Each November the analysts at the International Energy Agency in Paris look up from their crystal balls to confer with the world around them about their predictions.
As with all ‘good’ clairvoyants, the IEA leaves a lot of room, in its latest World Energy Outlook, for people to infer their own meanings. To the US, the research proves it will become the world’s top oil producer sooner than expected in 2015, because of shale gas and oil. Europe and Japan could lose up to one-third of their exports of energy-intensive products, such as chemicals, aluminium and cement, because of high energy prices. Indian energy demand will eventually outstrip that of China, while the Middle East will regain and retain its dominance in oil production by the mid-2020s.
What the World Energy Outlook tells us above all is that energy, and particularly fossil fuels, remain the single most influential factor in the shaping of the modern world. Oil and gas provide the materials that make our products, buildings and packaging for our foods and provide the energy for our homes, vehicles and gadgets. Exploration and exploitation of oil and gas resources shape geopolitics, drive the environmental agenda and accelerate the advancement of technology.
The predominance of fossil fuels is a two-way street. Just as society is addicted to using oil and gas, the Middle East is addicted to producing these fuels. For decades, the Middle East and North Africa (MENA) has been defined internationally by the vast wealth that the region’s elite has accumulated through oil and gas. The contrast between that wealth and the region’s terrible conflicts, hardships and cultural differences is often stark.
But, in the past few years, the pace of change in the region has massively accelerated. When Tunisian street vendor Mohammed Bouazizi committed suicide in December 2010, he sparked civil unrest throughout the region, destabilising and reshaping countries and governments in a movement that has since been named the Arab Spring.
Despite the recent instability, the oil and gas industry has phlegmatically kept the pipelines flowing and the tankers full. Justin Dargin, an expert in Middle East energy from the University of Oxford, says that people are now more aware of security issues. “Security protocols are reviewed in the light of attacks,” he says. “In Algeria, the industry is more or less satisfied with the steps the government took after the In Amenas attack.”
He adds: “The industry is robust. These companies are used to doing business with a variety of governments and characters in places other industries won’t go.”
The attack he mentions, by a militant group on the In Amenas gas plant during January 2013, was the most shocking moment for the industry in recent times. It led to a three-day siege in which 40 workers died. The gas facility is a joint venture operated by Statoil, BP and the Algerian state energy company, Sonatrach. A subsequent investigation by Statoil found that the company had relied too heavily on the Algerian army for protection.
The report also made several recommendations to improve operational security. “The terror attack against In Amenas was unprecedented,” said Statoil investigation leader Torgeir Hagen in a statement. “It clearly demonstrates that companies like Statoil today face serious security threats.”
The In Amenas gas plant is still operational, although expansion projects there and at nearby facility In Salah have been delayed. Statoil has not returned any workers to the site since the attack. BP has said that it expects to begin returning its workers before the end of 2013.
Another flashpoint is the Sinai Peninsula in Egypt, where Islamic militants have repeatedly targeted natural gas pipelines with bombs. More than a dozen attacks have occurred in the past two years. “In Egypt, these militants continuously blow up pipelines in the Sinai Desert,” says Dargin. “But there are other issues in Egypt that will take a long time to solve. You have the political transition and the chaos, as well as economic paralysis.”
Sonia Elkattan, senior adviser for UK Trade and Investment (UKTI), says that there are a lot of regulations, bureaucracy and a slow court system in Egypt, “but all these issues are improving”. She adds: “Despite the political instability, business is going on. Democracy and liberty have a price that has to be paid. But 95% of trade remains unaffected. Egypt is still a very attractive market, especially for long-term investments.”
Egypt’s oil and gas sector is vital to the country, contributing 15% of its GDP. Around 50 international exploration companies and 400 service companies work in the oil and gas sector there. The country also has nine refineries producing 726,000 barrels a day, making it the largest refining sector in Africa.
The UK is the largest foreign investor in Egypt, representing half of all money going into the country. More than 900 British businesses operate in the country, and British brands still equate with quality to most Egyptians, says Elkattan. Most big international oil and gas companies operate there, including BP, Shell, BG Group and Eni.
Egyptian oil is mainly produced in the Western Desert. New reserves have recently been discovered there, bringing the country’s total oil reserves to 4.4 billion barrels. In addition, recent discoveries have increased proven reserves of natural gas to 2.2 trillion m3. The domestic market features a large amount of foreign involvement. A UK exploration company recently won a concession in Egypt and is investing £300 million in the country, says Elkattan. The Egyptian Natural Gas Holding Company, EGas, is also expected to launch a tender by the end of 2013 for a gas exploration concession worth £250 million.
