ADIPEC, the Abu Dhabi International Petroleum Exhibition, has been firmly established as the Middle East's premier event of its kind, on par with the likes of OTC and Offshore Europe; this was emphasized by the scale and calibre of the most recent event held in the UAE's capital last month. There were 55,000 visitors and delegates present over the four days of the exhibit, which included major national pavilions from China, the USA, UK, Germany, France, Italy, the Netherlands, Norway, Turkey, Spain, Korea, Canada, Singapore and Belgium.
ADIPEC re-emphasized that the Middle East and North Africa (MENA) contains 51 percent of the world's proven conventional oil reserves and 42 percent of the world's proven conventional gas reserves. The region has 13 of the world's 20 giant oilfields including Ghawar in Saudi, Rumaila in Iraq, Zakum in Abu Dhabi and Burgan in Kuwait, as well as the largest gasfield in the world – the North Field in Qatar/South Pars in Iran. Five countries in the MENA region produce more than two million barrels per day – Saudi, Iraq, Iran, Kuwait and the United Arab Emirates.
During the event, we identified a "top 10" list of major MENA opportunities and challenges which clients should assess in their strategic positioning for 2014 and beyond.
1. Volume, Scale and Complexity of Energy Projects
The Middle East Economic Digest (MEED) now estimates that there are over US$3 trillion of projects underway or planned in the Middle East region (defined for this purpose as comprising the six GCC countries – Saudi Arabia, United Arab Emirates, Kuwait, Oman, Bahrain and Qatar – plus Iraq and Iran). The majority of these relate to upstream oil and gas, downstream (including refineries, LNG and GTL), petrochemicals and related infrastructure projects. Capital investment of over US$10 billion is focused on:
- The Jubail, Yanbu and Petrobigh refinery projects, and the Manifa and Safiyanah offshore fields developments in Saudi Arabia
- Rumaila, West Qurna and Majnoon in Iraq
- The Zadco Upper Zakum artificial islands field development, ADCO onshore fields development programmes, ADMA-OPCP offshore fields development and Shah and Bad sour gas development projects in the United Arab Emirates
- The Al Zour and Clean Fuels refinery projects in Kuwait
- The Khazzan tight gas project in Oman
- The Barzan Gas development project in Qatar
MEED anticipates that Iraq will overtake Saudi Arabia as the biggest projects market in the region in the next five years but Saudi Arabia and Abu Dhabi will continue to attract huge capital intensive projects. This represents a major prize for EPC contractors and their supply chain.
2. Advanced Technology & Know-How and the Return of the International Oil Companies (IOCs) to the Middle East
It was no coincidence that the Society of Petroleum Engineers (SPE) chose Dubai as the venue for its most recent Intelligent Energy conference and exhibition. The Middle East has long been associated with "easy oil" and "low tech, low cost" production models. However, such factors as the rapidly increasing need for enhanced oil recovery (EOR), sour gas, heavy oil, tight gas, LNG, GTL, "clean fuels" refineries, carbon capture and storage, nuclear and solar technologies have given a boost to advanced technologies and know-how, much of it garnered by joint ventures with international oil companies (IOCs) and their supply chain.
The retreat of IOCs from the region seen in the 1970s, when a major programme of nationalization pushed them out, has been reversed. Perhaps the most important development anticipated in the region in a generation is the expiration and replacement of the ADCO onshore concessions in Abu Dhabi in early 2014, which is anticipated to bring a host of new IOC operators in the emirate, including Statoil. The petroleum industry is balancing the politics of "resource nationalism" with the need for IOCs and their technology, and this is most acute in Kuwait where politics have slowed the rate of progress. It can be expected that there will be an increasing use of Enhanced Technical Services Agreement (ETSA) contract models as a partial solution to this challenge, such as the one Kuwait Oil Company placed with Shell to develop its tight gas Jurassic Field in the north of the country.
A further drive to advanced technology will certainly follow if the current and prospective Red Sea and East Mediterranean exploration and appraisal programmes bear their anticipated fruit, as these will bring deepwater fields into play in a region dominated by onshore and shallow water production apart from the existing offshore fields to the north of Egypt.
3. Regional Gas Demand and Supply in the Middle East – Gas Imports and Diversification to Nuclear and Solar Power
Despite hosting an estimated 40 percent of the world's gas reserves, the region cannot keep up with the rapid demand for gas needed to guarantee and expand power supplies for economic and population growth. This is particularly acute in Saudi Arabia, Kuwait and the UAE, and it is driving major new exploration campaigns, production of unconventional and sour gas, importation of LNG and diversification of supply to embrace nuclear and solar energy production in the region. It is ironic that we may soon see LNG produced in the USA being exported to the Middle East to meet this demand and supply challenge.
4. Impact of the Shale Gas Revolution in the USA
The rapid rise of the unconventional gas industry in the USA and the prospect that the USA will emerge as a net exporter of gas will have multiple impacts. The security of supply fears so prominent in Western countries at the start of the last decade are rapidly diminishing, the achievable sale price of exported LNG from the Middle East is under pressure and Middle East national oil companies are increasingly turning eastwards to China, India, Japan and other major Asia Pacific markets rather than to the USA and European Union as their major clients and partners. If the USA shale gas industry is also considered in tandem with Canada's oilsands, Venezuela's heavy oil, Brazil offshore petroleum and the anticipated 60 billion barrels of reserves in the South Atlantic, it is becoming clear that the security of energy supply for the Americas will continue to strengthen. This could mean that the decision to source petroleum from the Middle East will be more driven by choice and economics rather than by need and politics.
