Middle East Business Expansion – The Strategic Themes and Opportunities
The latter half of 2014 was dominated by the 50 percent drop in the oil price and the significant impact this has had on oil-producing countries and the global economy. Then like a boxer recovering from a knockdown, three additional blows were landed in quick succession over the summer with the signing of the Iran Joint Co-Operation Plan, the Chinese Stock Market crash and the near “Grexit” from the Eurozone brinksmanship in the Greece debt crisis process, all of which were perceived to have negative impacts on the supply and demand dynamics for oil and gas.
The supply and demand concerns will inevitably continue to dominate, but one outcome of the price slide is a re-focus on lower cost production regions – principally, the Middle East – as the supply chain seeks alternative revenue streams as demand stalls in higher cost markets. The jury remains out on whether the curbing of the U.S. shale oil and gas production boom, which US$100 plus oil has permitted over the previous five years, will be a short-term or permanent factor. Currently, no one seems confident of a price re-bound until well into 2016 at the earliest.
In this climate, the combination of a depressed oil price, mature assets, aging infrastructure and high production and people costs are particularly challenging for North Sea players. An increasing number of North Sea origin companies that are either already active in the region or are potential new entrants are therefore focusing their attention on the Middle East. In this article we identify some of the key strategic opportunities and challenges facing them.
1. Scale, Volume and Complexity of Capital Projects
The scale of capital investment in the Middle East makes it a market impossible to ignore, particularly now that the lower oil prices are stalling investment in higher cost areas. MEED Projects is currently tracking over 1500 projects in the six GCC countries with a combined value of almost US$700 billion. On top of this are the major Iraq projects, the re-emerging Algerian and Egyptian markets, and the prospective re-booting of the Iranian oil and gas industry which may need in excess of US$100 billion of new investment. Saudi Arabia, as usual, leads the way with the current focus on downstream refinery projects at Jizan and Yanbu and with the Fadhili Gas Processing Plant project on the east coast. The main focus in Kuwait is also downstream with the new Al Zour Refinery project and the Clean Fuels project of refurbishing two of the three existing refineries in the country. Major opportunities in Qatar are the Bul Hanine Field Development project and the Barzan Gas Development Projects. Oman is dominated by BP’s Khazzan deep/tight gas project and Abu Dhabi by the evolution of the ADNOC/Occidental Shah Sour Gas Project to include Hail and Ghasha, the ADNOC/Shell’s Bab Sour Gas project and ZADCO’s Upper Zakum Field Development project involving artificial islands and extensive horizontal drilling.
2. Advanced Technology and Know-How
The Middle East has long been associated with “easy oil” and “low tech, low cost” production models but the petroleum industry is now balancing the politics of “resource nationalism” with the need for international oil companies (IOCs) and their technologies. Factors including the rapidly increasing need for enhanced oil recovery (EOR), sour gas, heavy oil, tight gas, LNG, GTL, “clean fuels” refineries, carbon capture and re-injection, nuclear and solar technologies are driving new requirements for advanced technologies and know-how, much of it garnered by joint ventures with IOCs and their supply chains.
In the longer term, a further drive to advanced technology will follow if Red Sea and East Mediterranean exploration and appraisal programmes bear further fruit, as these will bring deepwater fields into play in a region dominated by onshore and shallow water production.
3. Regional Gas Supply Pressures
Providing energy to fuel domestic economic and population growth remains a key priority for the region with more gas needed to achieve this, particularly in Saudi Arabia, Kuwait and the UAE. This is driving new exploration campaigns, production of unconventional and sour gas and diversification of supply to embrace nuclear and solar energy production.
Previous forecasts of Iraq reaching production of 12 million barrels per day are now generally accepted as unrealistic. However, Iraq is now back up over the three million bpd level and projected to rise to six million bpd by 2020. Notwithstanding the ongoing security issues in the northern parts of the country, Iraq’s oil and gas industry continues to gather momentum. There will be increasing commercial advantages for, and pressures on, industry players to expand their presence and activities in Iraq.
The oil and gas industry continues to await the rehabilitation of Iran in the international community. The prospective return of Iran to more normalized relations with the U.S. and the West in general would open up a market that has been starved of technology and capital investment for the best part of a generation. However, should this turn of events ultimately come to pass, it will remain to be seen whether or not Iran persists in a resource nationalism posture or embraces the national oil company (NOC)/IOC partnership approach which has operated so successfully in Qatar and now Abu Dhabi. With an estimated US$100 billion of investment needed, the latter seems more likely.
6. Security and Cyber Security
Northern Iraq, Syria, Yemen and Libya are currently virtual no-go areas for operational activities, let alone investment, and recent terrorist attacks in Saudi Arabia and Kuwait are reminders that the GCC countries are not immune from security challenges. Cyber security has become a significant concern for the region’s petroleum industry. The need to manage and contain this risk is a major opportunity for specialist service providers who can contain and defeat these attacks, especially as we move further into the era of the digital oilfield.
7. In-Country Value and Local Content
The “Arab Spring” events of 2011 and their aftermath still concentrate the minds of regional governments and this will still feed through to the energy sector in the form of continued focus on in-country value (ICV) – policy requirements on local employment, local content, technology transfer and investment in in-country facilities. This is particularly true in countries with large and young local populations such as Saudi Arabia, Egypt and Oman.
8. Independent E&P Companies and Frontier/High-risk Opportunities
The activities of NOCs as well as IOCs continue to be 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 Kurdistan in the north of Iraq, where independents 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.
9. Sovereign Wealth and Outward Investment
Finally, the Middle East is home to many of the world’s largest sovereign wealth funds, especially in Abu Dhabi, Kuwait, Saudi Arabia 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 in turn a subsidiary of Mubadala Developments, which is now a leading player in the international renewables industry. This massive buying and investment power will continue to exert its presence in the international petroleum industry in the years ahead.