Oil and gas in the capitals

The hard-to-define conflict in Syria has created a nightmare in the nation’s oil fields, especially near the city of Deir al-Zor in the northeastern part of the country. A May 30 wire service report quoted Syrian Oil Minister Suleiman Abbas as saying that oil production in Syria was almost at a halt, and natural gas production was down by half because of the civil war.

It has created a golden opportunity for smugglers to ship badly needed, heavily subsidized petroleum products to neighboring countries, where prices of these products are at least six times higher. Additionally, the loss of Syrian crude has also affected global oil markets. Some European countries have lost their portions of valuable, 75,000-bpd light crude imports from Syria, due primarily to sanctions that ban the import of Syrian oil.

The Syrian conflict, expected to drag on for years, means potential delays of more than a decade, in terms of beginning development of Syrian blocks in the eastern Mediterranean. It might also limit production growth in Iraq and some other Gulf countries that started negotiations with the Asad regime, before the conflict started, to build pipelines to transport oil and gas from Iraq and the Gulf.

Health and environmental mess runs unabated. Oil fields under rebel control are experiencing one of the worst health and environmental tragedies in recent oil industry history. Oil thieves have found several ways to pump crude into small and large tanks, even oil tankers, for their own use. They then sell the oil in local markets, or sell it across the border in Turkey and Iraq. Many thieves have built makeshift refineries near oil wells to distill the crude into some form of fuel that can be used in cars, or for heating purposes. Under these primitive circumstances, crude oil is frequently spilled. Smoke from the makeshift refineries has affected the nearby populations of various villages, which are suffering from several strange health problems not seen before.

Water produced with Syrian crude frequently contains very high radiation levels and should be re-injected into oil fields. Instead, this water is flowing around the wells and forming small ponds. The contaminated soil and shallow-water aquifers will be silent killers of people, animals and plants for years to come. The cost of remediation will be tens of millions of dollars. Ironically, the first victims of this radiation are the oil thieves and their families. Thieves have also dismantled water pumps and pipes that are highly contaminated with radioactive materials, subjecting themselves to radiation, as well as the scrap yards, where they sell the metals.

Governmental revenues flag, while smuggling flourishes. Some oil fields are controlled by local armed militias that use oil revenues to pay their members and to buy weapons. Can a new government force out these armed militias without bloodshed?

Clearly, the Syrian oil fields have become an enormous problem. Those who are counting on the return of Syrian oil production to pre-revolution levels, once the Asad regime is removed or its officials quell the revolution, are missing an important historical lesson—it takes at least three years to bring back production. With radiation problems in the oil-producing areas, these fields will be sealed off until foreign companies and local experts remediate them. This will be a process that takes time and money—a lot of money. Where the money will come from?

On the west side of the country, smugglers are taking advantage of the withdrawal of the Syrian security forces from the Lebanese borders, and the weak position of the local rebels, who are fighting a brutal regime and do not want to cause friction locally. They are doing so by smuggling badly needed petroleum products to Lebanon—mostly diesel, which is a common heating fuel throughout Syria. Smuggling has caused fuel shortages, which add to the misery of the Syrian people. The prices of diesel and gasoline have multiplied on the black market so extensively, that some of the products smuggled to Lebanon find their way back to Syria.

While Syria may be a small oil producer, claiming 2.5 billion bbl of oil reserves and a pre-revolution production of about 330,000 bpd, oil export revenues did generate about 25% of the government’s revenues in 2010. Future Syrian governments should be wary of the fact that they cannot depend on revenues from the oil sector for their first few years. They should also be wary of any deals with the International Monetary Fund, the World Bank and/or international banks that depend on oil revenues. Syria’s oil production has been declining in recent years, and it is only expected to last 12 years, based on pre-revolution production.

No easy solution in sight. The problems facing the oil and gas sector, mentioned above, mean that future Syrian governments have to find other funding sources. Additionally, the explosive growth of energy consumption in the Arab Spring countries indicates that Syria’s energy usage could potentially explode, once the war is over. The increase in energy consumption would lead to higher imports of oil and natural gas. Where will the foreign currency to pay for these imports come from? If energy subsidies continue as is, can the government afford to pay for an explosive growth in energy consumption? The most important question is, “Will a new government of a devastated country, with low income and unemployment above 70%, dare to raise fuel prices?” We all wish that a speedy end to Syria’s nightmare would come, but clearly there are no easy answers.