The momentum in Iraq is now clearly gathering speed. Although original claims and ambitions that Iraq could be producing 12 million barrels a day in the foreseeable future are now generally accepted as over the top, Iraq is now back in the 3 million barrels a day club and is expected to produce 6-8 million barrels per day by the end of the decade. Iraq has more or less been operated and managed as three distinct areas, with the Shia-dominated south centred on Basra, the Sunni-dominated central area around Baghdad, and Kurdistan all requiring separate strategic approaches by foreign players. However, the recent production sharing awards to Exxon-Mobil, Chevron and Total in Kurdistan have removed the previous distinction in which the south was considered IOC territory and Kurdistan being for the independents. The political differences between the central Government and the Kurdistan Regional Government, the ongoing security challenges (apart from Kurdistan) and the alleged high levels of corruption permeating parts of the petroleum industry will continue to be formidable challenges. Even so, there will be increasing commercial advantages for, and pressures on, industry players to expand their presence and activities in Iraq.
6. New Dawn with Iran and the Emergence of the Emirates of Fujeirah as the Bypass to the Straits of Hormuz
A major theme throughout the ADIPEC 2013 event was the prospective return of Iran to more normalized relations with the USA and the West in general. Iran daily production has fallen, allegedly, from a peak of over 6 million barrels per day to less than 2 million. The Iranian economy and currency are toiling under the weight of sanctions, and its energy industry has been all but starved of technology and capital investment for the best part of a generation. The election of President Hassan Rohani in the summer has opened the door to what appears to be proper geopolitical dialogue, with the Iranians making major concessions on their nuclear energy programme in return for the loosening and ultimate removal of the sanctions. Although it is early in this process, if relations with Iran were to normalize this could open a raft of opportunities. However, it would remain to be seen whether or not Iran persisted in a resource nationalism posture or embrace the NOC/IOC partnership approach which has operated so successfully in Qatar and now Abu Dhabi.
A further development which may have had a partial impact is the new ADCOP pipeline linking Abu Dhabi's onshore Habshan field to the port of Fujeirah on the east coast of the UAE. Fujeirah is also the scene of major LNG, refinery and bunkering project developments and this is loosening the need for the UAE to use the Straits of Hormuz bottleneck between Iran and northern Oman. This could reduce Iran's ability to threaten to disrupt its supply lines.
7. Arab Spring Legacy and the Ongoing Impact on Local Employment and Local Content
The so-called Arab Spring has resulted in major disruption to the economies and petroleum industries of certain Middle East countries. Egypt and Libya have been particularly affected and the plans of many players for these areas are on the back burner until the political situation settles down. This is not expected to happen quickly. The Arab Spring has also had implications for Saudi Arabia and Oman – unlike the UAE and Qatar, both countries have large and young local populations with unemployment challenges. This is resulting in significant and increasing pressure on foreign players in those countries to commit their support for local employment and local content.
8. Cyber Security Replaces Terrorism as the Biggest Risk and Challenge
It should be noted that cyber security has now firmly replaced terrorism threats as the number one security concern for the region's petroleum industry. Major "cyber attacks" have been launched on the IT systems of Saudi Aramco and Qatar Petroleum earlier this year, causing major disruption to operations. The need to manage and contain this risk will be major opportunity for specialist service providers who can contain and defeat these attacks.
9. Role of the Independent E&P Companies in Frontier and High-Risk Opportunities
The activities of national oil companies (NOCs) as well as of IOCs are being complemented by independent exploration and production companies focused on niche or frontier opportunities, often at the high risk/high reward end of the spectrum. This is especially so in the case of Kurdistan in the north of Iraq, where independents such as Genel Energy and DNO are making their mark. But the independents also play a key role in Oman, Yemen and the northern emirates of the UAE. These companies may well serve as a source of future farm-in and even full merger and acquisition activity from the IOCs and/or NOCs when the development capital requirements of the independents, reserve replacement targets of the IOCs and advanced technology and know-how appetites of the NOCs align.
10. Sovereign Wealth Funds, Regional Operators and Outwards Investment
Finally, the Middle East region has traditionally been associated with inward investment of capital and technology but the region is now home to many of the world's largest sovereign wealth funds, especially in Abu Dhabi, Kuwait, Saudi and Qatar. These are now major outward investors with US$2 trillion dollars of combined investments. Abu Dhabi has gone a step further – the emirate's state-owned TAQA and Mubadala Petroleum are operators of petroleum assets and not simply investors. Mubadala Petroleum is a subsidiary of Mubadala Developments, which is now a leading player in the international renewables industry, recently commissioning the Shams 1 solar 100 MW energy project in Abu Dhabi. This massive buying and investment power will continue to exert its presence in the international petroleum industry in the years ahead.
In conclusion, it is clear to see that ADIPEC has emerged as the major petroleum event of the year in the Middle East. In our view the themes emphasized at ADIPEC and discussed above represent major opportunities across the supply chain for international oil companies, independent exploration and production companies, EPC contractors and suppliers of specialist technologies and know-how. At the same time, threats and risks will need to be managed.
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