Oil expert and executive editor of the Cyprus-based Middle East Economic Survey Walid Khadduri talks about gas and oil production in the Arab world in an interview with Zeinab Abdel-Razzak
With the discovery of a super-giant gas field in Egypt's territorial waters, do you expect Egypt to join the club of the major oil producers?
The discovery of the Shorouk Field, the largest natural gas field to be found in the Mediterranean so far, doesn't mean that Egypt will gain admission to the club of oil-rich countries. This is a discovery of gas, not oil, and there is a difference between gas revenue and oil revenue, in the sense that oil brings in a lot more revenue than gas.
Egypt also has a population of more than 80 million, which means that due to the high annual growth of the population and higher standards of living, Egypt's energy consumption will grow over the next few years, which will limit the scope of its exports. But the discovery has given Egypt a much-needed gas supply at a critical time.
The production of gas had earlier dropped in a manner that turned Egypt from an exporter to importer. But the drop also had something to do with the policies that were in place, some of which were financial and some had to do with the nature of the contracts signed with the production companies.
Egypt suffered from lags in exploration as a result, particularly with regard to deep-sea prospecting. Then there has been the rise in gas consumption due to subsidies, meaning that the growth in annual consumption in Egypt outstripped that seen in other countries. Some export projects were also conducted in haste.
All these factors combined led to excessive production and a drop in reserves. The confirmed reserves of natural gas rose from 36.4 trillion cubic feet in 1998-1999 to about 77.2 trillion cubic feet in 2008-2009. Meanwhile, the production of natural gas rose by three times during a decade, from 18 billion cubic metres in 1999 to 61 billion cubic metres in 2009, for the reasons mentioned above.
According to the director of the Italian energy giant Eni, the discovery will be a turning point for energy production in Egypt and the world. Is this true?
The Shorouk discovery will be a major turning point for Egypt's gas industry, if Eni implements what Claudio Descalzi, its chief executive, told the Italian parliament at the end of September. Descalzi said that Eni plans to link the Shorouk Field with other Eni gas projects in Egypt and with those in the Eastern Mediterranean and Libya, forming an export network to the Italian and European markets.
Of course, to implement Eni's ambitious plans, to make Egypt a centre for the gas industry in the Eastern Mediterranean, massive investment is needed. To link the Shorouk Field with other Eni-run gas fields in Egypt and neighbouring countries, such as Cyprus, would mean connecting excess gas, say from the Aphrodite Field, to the Shorouk Field.
This would give Egypt the capacity to play an important role in the Eastern Mediterranean gas field and even establish a market for the pricing and trading of natural gas, something that the region doesn't have at present.
Aside from extending the network of pipelines for local gas to link up with the Shorouk Field, it all depends on the financial cost that Eni will be willing to bear, as well as the price of the gas sent to Italy. This price has to be competitive with that of the other suppliers that sell gas to Italy, meaning the price of European gas, which currently ranges between $6 to $8 for one million British thermal units (Btu) of gas.
Otherwise, it will not be possible for the gas from the Shorouk Field and the Eastern Mediterranean to compete in the European market. So a deal will have to be reached with the Egyptian government on suitable and flexible gas prices. The price may vary from one field to another, according to the size and depth of the field in question.
How will the discovery alter the energy scene in Egypt? Will Egypt be able to meet its needs for natural gas for the decades to come, and will it turn from being an importer to being an exporter of gas?
After the rough time that Egypt has been through lately in turning from an exporter to an importer of gas, something that is unique in the international gas industry, especially after commitments were made, expensive contracts signed and billions of dollars invested, it is necessary to give priority to domestic consumption and the development of the national economy.
It is also necessary to strike a balance between domestic consumption and the size of the confirmed discoveries. This is why it is important to cooperate with reputable international engineering, economic and oil companies so as to gain precise forecasts about supply and demand over the next few decades, in a manner that is independent of the vision of the authorities alone.
The lack of a clear picture about supply and demand for the decades to come could inflict massive economic losses on Egypt, which have happened in the past. The geostrategic aspect of energy must also be considered.
