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Weekly Energy, Economic

& Geopolitical Outlook


Vol. 57. No. 48
28.November.2014.

OPEC

Oil & Gas

Saudi Arabia Gets Its Way As Ceiling Unchanged

Transportation

Defying predictions of a cut, Opec left its output target of 30mn b/d unchanged. Saudi Arabia hailed
a great decision. But cash-strapped members such as Venezuela and Iran were left viewing the
prospect of a precipitous fall in oil prices with trepidation.

Power & Water

CURRENT 30MN B/D OUTPUT CEILING

Refining &
Petrochemicals
OPEC
Geopolitical Risk
Corporate
Economics &
Finance
Selected Data

OIL & GAS

OIL & GAS

Iraq Hikes
2015 Export
Projections

Qatar Looks
Egypt Closes In Iran Plots
Export Hike
Resilient
On Payments,
Despite No Deal To Lower Prices
Shale Bidding

Iraq plans 500,000 b/d of


northern exports next year:
both Kirkuk and KRG volumes.
Infrastructure bottlenecks will
continue to constrain southern
exports.

In an exclusive interview with


MEES, Egypts Oil Minister
Sharif Ismail lays out his
strategy to curb the countrys
growing gas shortfall.

Tehran is to focus on what it


sees as a condensate-related
loophole in international
sanctions to boost exports as
new phases of South Pars come
onstream.

Qatars export revenues are


shrinking on the back of
depressed crude, condensate
and LNG prices. But it will
weather the storm, MEES
analysis suggests.

OPEC

OIL & GAS

REFINING & PETCHEMS

TRANSPORTATION

GCC Needs To
Broaden
Feedstock

Stocks: Chinese
Become A Bit
Less Reserved

GCC petrochemicals producers


face a challenge both from the
North American shale boom
and tight availability of gas
feedstock within the region.

MEES analysis of crude and


products stocks data shows
Saudi Arabia has the worlds
third largest reserves. This
comes as key customer China
releases SPR data.

Libya: Parallel Saudi Expands


NOC Planned
Scope Of Key
By Government Gas Project
Plans by Libyas elected
government to set up a new
National Oil Corporation and
Central Bank put Libya further
down the path towards civil
war and breakup.

A reserves boost means Saudi


Arabia is raising the capacity
of its under-construction Wasit
gas plant to 2.5bn cfd. The
Neutral Zones Khafji field is
still offline.

GEOPOLITICAL RISK

ECONOMICS & FINANCE

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28.November.2014

Oil & Gas

www.mees.com

iraq

Iraq Hikes 2015 Export Projections,


Includes Kirkuk, KRG Oil
Iraq plans 500,000 b/d of northern exports next year, a combination of Kirkuk
and KRG volumes. But, while southern output capacity is up strongly, export
volumes continue to be hampered by decrepit infrastructure.
raq has penciled in 3.2mn
b/d of oil exports, to include
Kurdish and Kirkuk oil, in
its 2015 draft budget, Iraqi
Oil Minister Adil Abd al-Mahdi says.
The inclusion of oil produced from
areas under the control of the Kurdistan
Regional Government (KRG) comes after
a provisional agreement between the
federal government in Baghdad and Erbil
to allow some Kurdish exports to be had
led by state oil marketer SOMO, though
the controversial status of Kirkuk, now
under Kurdish control, is not one that Mr
Abd al-Mahdi was willing to discuss.
The number cited by the Iraqi oil
minister is much higher than his previous assumption of Iraqi exports for next
year. Mr Abd al-Mahdi told parliament
recently that he estimated Iraqi exports for revenue purposes next year at
2.7mn b/d from oil fields under federal
control, mainly in southern Iraq.
Mr Abd al-Mahdi was speaking to reporters after the 27 November OPEC meeting in Vienna,
which he attended for the first time
as his countrys representative.
The new figure would imply additional
exports to come from the KRG and the
Kirkuk field at a combined 500,000 b/d.
Iraq is currently exporting an estimated
2.5mn b/d of crude oil, exclusively from its
southern fields. It lost potential exports of
700,000 b/d from the north in March after
the main pipeline to Turkeys Ceyhan was
knocked out by insurgent attacks around
the Mosul area, now under ISIS control
and inaccessible to repair crews. (Even
before the outage, actual Kirkuk-Ceyhan
exports had been running at less than
half of the routes capacity see graph.)

KRG EXPORTS

Mr Abd al-Mahdi says that he cannot give precise figures for anticipated
Kurdish exports because he has not seen
any official documents. Production from
fields under federal control is in excess
of 3mn b/d, he says. Internal supply of
500,000-600,000 b/d should be added
to the 3.2mn b/d export figure, he adds,
implying an anticipated 2015 Iraqi
production figure of 3.7-3.8mn b/d.

The KRG is currently exporting crude


oil through an independent pipeline
completed earlier in the year at a rate of
300,000 b/d with an additional 130,000
b/d from the Kirkuk oil fields Avana Dome
as well as the Bai Hasan field in the north.
The KRG took over the Avana Dome and
Bai Hasan in July to prevent the Islamic
State of Iraq and Greater Syria (ISIS)
from seizing the oil facilities after Iraqi
troops withdrew. The KRG subsequently
linked the Avana Dome to the northern
Khurmala Dome, which already lies within
Kurdish territory, by pipeline and is using
Kirkuk oil to feed its 80,000 b/d Kalak
refinery and exporting the remainder with
its own crude streams from the Taq Taq
and Tawke fields. Any future exports of
Kirkuk oil, should production be ramped
up from current levels, would require the
cooperation of both sides. The Iraq-Turkey
pipeline will take at least one year or more
to repair if and when the area is secured so
in the meantime all northern exports will
have to use the Kurdish infrastructure.
The Iraqi National Oil Company
(NOC), a ministry subsidiary, is still
producing from Kirkuks Baba Dome,
officials say current output here is
around 120,000 b/d, of which 30,000
b/d is supplying the Kirkuk refinery
and the rest re-injected into the field.
CONCILIATORY APPROACH

Baghdad, under the previous government of Nuri al-Maliki, considered


Kurdish oil exports to be illegal and an act
of smuggling and launched legal action to
deter potential buyers. Mr Abd al-Mahdi,
however, has taken a more conciliatory
approach to the long-standing dispute.
Earlier this month, he travelled to the
KRG capital Erbil and clinched a temporary deal, whereby the KRG agreed to
release 150,000 b/d of its production for
marketing by SOMO (SOMO is marketing these volumes as Kirkuk although
in practice they appear to be a blend of
KRG crude, perhaps with some Kirkuk
crude). Baghdad agreed to release $500mn
from funds that have been withheld by
the federal government since the start
of the year. Finance Minister Hoshyar
Zebari said last week that the funds had

already been transferred to Erbil.


The KRG has previously refused to
allow SOMO to sell its oil, insisting that
it has a constitutional right to manage its
own resources. The semi-autonomous
region also claims Kirkuk as part of Iraqi
Kurdistan and insists on a referendum to
determine the fate of the oil-rich region.

LONG-TERM DEAL 
UNDER DISCUSSION
Mr Abd al-Mahdi would not be drawn
into a discussion about conditions set by
both sides to reach a more permanent
agreement on oil exports and revenuesharing, reiterating that a hydrocarbon
law now being redrafted would help to
remove any ambiguity. It is not a question
of being flexible. Its a question of both of
us taking hard decisions, he said when
asked if Baghdad would allow the KRG to
sell its own crude. All these matters would
be discussed during talks expected to be
held in Baghdad with Masoud Barzani,
the KRGs Prime Minister, possibly next
week, he adds. The discussions will cover
the modalities of exports and the 17%
share of federal revenues to the KRG.
In the end, he says, all production from
Iraq and revenues should go into the
federal budget after they are deposited
at the New York Federal Reserve Bank.
We have no conditions on our part
and I dont think they have any conditions
from their part, he says, adding that the
constitution should form the basis of any
agreement going forward. A first step has
been taken and goodwill was shown by
both sides, he adds. As for Kirkuk, we
will sit at the table and see what we can
do. Kirkuk, he says, is a disputed area
and he did not want to prejudice the
negotiations by commenting further.
ISIS ATTACK ON BAIJI PIPELINE

The situation in Kirkuk, however, has


in recent days taken a bad turn with ISIS
forces attacking Peshmerga positions in
the area and reportedly damaging the K2

Continued on p3

IRAQ: OFFICIAL CRUDE EXPORTS* (mn b/d)


3.5

FAO: MORE STORAGE NEEDED

The fighting in the north and northwest


has not impacted operations in the south,
where foreign oil companies are proceeding with further development of Iraqs
six major oil producing fields. However
exports have been constrained to a current
level of 2.5mn b/d by insufficient infrastructure. Mr Abd al-Mahdi says the lack
of sufficient storage at the Fao terminal
was critical and steps are being taken
to address the problem and promised
that something very important will be
done by the middle of next year. Until
then, plans to segregate the main Basrah
Light stream into two separate grades,
heavy and light, to accommodate a rise
in heavier streams from new fields are
being pushed back. SOMO had signaled
to refiners that it planned to start offering a Basrah Heavy grade from the start
of next year, but the minister says this
is now not expected before mid-2015 or
early 2016. This will require boosting
storage capacity to 20mn barrels at Fao
before the crudes can be segregated into
separate streams at current export levels.
In the meantime, the increased flows
of heavy crude have impacted production from the Halfaya field in Misan
province, the managing director of the
Misan Oil Company, Adnan Sachit, tells
MEES. He says some 30,000-40,000
b/d of Halfaya crude is being held back
because the API gravity of the crude
has dropped to levels that do not meet
the specifications of Basra Light.
Fields in Misan province in southern
Iraq are producing 320,000 b/d with plans
to increase production to 400,000 b/d
by the end of next year, says Mr Sachit.
Production at Halfaya, operated by

3.0

2.5

Oil & Gas

2.0

1.5

1.0

0.5

0.0
2003

2004

2005

2006

2007

2008

2009

PetroChina, is currently at 200,000 b/d,


at times falling to 190,000 b/d, while the
three Misan fields of Faqa, Buzurgan and
Abu Gharab have come down to 120,000
b/d from 130,000 b/d, he adds. The two
smaller fields of Amara and Noor, which
are being developed by MOC, are producing 7,000-8,000 b/d of heavy oil. Current
gas production from the Misan fields is
150mn cfd, most of which is being flared.
Some 30% of the gas is supplying a local
power station though volumes are set to
rise when production reaches 200mn cfd
by the end of 2015, he says. Total, a junior
partner in the Halfaya development, has
offered to handle the associated gas but
has not yet heard back from the ministry.
The API gravity of Misan crude is
somewhere between 22 and 24, far
too low to be marketed as Basrah Light,
Mr Sachit says. Overall quality of Basra
Light has been deteriorating as new heavy
oil streams have been brought online
in southern Iraq, mainly from the West
Qurna-2 oil field operated by Lukoil, Halfaya and Badra. One cargo of Basra Light
loaded recently showed an API gravity of
26.83. Iraqs main export grade marketed
as Basrah Light previously had an API
gravity of 34, similar to Saudi Arabian
Light. The fall in quality is costly since
Iraqs state oil marketer SOMO has to pay
compensation of $0.4/B for each degree
of API below contracted specifications.
Plans are underway to link the Misan
fields by pipeline to the Tuba tank farms,
which will also handle heavy crude from
the Lukoil-operated West Qurna-2
field, and from there to offshore loading berths at Basra, he says. The 7.5km
pipeline will be built either by the Iraqi
State Company for Oil Projects (SCOP)
or by Chinese contractors and can be
completed in a relatively short time.

WATER SHORTAGE HAMPERS 


DEVELOPMENT
Mr Abd al-Mahdi says the oil ministry
is committed to the foreign contractors
and payments due to them though he
admits that they have faced hurdles, some

2010

2011

2012

2013

1Q14

2Q14

3Q14

2015*

related to infrastructure and others to


bureaucratic red tape that he says will be
addressed. No doubt these and the water
shortage in the south were among topics
discussed with a large number of foreign
oil executives who held talks with Mr Abd
al-Mahdi and other OPEC ministers in
Vienna. The new Iraqi oil minister held
back-to-back meetings over two days with
Total CEO Patrick Pouyanne, Lukoil CEO
Vagit Alekperov, BPs Middle East boss
Michael Townshend and senior executives
from Shell and ExxonMobil along with
representatives from Chinese, Japanese
and South Korean companies active in
Iraqs upstream sector. Mr Abd al-Mahdi
says the Common Seawater Supply Project, which is running behind schedule and
should provide treated seawater for reinjection, will likely be completed by 2018.
Iraq awarded long-term technical
service contracts to international oil
companies (IOCs) in 2009 and 2010 for
further development or development of
major oil fields in the south with initial
plans to raise production capacity to over
13mn b/d by 2017. It has since lowered its
target to around 9mn b/d and has negotiated lower plateau production targets
with nearly all the major operators.
Mr Abd al-Mahdi revealed during
the press briefing that a lower plateau of
1mn b/d had been agreed with Shell for
the Majnoon oil field, initially targeted
to reach 1.8mn b/d. He gave no details,
nor did he say if the contract would
include similar changes as those negotiated with BP, ExxonMobil, Lukoil and
PetroChina, which extended the plateau
period and lowered the stake of stateowned entities in the joint ventures.
Iraq has been allowed to remain outside OPECs informal system of production targets as it recovers from over two
decades of under-investment and decline
due to wars and international sanctions.
Mr Abd al-Mahdi said there had been
no talk during the latest OPEC meeting of Iraq rejoining the quota system,
noting that Iraq had already lost years
of production and more recently some
600,000-700,000 b/d from Kirkuk.

28.November.2014

pipeline that supplies the Baiji refinery,


which was recently restored to Iraqi military control after the Jihadist fighters who
had besieged the complex were pushed
back. Repair crews are now in the refinery,
which has capacity to process 310,000 b/d
and was previously supplied by the Kirkuk
field. Even assuming resumed flows from
Kirkuk and securing the area around the
refinery, it will take time to repair the
crude pipeline and allow the refinery to resume normal operations, the minister says.
The Institute for the Study of War says
in its latest situation report on Iraq that
fighting in northern Iraq has accelerated, as ISIS seeks to regain momentum
after suffering major territorial losses
and setbacks recently in the strategic
town of Baiji in Salaheddin province and
the towns of Jalula and Sadia in Diyala
province. It says ISIS over the last two
days concentrated its fighting effort
around Kirkuk city in a very likely effort
to force a repositioning of Iraqi Kurdish
Peshmerga forces from other fronts.

Southern Northern

*EXCLUDES INDEPENDENT KRG EXPORTS. 2015 FIGURES ARE PLANNED AND INCLUDE THE KRG.

