High oil prices are generating huge revenues for the world’s major oil companies. But the record prices are making the search for reserves replacement in the Middle East and North Africa (MENA) more difficult – especially with China and India using state muscle to win new upstream contracts in the region, as Gerald Butt reports:

Faced with declining reserves (and in the case of Shell with the reassessment and downsizing of existing figures), the major international oil companies (IOCs) are looking for new upstream opportunities. But the MENA region is offering few openings. High revenues mean that the governments of those countries closed to IOC investment see little incentive to let them in. There are exceptions to the rule. Occidental Petroleum led the US’s charge back into Libya, outbidding competition from Europe, and Iraq remains a tantalizing prize that could be awarded at some point in the future. But other likely openings are limited.

Saudi Arabia And Kuwait

The most mouth-watering potential opportunity remains Saudi Arabia, with its 262bn barrels of proven oil reserves. But there are no signs whatsoever that Saudi Aramco will loosen its grip on upstream oil. Shell, Total and Eni have signed up to joint ventures with the state company to explore for natural gas in the southern desert regions of the kingdom, with oil strictly off the menu. The view in Middle East energy circles is that the prospects do not look spectacular – especially given the high cost of production and transportation from such a remote area. Furthermore, the IOCs involved in any operations will have no entitlement to the gas – which is to be delivered to the kingdom’s Master Gas System. But when it comes to the recovery of liquids “the companies may construct facilities to recover and deliver raw NGLs and condensate to the Saudi Aramco system at mutually agreed points” on a take-or-pay basis (MEES, 28 July 2003). In general, energy experts say, the companies that have signed up with Saudi Aramco are presumably gambling on the chance that if eventually the upstream oil sector is opened up, then they will be best positioned to benefit.

In Kuwait, several majors (including ChevronTexaco, Total, BP, Occidental, ExxonMobil, and Shell) are patiently awaiting progress on Project Kuwait – the proposed venture in which a consortium of IOCs will expand production at the country’s northern oilfields from 600,000 b/d to 900,000 b/d and maintain this level for 20-30 years. But under the terms of the deal, the companies will be paid as operating service contractors, in cash, without any entitlement/ownership of the extra crude produced. So these volumes will not be bookable.

In North Africa, several of the major IOCs are likely to bid in future EPSA rounds in Libya. But the likelihood also is that they will face competition from Indian and Chinese competitors. Last year, Chinese firms won three of the eight blocks awarded in Algeria’s 2004 licensing round (MEES, 4 October 2004), expanding on their presence in the country (for a list of China’s major oil/gas interests in the MENA region, see MEES, 18 October 2004).

India/China Seek Supply Security

The involvement of Indian and Chinese firms in the MENA region in the near future seems certain to grow. Both India and China have put security of oil supply high on the list of national priorities. While Western states see supply security related to free and open markets, the Asian states put more emphasis on physically controlling energy sources, as well as the means of oil/gas transport and processing. They are less willing than their Western competitors to rely on the market which they cannot control. Furthermore, in the words of an exasperated IOC executive, “with state backing, they are prepared to take less in returns on investments and are not subject to US restrictions on countries where they can operate.”

Not only are the governments in New Delhi and Beijing willing to provide strong political support to their national oil companies, but they are also ready to make available huge funds for investment in overseas oil and gas ventures – and give increasing freedom to state firms. For example, the Indian government on 7 February announced that state-owned Oil and Natural Gas Corporation’s (ONGC’s) upstream subsidiary ONGC Videsh was being allowed to invest up to $75mn abroad without seeking government approval. The figure was raised from $50mn. According to an oil ministry official, “there were a few offers of small stakes in foreign oil projects, but ONGC could not strike a deal quickly as the investment required was about $70mn. A Chinese company walked away with the deals.”

Iran And Sudan

Iran and Sudan – one under US sanctions, the second threatened with UN sanctions – are two countries where Western IOCs, in the main, have trodden warily over recent years. And both look like being areas of success for Indian and Chinese firms. In Iran, these firms have won deals tied to long-term sales contracts. In January, India and Iran signed a preliminary agreement under which India would import 7.5mn tons/year of Iranian LNG over 25 years beginning in 2009, while ONGC Videsh would be given a 20% stake in the development of Iran’s Yadavaran oilfield, and an outright buyback contract for the development of the Jefeyr oilfield (MEES, 17 January). This deal followed a similar but larger agreement struck between China and Iran, under which China would take 10mn t/y of LNG over 25 years, while Chinese upstream companies would be given a 50% stake in the Yadavaran oilfield (MEES, 8 November 2004).

In Sudan, ONGC Videsh and China National Petroleum Corporation (CNPC) are major stakeholders (25% and 40% respectively) in the Greater Nile Petroleum Operating Company (GNPOC) which produces around 300,000 b/d. CNPC is the lead consortium member (41% stake) of Petrodar which has begun the Melut Basin Oil Development project. This, by 2007, will be producing 300,000 b/d, rising thereafter to 500,000 b/d (MEES, 9 August 2004). Both ONGC Videsh and Chinese companies are bidding for Blocks 12 and 15, and are likely to do the same when Block 13 is offered later this year. At the same time, Indian and Sudanese firms are involved in refinery upgrade and pipeline projects, while ONGC is considering an offer to build a new refinery in Port Sudan.

Gulf/Asia Relations

With demand for oil growing in both India and China, Middle Eastern producers are looking increasingly towards Asian markets. Moreover, governments in the Gulf are keen to develop interests in the Asian downstream. Saudi Aramco already has stakes in refineries in South Korea and the Philippines, and is involvedin a venture to develop a refining/petrochemical complex in Fujian in China (MEES, 10 January). More opportunities in Asia – and in India in particular – are being sought. In a speech in New Delhi last month, Saudi Oil Minister Ali Naimi stressed the importance of the energy relationship between the Gulf states and Asia (MEES, 10 January). He said the interdependence between them was “strong and requires sustained efforts to achieve a degree of strategic alliance, integration and development of reciprocal interests in the area of petroleum as well as other economic areas. Saudi Arabia recognizes petroleum as a common bond linking us with the importing countries of Asia.”

Given the importance of the Gulf/Asia energy relationship, the expectation is that Asian firms will find more upstream opportunities in the Middle East in the coming years. It is a factor that IOCs in the West will have to take into account as they seek upstream openings for themselves. They might decide to heed the words of one IOC executive who told MEES: “If you’re looking to book reserves, my advice is: don’t go to the Middle East.”