The OPEC-Middle East Investment Cycle - Oxford Institute for … · 2016. 9. 8. · OPEC Output At Record Levels Saudi Arabian oil output, mb/d Iraqi oil output, mb/d Saudi Arabia

The OPEC-Middle East Investment Cycle

Bassam Fattouh

OIES OIL DAY, ST CATHERINE'S, OXFORD, NOVEMBER 17 2015

Oxford Institute for Energy Studies

OPEC Output At Record Levels

Saudi Arabian oil output, mb/d Iraqi oil output, mb/d

Saudi Arabia has been producing consistently above 10

million b/d in part to meet the increase in domestic

demand and maintaining market share in key markets

Despite deteriorating security situation and deteriorating

finances, Iraq has surprised on the upside with Iraqi

output above the 4 million b/d mark in an attempt to

maximize revenues

Iraq’s Growth To Slow Down

Iraq Rig Count

Iraqi rig count has halved with government facing

serious fiscal pressures

Under fiscal pressures, Iraqi government has been forced

to revise downwards it production target negotiating

with oil companies new plateaus

40

50

60

70

80

90

100

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

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-15

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-15

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15

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-15

Decline Rates Accelerating in Some Mature Areas

Algerian oil production, mb/d Qatari oil production, mb/d

Algeria’s oil production falling fast and investment

prospects remain limited to reverse declines

Qatari oil production falling fast with NGLs

exceeding crude output

Source: Energy Aspects, MEES

Long Term Implications on the Investment Environment

• Unrest colors perception of regional risk as a whole

as risk of contagion continues raising cost of

finance

• Political instability and policy uncertainty

– Weighs on investment decisions

– Delays in bid rounds; Delays in passing new

regulations

• Inability to implement large infrastructure projects

in some countries

• Weak institutions and bureaucratic delays

– Customs procedures, clearance, visa

processing, port regulation, etc…

• How to distribute revenues internally become a key

issue encouraging separatist tendencies

– Iraq: Central government-Kurdish region; Oil

provinces trying to gain greater control

Libya output vs IEA 2005 forecast, mb/d

This is Not Only Confined To Affected Directly by Conflict

Kuwait oil production, mb/d

Kuwait has ambitious plans to increase capacity to 4 million b/d by 2020 but production is most likely to decline

Weak business environment, volatile politics, mature fields, unattractive terms, and (now) border disputes

Neutral Zone Oil Fields, mb/d

UAE Contribution Marginal

UAE Oil Output, mb/d

UAE moving with its expansion plans but target of 3.5 mb/d production likely to be pushed from 2017

to 2020

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oil

gas

UAE Rig Count, mb/d

In 2015, UAE managed to increase its output by around 0.1 mb/d

Saudi Arabia Production to Remain Elevated

Saudi Arabia Rig Count

Internal and external factors shaping Saudi Arabia production, which will remain elevated in the 10.2-10.5 mb/d range

Saudi Arabia production will continue to rise to meet increased demand from domestic refineries, as domestic consumption rises, and stocks rise

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Oil Gas

Saudi Arabia Refinery Runs

Optimum Strategy in Face of Uncertainty

Potential Impact of Iran’s Return on Oil Market

• Multiple sanctions (combination of US, EU,

and UN sanctions) and mismanagement

hampering Iran’s oil sector development and

its output potential

• Potential impact on oil markets through variety

of channels

– Change in market expectations about a major source of

supply growth with a big reserve base

– Change in market expectations regarding dynamics

within OPEC (Saudi Arabia vs Iran)

– Short-term impact on market:

• Available ‘liquids’ in floating storage

• Restoring main fields to pre-disruption level

• New projects recently completed or about to

come on stream in 2016-2017

– Longer term: Development of new projects with help

of IOCs expertise (Iran unveiled a list of 49 projects)

• Implementing enhanced recovery methods on

mature fields

• Developing and expanding on new projects

(priority given to shared fields)

Iran oil Exports by Destination, kb/d

Source: OPEC

2248

2537

2102

12151109

1248

0

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1000

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3000

2010 2011 2012 2013 2014 2015

Restoring Production from Existing Fields

• Most of the cut has been shouldered by the

large onshore fields (Ahwaz, Marun,

Gachsaran)

• Other fields have been on a decline path;