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iraq
COUNTRY

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Oil & Gas

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egypt

Egypt Closing In On Debt Repayment


And New Bid Round, Minister Says
In an exclusive interview with MEES, Egypts Oil Minister Sharif Ismail lays out
his strategy to curb the countrys growing gas shortfall.
gypt will next week decide
on a bank loan that determines the size of the next
tranche of payments to
international oil companies (IOCs)
that are owed billions by the government, the countrys oil minister says.
Producers could be paid up to $3bn,
according to Sharif Ismail, Minister of
Petroleum and Mineral Resources, paving
the way for a new oil and gas bid round to
be launched before the end of the year. The
auction will for the first time include shale
acreage, and contractual terms are being
amended to make unconventional production commercially viable, Mr Ismail says.
The government has doled out
two payments over the last twelve
months, reducing overdue receivables to $4.9bn by its own account, in
an effort to incentivize international
investment into Egypts upstream.
LNG imports will commence from
next March as a stop-gap solution to the
growing gas deficit plaguing the country,
and the minister tells MEES that a third
of the cargoes to be delivered over the
next five years has already been secured.
Meanwhile, the loan deal to enable further payments to IOCs is
close to being finalized, after nine
banks submitted proposals.
Hopefully early next week we will
be able to award, said Mr Ismail. The
scope of the resultant third tranche of
IOC repayments depends on which loan
the government chooses, but the minister
said the payout will be about $2-3bn.
This will be decided once we have
evaluated the offers. But the intention is
to drastically reduce the arrears, because
this will promote more investment
in the field of oil and gas exploration
and production, added Mr Ismail.
In a statement released on 13 November, the government announced that it
was considering a tender for pre-export
financing, guaranteeing a $2bn loan with
oil sold by state-owned Egyptian General
Petroleum Corporation (EGPC) over the
next five years. According to the government, it had released a second tranche
worth $1.5bn to producers at the beginning of the month. Debts to IOCs that
had accumulated in the aftermath of the
2011 revolution were first addressed with
a $1.5bn payment in December 2013.

Apart from chipping away at the debt


pile, Egypt is managing to meet its current obligations towards oil and gas
producers, the minister said, claiming
the government had paid $10.7bn of the
$11.2bn accrued as receivables in 2013.
Mr Ismail rejected reports that
Egypt will be able to repay all its debts
within six months, however, instead
suggesting a two-year time period.
We will continue to pay all the
dues, and try every quarter, or four
months, to have something, so that
we can reduce it over maximum of
two years from now, he said.
Egypt is struggling to contain a
natural gas deficit that has caused rolling
blackouts over the summer and brought
exports to a virtual standstill, leaving
two LNG export facilities idled. Output
slumped to 4.8bn cfd for the first seven
months of 2014 (and a 10-year low of
4.55bn cfd for July the most recent
available data), over 700mn cfd down
on estimated demand of 5.57bn cfd.
The deficit is the result of years of
upstream underinvestment and rampant
consumption by a growing population
benefitting from heavy energy subsidies.
The government slashed these subsidies
by a third in the current fiscal year, and
pledged to reduce them further in future.
This will not only curb consumption,
but free up funds to increase production.
Together with billions in financial aid
from Saudi Arabia, Kuwait and the UAE,
which have lavished Egypt with loans and
grants since Field Marshal Abd al-Fattah
al-Sisi wrested power from the Muslim
Brotherhood President Muhammad
Mursi in 2013, this cash boost provides
the platform for upstream growth.
NEW BID ROUND BEFORE YEAR END

The government is wasting little time, and Mr Ismail says a new bid
round will be launched just a year after
the most recent auction, which was announced in the final days of 2013 and
concluded over the summer. So far nine
blocks have been earmarked for the new
auction, but the minister is aiming to
increase this to as much as 15 blocks in
Upper Egypt, the Western Desert, and
offshore acreage in the Mediterranean.
The last bid round was widely regarded

as a success, with IOCs signing a slew of


concessions for gas blocks, encouraged
by debt repayments and a higher price
paid for gas from cost-intensive offshore
acreage, where much of Egypts incremental gas lies. According to Mr Ismail, the
government signed off on 36 new oil and
gas concessions or concession modifications recently, and is looking to sign off
on a further 20 before the year is out.
The minister hopes to repeat the
trick of tapping into a previously neglected resource by including shale
acreage in the upcoming bid round. To
make shale gas attractive to producers,
the government needs to amend the
terms of the concession agreements, and
raise the price from the $2.65/mn BTU
paid for conventional onshore gas.
We are trying to work out something
for shale gas, but we need to revisit our
master concession agreement to cope
with this. Some modifications have to be
introduced so that we can cope with the
requirements of the shale gas. Definitely
there will be a new price for the gas, said
Mr Ismail, who added that the length of
the agreements, as well as the percentage
of cost recovery and of relinquishment
costs borne by IOCs will be reconsidered.

FIRST UNCONVENTIONAL 
GAS DEAL CLOSE
A first deal with revised prices for
unconventional gas extraction will be
signed very soon, the minister says, as the
government has agreed on terms for a
tight gas project for the Apollonia formation in the North East Abu al-Gharadiq
concession with Shell and US independent Apache. Both companies have
confirmed to MEES that negotiations
have taken place (MEES, 14 November).
Hopefully before the end of
next week we will have this agreement signed, says Mr Ismail.
Egypt has already made inroads
into unconventional gas exploration.
Apache and EGPC subsidiary Egypt
Natural Gas Holding Company (EGAS)
have drilled a first exploration well into
shale rock at the Khalda concession in

Continued on p5

APACHE SHALE OIL PROJECT 


IN THE PIPELINE
Egypt is also close to striking a deal
with Apache on shale oil exploitation, according to the minister.
We have a big project with
Apache, this will happen very soon,
he said, without elaborating.
A source at the company confirmed
that negotiations with the ministry
had taken place, and that the deal still
needs to be approved by the cabinet.
Its an area which we are working with the ministry to gain access
to. It requires for certain parts of
the cabinet to discuss [as it] involves
some sensitivities, said the source.
As both a leading producer in Egypt and
a sizeable player in US shale production,
Apache is well suited for a pioneering role
in developing Egypts shale potential.
LNG IMPORTS TO START IN MARCH

After a lengthy negotiation process,


the government finally managed to sign
a five year deal for a floating LNG import
terminal with Norways Hegh LNG. The
Gallant floating storage and regasification unit (FSRU) will be moored at the
port of Ain Sukhna in the Gulf of Suez,
and supply the part of the country in
which the gas supply is most stretched.
According to Mr Ismail, LNG deliver-

ies will start arriving in March, and 13 to


14 cargoes have already been secured.
Over a five-year period, a total of 48
cargoes will each deliver 3.4 trillion btu
of gas, enough to supply 100 to 110mn
cfd over a 30-day period, he said.
We have received offers, and
we will be awarding the rest of the
cargos very soon, he said. .
In its search for gas, Egypt has cast its
eyes across the Mediterranean, where
Cyprus is intent on developing its offshore
resources. Mr Ismail on 25 November
met his Cypriot and Greek counterparts
in Nicosia, where the three ministers
agreed to expedite talks on potential gas
exports via a pipeline from the offshore
Aphrodite gas field in Cyprus to Egypt.
Cyprus Energy Minister Yiorgos
Lakkotrypis said that a technical study
for a subsea pipeline would be completed in January 2015. Once Cypruss
offshore gas is being produced, it could
be piped to LNG export plants in Idku
and Damietta, or sold into the domestic
market, Mr Ismail told reporters. The
7.2 mn tons/year Idku plant is operated
by BG Group, while the 5mn t/y plant in
Damietta is operated by Union Fenosa.
Egypts government has also indicated
it will approve deals to pipe Israeli gas
to the LNG export terminals, after BG
and Union Fenosa signed initial agreements with the Noble Energy-led
consortium exploiting Israels huge
offshore gas fields. Mr Ismail has in the
past said that such arrangements need
to also benefit Egypt, suggesting that
the government is looking to receive
Israeli gas for the domestic market.
PETROLEUM PRODUCT IMPORTS

Apart from gas, Egypt is also suffering from a shortage of petroleum


products, and Gulf countries have
stepped into the breach by providing vast amounts of product.
Saudi Arabia alone reportedly sent
$5bn worth of refined products to
Egypt between the beginning of the
year and September.
On 17 November, the government announced it will receive 65% of its oil product imports from the UAE in the coming
year. Mr Ismail said that at present, Egypt
pays for half of its imports from the UAE,
with the latter providing loans for the rest.
Total imports of petroleum products
average at around 300,000 tons of gasoil a
month, 100,000 tons of LPG, and 120,000
tons of fuel oil, as well as small amounts
of gasoline, the minister said.

algeria

Algeria will launch its next oil and


gas bid round by the middle of
next year, giving the government
time to respond to feedback from
international oil companies (IOCs),
which overwhelmingly shunned an
auction that concluded last month.
Only four out of 31 blocks were
awarded in October, a poor result for
a bid round that boasted improved
terms and was promoted with zeal by
state energy regulator Alnaft. IOCs
nevertheless remained unimpressed
by the acreage and the terms on
offer, and the government wants
to avoid another disappointment
by consulting with companies in
the run up to the next auction.
We are discussing with the
partners, we are discussing very
closely with them, Youcef Yousfi,
Algerias Minister of Energy and
Mines, told MEES at this weeks
OPEC meeting in Vienna, adding
that the bidding process would
commence by mid-2015.
No decision had been taken
on which blocks would be put to
tender, said the minister. Many of
the blocks offered in the past bid
round had been shale prone, and
Algeria had hoped to capitalize on
its vast shale reserves by amending contract terms to incentivise
unconventional production. But
none of the blocks in core shale
areas were taken up by IOCs.
Improved fiscal terms for shale
plays are offset by complaints about
bureaucratic red tape, contractual
uncertainties, and the stipulation
that national oil company Sonatrach
holds a majority in every concession.
Algeria needs to attract foreign
investment into its upstream to
reverse production declines. The
International Energy Agency
estimates that current oil output
capacity of around 1.2mn b/d will
drop by 290,000 b/d in the five years
to 2019, while the gas yield will only
increase by 10 bcm over the same
period, much less than envisaged
by the government. At an estimated
707tcf, Algerias shale gas reserves
are the worlds third largest.

Oil & Gas

-Oil Minister Sharif Ismail

Algeria 
Prepares 
New Bid Round
For Mid-2015
Launch

28.November.2014

the Western Desert. The minister said


that while gas has been stuck, the well
was not horizontal and Apache did not
make use of multi-stage fracturing, the
common practice for shale gas exploitation through hydraulic fracturing.
The minister adds that Apollonias tight
gas reservoir has the same characteristics
as shale rock, and will require both horizontal drilling and multi-stage fracturing.
If successful, the project could unlock
the areas unconventional potential.
This will open a new era in the
Western Desert for a new play in addition to shale oil and gas and conventional drilling, says Mr Ismail.
According to estimates by the US
Energy Information Administration
(EIA), Egypt holds 100 tcf of recoverable shale resources. Shale gas production has so far failed to take off outside
North America, and the success of
Egypts efforts hinge on the terms it
offers to technologically savvy IOCs.
Algeria, holder of the worlds third
largest shale resources, failed to attract any foreign investment to its key
shale acreage in a recent bid round.
Unlike Algeria, which has stubbornly
insisted on retaining some of the most
miserly fiscal terms in the industry,
Egypt has proven itself to be more flexible on concession terms and pricing.

We are trying to work out


something for shale gas. There
will be a new price.

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egypt
COUNTRY
algeria

Oil & Gas

www.mees.com

saudi arabia

kuwait

Saudi Arabia Expands Scope


Of Key Gas Project
audi Arabia is slightly behind
schedule in its gas development but expects to add
3.5bn cfd to gas processing
capacity over the next two years when
the Wasit gas processing plant is fully
operational. A further 3bn cfd will come
from unconventional gas development
in the north and southeast within a
decade, industry sources tell MEES.
The Wasit delay is down to the Hisbah
gas field turning out to be larger than
initially thought, the sources tell MEES.
The Wasit gas plants capacity has been
expanded to 2.5bn cfd as a result and will
come online gradually in 2015 and 2016.
An additional 1bn cfd will come from
associated gas produced at the Fadhili
oil field. Earlier reports suggested that
Hisbah gas contained a higher than
expected percentage of sulfur, forcing a recalibration of facilities.
The Fadhili gas processing plant,
scheduled for 2018 start-up, will produce 520mn cfd of sales gas. Fadhili is
part of the 500,000 b/d Khursaniyah oil
development. The associated gas from
Khursaniyah will provide the Fadhili
plant with some of its feedstock.

Saudi Arabia, with current oil production capacity of 12.5mn b/d, has focused
more on gas exploration and production
as it completes its oil expansion plans.
The 900,000 b/d Manifa heavy oil field
the last of Saudi Aramcos greenfield
capacity expansion projects will reach
full capacity on schedule by end-2014.
The offshore field will provide feedstock to two refineries, the Satorp JV
refinery with Total, which is now operating
at its full 400,000 b/d capacity, and the
newly commissioned 400,000 b/d Yasref
JV refinery with Chinas Sinopec. Crude
runs began in late September, but the plant
is not expected to be fully online until well
into 2015. The source tells MEES that
commissioning will take six months.
Saudi Oil Minister Ali Naimi said in a
speech in Mexico in early November that
the kingdom has no intention of exporting gas or developing an LNG business,
despite plans to double gas production
capacity over the next decade. Saudi
Arabias conventional gas reserves are at
least 300 tcf: developing these is a fundamental part of Saudi Arabias longer-term
development and prosperity, he says.
Saudi Arabias gas development has

fallen to state-owned Saudi Aramco and


some key projects such as the Wasit gas
processing plant, which will provide a
major boost to supplies of sales gas to the
national grid, are expected to come online
next year, slightly behind schedule. A
much-heralded gas initiative that saw international oil companies enter into joint
ventures with Saudi Aramco to develop gas
deposits in the Rub al-Khali (Empty Quarter) desert have so far not been successful.
Until the oil-rich kingdom can
substitute gas for crude oil and liquids
for power generation and desalination,
Saudi Aramco will find it difficult to cut
its oil production and lose much needed
associated gas, which might partly explain
its reluctance to consider cutting oil
production to shore up oil prices (see p10).
Saudi Arabia has maintained oil
production at around 9.6-9.7mn b/d in
the past two months despite its decision
to shut down the Khafji oil field in the
neutral zone shared with Kuwait (see
box). Unlike Kuwait, which has been
unable to make up for the loss of its 50%
share of Khafji production, Saudi Arabia
has made up for the loss by tapping into
its spare production capacity.