Egypt is a major regional country, and if it intends to rely extensively on gas in generating electricity, which is now the case, and if it intends to expand the use of gas in petrochemicals, and if it has plans to use gas in heavy industries such as iron and steel, or in cement and fertilisers, thus substituting gas for expensive oil products which are not available in large quantities locally, while improving the environmental impact and reducing carbon dioxide emissions, then this all means adopting policies to be proposed to the parliament on determining how much gas should be exported and how much should be conserved for use over the next five decades or so.
This should be done in the light of the confirmed gas reserves of the country, not of the potential reserves. Egypt must not go on suffering from the current situation in which it has to negotiate with foreign companies to import gas at international prices. It must stop having to cut off electricity supplies to homes or freezing the exports of liquid gas and paying heavy penalties for breaches of contract.
Does the discovery confirm reports that Egypt's territorial waters contain more massive natural gas fields that may give it self-sufficiency in energy?
In order to speak of additional reserves one has to consider many things: the geology of the country, the local oil laws and the available technology. Oil in the waters of the Eastern Mediterranean, so far, has been found in very deep water, whether off Egypt, Cyprus or Israel. The depth of the water ranges between 15,000 and 20,000 feet.
Clearly, discovery and production at such depths mean using the latest technological methods and high costs. What helps in this endeavour is that such maritime activities have expanded in various parts of the world. For example, the daily cost of work in boring one well in the deep water of the Eastern Mediterranean is estimated at $80 million to $150 million.
There are geological risks connected with exploration and prospecting. The companies working in the field have to take these risks, but the region is geologically promising. For example, Royal Dutch Shell gave up on a "promising" zone in Arctic waters near Alaska two weeks ago, after digging there for almost a decade and spending some $5 billion to $10 billion. It didn't discover oil at commercial quantities there. The area may be promising, but what will happen during explorative digging in the sensitive geological strata?
Another example is that of a European company that used to work in the Shorouk location before Eni but found no gas. So it gave up working in this particular zone. Eni decided to prospect in the same spot and found gas. This is not uncommon. A company may prospect in the top geological strata and find neither oil nor gas and give up.
There are several important matters that need to be borne in mind in prospecting and digging operations: one is to have very accurate geological maps of the area. Another is to have the latest technology for digging, especially in very deep water. A third is to have the economic motive to make companies tackle geological risks. As a rule, governments take no risks at the stage of exploration. This is the responsibility of the companies that bear all the costs until production starts.
For all this to happen, international oil prices must be reasonable and stable. And the contracts made with the local authorities must motivate the companies to engage in the work. Financial motives are important, but they are not the only ones. The companies should also be able to work without bureaucratic hindrances that may stymy their work. The cost of hiring a drilling platform runs into millions of dollars per day. So the companies would lose a lot of money if the platforms were kept from working for days or weeks because of red tape.
Russian oil production is at its highest point since the collapse of the former Soviet Union, making Russia, along with Saudi Arabia and the US, one of the world's top three producers. What do you have to say about that?
The increase in Russian oil production capacity to over 10 million barrels a day at present, the same level of production reached before the collapse of the former Soviet Union, is due to work done by relatively small-sized Russian companies. These companies have discovered many new fields in the past few years.
The recent rise in production, which took place despite the Western blockade on Russia, is also due to the tax policies followed by the Kremlin that favour the export of crude oil instead of processing it for sale in the local market. It seems that this policy has succeeded, but at a cost to the local market.
Why did Russia refuse to cooperate with OPEC in mid-2014 when OPEC wanted to reduce production?
The Russian refusal to reduce production in the summer of 2014 and Moscow's unwillingness to cooperate with OPEC happened because Russian companies had everything ready and in place to increase production. They had the right technology and funding to invest in new fields. Also, Russia managed to boost its oil exports to the East Asian countries, especially China.
What impact will the drop in oil prices that has occurred over the past few months have on the stability of the Arab countries?
The drop in oil prices by about 50 to 60 per cent will clearly have a negative impact on the economy and stability of all the Arab oil-exporting countries. But the economic and political impacts will differ according to the nature of the regimes and the state of their economies before the prices dropped.
