choke point of the Strait of Hormuz.
Figure-9 shows a zoomed view of the oil fields in UAE with locations on the land and the
Persian Gulf with production shown in Figure-10.
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STRATEGIC COMPLEXITIES WITH SECURITY ATTACKS
The US drone attacks increased in Yemen after the so-called “Arab-uprisings.” De-
stabilization of Libya, Egypt, turbulent Syria, threats of attacks on Iran and Gaza are not
considered as viable global economic directions for bringing peace and stability to the
Gulf region, while also creating complications for US and European state policies in the
South East Asia.
Currently Saudi Arabia has nuclear power collaboration with China, France, Argentina,
and South Korea. The Sino-Saudi relations are good, continual, and enhanced. The trade
and investment is over a Billion US $ /year especially on petrochemical export to China
which has Saudi Arabia as the largest trade partner in Western Asia.
Currently Saudi Arabia invested as a joint venture with Chinese companies on the Hainan
Island to build a large oil storage facility. While China‟s Chalco (Aluminum Company)
invested US $ 3 Billion in building a major Aluminum Factory in Saudi Arabia. The
Chinese Railway invested US $ 1.8 Billion in building a monorail to Mecca to transport
pilgrims.
The Obama Administration of the US Government now plans to enhance oil and gas
production in the US, while increasing the tax options on its richer class for stabilizing its
economy as it plans to exit Afghanistan by 2014. France and UK are planning to exit
from Afghanistan and focusing more military attention towards Gulf and Africa, with
long-term consequences for the world at large.
A stable and peaceful Middle East keeps global oil prices at a reasonable level with a
positive impact on the international economy. The current US foreign policy, which
allows Israel to develop and maintain hundreds of nuclear weapons, impose sanctions on
Iran, and IAEA and UN yield to the US pressure, help create doubts about the
effectiveness of the international institutions and also undermines the credibility of the
non-proliferation regime.
In this complex interplay, where overt and covert competition, LIC, ideological divisions
and lack of trust between major powers have resulted into continued political instability
in Gulf, many developing countries including Pakistan have borne direct and indirect
consequences of this intense energy politics. Iran-Pakistan gas pipeline project, which
offers a reasonable and immediate solution to the energy crisis in Pakistan, has become
the victim of this complex major power play and energy politics.
India, which heavily relies on the Iranian crude oil and gas along with other Asian
countries, which are main buyers of Iranian oil and gas, has sharply decreased the oil and
gas import from Iran. Same is the case in various other Asian countries. The vacuum
created by the absence of Iranian oil and gas in the Asian market, has to be filled by
higher production by Saudi Arabia, Qatar and UAE, not only to benefit from increased
export revenues but also to stabilize the international oil prices, contribute towards global
economic progress and promote international peace and security.
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Recommendations:
1- Major Powers should revisit their policies in the Gulf region. Their policies
should be based on a consensus-based approach that „a stable and peaceful Middle
East‟ is essential to keep global oil prices at a stable and reasonable level with a
positive impact on world economy.‟
2- The covert warfare by major powers in different Gulf states will fester further
instability and will have negative impact on global energy security. Hence the
policies of covert operations should be discouraged.
3- The US and Europe should not have a discriminatory policy towards nuclear
proliferation and the right to peaceful use of nuclear technology should be given
and respected in case of all states. A nuclear-armed Israel, with hundreds of
nuclear weapons, will always pose a threat to security and stability in the Middle
East and a Nuclear Weapon Free Zone in Gulf will discourage a regional nuclear
arms race, as earlier proposed in the last NPT Review Conference.
4- The policy of containing Iran through tough economic sanctions, political and
diplomatic arm twisting is an irrational policy, as far as the international energy
security and World economy is concerned and heightens Tehran‟s insecurity,
which accelerates the regional circle of violence and regional instability.
5- The US, should contribute politically, diplomatically and strategically towards
making the Gulf a more stable, cooperative and inter-dependent region. The
future of the US and European economic recovery greatly depends on the secure
energy supply from a stable Gulf region, at peace with both itself and other
regions of the world.