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28.November.2014

Khafji Still Offline As Kuwait Advances $80Bn Oil Investment

A delegate at the OPEC meeting in


Vienna this week tells MEES that the
300,000 b/d Khafji field in the offshore
Neutral Zone, shared 50:50 by Saudi
Arabia and Kuwait, remains offline following a unilateral Saudi decision to take
Khafji out of production last month.
A meeting is supposedly scheduled
for 30 November, though it remains
unclear if a resolution is in sight.
Khafji is believed to have been producing about 200,000 b/d when it was shut
down. Saudi officials cited environmental
concerns as the reason for shutting in
production at Khafji, but it appears that
the problem runs far deeper. Kuwait
stopped issuing new work visas to
Chevrons employees operating in the
onshore Neutral Zone and refuses to
renew expiring work permits. Part of the
problem in the shared production zone
is that, while decisions are meant to be
taken jointly, each side often operates
independently of the other leading to
confusion and some degree of mistrust.
While both sides continue to downplay
disputes in the Neutral Zone, the loss of
Khafji has far reaching consequences,
particularly for the Kuwaiti side which
has high hopes of boosting oil output. The

loss of Khafji barrels means that Kuwait


produces 2.8mn b/d, and MEES understands that it is currently unable to push
beyond this level while Khafji is offline.
Kuwaits share of Neutral Zone
output forms a key part of the countrys plans to hit its ambitious 4mn b/d
2020 output. Of this 350,000 b/d is
slated to come from the Neutral Zone.
Excluding the Neutral Zone, Kuwaiti
state firm Kuwait Oil Company (KOC)
plans to spend $40bn on upstream
development through 2020 in an effort
to boost production capacity to 3.65mn
b/d. With this in mind Kuwait is set
to explore its offshore area for hydrocarbons for the first time since drilling
two wells in 1983-84. KOC is processing seismic data and will likely spend
between $1-1.5bn on the offshore drilling.
Kuwait has equally ambitious
downstream plans for its downstream
segment: state refiner KNPC expects to
spend $40bn in the period to 2022, with
major projects including a new refinery
and a clean fuels upgrade at two existing
refineries. KNPC chief executive Muhammad al-Mutairi told a conference in Kuwait City on 24 November that these projects would be completed during 2018-22.

Mr Mutairi says the new Al-Zour refinery,


which will be the Middle Easts largest
with capacity to process 615,000 b/d of
crude oil, is scheduled for completion
in 2019. He adds that the clean fuels
project will see throughput capacity at Mina Abd Allah refinery raised
from 270,000 b/d to 454,000 b/d, while
Mina al-Ahmadi will be reduced from
466,000 b/d to 347,000 b/d. The aging
200,000 b/d Shuaiba plant will be closed
after Al-Zour is fully operational.
KNPC recently extended bidding for
Al-Zour, for which the most recent cost
estimate was $16bn, after bidders asked
for more time because of its scale and
complexity (MEES, 19 September). The
company earlier awarded three contracts
worth a combined $12bn for engineering,
procurement and construction under the
clean fuel program (MEES, 14 February).
It remains to be seen, however, if
Kuwait will overcome political, logistical and bureaucratic issues to
realize its upstream and downstream
ambitions according to its schedule.
Most of the announced projects on
both the upstream and downstream
ends of Kuwaits oil and gas industry
have already faced years of delay.

SAUDI ARABIA/regional

China is the biggest omission from


the Jodi reserves data (Russia and India
are also absent). However, China last
week for the first time revealed details on
its strategic petroleum reserve (SPR).
China is storing 12.43mn tons (around
91.1mn barrels) of crude at the four sites
which comprise its 103mn barrels-capacity SPR Phase-1. But total Chinese crude
reserves are likely to be much larger. The
170mn barrel-capacity SPR Phase-2, set
for 2020 completion, is already part full.
China is thought to have stepped up
buying in response to lower crude oil prices in recent months. Comparing Chinas

SAUDI PRODUCT STOCKS IN DETAIL (MN BL)

CRUDE AND OIL PRODUCTS STOCKS (MN BL, END OF PERIOD)


1Q12

3Q12

2012

1Q13

1H13

3Q13

2013

1Q14

1H14

3Q14

CRUDE OIL: Top 5*

1H13

2013

1Q14

1H14

3Q14

Diesel/Gasoil

27.7

30.8

28.5

26.3

28.1

Gaoline

28.4

26.5

24.7

25.2

27.2

16.3

16.1

15.7

16.2

15.8

1,064.0

1,064.0

1,060.3

1,088.1

1,063.9

1,069.0

1,053.0

1,079.7

1,074.9

1,051.2

Japan

423.5

425.8

423.6

419.4

405.9

403.8

404.5

424.2

420.0

422.6

Jet-Kero

S Arabia

273.6

269.3

276.6

271.3

275.7

281.9

287.9

287.7

279.4

294.5

Fuel Oil

9.6

9.7

10.1

11.1

11.1

Germany

149.1

154.6

156.7

158.8

161.3

160.1

159.2

161.3

161.3

160.8

LPG

0.3

0.3

0.3

0.3

0.3

Korea

107.2

119.0

113.1

122.3

124.3

123.1

111.2

118.3

117.7

119.0

Other

3.7

4.3

3.6

4.5

5.0

Turkey^

34.2

35.1

34.0

33.8

35.5

35.8

34.7

34.4

34.4

34.3

Venezuela^

28.1

29.4

30.3

28.7

25.0

28.1

NA

29.0

NA

NA

300

166.0

Germany

129.0

122.0

124.9

125.5

121.8

120.1

123.4

121.6

123.8

120.7

Japan

90.5

110.2

99.6

99.5

101.8

114.2

104.3

94.9

96.9

115.1

France

103.9

105.8

103.5

104.7

106.4

105.3

103.6

108.9

107.6

110.2

78.4

82.8

82.7

80.7

86.0

85.6

87.6

82.9

83.6

87.6

Venezuela^

81.7

68.1

54.0

63.5

27.9

81.3

NA

84.5

NA

NA

Turkey^

28.2

28.5

28.2

28.4

29.2

27.7

27.8

28.7

28.5

28.5

1,723.5

TOTAL OIL STOCKS


USA

1,631.8

1,660.0

1,664.0

1,653.2

1,671.1

1,685.0

1,630.7

1,615.7

1,663.3

Japan

514.0

536.0

523.2

518.9

507.6

518.0

508.9

519.0

516.9

537.7

S Arabia

352.0

352.1

359.3

351.9

361.6

367.5

375.6

370.5

362.9

382.2

Germany

278.1

276.6

281.5

284.4

283.2

280.3

282.6

282.9

285.1

281.5

Korea

164.3

184.0

176.8

187.1

189.4

188.6

177.7

187.3

179.8

187.2

Venezuela^

109.9

97.5

84.4

92.2

52.9

109.5

NA

113.5

NA

NA

62.4

63.5

62.2

62.2

64.6

63.5

62.4

63.1

62.9

62.8

Turkey^

*NO DATA FOR CHINA, RUSSIA, INDIA. ^TURKEY AND VENEZUELA ARE THE ONLY OPEC OR MENA COUNTRIES OTHER THAN SAUDI ARABIA IN THE
TOP 30. SOURCE: JODI.

250

200

150

100

50

SOURCE: JODI, MEES ESTIMATES & CALCULATIONS.

3Q14

672.3

166.0

2013

588.4

165.5

2012

536.0

159.2

2011

577.6

NA

2010

616.0

145.4

2009

607.3

146.1

2008

565.1

111.0

2007

603.7

134.9

2006

596.0

100.8

2005

567.8

S Africa

2004

USA

2003

OIL PRODUCTS: Top 6*

S Arabia

SAUDI ARABIA CRUDE STOCKS (MN BL, end period)

2002

USA

TRANSPORTATION

CHINESE RESERVE(S)

1.53mn b/d to 1.07mn b/d and those from


Iran fell from 502,000 b/d to 338,000 b/d.
Overall the Chinese figures indicate crude reserves of at least
285mn barrels rivalling Saudi
Arabia for third place globally.
Of course the 620,000 b/d rate at
which (according to the IEAs calculations) China built its stocks in September
is a big number in terms of the global
supply/demand balance. Whether or
not China has since continued, or will
continue, this level of buying is a crucial
factor as to the likely demand for OPEC
crude over the coming months (see p10).
The IEA has repeatedly criticized
China for a lack of transparency on its oil
reserves. It will surely welcome the latest
Chinese announcement which came a
few days after the IEAs 14 November release of its monthly report (not necessarily
a coincidence). The IEAs comment that
the Chinese administration does not routinely disclose information on the SPR and
thus little up-to-date information is available concerning specific volumes, sites and
timescales remains broadly valid.

28.November.2014

crude supply numbers (production plus


net imports) to refinery runs indicates that
China added 5.2mn barrels (170,000 b/d)
to its crude reserves in August and 18.7mn
barrels (620,000 b/d) in September with
extra cargoes [imported] from Saudi
Arabia, Kuwait, Iraq and Oman, the IEA
says in its November Oil Market Report.
According to IEA calculations,
China added 105mn barrels to its stocks
during the first nine months of 2014.
This comes on top of an 89mn barrel
stock build in 2012 when a portion of
Phase-2 SPR capacity was filled.
Chinese transparency only goes so
far, however the Phase-1 storage
for which data has been released was
completed in 2007 and thought to have
been filled by 2009.
Industry reports and shipping data
suggest that [Chinese] SPR filling could
well have continued into the fourth quarter, the IEA says. That said, the latest data
show that Chinese imports fell by 1.1mn
b/d to 5.63mn b/d in October. Volumes
from all of Chinas key Mideast customers
eased: those from Saudi Arabia fell from

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audi Arabia has the worlds


third largest oil stocks,
MEES analysis of Jodi data
indicates. The kingdom had
382mn barrels of oil stocks as of endSeptember, of which 77% was crude. The
US is way out in front with oil stocks of
over 1.72bn barrels, up by over 100mn
barrels on six months earlier (see tables).

www.mees.com

Stocks Special:
Saudi Strong, Chinese A Bit Less Reserved

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28.November.2014

refining & petrochemicals

www.mees.com

regional

GCC Petchems Producers Need To


Broaden Feedstock-Aramco
GCC petrochemicals producers face a challenge both from the North American
shale boom and tight availability of gas feedstock within the region. They will
have to broaden both their product range and their feedstock options.
bundant cheap feedstock
remains a competitive advantage for GCC petrochemicals
firms, Muhammad al-Mady,
CEO of Saudi state-owned petchems giant
SABIC, says. But he warns that we cannot
rely solely on natural resources for our
future growth Transforming natural
resources into solutions for our customers
is, and will always be, the core capability.
Saudi Aramcos CEO Khalid al-Falih
sees relatively cheap US and Canadian unconventional oil and gas leading to a doubling of North American
plastics and chemicals production
over the next decade, while supplies
of gas-based feedstocks within the
GCC are increasingly constrained.
Supplies of ethane are becoming
tighter in our region, Mr Falih told
this weeks Gulf Petrochemicals and
Chemicals Association (GPCA) annual forum in Dubai, but supplies of
alternative feedstocks such as naphtha and other liquids are plentiful.

BUILDING BLOCKS

Ethylene is the GCCs main petrochemicals building block, amounting


to 21.7mn tons, or 48% of basic petrochemicals produced in 2013, according
to freshly-released GPCA data. MEES
estimates that this would require some
2.1bn cfd of ethane feedstock, almost
three times that required in 2003, when
GCC ethylene output was 7.4mn tons.
Methanol is the second largest GCC
basic petrochemical, with 9.3mn tons
2013 output (20.6% of the total), requiring 800mn cfd of methane feedstock.
Methanol output has grown more slowly
than ethylene, with most output being
exported. Nevertheless, output has almost
doubled from 4.9mn tons in 2003.
Of the basic petrochemicals, propylene
output has risen fastest at 28.6% a year
over the past decade, from 600,000 tons in
2003 to 7.1mn tons in 2013. Much of this
will have come from refinery crackers, but
regional propane dehydrogenation capacity requiring almost 1.2 mn tons/year
of propane for every 1mn t/y of produced
propylene is growing. Perhaps more
significantly in terms of future feedstocks

trends, aromatics benzene, toluene and


xylene output was 7.1mn tons, or 15.6%
of GCC basic petrochemicals output,
more than five times 2003s 1.3mn tons.
Aromatics are typically produced by
naphtha reforming in refineries and are
central to Saudi Arabias products diversification strategy (MEES, 17 October).
We shouldnt think of feedstocks as
mutually exclusive choices, but rather
view them as a mixed pool of feedstocks
that can be used to leverage each other,
says Mr Falih. Liquids are more versatile than pure ethane and, when used
in mixed feed crackers, offer a broader
product slate, including opportunities
to produce specialty chemicals, which in
turn can help spawn new industries.
Mr Falih warns that pursuing a mixed
feedstock cracker strategy only for
newbuild plants would limit its potential. Considering the massive scale of
the regions petrochemicals asset base
built in the 1970s and 80s, it would
generate enormous additional value if
we pursued opportunities to restructure and upgrade these legacy assets.

INNOVATION NEEDED
Mr Falih envisages a retrofit program including not only changes to the

feedstock mix, but also the deployment


of more energy efficient technologies and
the addition of further high value specialty
products: But to succeed in specialties, we need to leapfrog in knowledge
intensity and accelerate our innovation.
Mr Mady told the forum: The time to
either reap benefits from established competitive advantages or react to unforeseen
events has tightened. Whether on the feedstock or value chain front, developments
are taking place faster. Clear examples
are coal-to-chemicals in China or product
cycles in the electronic industry.
While GCC chemicals capacity has
grown 10% a year over the past decade,
GPCA secretary-general Abd al-Wahab alSadun warns against complacency: While
the emergence of favorably priced feedstock an advantage the GCC chemicals
producers have enjoyed for over 30 years
becomes available to other regions as shale
oil and gas becomes commonplace, we as
an industry need to focus on innovation.
GPCAs Facts and Figures 2013
report, announced at the forum, says
GCC petrochemicals revenues hit a new
peak of $89.4bn in 2013, an increase
of $6bn or 7.2% from 2012. The report
says total GCC petrochemicals and
chemicals production capacity reached
140.5mn t/y in 2013 (see tables).

GCC PETROCHEMICALS AND CHEMICALS CAPACITY (MN T/Y) BY COUNTRY

SOURCE: GPCA.