Countries such as Iraq and Libya are faced with problems of existential proportions. The very essence of these two countries is in jeopardy. Their financial reserves were depleted before the drop in oil prices occurred, and the drop in oil prices has made things worse. But countries with stable regimes and ample financial reserves have been able to avoid the worst by using their financial reserves, or borrowing from domestic or international markets.
The main challenge to such countries is this: will these countries take this opportunity to introduce economic and political reforms? Or will they leave the situation as it is and go on as they have done for decades in the past, relying on the revenue from this one volatile commodity whose price depends on external and uncontrollable factors?
We must keep in mind that the economic systems of the oil-rich Arab countries have changed only marginally since the middle of the last century. Meanwhile, the economies and societies of these countries have changed. It is therefore inconceivable to continue the same economic and social policies; namely, the welfare policies that aim to provide electricity, water and gas almost for free, or at least at less than cost price.
It is necessary for Arab experts to examine and revise this situation and for the politicians to make the right and brave decisions that are needed before things get worse.
Will the Middle East lose its international importance if oil prices continue to fall?
The geopolitical significance of the Middle East is unlikely to diminish with the collapse of oil prices. Oil is vital for the world economy. Even when it is sold for less than a dollar a barrel, which was the case before the 1970s, the region was still geopolitically significant.
Oil is facing many challenges, including that of alternative or sustainable energy, such as solar, wind and nuclear power. But after years of experimentation and the expenditure of millions of dollars to support sustainable energy, these are still limited in scope, constituting less than 10 per cent of the world's total energy supply. Oil, meanwhile, provides between one fourth and one third of the global consumption of energy.
I believe that the major challenge to Middle East oil, and oil in general, is nonconventional oil; for example, shale oil and deepwater oil. The major challenge for oil is what will happen if transport vehicles start using electric or solar energy on a large scale, or if the use of hybrid cars becomes universal. The transportation sector is the main consumer of oil. If technology can change this, this will be a major challenge.
Is the drop in oil prices a temporary or a lasting thing? How will it affect the Gulf states?
There are two types of downward turn in prices. One is the drop in prices that we have seen. This happened because of the extreme rise in oil prices to $100 to $115 per barrel, which led to consumer anxiety and a drop in demand. This drop coincided with the quick rise in shale oil production in the US, which has reached about 4,200 million barrels per day, higher than the production of Iraq, the second-largest oil producer in OPEC. The fast increase in the production of US shale oil was unprecedented, just as it was unexpected.
There is also the drop that happens because of the daily fluctuations of prices, in which prices may go up and down by between one and five per cent as reports indicate a possible increase in world commercial reserves or temporary disruptions in an exporting nation. These are temporary developments.
The view among the OPEC countries is that international demand for oil will continue to grow. Major oil-producing countries in OPEC, especially Saudi Arabia, believe that sustainable development in the emerging economies of the Third World (China, India, South Africa, South Korea, and Brazil), in addition to the high population density in these countries and the rise in the standard of living, will boost demand for oil and compensate for the sluggish growth of demand in Western industrial countries.
Currently, the bulk of Gulf oil goes east to Asia instead of west to the US and Europe. The improvement of the economies and the growth in population and expansion of the middle class in the emerging nations are the main guarantees for the growth of the oil industry. By the way, such phenomena are not confined to China. Growth rates in India now match those of China.
Venezuelan President Nicolas Maduro has proposed an emergency meeting of OPEC member states to stop the continued decrease in oil prices. Can such a meeting resolve the problem of falling prices?
I don't think that holding a summit of OPEC member and nonmember countries, which Venezuela has proposed with support from Iran and Algeria, is on the OPEC agenda at present. There is a wide debate about the topic, and major differences have surfaced.
Meanwhile, I believe that it is time OPEC started changing its manner of dealing with the US and Russia, politically and with regard to oil. Admittedly, there are political differences between some OPEC countries and one of these two superpowers. There are also different laws and regulations between the US and Russia.
