Oil and Gas in the Capitals

 Vol. 232 No. 12

One of the most important implications of the “Arab Spring” for the oil and gas markets is not only the oil and gas lost this year, but also the loss of production that was expected to come on line in the next few years.

The events of the Arab Spring have halted oil production in Libya for several weeks, leading to a sharp increase in light crude oil prices (except WTI). Although production is recovering, only “easy” oil can be brought on line quickly. Repairs of damaged facilities and replacement of looted items means that it will take time to restore full production. The political upheavals have also reduced oil production in Egypt, Syria, Tunisia and Yemen, with most of the losses in Syria and Yemen. Unlike Yemen, where most of the oil losses occurred because of pipeline bombings, sanctions on Syria reduced its oil production. It is expected that Syria oil production will decline by up to 15% in 2011 as international companies halt production because of the inability to export, full storage, and the inability of the Syrian government to pay the international companies for lifting the oil.

Several projects in a number of countries have been delayed when expatriates left during the peak of the crisis in Egypt and Libya. New bid rounds in Syria were delayed, and Turkey canceled its joint exploration with Syria’s state oil company. Investment to develop new oil and gas reserves is no longer a priority, especially in countries affected by the unrest. 

In addition, political instability in the Middle East might not end with the fall of a dictator or a change of a regime. As I stated in my column last June, “Demonstrations and turmoil are expected to continue in the foreseeable future, casting their shadow on global oil and gas markets. What we are witnessing is a ‘clash of generations.’ The removal of a president or a regime will not bring back stability. Therefore, the risks that existed before the collapse of the regimes will continue for an extended period of time.”  

Some experts believe that the entire Arab World has experienced the Arab Spring in one way or another. They see any increase in government spending, increased subsidies, new training and employment programs, and increased salaries and benefits of government employees as policies needed to avoid an Egypt-like or Libya-like crisis. The threatened governments are responding to the demands of people in their own way. The massive increase in spending will affect global oil markets in various ways. These countries require higher oil prices than ever to fund their budgets and maintain the peace. If oil prices decline, these countries will cut production to support prices. It just happened that cutting production is also a populist move. As a result, cutting production appears to be beneficial in both economic and political terms. In short, the Arab Spring has created a higher price floor for oil in the coming years.

Also, the entry of the oil majors into Kurdistan might mark the “Kurdish Spring” with no end in sight to the problems between the central government of Iraq and the Kurdistan Regional Government (KRG). The dispute will limit the ability of Iraq, including Kurdistan, to reach its potential. Take the recent move by ExxonMobil and Shell to invest in the Kurdistan upstream sector, for example. Iraqi officials threatened to cancel ExxonMobil’s contract in the West Qurna-1 oil field and ban the company from any future exploration in Iraq. Under the threat of losing its contracts in Iraq and the lure of a new gas contract, Shell halted negotiations with the KRG. It was rewarded instantly by the Iraqi government with a gas contract. Since the dispute between the central government and the KRG is expected to continue, and oil companies are attracted to both oil-rich regions, we are likely to hear more stories like that of ExxonMobil and Shell in the coming years. Threats to the sustained development of oil fields in the region will continue.

While the demand for oil and gas in these “Spring” countries declined during mass demonstrations and fighting, it is expected to skyrocket in the coming years. Several of these countries, especially Libya, Syria and Yemen, were kept way below their economic potential. In short, we will see less oil and gas supply from these countries and higher demand in the future.

The Arab Spring has made several fundamental changes, not only in the Middle East, but also in the Western and Eastern Capitals of the world and the way politicians in these capitals see and deal with the Middle East. These fundamental changes will have a major impact on the oil industry in the future. For example, continued instability as discussed above, high oil and LNG prices, the revolution of shale gas and oil in North America, and the decrease in costs of some renewable energy sources, will make politicians focus on increasing energy production from domestic sources and reduce oil imports from the Middle East. In some circumstances, the focus on lower imports might turn to exporting the surplus, which will compete directly with oil from the Middle East. On this note, Saudi Arabia has announced publicly last month, and for the first time,  that it will not increase its production capacity from the current 12.5 to 15 million bopd as predicted by the EIA, the IEA, and others, mostly because of the development of shale oil, NGLs, and oil from oil sands in North America.

In conclusion, the amount of oil that will flow out of the Middle East in the coming few years will be less than what was expected, creating opportunities for majors and independents, especially in North America, West and East Africa, and hot spots in Latin America.  WO