2003

2005

2007

2009

2011

2013

36.1

44.1

54.4

73.0

83.1

91.5

Qatar

7.8

10.8

11.1

11.2

17.3

19.3

UAE

4.5

5.1

5.6

5.6

9.1

10.5

Saudi Arabia

Kuwait

4.9

4.9

5.0

6.0

8.5

8.6

Oman

0.0

2.8

3.6

7.3

9.0

9.1

Bahrain

1.4

1.4

1.4

1.4

1.5

1.5

54.7

69.3

81.1

104.5

128.5

140.5

Basic Chemicals

14.3

19.4

23.8

32.6

42.2

45.2

Polymers

6.5

9.0

12.1

17.6

21.3

24.1

Intermediates

7.4

9.8

12.0

18.6

20.7

21.7

Total

AND PRODUCT

Fertilizer Raw Material

12.8

14.1

15.4

16.6

19.8

21.2

Mainstream Fertilizers

7.7

10.4

10.9

11.7

16.6

19.3

Downstream Chemicals

4.5

4.7

5.0

5.5

5.8

6.5

Inorganic Chemicals

1.5

1.7

1.7

1.9

1.9

2.2

Specialties

0.0

0.0

0.0

0.0

0.3

0.4

regional/oman/uae

TABLE 1: TRANSFER CAPACITIES

GCC GRID ELECTRICTY EXCHANGES (GWH)

System

MW

900 SOURCE: GCCIA.


800

Saudi Arabia

1,200

700

Kuwait

1,200

600

Unscheduled Traded

500

UAE

900

Qatar

750

Bahrain

600

200

Oman*

400

100

400
300

SOURCE: GCCIA. *PLANNED.

2010

2011

2012

2013

TABLE 2: GCC ELECTRICITY GRID NATIONAL MARKETS STATUS


Saudi Arabia

Kuwait

UAE

Qatar

Bahrain

Oman

Regulator

ECRA

No

Bureau

No

No

AER

Electricity Law

Yes

No

Yes

Yes

No

Yes

Transmission Grid Code

Yes

No

Yes

Yes

No

Yes

Structure*

PB

VI

SB

SB

SB

SB

Subsidies Issue

Yes

Yes

Yes

Yes

Yes

Yes

Authority To Trade

Need Permission

No

Yes

Yes

Yes

Yes

Price For Trade

From Ministry

Not Ready

On Request

From QP

Not Ready

Fuel-Based

Power Offered

Not Declared

Not Declared

On Request

Full Capacity

On Request

Not Ready

*PB=principal buyer, sb=single buyer, vi=vertically integrated. SOURCE: GCCIA.

Dubai Solar Shortlist


Dubai Electricity & Water Authority (DEWA) has selected 10 bidders to
build a 100MW IPP solar PV phase-2
of the Dh12bn ($3.37bn) Mohammed
bin Rashid Al Maktoum Solar Park being built at Seih al-Dahal, 50 km south
of Dubai, which is slated to have 1GW
capacity when completed in 2030.
Phase-2 is slated for 2017 start-up.
Phase-1, a 13MW capacity solar PV
plant was connected to the Dubai grid
in October 2013. Dubai aims to generate 5% of its electricity from solar
plants by 2030, although gas will still
be the main provider with 71%.
While DEWA is keen to build solar
capacity, it is also looking to nuclear and
coal to help meet rising power demand.
Each is slated to meet 12% of Dubais
2030 power needs. Abu Dhabi has a

four-reactor, 5.6GW nuclear project


under development at Barakah, while
DEWA is developing the 1.2GW Hassyan
coal-fired project (MEES, 26 September).
BIDDERS FOR 100MW DUBAI SOLAR PLANT
Company

Country

Huaneng Power

China

First Solar

US

NRG Energy

US

Fotowatio

Spain

SunEdison

US

Abengoa

Spain

EDF

France

ACWA Power

Saudi Arabia

Hareon

Bulgaria

Masdar

UAE

energy usage across a joint power market.


GCC interconnection would save
$180mn in operating costs on a yearly
basis, Mr Niyadi says. We are hoping to launch a GCC market for power
trade soon. We have agreed to form
a team of GCC experts to deal with
this project during the next year.
Transfers among the five current
GCCIA members whose link capacities range from 600MW to 1.2GW (see
Table 1) have mainly been in response to
potential outages. GCCIA chief operating officer Ahmad al-Ibrahim told a
recent power trading forum that the
GCC grid utilization factor is now 8%.
While the grid has maintained supply
stability and supported around 1,100
incidents since 2009, Mr Ibrahim
says it is not used for economic gains
through economical trading of energy.
He says beneficial trading would require coordinated power generation
and improved market processes.
Mr Ibrahim says the obstacles to GCC
electricity market development are: a
lack of awareness of electricity costs
and the benefits of trading; energy price
distortion due to subsidies; differences
in national energy policies; differences
in local regulation for cross-border
power trading; differences in national
power sector structures; and the low
number of market participants.
Only three GCCIA members, including
Oman, have an electricity industry regulator. Four, including Oman, have electricity
laws and transmission grid codes. Four
have a single electricity buyer, while one
has a principal buyer and one has vertically
integrated companies. The only factor
common to all six countries electricity markets is identified by Mr Ibrahim
as subsidies (see Table 2). Mr Ibrahim
says the way forward for the GCC grid is
a feasibility study for capturing power
trading opportunities between member
states. This should lead to the creation of a
model which includes a pricing structure
that is agreed by all members. This model
could then be used to revise the existing
power exchange and trading agreement.
At the signing ceremony for Omans
three agreements to join the GCCIA,
Mr Niyadi said that the authority is also
studying applications from non-GCC
countries to join the grid. When Saudi
Arabia and Egypt signed an agreement
last year to link their own power grids,
Saudi Electricity Minister Abd Allah
al-Husain said that the GCC grid could be
expanded to link a total of 14 countries in
the near future (MEES, 7 June 2013).

28.November.2014

members Saudi Arabia, Kuwait, UAE,


Qatar and Bahrain have risen tenfold,
from 80GWh in 2010 to 815GWh in 2013,
though even the higher figure represents
less than 0.25% of regional demand.
Scheduled trading started at 0.31GWh
in 2010 and rose to 46GWh in 2011, but
has been zero ever since (see chart).
Announcing Omans decision to join
the GCC grid, GCCIA director Matar alNiyadi said the grid is preparing to enter a
new phase, which will include activating
energy trading as a mean of optimizing

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lectricity transfers across


the GCC are rising, but use of
the interconnectors linking the six-member group
remains emergency only: scheduled
trading has petered out. Nevertheless
Oman, which wants cross-border trading to be part of a planned electricity
spot market, has agreed to become a full
member of the Gulf Cooperation Council
Interconnection Authority (GCCIA).
The GCCIA says unscheduled
electricity exchanges between current

power & water

www.mees.com

GCC Grid Growth Stalled


As Oman Set To Join

AFTER THE HYPE, OPEC MEETING ENDS WITH A WHIMPER


lobal oil prices dropped by 7% immediately after OPECs decision on
27 November to hold its production
ceiling at 30mn b/d despite a more
than 30% slump in the Brent price since midJune. With forecasts for much lower demand
for OPECs oil in the first quarter of 2015, the
decision to roll over the current ceiling level till
the middle of next year was a bearish signal that
sent the market into a tailspin. In the end, it was
Saudi Arabias default position that prevailed.
It took the heads of delegation from the 12
member states 11 ministers and a deputy
premier from Libya four hours to come up
with a decision to maintain the status quo
despite efforts by Venezuelan Foreign Minister
Rafael Ramirez to orchestrate a production
cut of 2mn b/d, equal to the anticipated fall in
demand for OPECs oil in the first quarter of
next year (see graph). Delegates say there was
no discussion of numbers during the conference with only a vague proposal presented
for a 5% reduction, which would have done
little to pacify an oversold market. Standard
Chartered Bank immediately cut its Brent
forecast for the first three months of 2015 by a
whopping $21/B to $68/B, saying it expected
a chaotic first quarter as a result of OPECs
decision. Its forecast for the whole of 2015 was
lowered by $16 to $89/B despite expectations
of a significantly tighter market in the second
half, given the low level of the current surplus.
In a report issued just hours after the meeting concluded in Vienna, the banks respected
analyst, Paul Horsnell, said that for at least
one quarter it appears that the oil market has
been left free to discover how much damage
is done to non-OPEC output at lower price
levels. January Brent futures fell below $72/B
on 27 November after the OPEC meeting
concluded, taking the total loss in the value
of Brent since mid-June to nearly $44/B.
At least one quarter of chaos is likely to
ensue, with the cash constraints on the industry
tightening significantly, Mr Horsell says, adding that OPEC might have to meet sooner than
the next scheduled meeting in June 2015. Next
time around, he adds, OPEC is likely to have to
cut more aggressively than it needed at this latest meeting, given what he says is the deep market skepticism that is likely to surround the announcement of any emergency meeting. Most
analysts had predicted that OPEC would take
action to trim supply, by at least 500,000 b/d if
not 1mn b/d (to 29mn b/d) to counter the price
slide. Mr Horsnell says any price rebound is now
likely to be put back by one quarter and price
weakness in the early part of the year is likely
to continue until the level of distress within
the industry at prices below $80/B becomes
clear enough to support some stabilisation.

RUSSIA DEAL GOES NOWHERE 


The build-up to the OPEC meeting had

10

OPEC

CALL ON OPEC CRUDE vs OPEC PRODUCTION (mn b/d)

IEA (NOV MOR) OPEC (NOV MOMR) OPEC Production (MEES est)

32.0

*OCTOBER FOR PRODUCTION.

31.5
31.0
30.5
CURRENT 30MN B/D OUTPUT CEILING

30.0
29.5
29.0
28.5
28.0
27.5
27.0
26.5
1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

hinted at the possibility of a grand deal between


the Arab-dominated producers club and Russia to halt the damaging slump in oil prices.
Venezuela had taken the lead in trying to broker
a deal between OPEC and Russia with a possible
contribution from Mexico, which has cooperated with OPEC in the past. Saudi Arabia was
OPECs representative at the highly anticipated
meeting held at a former Vienna bank turned
luxury hotel. But the attempt at coordinated action ended in disarray on 25 November and the
market dropped by close to $2/B in response.
It was clear from the day Saudi Arabian
Oil Minister Ali Naimi arrived in the Austrian
capital that Riyadh was not prepared to bear
the brunt of a production cut without the
participation of Russia, the worlds largest oil
producer, and perhaps the Caspian states. Nor
were the Saudis willing to accept a lower OPEC
ceiling only to see Iraq ramp up its production at the expense of Saudi Arabia and others
in OPEC, a senior Gulf delegate tells MEES.
We came to Vienna prepared to consider
a production cut but we were not going to
do it without a contribution from Russia,
the delegate said on the eve of the ministerial meeting at OPEC headquarters. Libya
and Iran, where oil production is constrained
by violence in the former and sanctions in
the case of the latter, must also coordinate
further increases in their output above certain
levels, he added. Given all this conditionality,
it was difficult to see any outcome other than
a decision to maintain the 30mn b/d ceiling, which now appears to be set in stone.
LEAKY CEILING 
The collective ceiling has been in place
since 2011 but has been leaky with members
consistently failing to comply with their
individual allocations. Monthly surveys of
OPECs production by MEES show that the
group has overproduced the ceiling since
June, despite erratic production from Libya

3Q14

*4Q14

1Q15

2Q15

3Q15

4Q15

due to shutdowns and the absence of some


1mn b/d of potential Iranian exports that are
off markets because of sanctions (see p13).
Mr Naimi, representing the most influential member of OPEC, gave an early hint
of the Saudi position when he told reporters
on 26 November that he believed the market
would stabilize itself eventually. This was
taken as an indication that Riyadh was leaning
toward a rollover despite the dramatic slide
in oil prices since the group last met in June.
MEES soundings indicate the Saudis are
not overly concerned with the prospect of
further oil price weakness, which they believe
will be short lived because of the relatively
high cost of the marginal barrel. Russia, for
example, needs oil prices of between $100/B
and $120/B, the higher number reflecting the
cost of developing remote Siberian fields. North
American shale and oil sands production cannot
be sustained at current price levels between
$70-$80/B, they think. The Saudis expect to see
an impact during the second half of next year
should prices remain at current levels. Yet US
oil production is rising steadily: it reached a
28-year high in August with November on target
to set a new record. Imports of OPEC crude
have fallen to less than 40% of total US imports
for the first time in three decades (see p19).
At some point, something has to give
and Riyadh is betting that its low-cost
production will ultimately trump the
higher cost barrel from tight oil fields,
deep offshore and the Siberian steppes.
RIYADH CAN TAKE THE PAIN 

Saudi Arabia, which has built up a comfortable foreign currency cushion of some $800bn
during the past four years of stable $105-110/B
prices, can sustain lower prices for one year or

Continued on p11

Middle East Petroleum and Economic Publications (Cyprus) Ltd


Reproducing MEES Is Strictly Prohibited

28.November.2014

OPEC

Continued from p10


two even if need be. Although production costs
in the kingdom have nearly doubled in the past
decade, they remain well below $10/B, several
multiples below even the lowest estimate of the
cost of shale oil, which experts say can be sustained at least in some shale plays at far lower prices than the $70-80/B OPEC estimate. The
Saudis and their Gulf allies, who put up a united
front in Vienna, are willing to take the pain in
anticipation of longer term gain. As the UAEs
Energy Minister Suhail al-Mazrui put it, current market oversupply is not OPECs doing and
it is not fair to ask one player to fix the market.
He too expects prices to move higher
because further investment in shale and
unconventional oil cannot proceed at
current price levels.
VENEZUELAN EFFORTS FAIL 

The problem is that a weaker price hurts


fellow OPEC producers like Venezuela, Iran and
Iraq, all of which need an oil price in excess of
$100/B to balance their budgets. This explains
why Venezuelas Ramirez, the former oil minister and current head of his countrys delegation, spearheaded an initiative to bring about a
production cut and help prevent a further deterioration in his countrys economy, which is on
the verge of collapse. But something went terribly wrong: the attempt to show a united front
between OPECs heavyweights and Russia, with
Mexico in a cameo role, backfired. It makes
little sense for Mexico, which is opening its oil
sector to foreign investors, to consider cutting
its already declining production at this time.
The idea for coordinated action with nonOPEC was mooted by Mr Ramirez during
a meeting earlier this month with Mr Naimi
on the sidelines of a climate conference in
Venezuela. The Saudi minister reportedly
indicated willingness to consider a production
cut if Mr Ramirez succeeded in convincing
Moscow and other non-OPEC producers to
share the burden.
The purpose of the sideshow directed by Mr
Ramirez is a mystery since it was obvious that
the Russians came to Vienna with no intention
of playing ball. Mr Naimi brought forward his
trip to Vienna to be available for rare pre-OPEC
discussions with Russian Energy Minister
Alexander Novak, Igor Sechin, the powerful
chief executive of state-owned oil company
Rosneft, and the Mexican Energy Minister,
Pedro Coldwell, who flew all the way to Austria
for the meeting. A promised communique was
not issued at the end of the talks and sources
privy to the discussions say the Russian officials
argued over the proposal to join OPEC in a
production cut. Russian media had previously reported the possibility of a 300,000 b/d
contribution from Moscow, which has seen the