US laws do not allow negotiations with OPEC on the grounds that the said organisation is a cartel, which is against the US [anti-monopoly] laws. Therefore, dealing with the US will have to be through market forces, which is what has happened over the past two years as the challenge of shale oil appeared.
As for Russia, the great majority of oil companies there are owned by the government, which makes it possible to negotiate with Moscow to find common ground for cooperation that is mutually beneficial. In fact, OPEC has been meeting with nonmember oil producers [including Russia] for some time now. But these meetings have been confined to experts and technical issues.
In August 2015, the UK's Guardian newspaper published a report claiming that Saudi Arabia would get into trouble because of falling oil prices, especially now that the US oil industry has surged. How do you view this?
The rapid drop of the income of any country by 50 to 60 per cent creates unusual conditions, which is true for Saudi Arabia just as for any other country. The only difference is that Saudi Arabia can, and did, borrow from the financial markets to offset the deficit.
The Iranian nuclear deal has changed the balance of power in the Middle East. How do you read this new situation and the idea that Iran could once again be the "policeman of the Gulf"?
Iran under the shah, before 1979, tried to be the policeman of the Gulf and the US rejected that idea. The Western countries that were allied with the shah did not help him either, and he was deposed. Meanwhile, Iran is a major regional country and a neighbour to several Arab countries. This is a fact that must be given some consideration.
But Iran needs to stop its interference in the domestic affairs of the Arab countries. It needs to stop trying to export revolution by agitating the Shiite communities in our countries. This is a dangerous act and one that may backfire.
As for Iran's nuclear capabilities, they are more of a deterrent than an active weapon. If such capabilities exist, and the same goes for Israel, then the Arab countries must also develop their nuclear capabilities to level the field.
Of course, the US is opposed to such developments. But the failure to create a new reality is a sign of the deterioration of Arab power in general and the inability of Arab governments and armed forces to provide the necessary security to protect their countries.
Could the discovery of oil in the Mediterranean provide a pretext for war between Egypt, Israel and Turkey?
The problem related to the discovery of oil in the Eastern Mediterranean is that the limits of territorial waters are not properly drawn up, nor has any agreement to that effect been ratified by the respective parliaments. Differences over territorial waters could lead to escalation.
Of course there are other problems. Turkey has occupied the northern part of Cyprus, so it considers the waters adjacent to the northern part of the island as its own. It claims that it does so in the interest of the Turkish community living in Northern Cyprus. Several problems have emerged because of this Turkish argument when trying to draw up the economic zones pertaining to Cyprus, Syria and Lebanon.
In recent years, Turkey has seen considerable economic and industrial growth. But the problem for Turkey is that it lacks hydrocarbon resources [oil and gas] on its land and in its territorial waters. Therefore, Ankara is trying to import its needs from other countries, such as Iraq, Iran, Russia, Azerbaijan, Algeria and Nigeria. It is also trying to promote a climate of rivalry among these exporters to obtain favourable prices. I believe that Turkey will try the same policy with regard to Eastern Mediterranean gas if given the chance.
As for war erupting over gas, this is unlikely. Still, it is very possible that we will see acute differences due to the lack of clarity about the boundaries of territorial waters. Wars depend on the political situation in each of the countries concerned and on the preparedness of the respective armed forces to defend their country's security. If there is a chink in the armour, hostile forces may move in. But is gas a likely pretext? Possible, but unlikely.
The reason is that war in the Eastern Mediterranean is not a matter that can be left to the countries of the region alone. There are international oil companies working in the oil fields, and each has many engineers and workers working around the clock on drilling platforms.
There is the high cost of these platforms, which runs into millions of dollars per platform. The destruction of a drilling platform would be met with retaliation in kind to the platforms of other countries. Then the industrial countries to which the companies belong would have to do something about it.
The eruption of differences is very likely, however, especially given the ambiguity surrounding the boundaries of the territorial waters in the Eastern Mediterranean. But the outbreak of a major and destructive war, just because of gas, is unlikely.
© Al Ahram Weekly 2015