Estimates of 8% annual decline rates

• In 1979, fields were not shut in properly leading

to loss of reservoir pressure and Iran never

recovered to the pre-revolution level

• Iranian government claims that some of bigger

fields have benefited form being shut and field

pressure has been enhanced

• But restoration to the pre-disruption level can’t

be taken for granted

– Concept that shutting fields enhance pressure may be

wishful thinking and needs to be tested

• Government likely to be able to increase 200-

350 thousand b/d by end of 2016 by applying

EOR in mature fields

Iranian Onshore Oil Production, mb/d

Source: Energy Aspects

Offshore Fields Suffering from High Decline Rates

• Offshore fields suffering from even

higher decline rates

– 12% on average

• Increase in condensate production

from South Pars helped offset some of

the decline from offshore fields, but

this has increased the ratio of

condensates to crude

• Most offshore fields declined in recent

years with only Foroozan and Salman

receiving small boosts from gas

injection

Iranian Offshore Oil Production, kb/d

Source: MEES, Energy Aspects

Increase in Condensates will Offset the Declines

• In the next 18 months, the main

increase in offshore production

will come from South Pars

• But this means more condensates

and it may not be enough to offset

the declines in crude from other

offshore fields

South Pars Condensates, kb/d

Project Developer Current Target Remarks

South Pars 12 POGC 100 110

Completed and

Inaugurated in 2015

South Pars

15-16 POGC 15 75 Early 2016

South Pars

17-18 POGC 10 80 2017

Source: MEES, Energy Aspects

New Upstream Projects Facing Serious Delays

• Focus has been mainly on West Karun fields

– North Azdagan, South Azdagan, North Yaran, South Yaran, Darquain, Jofier

• Iran was forced to rely on Chinese companies (CNPC, Sinopec)

• But not successful and many of the projects have been facing delays and as a result some contracts have been cancelled

• Most of these projects are producing well below their production targets

• Government’s plan to bring three projects online quickly adding 240,000 b/d by 2016, but unlikely to be successful with all

• Especially with limited investment; Iranian oil minister: ‘Because the drop in the oil price, almost nothing has been set aside for investment in the oil industry this year’

Project DeveloperCurrent

Production Target Plateau Year

Yadavaran Phase Sinopec 50 100

Start-up in 2014; Three

phases scaled back to one

phase with production 0.1

mb/d

Azar Phase 1 NIOC 0 30

2016; Shared Reservoir with

Badra Field

North Yaran PEDEC ~5 30 2016

South Yaran NIOC 0 55 2018

North Azdagan

Phase 1 CNPC 75

2016-2017; Facing delays;

Shared with Majnoon

North Azdagan

Phase 2 CNPC 0 75 2019

South Azdagan

Phase 1 No ~50 150 CNPC contract cancelled

South Azdagan

Phase 2 No 0 110 NA

Foroozan NIOC 30 125 2017-2018

South Pars Oil

Layer Phase 1 PEDEC 0 35 2017-2018

Source: EIA, Energy Aspects

The Challenge of Increasing Long-Term Productive Capacity

• The contractual terms

– The Iran Petroleum Contract

• Dealing with a ‘new business elite’

– During the Ahmadinejad time a new business elite emerged led by Iran’s Islamic Revolutionary Guard Core (IRGC)

– Increase influence in the economic sphere particularly in construction and oil services but even at the ministry and the NIOC (currently around 250,000 employees)

– Not clear how this business elite will respond to opening of sector

– They have the power to slowdown things

• Bureaucratic procedures, red tape, unfriendly business environment, weak institutions

• Implementation of large infrastructure problems (mainly the gas injection projects needed to increase production)

• US secondary sanctions (IRGC still deemed a terrorist organization)

• Companies have to take into account the risk of ‘snap sanctions’

• The Foreign Corrupt Practices Act (FCPA)

Source: Global Competitiveness Report 2014-2015

The Middle East-OPEC Investment Cycle

CountryOil capacity

(mb/d)

Oil growth

potentialComments

Saudi Arabia 12.5 HighInvestment may be delayed by uncertainty over long-term

demand for oil exports.

Iraq 4 HighPotential to more than double production, but security,

bureaucratic and political hurdles will moderate growth.

Kuwait 2.8 MediumPolitical uncertainty and restrictions on investment likely to

contribute to missing target of 4 mb/d by 2020.

Iran 3.6 MediumNuclear deal and the lifting of sanctions needed to unlock

growth. Technical issues may slow any increases.

Libya 1.6 LowSignificant reserves, but exploration and production will

struggle until political stability amd security returns.

Qatar 2.8 LowOil output growth prospects limited. Moratorium on gas

projects, but debottlenecking may raise LNG exports.

Algeria 1.2 LowSubstantial decline rates in oil and gas fields; investment

prospects remain limited; political stability fragile.

UAE 2.7 LowTarget of 3.5 mb/d production likely to be pushed from 2017

to 2020, limited supply growth prospects.