11

value of the rouble slide as a result of sanctions


imposed by the US and the EU over the Ukraine
crisis, and would benefit from higher oil prices.
Mr Sechin, a close ally of Russian President
Vladimir Putin, is believed to have vetoed any
proposal of joint action, telling the Saudis that
the Russian system would not allow a steep cut
in production. Mr Sechin, who has attended
OPEC meetings as an observer in years when relations were more cordial, returned to Moscow
and predicted that oil prices would fall to $60/B
or lower by the end of the first half of 2015.
NAIMI: GREAT DECISION 

Yet Mr Naimi hailed the agreement as a


great decision even as the oil market took an
immediate dive on news of the rollover. It was
left to Libyas Abd Allah al-Badri, the long-serving OPEC Secretary General whose mandate
was extended yet again till the end of 2015, to
explain the decision to skeptical journalists and
analysts. OPEC, he said, had extended the ceiling to the middle of next year and would wait to
see how the market behaves. The decline in the
price does not reflect fundamentals, he adds.
OPEC has to adapt to change and we have
to live with the new circumstances, Mr Badri
said, suggesting that the group, which accounts
for a third of global supply, was abandoning
its fate to market forces rather than taking
a pro-active stance with regard to supply.
We will produce 30mn b/d and we
will watch how the market will behave to
it and follow it accordingly, he says, adding that OPECs 12 members would be able
to adjust their budgets to lower revenues
and that not all needed a price of $100/B.
The Saudis seem to believe that most
of the marginal barrels will disappear at a
price of $70-80/B, if not immediately then
possibly during the second half of next
year, though they anticipate a difficult period during the first six months of 2015.
They also dismiss the latest data from
the US showing a sharp decline in imports
of Saudi crude oil as normal fluctuations
in seasonal demand from refineries.
Numbers released by the US Energy Information Administration, the statistical arm
of the Department of Energy, shows a steady
decline in the market share of OPEC producers
in the US market. September crude volumes
from OPEC fell below 40% for the first time in
29 years, while provisional October statistics
point to a further decline to 34% of the total.
Although Saudi Arabia remains the top exporter
to the US after Canada, imports of Saudi oil in
October fell to a five-year low of 847,000 b/d
though volumes picked up in the 1-21 November
period to 940,000 b/d. At the same time, US
crude production at 9.05mn b/d, slightly below
Saudi output estimated at between 9.6mn and
9.7mn b/d, was the highest since February 1986.
That year marked a watershed for oil

markets and for Saudi Arabia in particular.


Mr Naimi was at the time Chairman of Saudi
Aramco and remembers well the collapse in
oil prices that year below $10/B as a result of
what was then a real price war and a battle
for market share amongst OPEC members.
Saudi oil production fell from 10mn b/d in the
early 1980s to just 2.3mn b/d. That, says one
delegate, will never be allowed to happen again.
Saudi Arabias oil minister at the time was
the charismatic Shaikh Zaki Yamani, whose
words on the 27th of November in 1986 could
easily be allied to todays market. Sheikh
Yamani, who subsequently lost his job after his
experiment with netback pricing contributed
to the price collapse, stressed the need for
cooperation between OPEC and non-OPEC
producers if a price war was to be averted. The
solution to the problem Shaikh Yamani said at
the time can come through coordination and
cooperation among all oil producers OPEC
and non-OPEC - to agree on a production
ceiling instead of engaging in a price war.
Although Mr Naimi has denied speculation
that Saudi Arabia is taking on rival producers,
Mr Yamanis words in Baghdad nearly three
decades ago are a reminder that history has a
tendency to repeat itself. It is worth remembering that lower prices then did not halt the
rise in North Sea oil production, which had
emerged as a threat to the cartel just as US shale
production has now displaced OPECs barrels.
In his opening address to the 166th OPEC
ministerial gathering, Abd al-Rahman alAhirish, Libyas Vice Premier for Corporations
in his capacity as President of the conference,
noted that non-OPEC supply was anticipated to
rise next year by 1.4mn b/d, more than enough
to cover the 1.1mn b/d expected increase in
demand. OPECs own calculations forecast
demand for its oil in the first quarter of 2015 at
28.4mn b/d, more than 2mn b/d below October
production (see graph), which makes the
decision to uphold the ceiling rather baffling.
IN IT FOR THE LONG HAUL? 

In its final communique, OPEC said that


while the group was concerned over the
rapid decline in oil prices in recent months,
the conference concurred that stable oil
prices, at a level which did not affect global
economic growth but which, at the same
time, allowed producers to receive a decent
income and to invest to meet future demand
were vital for world economic wellbeing.
Weaker oil prices may produce a silver lining by encouraging higher demand growth,
particularly in Asia, where it has flagged
due to lower economic growth in China and
India, the continents two powerhouses.
Yet analysts argue that it takes years not
months for lower oil prices to translate into
higher demand. OPEC may have to adapt to
a lower price environment until then.

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28.November.2014

Libyas Government Plots Route To Oil Riches


lans by Libyas elected government to set up a new National Oil
Corporation and Central Bank put
it further down the path towards
civil war and a breakup of the country.
Libyas elected government is seeking to
replicate existing state institutions in order to
gain access to the countrys oil revenues, which
would give it the upper hand in the struggle
against an Islamist movement in control of the
capital Tripoli. These efforts are likely to be opposed by the international community, amidst
fears that current tension could escalate into
civil war and a break-up of the country. But the
government made some progress on its plans
this week, when its newly appointed head of the
National Oil Corporation (NOC) was accepted
as a delegate to OPEC in Vienna. Al-Mabruk
Bou Seif was introduced to the press as the new
NOC chairman by Deputy PM Abd al-Rahman
al-Tahir on 26 November. By taking part in the
OPEC meeting the following day, he affirmed his
governments claim over Libyas oil resources.
Mr Bou Seif replaces Mustafa Sanallah, who
is based in the NOC headquarters in Tripoli,
where Islamist militia prop up the self-declared
National Salvation Government. The elected
parliament sits in the eastern city of Tobruk,
while the government is based in the nearby
city of Baida after being expelled from Tripoli
by the Libya Dawn militia alliance in July.
The reshuffle will have no impact on the
NOC, which is firmly under Islamist control. Instead it is regarded as a step towards
establishing parallel state institutions that will
enable it to access oil revenues. Mr Bou Seif
confirmed that the government was attempting to set up a payment mechanism to channel
oil money to Baida. Yes, there are discussions, he told MEES at the OPEC meeting.
Sources in Libya say the government has
over the past month worked towards establishing an overseas bank account to receive
oil revenues. At present, oil money flows into
an overseas account held by the Tripoli-based
Central Bank of Libya (CBL), and can only
be accessed by the central bank. While the
government claims that the new account
would be under the auspices of the central
bank, it is intended to be independent of it, and
could serve as the basis for a new central bank
controlled by the administration in Baida, said
Claudia Gazzini, a Libya expert at the International Crisis Group. Mr Bou Seifs appointment
also serves to create a new state institution.
They are not appointing someone that is
going to take over the NOC in Tripoli, they are
trying to start it from scratch, says Ms Gazzini.
The Islamists in Tripoli seem aware
that something is afoot. On 27 November,
they issued a second warning against buying oil from any other source than the NOC.
We warn against dealing with any other
body, the statement said. The NOC is the
only executive body for the administra-

12

tion and investments in oil resources.


Efforts to create a new national oil company
are still at a very early stage, and the government lacks qualified staff. Little is known about
Mr Bou Seif, and the nominal new NOC head
certainly does not come with an accomplished
resume. According to rumors emerging from
Libya, he was either working at the NOC
subsidiary Sirte Oil Company, or as a driver at
one of the oil companies operating in Libya.
So far, both sides stress the independence of the central bank, which continues to
receive oil revenues. The Baida-based government has accused the bank of withholding payments, however, and has sacked CBL
Governor Sadiq al-Kabir. In the absence of
a budget for the current fiscal year, the bank
claims it is only releasing funds for government salaries and for basic subsidies.
The NOC also claims to be free from political
partisanship, but the National Salvation Government has installed its self-declared oil minister Mashalla Zwai in its headquarters. Mr Zwai
earlier this week said he aimed to attend the
OPEC meeting, but that he had failed to secure
a visa and was nowhere to be seen in Vienna.
Mr Bou Seifs attendance at the OPEC meet
confirmed the international recognition of
the government in Baida, and underlined the
National Salvation Governments lack
of legitimacy.
After the Islamist Justice and Construction
party lost heavily in the June parliamentary
elections, Libya Dawn overwhelmed progovernment armed groups from the town of
Zintan to claim control of Tripoli. This forced
the new parliament, the House of Representatives, to flee to Tobruk. Backed by Libya Dawn,
which consists largely of militia from the city
of Misrata, Islamist lawmakers resurrected
the previous parliament, the widely discredited General National Congress (GNC).
In spite of the undemocratic nature of the
self-appointed Tripoli government, the UN has
pushed for negotiations between the two sides,
anxious to prevent the country from slipping
into civil war. The UN Security Council is said to
be considering an escrow account that would receive oil revenues, keeping funds that could find
a military campaign from reaching either side.
I think it would be dangerous if unlimited
funds would be going to an internationally
recognized parliament that is advocating a
total military solution. It hinders the possibility to push forward with a negotiated political solution or ceasefire, says Ms Gazzini.
Recent UN-mediated talks between the
government and Islamist elected lawmakers
that are boycotting the House of Representatives failed to achieve a rapprochement, and
the situation has since escalated. A renewed
offensive by a military strongman Khalifa
Haftar against the Jihadist Ansar al-Sharia
militants in Benghazi was endorsed by the
government, but irked Tripolis Islamists.

OPEC
Last week, Prime Minister Abd Allah
al-Thinni stepped up the sabre-rattling by
declaring that government forces had Tripoli
surrounded; this week, the prime minister
said the government was responsible for two
air strikes on Mitiga, Tripolis last operational
airport. National Salvation Government head
Umar Hasi responded by declaring that while
his side was open to talks, it was being forced
into a confrontation and war. In an interview
with the London-based Times a week earlier,
he had rejected any dialogue with the government, and admitted to Libya Dawn forces
fighting alongside Ansar al-Sharia, a group
designated a terrorist organization by the US
and the UN. Apart from the air strikes, fighting
between Zintani militia and Libya Dawn was
also reported in the town of Kikla near Tripoli.
In spite of Mr Hasis bellicose rhetoric,
Ms Gazzini believes that there is a willingness amongst Libya Dawn for talks with the
government. To bring the two sides to the
negotiating table, the Thinni government
must be dissuaded from pursuing a military
solution and the creating of parallel state
institutions, both of which could result in a
civil war and the breakup of the country.
The UN Security Council in a 26 November statement warned it is not afraid to
use sanctions against those who threaten
Libyas peace, stability or security or that
obstruct or undermine the successful
completion of its political transition.
The UN last year applied sanctions against
oil shipped out of Libyas eastern ports after a
separatist movement had taken control of the
export terminals. The standoff was resolved
when the separatists dropped their demands
and agreed to take part in the June elections.
They handed over the terminals, allowing for
a revival in Libyan production and exports.
The creation of parallel institutions and the
diversion of oil revenues were some of the key
aims of the separatists, led by Ibrahim al-Jathran, who commands several thousand former
oilfield guards. His separatist demands are
increasingly mirrored by the Baida government,
and it may be no coincidence that Mr Bou Seif is
from the same tribe as Mr Jathran. All this will
have alarmed the UN, which has made it clear
that it remains opposed to a fracturing of Libya.
The members of the Security Council
reaffirmed their strong commitment to the sovereignty, independence, territorial integrity and
national unity of Libya, it said in its statement.
OUTPUT SUBDUED 

Oil output remains hit by the outage of


the Sharara and El Feel fields in the west
of the country. De-facto NOC chief Zwai
told Reuters on 25 November that output stood at 757,520 b/d. Waha (200,000
b/d) and Agoco (155,000 b/d) are the biggest contributors, Mr Zwai says.

Middle East Petroleum and Economic Publications (Cyprus) Ltd


Reproducing MEES Is Strictly Prohibited

28.November.2014

iran

CONDENSATE BOOST

Speaking in Vienna this week, Irans


Oil Minister Bijan Zanganeh said that
despite the sanctions, Iran is still targeting an increase in exports over both the
short and medium term -- beyond 2014s
near 200,000 b/d year-on-year gains.
Given the clear restrictions Washington has given Irans buyers with respect
to how much crude oil they can import,
the focus in Iran has shifted at least for
now to condensate. Iran would take
advantage of a loophole in US legislation,
which allows Irans customers to buy
condensates without fear of US sanctions.
With new output set to come online
soon, the minister has set his sights on
Irans condensate as a way of mitigating at least in part the loss of about
half of its export volumes on account of
the sanctions. We are trying to increase
our production, and particularly our
exports, the minister told reporters
on 26 November. He put Irans current
oil exports at around 1.5mn b/d some
300,000 b/d above MEES estimates based
on consuming countries import figures

4.0 *JAN-OCT 2014. SOURCE: MEES ESTIMATES.

2.5

3.0

2.0

2.5

3.5

2.0

1.5

1.5

1.0
0.5
0.0

1.0
0.5

*CRUDE & CONDENSATE. SOURCE: OFFICIAL TRADE STATISTICS,


MEES ESTIMATES.

0.0
d

of which around 1.1-1.25mn b/d is crude.