In addition, there are large levels of investment in Egypt’s downstream industries. Two refineries are being built near the Suez Canal, and an oil refinery and petrochemical plant is being built in Port Said. A pipeline to transport crude oil to Alexandria is also being built – a £6 million project that will take two years.
.jpg?sfvrsn=ffad3812_2 "Domestic gas prices are kept low in the Middle East, making the development of downstream chemicals plants an attractive prospect")
Domestic gas prices are kept low in the Middle East, making the development of downstream chemicals plants an attractive prospect
Engineering firms looking to do business in Egypt should register with the government and research prospects beforehand, says Elkattan. “You have to have a presence in the market,” she says. “You won’t be able to do business here by staying in the UK – and you have to be patient. We are a country with political problems, but we have 85 million people to feed and clothe. Also, Egypt will remain dependent on imports, because we lack innovation and design capacity.”
The large-scale expansion of the downstream petrochemical sector in Egypt is typical of what’s happening across the MENA region. But another associated common characteristic is a shortage of professionally skilled engineers and technicians. There are laws in places such as Saudi Arabia to ensure companies that employ foreign engineers and technicians also take on workers from the indigenous population. During the past year, there has been an amnesty for illegal foreign workers. The result of these measures over the year, media reports suggest, has been an exodus of more than a million foreigners. Meanwhile, the Saudi government is attempting to improve the education system. According to UKTI, two schools are opened every day in the country.
The push to produce more skilled engineering and technical staff indicates that many MENA governments have realised that, in order to prosper, their industries have to diversify away from just producing and exporting oil and gas, says Dargin.
“Saudi Arabia, like most other MENA countries, realises that overdependence on oil exports is unsustainable and volatile; they can’t rely on them for the long-term development of their countries.”
This diversification includes state programmes for citizens. “Since the Arab Spring, there has been an expansion of the population and a rise of subsidisation across whole swathes of the economy,” says Dargin. “To encourage co-operation from the citizenry, there has been a massive expansion of the state and of subsidisation programmes. Because of this, many MENA states must achieve a much higher break-even price for their oil or they will be running deficits.”
The need to maximise the value from oil and gas in volatile international markets is a key driver in the region’s downstream boom. Saudi Arabia is home to the world’s largest oil and gas company, Aramco, and also to one of the biggest chemicals processing complexes to be built in one phase – the Sadara project at Jubail Industrial City.
Many countries in the Middle East hope to emulate the scale of development
seen in Dubai
The first parts of the Sadara complex – a joint venture with US chemicals firm Dow – are due to be commissioned in the second half of 2015. The entire complex, which comprises 26 processing and manufacturing units, is expected to be completed by the end of 2016. According to Saudi Aramco, the £8 billion complex will “possess flexible cracking capabilities”. It will be able to produce “over 3 million tonnes of high value-added chemical products and performance plastics” that will also lead to the set-up of other downstream plants.
Domestic natural gas prices in MENA region countries such as Saudi Arabia are heavily subsidised, and cheaper than international market prices.
That makes the region an attractive place to set up downstream operations, such as chemicals and fertiliser plants.
However, the grand economic plan of diversifying around downstream oil and gas has a major blip on the horizon – North American shale gas.
National oil companies, such as Saudi Aramco, have made it widely known that the shale ‘revolution’ does not worry them and, indeed, offers them opportunities. But the long-term consequences could still damage the region’s development, says Dargin.
He says: “Saudi Arabia, like most energy producing/exporting countries, is funnelling billions of dollars into the downstream petrochemical and natural gas industries. It’s had the competitive advantage for a long time in terms of natural gas input pricing. Now that’s under threat.” These countries’ dependence on the skills of international oil companies creates pressure on prices, he says.
“The North American shale gas revolution represents a threat to that framework of funnelling inexpensive natural gas imports to certain economic sectors. Even though MENA countries have enough natural gas reserves, it is non-associated [isolated in natural gas fields rather than found in oil fields], which is often quite difficult to produce. Often the national oil companies don’t have the expertise, technology and managerial skills to produce it. So they have to collaborate and co-ordinate with international oil companies.
“But the international oil companies do not want to be involved as long as the domestic price of gas is low because most, if not all, of the gas being produced is slated for domestic allocation. That is putting pressure on governments to increase the prices.”