Condensate exports are running at
between 250,000 b/d and 350,000 b/d,
the minister said, with these volumes set
to increase with the imminent expansion of output from Irans massive South
Pars gas field. There is fluctuation [of
condensate exports] between months,
but on average we have been exporting
close to 300,000 b/d We expect this to
increase month-on-month, because of
the new phases of South Pars, he added.
Unlike crude oil, condensate is not
restricted by US sanctions, as long as the
buyer nation was granted a 180-day waiver
from the sanctions by gradually winding
down the amount of crude it imports from
Iran. Among others, all of Irans main buyers China, India, Japan South Korea and
Turkey were regularly granted waivers
by the US until November 2013, when, as
per the terms of the interim nuclear deal,
Irans consumers were no longer required
to continue winding down their purchases.
SOUTH PARS PHASE 12

This boost, should it come, would


continue a trend which has seen condensate exports increase steadily over the
course of the year. According to Iranian
customs data, exports of gas condensates
from the giant South Pars gas field were
up close to 85% in the first half of this
Iranian year (21 March to 22 September),
versus the corresponding period last year.
This is a trend also picked up by the
OECD energy watchdog, the International
Energy Agency (IEA), which recently
touched on the increasing presence
of condensates from Irans Assaluyeh
terminal on the south coast. Volumes
averaged 195,000 b/d for January-October
2014, up 110,000 b/d up on the same
period last year the IEA said this month.
As mentioned by Mr Zanganeh, the
lions share of Irans upcoming incremental condensate production going forward
will come from South Pars in particular
from those 15 phases which are as yet

2009

2010

2011

2012

2013

2014*

unfinished. Iran has previously said it


plans to complete all phases by end-2017,
but MEES sees 2019-20 as more likely.
South Pars currently produces some
10bn cfd of gas, and around 500,000
b/d of condensates, according to MEES
estimates. Once complete however,
this should rise to 27.1bn cfd of gas, and
more than 1.1mn b/d of condensate.
Of the South Pars phases yet to be finished, Phase 12 is the furthest along, which
the ministry says should be completed
and fully operational by the end of the
current Iranian year (March 2015). The
injection of processed gas from Phase 12
gas into gas trunklines began this week,
said Rasoul Fallahnejad, the projects
director, bringing total sweet gas production from the phase up to 1.77bn cfd, from
500mn cfd. Once complete, the phase
should produce 2.9mn cfd of gas, and
120,000 b/d of condensate, which could
easily be diverted to Assaluyeh for export.
Phases 15, 16, 17 and 18 are next in
line for completion, according to Irans
Oil Ministry.
REVENUE BOOST

At a time when the economy is being


squeezed by sanctions, this condensate
boost and the resulting revenue boost
would provide state coffers shot in the
arm in the face of falling oil prices.
Question marks over the price at
which Iran sells its oil exports, and over
how much of the revenues Iran has access to given financial sanctions hinder
attempts to quantify the effect of such
an export boost (MEES, 21 November).
Any additional revenue will be welcomed
by Tehran, which this week committed
itself to a budget for the Iranian year
beginning March 2015 based on $70/B
oil down from $100/B this year. As
per this weeks extension of the nuclear talks, Iran will continue to receive
$700mn in past frozen oil revenues per
month for the remainder of this extension (December 2014 July 2014).

geopolitical risk

IRANIAN CRUDE OUTPUT (MN B/D)

28.November.2014

Imports of Iranian Oil* (Mn B/d)


2012 2013 2014
3.0

Middle East Petroleum and Economic Publications (Cyprus) Ltd


Reproducing MEES Is Strictly Prohibited

ran expects its oil exports to


rise over the coming months,
despite US and EU plans
to keep sanctions on its oil
sales after Iranian negotiators in Vienna
failed to strike a comprehensive deal with
their counterparts from six world powers
over its nuclear enrichment program.
Negotiators from Iran and the five
permanent members of the UN Security Council plus Germany agreed
on 24 November to extend negotiations for up to seven extra months.
Talks have already lasted a year.
Real and substantial progress has
been made in both sides pursuit of a
deal with neither side prepared to walk
away, US Secretary of State John Kerry
said following the extension announcement. We have earned the benefit
of the doubt, he told reporters.
In theory the extension changes little
for the Islamic Republic EU and US
sanctions will remain in place. But Iran
has hinted that is has plans to raise oil
exports even before sanctions are lifted.
Iranian crude output fell by close
to 1mn b/d in the first half of 2012 as
key US and EU sanctions were implemented hitting a low of 2.7mn b/d in
2013. Exports too are down, averaging less than 1.3mn b/d for the first ten
months of 2014 (including condensate),
versus 2.53mn b/d in 2011 (see graphs).

www.mees.com

Iran Oil Exports To Rise In 2015


Despite Nuclear No-Deal

13

corporate

www.mees.com

regional

MOROCCO

Gulfsands, Vitol Subsidiary


In MENA Tie-Up
K minnow Gulfsands Petroleum looks to finally emerge
from dormancy after sanctions
halted its Syria operations,
its only producing assets in late 2011.
On 19 November, Gulfsands announced
that it has entered into a strategic partnership with Arawak Energy an upstream
subsidiary of Swiss trading giant, Vitol
to jointly acquire projects in the MENA
region. Any future joint ventures will see
Gulfsands hold a 30% stake and operatorship, while Arawak will hold a 70% stake
and will provide financing a condition
that Gulfsands says will help it pursue
projects that might otherwise be considered to be beyond its reach. Though
Gulfsands did not specify which countries
it will target, the company said during a
conference call that it has been given the
go ahead from Vitol to continue with its
Morocco operation, where it is in the process of commercializing a small onshore
gas discovery. However, the two firms will
target oil developments: Id imagine [Vitol is] looking wherever possible to expand
their existing business, said Gulfsands
CEO Mahdi Sajjad during an analyst call.

Middle East Petroleum and Economic Publications (Cyprus) Ltd


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28.November.2014

INSURGENT INVESTOR?

14

Just days before Gulfsands announced


a $20mn loan facility and the partnership
with Arawak, Waterford Finance and Investment a UK-based energy investment
firm with a 26.5% stake in Gulfsands
called for a general meeting in order to remove Mr Sajjad and Commercial Director
Kenneth Judge from the companys board.
Though Gulfsands said it would comment
further in due course, it appears that the
firm trumped Waterford with its subsequent Vitol announcement. Mr Judge told
financial news group Proactive Investors
that Waterford must have been working
on knowledge of the pending deal with the
Vitol subsidiary and that its announcement was an attempt to influence the outcome of the negotiation process. It failed
in that regard, according to Mr Judge.
MOROCCAN PROMISE

Gulfsands says it is moving forward


with plans to commercialize gas production at its Lalla Yetou Updip-1 (LTU-1)
well in Morocco, with first gas expected
by year end. If successful, it will represent the firms first commercial production in nearly three years. In addition to
the strategic MENA partnership with
Gulfsands, Arawak has also agreed to
provide Gulfsands with a $20mn loan to

help the firm move forward with its gas


discovery in Morocco. An immediate
tranche of $10mn will be made available
to Gulfsands, half of which will go towards
corporate activity and the other half to
the Moroccan operation. An additional
$10mn will be provided if Arawak is satisfied with Gulfsands activity at the LTU-1
discovery. Gulfsands also has a permit to
operate with a 75% interest in the Moulay
Bouchta exploration license. In addition,
it has non-producing assets in Tunisia
and will divest from its non-producing
assets in Colombia and the United States.
Gulfsands hasnt yet let go of hopes
of an eventual return to Syria, talking of
a potential return during a conference
call earlier this month. Gulfsands operations in Syria were in Hasakah province
in the extreme northeast of the country,
now mostly under the control of Kurdish YPG forces, though Islamic State (IS)
militants control sections of the Hasakah
countryside. The companys working
interest from its Block 26 operations
amounted to 10,300 b/d in 2010, though it
fell to 8,500 b/d in 2011 before operations
ended altogether late that year. Gulfsands
proved quite adept and nimble in terms
of its ability to navigate Syrias politics
before the war began; it may be able to
work out a deal with Kurdish forces if
sanctions are rolled back at some point in
the future. But this appears unlikely given
the intractable nature of the conflict.
Theres little hope for a political

resolution to the Syrian conflict, at


least not in the foreseeable future, and
military victory on the part of any side
of the conflict appears equally unlikely
at this time. Regime and pro-regime
forces continue to see successes around
Aleppo while Jihadist forces consolidate
their presence in the north and east of
the country and are gaining a stronger
foothold among rebels in the south, where
fierce battles have raged in recent weeks
along new fronts such as Mount Hermon
in the Golan Heights. Yet Gulfsands said
in a statement that it is holding out hope
for its Syria operations: Gulfsands is
committed to maintaining that position
until such time as EU and other relevant
regulations permit the Company to
resume operational activities on Block
26 in north-east Syria, where the Companys assets remain shut-in and secure.
Gulfsands relocated its offices to
Damascus in order to meet a contractual
agreement after it ended Syria operations in late 2011. Mr Sajjad leveraged
close ties with Rami Makhluf, one of
Syrias most powerful businessmen of
the pre-war era and a cousin of President Bashar al-Asad, to secure Gulfsands position in Syria. Mr Makhluf
was paid a consulting fee and controlled
a 5.75% stake in the company through
his investment vehicle, Al Mashreq
Global Invest. Gulfsands cut ties with Mr
Makhluf as a result of sanctions targeting him and his business interests.

WOODSIDE FIRMS ITS INTEREST IN MOROCCAN OFFSHORE


Australias Woodside Petroleum on 26
November announced it had signed a reconnaissance licence for the Rabat Ultra
Deep Offshore block in Moroccan waters.
The block is adjacent to (further
offshore from) acreage offshore north
western Morocco that the Australian
company bought into earlier this year.
Under the terms of the latest 12 month licence, Woodside will conduct 2D seismic
of the 36,000sq km block, where water
depths range from 1,700ms to 4,400ms.
The deal follows Woodsides July
farm-in to the Rabat Deep permit (1503,500ms depth), held by Chariot Oil and
Gas. Here Woodside acquired a 25% participating interest, with the option of taking up a further 25% and operatorship in
return for paying for an exploration well
planned for next year (MEES, 4 July).
Exploration in this basin aligns with
our strategy to secure new international
growth opportunities in frontier and

emerging basins, said Woodside Chief


Executive Peter Coleman said in July.
The company had this year declined
to buy into the giant Israeli offshore
Leviathan gas field, operated by a
Noble Energyled consortium, citing
unfavorable tax terms. Woodside currently has no other MENA interests.
While few discoveries have been made
in Morocco, its fiscal terms are some
of the most generous in the industry,
but a flurry of offshore drilling this year
has so far produced underwhelming
results. Most recently a well on the Genel
Energy-operated Sidi Moussa licence
encountered oil shows but in seemingly
sub-commercial quantities. Further
tests on the oil samples taken will help
determine the provenance of the oil
which in turn will aid the identification
of optimal locations for potential oil
accumulations, Genels partner Serica
Energy said in a 13 November release.

OMAN

Oman is considering spending cuts as it looks to balance its budget for 2015 amid
falling oil prices and export revenue.

PRICE COLLAPSE

Oman based its 2014 budget on a


seemingly-conservative oil price assumption of $85/B. While prices will
comfortably exceed this for the year as
a whole (Oman crude prices averaged
$102/B for January-October), the fact
that they have fallen below the $85/B
mark since mid-October and are now well
below this has sounded the warning bells.
Current $72/B prices for Oman crude
are down by 35% from their $110/B June
peak (see p20). Prices averaged a buoyant $105-110/B for 2011 through 2013,
giving Oman a degree of budget stability.

output steady, 
exports edge lower
At 948,000 b/d for the first 10 months
of 2014, Omans oil (crude and condensate)
output is level with 2013. However, exports
at 805,000 b/d for January-September are
down 3% on 833,000 b/d for 2013, pressuring revenue further. China is Omans
dominant customer taking 560,000 b/d for
Q1-3 2013, up from 495,000 b/d for 2013.
Muscat is looking to increase nonhydrocarbons revenues, such as taxes
and customs duties, though potential
reforms will be tested for their economic
effects on society, Mr Balushi says.

THE 2015 BUDGET

Mr Balushi said that the 2015 budget


will be based on an unchanged $85/B
oil price assumption and average oil
production of 990,000 b/d. The IMF
calculates the fiscal breakeven price
for Oman at $102.6/B in 2015 and
$99/B in 2014 (MEES, 31 October).
The minister estimates revenue at
OR12.5bn ($32.5bn), up 7% on 2014,
with oil and gas revenue accounting
for about 82% of total revenue, and
expenditure at OR15bn ($39bn), up 4%
on 2014. The resulting deficit is put at
OR2.5bn ($6.5bn), which represents
8% of GDP and 20% of total revenue.
The projected deficit in 2015 will be
financed to the tune of OR1bn ($2.6bn)
from the surpluses of the last two years,
OR700mn ($1.8bn) from the state reserve
fund, and OR800mn ($2.1bn) from
commercial debt, of which OR200mn
($520mn) will come from external sources.
The minister acknowledged that under
these circumstances, it would be extremely difficult to maintain the expansionary
fiscal policy of previous years. But he
said that the new budget will continue to
support economic stability, provide the

necessary social services to the people and


complete the development of infrastructure in the country. Among the GCC
countries, Oman and Bahrain are deemed
to be most vulnerable to falling oil prices.
The new budget will also aim to
boost the role of the private sector in
order to make it the main driver in job
creation in 2015, the last year of the
current five year development plan.
SMALL SURPLUS IN 2014

Oman looks like ending 2014 with


a small budget surplus, instead of the
OR1.8bn ($4.7bn) deficit projected at
the beginning of the year. Latest official statistics show that in the first
nine months of 2014 Oman has actually
posted a surplus of OR55.5mn (144mn),
compared to OR351.3mn ($913.4mn)
in the corresponding period of 2013.
Oman had posted an actual surplus of
OR350mn ($910mn) in 2013, the first after
successive deficits between 2009 and 2012,
according to the 2014 Statistical Year Book.
Total revenue in the first nine months
of 2014 was steady at OR10.463bn
($27.2bn), compared to the same period of
2013. Oil and gas revenue in 2014 was put
at OR7.808bn ($20.3bn) and OR1.046bn
($2.72bn) respectively, down 1.2% and
4.1% from the corresponding figures of
2014. But total expenditure in the first
three quarters of 2014 was OR9.317bn
($24.22bn), up 15% on the corresponding period of 2013. Oil and gas revenue in
the first nine months of 2014 accounted
for 84.6% of total budget revenue.
GDP GROWTH AT 4%

Omans real GDP is expected to


grow by 4% in 2014 and 4.5% in 2015,
driven by strong non-oil performance
expected to average 7% over the two
years, as the governments diversification program focusing on tourism,
industrial and manufacturing begins to
yield results, National Bank of Kuwait
(NBK) says in a recent update on Oman.
Oil GDP growth is projected to slow
to 0.8% in 2014 and 0.5% in 2015, from
2.8% in 2013, according to NBK which is
also projecting a budget deficit in 2015
after fiscal breakeven in 2014. Current
annual inflation is just over 1%.

28.November.2014

The Majlis made a number of suggestions


for spending cuts and tax rises. A levy on
LNG exports could raise an additional
OR196mn ($510mn), it said (presumably this would have to come out of the
pockets of state firm Oman LNG as it
could not contractually be passed on to
Omans Japanese and Korean customers).
Oman exports 11.5bcm/year of gas in
the form of LNG. Exports are split 50:50
between Japan and Korea. Latest Korean
import data for October show that prices
(at around $18/mn BTU delivered) have
held up so far in 2014. But with LNG prices
linked to crude, lower oil prices will soon
feed through into lower LNG revenue.
The Majlis also recommended the imposition of a 2% tax on remittances made
by the more than 1mn expatriate workers
in Oman, a 12% royalty to be levied on telecoms revenue, and a hike in mining royalties to a maximum of 10% of sale revenues.
The minister added that a tax consulting firm had been hired to examine the implications of these recommendations and
report to the government by March 2015.

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peaking to Omans Majlis


al-Shura (Consultative
Council) this week, Finance
Minister Darwish al-Balushi
said Omans government is considering a raft of spending cuts to balance
the 2015 budget. Without revisions
the country faces a deficit, he said.
Mr Balushi says he has asked all government departments to postpone unnecessary spending. A freeze on new state hiring
and promotions is under consideration but
there are no plans for salary cuts, he adds.
The minister reiterated plans, announced last month, to cut its energy
subsidies for 2015, with the currently
ineffective system to be better targeted on the needy sections of society.
Omans 2014 budget projects spending
on energy subsidies ofOR860mn
($2,236mn), 53% of total subsidies of
OR1,600mn ($4,160mn - MEES,
10 January).

^^ECONOMICS & FINANCE

www.mees.com

Oman Set To Cut Spending


For 2015 As Revenues Slide

15

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16

Qatar Looks Resilient


To Lower Oil Prices

AUSSIE PROJECTS UNDER PRESSURE

While lower oil prices will sooner


or later feed through into lower LNG
revenue, Qatar, with its already established infrastructure, is in a much stronger
position than the nascent competition.

JAPANESE & KOREAN IMPORT PRICES FOR QATARI LNG


($/MN BTU)
Japan Korea
20

18

18

Source: Japans Ministry of Economy, Trade and Industry.

*jan-oct. Source: KOREAN CUSTOMS, IEA.

16

17

14
16

12

15

10

14

13

October

August

10

July

11

September

12
June

Japan Spot LNG Prices, April-October 2014 ($/mn BTU)


contract-based arrival-based
19

May

atars export revenues are


shrinking on the back of
depressed crude, condensate and LNG prices. But it
will weather the storm. The gas giant,
despite its foreign policy largesse, has
been more conservative than some of its
Gulf peers in putting money aside in the
years of plenty. While prices for most of
its key LNG exports are oil-linked, costly
Australian projects will be harder hit.
Qatar posted a surplus of some 31%
of GDP in 2013. This will only shrink
modestly in 2014: the country benefitted
from high oil and LNG prices for much of
the year: crude prices remained at $100/B
and above until late August. While 2015
may prove more problematic, especially if crude prices stay around current
levels of $72/B, it is too soon to say that
Qatar may have to cut its liberal spending on either domestic infrastructure
or its interventionist foreign policy.
Qatar enjoys one of the lowest fiscal
breakeven prices of any of the MENA oil
producers requiring just $54.2/B in 2014
to break even and an estimated $60/B next
year, according to IMF figures. Qatar also
has the highest savings rate in the world, at
over 58% of GDP in 2013, according to Qatar National Bank. Indeed, it would likely
take a steeper drop in energy prices over a
prolonged period to slow Qatars massive
spending on infrastructure and economic
diversification. But lower oil and LNG
prices have a number of implications for
Doha and the future of its energy industry.
Seemingly counter-intuitive, there are
actually several ways in which Qatars LNG
industry may benefit from the current
market environment. Spot LNG prices
are falling, especially in Qatars biggest
buyer Japan where there is a strong oil
price link (see graph). However, the bulk of
sales to both Japan and the second biggest
customer, South Korea, are on long-term
contracts. Latest Korean data for October
show that the fall in oil prices in recent
months has yet to be reflected in the countrys LNG import prices. Korea imported
10.64mn tons of LNG from Qatar for
the first 10 months of 2014 at an average
price of $17.8/mn BTU, with the October
2014 price exactly in line with this, and
up by $1/mn BTU on a year earlier.

April

^^ECONOMICS & FINANCE

www.mees.com

qatar

Australia is set to overtake Qatar as the


worlds number one LNG producer by
2017 on their way to producing over
100mn tons/year by 2020. But these
figures, especially the timing and the
eventual volume, are not set in stone.
Several Australian LNG projects
appear to have been based on long-term
price assumptions higher than the $12/mn
BTU seen on the spot market in Japan in
October. Costs were already spiraling out
of control at some of the bigger Australian
LNG export projects. The $54bn, 15.6mn
t/y Chevron-led Gorgon LNG project
delayed plans to build a fourth 5.2mn t/y
train when its economics were brought
into question, as future US LNG exporters
signed sales deals to Asia-Pacific buyers
at prices linked to the US Henry Hub gas
benchmark. Several other Australian LNG
projects may now be pushed back, and if
prices fall further, ultimately cancelled.
The economics of Australias floating
LNG (FLNG) projects now look increasingly fragile, and analysts are beginning
to wonder what will become of expensive developments like Woodside-led
Browse FLNG, which has already faced a
delay due to falling prices. Shell recently
indicated that it might push a final investment decision on Browse into 2016.
Though prices may rebound, Qatar
now finds itself in the unlikely position of having more time on its hands
to formulate a response to the evolving
LNG market welcome breathing room
for Qatargas and RasGas, which seemed
almost resigned to a lesser role in the
market in the years ahead. Qatar has
controlled about a third of the global LNG
market since completing its last train in
2011 and now has an export capacity of
slightly more than 77mn t/y. By next year,
a series of new market pressures were set
to gradually transform the industry and
erode Qatars position in the market.

2
0
2008

2009

2010

2011

2012

2013

2014*

As for Australia, so with planned US LNG


exports. However, here Qatar stands to
lose as well as win. The economics of Qatar
Petroleum (QP) and ExxonMobils $10bn,
15.6mn t/y Golden Pass LNG export
terminal in Texas on the US Gulf Coast
look less impressive today. Golden Pass
is a key component of Qatars strategy to
respond to expected changes in the LNG
marketplace in the years ahead and will
allow it to boost Qatari LNG output
by some 11mn t/y. While a few months
ago Japanese spot LNG prices were at a
premium of $7/mn BTU to Henry Hublinked LNG prices, the premium has since
fallen to $2/mn BTU. LNG prices in Asia
Pacific, the target market of future US
LNG exporters, have declined significantly; meanwhile, Henry Hub gas prices
have risen slightly since October as a
result of higher than anticipated heating
demand. In August, Golden Pass Products
(QPI 70%, ExxonMobil 30%) awarded a
front-end engineering and design (FEED)
contract and had previously applied for
regulatory approval to export LNG to
countries with which the United States
does not have free trade agreements, such
as Japan. QPI and ExxonMobil plan to take
a final investment decision on the project
next year; however, if LNG prices remain
weak over an extended period, its likely
that the joint venture will delay its FID.
That said, the economics of Golden Pass
compare very favorably with the Australian Gorgon project, with cost estimates
for Golden Pass running at less than
one-fifth of Gorgon for an export facility
of the same size. Golden Pass will convert
some of the existing import infrastructure
at the plant, leading to reduced costs.

Continued on p17

Asian LNG buyers have for years been


pushing to reduce or end the oil price
linkage in their LNG purchase contracts.
The expected changes to the LNG market
are nearly inevitable: huge new volumes
will hit the waters in the coming years
barring an unforeseen collapse in prices
or demand and new sources of LNG
will introduce at least some competition in pricing mechanisms. However
falling oil prices may work in the other
direction, reducing the desire of buyers to look for alternate mechanisms.
US-based LNG expert James Jensen
tells MEES that lower oil-linked LNG
prices take pressure off Asian buyers to
push the market towards greater levels
of pricing flexibility. With buyers less
eager to disrupt contracts and pricing
mechanism in the low price environment, depressed prices may for the time
being shelter Qatar from the inevitable,
offering the Gulf LNG giant a bit more
time to prepare for these changes and to
formulate an effective response. Qatar is
also sheltered from lower LNG prices by
its world-leading low production costs:
its LNG will remain profitable and an
economic boon even in the event that
oil-linked LNG prices continue to fall.
CONDENSATE TROUBLE?

Qatar produces around 700,000 b/d


each of crude and condensate, of which
around 600,000 b/d crude and 500,000
b/d condensate is exported. With prices
for condensate broadly echoing those
of crude, earnings for this 1.1mn b/d
of exports have fallen by $40/B, more
than a third since their June peak.
Because the liquids yield from North
Field wet gas production is so high, Qatar
is a major producer and exporter of two
main condensate grades marketed by
Tasweeq as Deodorized Field Condensate (DFC) and Qatar Low Sulfur Field
Condensate Qatar (QLSC). Japan alone
bought an average of about 90,000 b/d of
DFC and 27,000 b/d of QLSC in the third
quarter; however, since regional refinery
margins are tightening as oil prices plummet, Qatari condensate is being pushed
out of the market by its less expensive
alternative, finished naphtha. Indeed,
condensate is likely Qatars main vulnerability in the low oil price environment.
QP may cope with market pressures by
reducing output from its most liquidsrich reservoirs at the North Field, like the
K-4 reservoir, according to Mr Jensen.
BUL HANINE UNDER THREAT

While LNG is the largest single source


of Dohas hydrocarbons export revenue,

he Egyptian economy has


begun to recover, the IMF
said this week at the end
of Article IV consultations
with Cairo, the first since April 2010.
IMF mission chief Chris Jarvis says
there is a growing national consensus
on economic reforms, though Egypt
faces many challenges with subdued
growth, high unemployment, budget
deficits and slim foreign reserves.
Cairo has begun to address these
challenges by implementing bold subsidy and tax reforms and wide-ranging
regulatory and administrative reforms,
the IMF says. These measures, coupled
with a return in confidence, are starting to
produce a turnaround in economic activity
and investment, Mr Jarvis observes, with
growth projected at 3.8% in fiscal 2014-15.
In a seeming reference to $8.4bn
Second Suez Canal plans, the IMF
cautions megaprojects offer prospects for jobs and growth but should be
carefully designed and monitored to
limit potential fiscal risks, for example
if they entail additional public investment or large contingent liabilities.
In July Cairo cut subsidies on oil products, with diesel hiked by 64% and gasoline
by 77% in a bid to reduce the budget deficit
(MEES, 11 July). Instability after the January 2011 revolution delayed these politically-sensitive cuts for some time. For the
IMF energy sector reforms and sizeable
investments will be critical to reduce energy supply bottlenecks and boost growth.
Mr Jarvis says that Cairo is seeking to reduce the budget deficit to
8-8.5% of GDP and the budget sector
debt to 80-85% of GDP by 2018-19.
The IMF calls on Egypt to adopt a
more flexible exchange rate policy
avoiding real appreciation [which]
would improve the availability of foreign
exchange, strengthen competitiveness, support exports and tourism, and
attract foreign direct investment.
After the January 2011 revolution,
Egypt tried to negotiate a $4.8bn IMF
loan but Egypt was ultimately unwilling
to commit to tough IMF terms. After the
ouster of former president Muhammad
Mursi in July 2013, Saudi Arabia, Kuwait
and the UAE extended a lifeline of some
$12bn to Egypt which was crucial in gradually bringing about the economic recovery.
As Egypt looks for more cooperation
with the IMF, conditions may be improving for the finalization of the IMF loan.
Egypt is keen to have good relations
with the IMF ahead of a donors conference scheduled for March 2015.

^^ECONOMICS & FINANCE

Egypt:
IMF Praise

28.November.2014

PRICING FORMULAS

Qatar plans to stabilize and expand crude


output over the medium term. Falling oil
prices may threaten its strategy however.
Several Gulf countries plan big spends
to either stabilize or boost crude production, but the astronomical costs associated with Qatars strategy suggest that
Doha might be better off scaling back its
ambitions, particularly since it may be
some time yet before prices rebound to
mid-2014 levels. Futures markets are
currently pricing in only modest gains
for the coming years: the January 2018
ICE Brent contract closed at $84/B on 27
November, compared to $72.6/B for the
front-month January 2015 contract.
This is not to say that Qatar should
overreact to what may prove to be a
short-term fluctuation in long-term oil
price strength. However, given the fact
that many analysts expect at least one
of the factors contributing to falling oil
prices the strong dollar to continue to
be a source of downside price risk for some
time to come, it is worth exploring the
possibility that QP may rethink one of its
planned upstream oil projects: the redevelopment of the 45,000 b/d Bul Hanine field.
At the OPEC meeting in Vienna this
week, Qatari Energy Minister Muhammad al-Sada said that the project is
on track, but questions remain unanswered as to why QP is pursuing the
expensive field redevelopment.
QP announced earlier this year that
the projected costs of redeveloping and
expanding Bul Hanine, set to eventually
yield 90,000 b/d over an extended plateau
period, had nearly doubled to $11bn. This
represents an unheard-of level of about
$244,000 per incremental barrel, about
double the cost per incremental barrel of
what is likely the oil industrys most notoriously expensive project, the Kashagan
joint venture offshore Kazakhstan. Even
if Bul Hanine is considered a greenfield
project which is fair given the fact that
QP plans to build new processing facilities
and drill 150 new wells by 2028 and if gas
and NGLs are taken into account (QP says
that it expects the redeveloped Bul Hanine
field to yield about 900mn cfd of wet gas),
the costs associated with the project still
boggle the mind. Observers are puzzled as
to how a shallow-water project in the Gulf
the epicenter of the worlds easy oil
production can run so high. Even before
oil prices started their march downward
this summer, the International Energy
Agency (IEA) noted in its Medium Term
Oil Market Report that the Bul Hanine
development is expected to cost about
15 times higher per incremental barrel
than the cost per incremental barrel at
some Saudi fields. Perhaps QP expects
to make a satellite discovery, which may
justify the high costs at Bul Hanine.
But as oil prices plummet, QP may
deem that the costs associated with a
prestige project like Bul Hanine aimed
at keeping Qatari crude production
steady are too high to justify.

Middle East Petroleum and Economic Publications (Cyprus) Ltd


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Continued from p16

www.mees.com

qatar egypt
COUNTRY

17

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28.November.2014

^^ECONOMICS & FINANCE

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JORDAN

18

SAUDI ARABIA

Jordan Moves Toward


Austerity In 2015
ordan will streamline its
public spending next year,
Finance Minister Umayya
Tuqan said this week, as he
unveiled details of the kingdoms austerity
budget for 2015 to Jordans parliament.
Mr Tuqan reiterated Jordans commitment to pursue IMF-backed fiscal and
economic reforms which are intended to
contain the budget deficit and public debt.
Amman plans to boost Jordans social
safety net, while ensuring that subsidies
target needy sectors of society. It will
also develop renewable energy to lower
the kingdoms import bill after the loss of
Egyptian natural gas (MEES, 17 January).
Non-productive expenditure will
be curtailed and public entities will be
restructured, coupled with mergers
when possible, such as the case of the
Natural Resources Authority which has
been amalgamated with the Ministry of
Energy and Mineral Resources. Also the
government wants to achieve a higher
degree of reliance on local resources to
fund domestic expenditure, via efficient
tax collection, and to maximize the use
of development grants from the GCC.
In order to curtail expenditure and
lower the budget deficit, Mr Tuqan
announced that new projects would
not be allocated any funds, unless they
are deemed to be strategic or could be
financed from foreign grants and loans.
He also said that he expects parliament to
pass a new income tax law before the end
of the current year. This would reform the
taxation system in the country, minimize
tax evasion and improve tax collection.
The minister also said that the
government will maintain the current mechanism of pricing oil products
by adjusting these prices upwards or
downwards in line with fluctuations
in the international market. The 2015
budget assumes an oil price of $100/B.