This upward pricing pressure, and the presence of shale gas on the international market, make it likely that a very different price regime will exist in the region by the end of the decade, says Dargin. These factors have also led some MENA countries to develop advanced manufacturing sectors in areas such as defence, aviation and automotive, mainly through creating technology hubs to transfer know-how.
Furthermore, the region is a burgeoning market for engineers and industries of all types. Against all the odds, a Middle Eastern country, Qatar, is hosting football’s World Cup in 2022. The world’s largest public transport project is to be built in Riyadh, Saudi Arabia. And Abu Dhabi has a £56 billion budget over the next five years to build infrastructure ranging from airports to renewable energy projects.
The places spending the most and with the greatest potential for engineers and engineering firms are Qatar, followed by the UAE and then Saudi Arabia, says Dargin. “These places are funnelling billions of dollars towards mega energy projects, reconfiguring their power sectors and building downstream related industries.
“The amounts being spent in Qatar are phenomenal. The country offers good opportunities for engineering firms who want long-term work, and remuneration packages are quite attractive,” says Dargin.
Governments and companies in the Middle East would be most interested in foreign engineering companies that can help them produce energy more sustainably, or reduce energy consumption more efficiently, he adds. “Any company that can position itself in that light will find that energy-rich MENA countries will be very interested in what they have to say.”
However, despite noises from MENA governments heralding massive projects in renewables such as solar and hydroelectric power, the progress has been slow. Many experts believe that the policy of subsidising domestic energy prices is severely hampering the development of renewables in the region. Oil and gas remain the most important economic force there. “Without oil revenue, most of these megalopolises would be submerged under the sand,” says Dargin.
“The region is very uneven in terms of development, cultural attitudes, and adaptability. But, as a whole, by the long term, perhaps by 2025, this period of chaotic political transition and instability will subside. Even Iraq is stabilising,” he says.
Iraq has reserves of 143 billion barrels of oil and 172 trillion ft3 of gas. These are the fifth largest proven oil reserves, and the 13th largest gas reserves in the world. The country produces 3.4 million barrels of oil a day, the second largest amount in the Organization of Petroleum Exporting Countries.
.jpg?sfvrsn=95ad3812_2 "Flowing again: The Iraqi government hopes to triple oil output by 2020")
Flowing again: The Iraqi government hopes to triple oil output by 2020
The government plans to increase production to 4.5 million barrels per day by 2015 and to 9 million by 2020. Investment in the country’s oil and gas sector up to 2030 is forecast to be worth $420 billion. International companies operating in Iraq include BP, Shell, ExxonMobil and Eni.
The key opportunities are in the upstream development of the country’s 12 largest oil fields, including the so-called ‘super giant fields’, according to Ali Al Zubaidy from the UKTI office in Iraq. An export pipeline is being built from Basra to Jordan in two phases, with contracts for the first section being awarded by the Iraqi Ministry of Oil.
The Basra Gas company is working with Shell to capture the 700 million ft3 of flare gas that is wasted from the big oil fields. This project involves “rehabilitating and upgrading” the current infrastructure, says Zubaidy. The project will help to meet domestic needs for power generation and reduce the environmental damage caused by flaring.
Another large project that requires international involvement is the Common Seawater Supply Facility, which mainly represents opportunities for process engineering companies.
The project aims to build 100km of pipeline to transport up to 12 million barrels of water from the sea to Iraq’s oil fields. The water will be used to produce the necessary pressure to extract oil.
Any companies operating in Iraq have to arrange their own security. Security and transport in the international zone of Baghdad costs £1,600 per day, says Zubaidy. “The company staff work and live in secure compounds. They do not go anywhere near downtown,” he says.
Despite these challenges, the opportunities for international companies are immense, he says. “There is a huge scale of opportunities upstream and downstream over the coming 12 months. The existing oil and gas infrastructure was built on UK standards from the 1930s, so Britain means quality in Iraq. But there is strong competition from both established and emerging energy companies.”
Competition in Iraq, attacks in Algeria, cultural differences in Saudi Arabia, bureaucracy in Egypt – that oil and gas companies take these issues head-on shows both their resilience and the strength of the world’s thirst for energy. It may be one of the most dynamic times in the region’s history, but the great forces of societal and economic change flowing through will not stop the pipelines and tankers carrying oil and gas to those willing to pay the highest price.
If the world is addicted to oil, the MENA region won’t stop supplying until the well is dry.