MAIN ASPECTS OF 2015 BUDGET

Outlining the main features of the


new budget, Mr Tuqan said that the
deficit (after grants) is projected to
shrink by 24.5% to JD688mn ($970mn),
or 2.5% of GDP, from a revised figure
of JD911mn ($1,285mn) in 2014.
Total revenue is estimated at
JD7,408mn ($10,445mn) up 6.9%
from 2014, consisting of domestic
revenue of JD6,280mn ($8,855mn)
and foreign grants of JD1,128mn
($1,590mn) JD806mn ($1,136mn)
from the GCC and JD322mn ($454mn)
from others, mainly the US and EU.

Total spending is projected at JD8,097mn


($11.4bn), up 3.2% on 2014: JD6,922mn
($9,760mn) for current spending an
JD1,175mn ($1,657mn) for capital
expenditure. With inflation estimated
at 2.4% in 2015, total spending is slated
to rise by less than 1% in real terms. Real
GDP is expected to grow at 4% in 2015
and 4.5% in each of 2016 and 2017.
THE ECONOMY IN 2014

Reviewing the current year, Mr Tuqan


said he expects the economy to grow by
3.3% in 2014 despite the difficult economic and political climate in the region,
especially in Syria and Iraq. Jordan is
currently hosting over 600,000 Syrian refugees. Inflation has moderated
to 3% in the first 10 months of the year,
compared to 6.1% in the same period of
2013. Also the unemployment rate fell to
11.7% in the first three quarters of 2014
from 13.1% in the same period of 2013.
The minister said that total revenue in
the 2014 budget had risen by 20.4% from
2013, while total expenditure increased
by 10.8% from the previous year. As a
result the deficit in 2014 is projected
to fall by JD407mn ($574mn) to reach
JD911mn ($1,285mn), or 3.5% of GDP.
Mr Tuqan noted that the deteriorating
regional situation, the disruption in Egyptian gas supplies to Jordan (which have all
but stopped during the year), and the cumulative losses made by the state-owned
National Electric Power Company (Nepco)
have been the main challenges to the 2014
budget, leading to an increase in public
debt which is expected to rise to around
JD21bn ($29.6bn) by the end of 2014.
This rising debt is also a cause of
concern for the IMF Mission Chief to
Jordan Kristina Kostial who said earlier
this month that the kingdoms indebtedness could reach 89% of GDP by end 2014,
from 71% in 2011. Ms Kostial added that
to address this problem, the authorities
have to control public finances, especially
those related to the central government
and service units like Nepco. Mr Tuqan
seems to have heeded this advice
from the IMF in next years budget.
Meanwhile Jordan, which imports
about 97% of its energy needs, has seen
its energy import bill rise by 11.5% to
JD3,358mn ($4,735mn) in the first nine
months of the year from JD3,011mn
($4,246mn) in the corresponding period
of 2013, Jordans customs statistics show.
But this increase is expected to moderate
in the remaining part of the year as lower
energy prices reduce the import bill.

Saudi Petchems
Firms Secure 
Islamic Finance
Saudi Kayan and Advanced Petrochemicals have both completed
Islamic financing deals. Saudi Kayan,
whose end-3Q14 market cap was
SR25bn ($6.67bn), has secured
two loans worth almost SR2.63bn
($700mn) combined. Advanced,
with an end-3Q14 capitalization
of SR9.8bn ($2.61bn), has completed a SR1bn ($$267mn) sukuk.
Petrochemicals and chemicals
producer Saudi Kayan, an affiliate
of state-owned giant Sabic (see
p8), has announced the completion
of two sharia-compliant Murabaha
loans with Saudi financial outfits: for
SR1.5bn ($400mn) for up to 15 years
with National Commercial Bank and
for $1.125bn ($300mn) for up to 10
years with Samba Financial Group.
Saudi Kayan says the loans
will increase the firms working
capital. Among funding requirements will be Saudi Kayans share in
Saudi Butanol Company (Sabuco),
a joint venture with Sadara and
Saudi Acrylic Acid Company (SAAC)
which is building the worlds largest
butanol plant with capacity for
330,000 tons/year of n-butanol and
11,000 t/y of iso-butanol for 2015
completion (MEES, 12 July 2013).
On completing its first sukuk,
polypropylene producer Advanced
said the total order book reached
SR2.43bn ($650mn) and that the
issue was made on a floating rate
basis with a term of five years to
be distributed semiannually. The
company has not decided how much
of the oversubscription will be taken
up, but says the issue will provide
funding for general corporate purposes to achieve its strategic plans.
Advanced is planning to expand
at home and abroad. It is debottlenecking its polypropylene plant at
Jubail to raise capacity from 450,000
t/y to 530,000 t/y and is paying
around $1bn for 35% of a 600,000
t/y propane dehydrogenation plant
LPG supplier SK Gas is building
in Korea (MEES, 17 October).

selected data

US PETROLEUM IMPORTS, EXPORTS, DEMAND (000 B/D)


*Nov-14

*Oct-14

Sep-14

3Q14

2Q14

1Q14

1-3Q14

vs2013

vs2012

2013

2012

2011

2010

2009

CRUDE OIL IMPORTS

7,329

7,293

7,508

7,534

7,255

7,349

7,380

-347

-1148

7,726

8,528

8,929

9,212

9,015

from OPEC

2,695

2,454

2,899

3,085

3,198

3,165

3,149

-344

-882

3,493

4,031

4,209

4,553

4,355

36.8

33.7

38.6

40.9

44.0

43.1

42.7

-2.5

-4.6

45.2

47.3

47.1

49.4

48.3

16

-21

-112

29

120

178

328

281

140

91

126

-76

-96

202

222

335

383

448

% of crude imports
Key OPEC Suppliers: Algeria
Angola

122

158

183

149

Ecuador

170

273

305

275

172

188

212

-16

+35

228

177

203

210

181

Iraq

474

195

350

463

400

277

380

+39

-96

341

476

459

415

449

Kuwait

132

322

237

292

344

389

341

+15

+38

326

303

191

195

180

Nigeria

24

34

32

12

109

62

61

-178

-345

239

406

767

983

776

938

847

1,004

1043

1273

1446

1254

-71

-107

1,325

1,361

1,186

1,082

980

12.8

11.6

13.4

13.8

17.6

19.7

17.0

-0.2

+1.0

17.1

16.0

13.3

11.7

10.9

Saudi Arabia
% of crude imports
Venezuela
By region: MENA**
MENA %

836

625

756

804

733

714

750

-5

-162

755

912

868

912

951

1,543

1,364

1,622

1,845

2,048

2,114

2,003

-73

-353

2,076

2,356

2,089

2,086

2,041

21.1

18.7

AMERICAS**
Americas** %
Canada

2,711

2,881

Mexico

770

832

21.6

24

28

29

27

+0.3

-0.5

26.9

27.6

23.4

22.6

22.6

5,479

5,276

4,798

4,954

5,009

+89

-145

4,920

5,154

5,117

4,945

4,844

73.0

70.1

66.2

67.4

67.9

+4.2

+7.4

63.7

60.4

57.3

53.7

53.7

3,129

2962

2753

2718

2811

+242

+386

2,569

2,425

2,225

1,970

1,943

816

755

725

857

779

-71

-196

850

975

1102

1152

1092

310

271

325

204

267

-302

-536

569

803

1316

1619

1556

EUROPE/EURASIA

24

79

47

50

59

-55

-111

114

170

355

487

483

ASIA/OCEANIA

43

49

38

28

38

-4

-7

42

45

58

75

88

1,644

1777

2004

1870

1884

-244

-187

2128

2071

2501

2579

2679

AFRICA (sub-Saharan)**

PRODUCTS/NGL IMPORTS
Canada

412

456

471

567

498

-65

-24

563

521

505

565

537

OPEC

316

277

213

199

229

+3

-10

227

240

347

354

422

of which: Algeria

185

140

90

80

103

+17

-19

86

122

181

182

213

Venezuela
TOTAL OIL IMPORTS
OPEC
OPEC %
Gulf
Gulf %
Saudi Arabia
Saudi %
EXPORTS

67

60

58

41

53

+2

+6

51

47

83

76

112

9,152

9311

9260

9219

9263

-591

-1335

9854

10598

11431

11791

11694

3,215

3,362

3,411

3,364

3,379

-337

-892

3,716

4,271

4,555

4,906

4,778

35.1

36.1

36.8

36.5

36.5

-1.2

-3.8

37.7

40.3

39.8

41.6

40.8

1,644

1,856

2,048

2,159

2,021

+13

-135

2,008

2,156

1,859

1,712

1,691

18.0

19.9

22.1

23.4

21.8

+1.4

+1.5

20.4

20.3

16.3

14.5

14.4

1,004

1043

1288

1457

1263

-64

-103

1327

1366

1194

1095

1005

11.0

11.2

13.8

15.8

13.6

+0.1

+0.7

13.5

12.9

10.5

9.3

8.6
2,022

3,962

4,325

4,081

3,830

4,079

+460

+874

3,619

3,204

2,983

2,351

Crude

349

380

317

244

314

+179

+246

134

67

47

42

44

Products/NGLs

3,613

3,945

3,764

3,586

3,765

+281

628

3,484

3,137

2,937

2,309

1,979
9,672

NET OIL IMPORTS (inc biofuels)

5,190

4,986

5,179

5,389

5,185

-1051

-2209

6,236

7,394

8,447

9,440

% of oil demand

27.3

26.0

27.7

28.6

27.5

-5.4

-12.5

32.9

40.0

44.7

49.2

51.5

Crude

7,159

7,154

6,938

7,106

7,066

-526

-1394

7,592

8,460

8,882

9,170

8,971

Products/NGLs

-1,969

-979

-375

-544

-633

-774

-992

141

360

1,171

1,800

2,308

2,971

3,080

3,141

3,195

3,139

-340

-954

3,479

4,093

4,428

4,788

4,678

Saudi Arabia

995

1,040

1,287

1,451

1,259

-65

-105

1,325

1,365

1,193

1,095

1,004

Venezuela

742

775

716

713

735

+11

-140

724

874

919

968

1,037

Iraq

350

463

400

276

380

+38

-95

342

475

458

417

451

Kuwait

245

294

344

394

344

+18

+40

327

304

191

197

183
2,256

OPEC Net

Canada
US PETROLEUM OUTPUT
Crude oil
NGLs

9,048

2,783

2,571

2,466

2,579

2,539

-56

+8

2,595

2,531

2,379

2,302

12,049

11,989

11,828

11,488

10,766

11,360

+1315

+2456

10,045

8,904

7,858

7,557

7,259

8,949

8864

8,737

8,540

8,060

8,446

+1006

+1950

7,440

6,496

5,643

5,483

5,349

3100

3125

3,091

2,948

2,705

2,915

+310

+507

2,605

2,408

2,215

2,074

1,910

TOTAL OIL OUTPUT

13,033

12,883

12,551

11,778

12,404

+1355

+2534

11,049

9,871

8,871

8,461

8,016

Ethanol

919

931

941

909

927

+61

+67

867

860

909

867

713

Biodiesel

88

90

78

68

79

-10

+14

89

64

63

na

na

MTBE

37

35

44

35

38

-11

-4

49

42

42

37

44

19,039

19,160

18,711

18,814

18,895

-65

+404

18,959

18,490

18,882

19,178

18,771

US OIL DEMAND (Products Supplied)

19,200

*PRELIMINARY BASED ON WEEKLY DATA. OPEC AND GULF TOTALS EXCLUDE UAE (18,000 B/D FOR JAN-SEP 2014) **INC OPEC MEMBERS. SOURCE: EIA, MEES CALCULATIONS.

19

Middle East Petroleum and Economic Publications (Cyprus) Ltd


Reproducing MEES Is Strictly Prohibited

28.November.2014

selected data
benchmark crude prices ($/b)
27-Nov

17-21 Nov

10-14 Nov

Oct-14

Sep-14

Q3 2014

Q2 2014

2013

2012

2011

WTI

69.02

75.44

76.51

84.33

93.13

97.25

103.00

98.03

94.18

95.07

ICE Brent

72.58

79.11

80.34

88.05

98.57

103.41

109.76

108.69

111.70

110.90

DME Oman

74.21

76.90

79.06

86.96

97.12

101.93

106.23

105.47

109.30

106.68

ICE Dubai

70.87

77.17

78.34

86.73

97.15

101.75

106.30

105.49

109.44

106.45

OPEC Basket

70.80

74.35

76.37

85.07

95.98

100.88

105.86

105.89

109.44

107.46

na

na

na

na

106.21

109.46

109.54

110.38

114.77

109.10

JCC

Average settlement prices for period in question

WTI ICE Brent DME Oman OPEC Basket


120

110

100

90

80

70

mar-14

apr-14

may-14

jun-14

jul-14

aug-14

sep-14

US CRUDE IMPORTS: CANADA OVERTAKES OPEC (MN B/D)

nov-14

oct-14

*TO 21 NOVEMBER. SOURCE: EIA.

OPEC CANADA

% AMERICAS % OPEC

80

70
5
60
4
50

40

30
2
20

*Q414

3Q14

2Q14

1Q14

1
10

1985 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

MEES EDITORIAL STAFF


Publisher:

Dr.Saleh S Jallad

sjallad@mees.com

Senior Editor:

Kate Dourian

kdourian@mees.com

Managing Director:

Fadi Aboualfa

faboualfa@mees.com

Editors:

David Friedman

dfriedman@mees.com

Managing Editor:

James Cockayne

jcockayne@mees.com

Nader Itayim

nitayim@mees.com

Consultant:

Walid Khadduri

wkhadduri@mees.com

David Knott

dknott@mees.com

Advisor:

Basim Itayim

bitayim@mees.com

Florian Neuhof

fneuhof@mees.com

Production Assistant:

Irene Stylianou

irene@mees.com

Peter Stevenson

pstevenson@mees.com

20

Middle East Petroleum and Economic Publications (Cyprus) Ltd


Reproducing MEES Is Strictly Prohibited

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