Caution to Prevail in MENA Region as Demand Questions Remain

Not All Well Everywhere

The Middle East is entering 2010 with a relative sense of comfort, with crude prices at a convenient level for most countries to post sizeable budget surpluses and the budgetary fears of end-2008 and early 2009 being relegated to memory. Notable exceptions exist of course, with Dubai likely to spring to mind, although its economical woes ironically spring from it having diversified its economy away from hydrocarbon dominance. Iran and Yemen, however, stand out especially in this regard, as they enter 2010 still under tremendous financial pressure and with downbeat expectations of a reversal of fortune. In Yemen rapid mature decline has weakened its crude export earnings significantly over the past decade, spurring increased political strife over the access to the increasingly limited government revenue, and the advent of LNG exports will deliver only partial relief from 2010 onwards. Iran for its part also made itself too dependent on top oil prices and could not alter its financial ways until after the crucial mid-2009 elections. The intention of making radical cuts in the country's generous fuel subsidy regime, potentially provoking significant controversy during 2010, is now a priority. Sanctions continue to stymie Iran’s ability to attract necessary investment, with shortages in technology, advanced machinery, funding—and increasingly, skills—becoming more and more visible in its delayed gas developments, its increasingly desperate measures to halt mature oil output decline, and its inability to rapidly or effectively expand its refining capability in order to reduce the vast amount of refined products it has to import and than hand out for next to nothing in the domestic market.

A Middle Year for Most

For the rest of the Middle East and North African (MENA) states, however, 2010 will be a middle year, in which previously announced projects—in many cases held back during periods of 2009 to capture falling costs and assess the depth of demand destruction in key consumer markets—proceed, but precious few new ones are launched, given the general tendency to wait for global oil, gas, refined product, and petrochemical demand to recover and show their future growth trends. The simultaneous start-up of projects delayed in tendering during late 2008 and 2009 are nevertheless likely to lead to renewed upward pressures on construction costs in the region, where shortages of skills in particular—and to some extent machinery—seem more persistent than first thought when costs started to fall in the wake of the mid-2008 oil price crash. Saudi Arabia’s 900,000-b/d Manifa oilfield development is a case in point, with costs at the project in December 2009 said to again be approaching US$16 billion—almost US$7 billion over the initial cost estimate—although part of the increase is likely to stem from Saudi Aramco’s relative inexperience with vast offshore projects. Saudi Arabia’s 400,000-b/d joint-venture (JV) refinery projects with Total and ConocoPhillips, respectively, and its own Ras Tanura project are all also again approaching a US$11-billion price tag, after high hopes in late 2008 that the projects initially costed at US$6-7 billion would come in at about US$10 billion, following a mid-2008 peak of over US$13 billion. This is unlikely to be a trend restricted to Saudi Arabia; the United Arab Emirates, Oman, Egypt, and Algeria are all likely to experience similar pressures, although more lukewarm investor interest in Algeria might moderate the trend.

A Year of Reckoning

For many countries, however, 2010 will also be a year of reckoning, as it has been—at different times—touted as a milestone for many of the states’ crude production capacity expansion programmes. Failures to move ahead have been legion, with the decade-long political deadlock in Kuwait well known and its non-performance long in the making, although Libya has far fewer "legitimate" reasons to blame for its inability to move forward with the redevelopment programme at its mature and declining main assets. Iran with its sanctions is more understandable, while strong signs that tendering at large expansion projects in Abu Dhabi is going ahead will be sought in order that the markets might see that past sluggishness is being rectified. Towards the end of 2009 its International Petroleum Investment Company (IPIC) even held out hopes once more for early 2010 progress on the long-planned Fujairah refinery, though this has now shrunk from 500,000 b/d to 200,000 b/d. Algeria looks set to continue struggling to reverse the overall cooling interest from investors for developing its oil, and particularly gas, acreage, with the attempt to speed up progress and regain upstream development momentum lost in recent years continuing throughout 2010.

Iraqi Indicator

Iraq offers perhaps the largest single signpost—for perhaps the largest single oil market change in decades—during 2010. Although technical service contracts (TSCs) for Iraq’s supergiants and some of its other significant oilfields were awarded mainly during the second half of 2009, work will have to start very rapidly during the first half of 2010 for the companies to be able to deliver anything close to their highly ambitious output targets both at early phases and for the plateau production levels, which are to be reached within seven years of the signing. Moreover, Iraq’s Oil Ministry will have to start making headway on planning and tendering the necessary large-scale expansions of the nation’s pipelines and export terminals. The Iraqi TSCs only include work by the oil companies on the fields, such as production and treatment facilities, while export links and facilities remain the responsibility of the Oil Ministry. The already producing supergiant contracts awarded in or after the first licensing round—Rumaila, Zubair, and West Qurna-1—in particular should start yielding significant oil increments by 2011 and 2012 if all goes to plan. This means that any failure by the Oil Ministry and its production subsidiaries to tender the first contracts for the expansion of the transport and export infrastructure during the first half of 2010 risks creating bottlenecks for the upstream production capacity. Given that oil companies have agreed to very tight terms and will be reimbursed per barrel produced, this could be the source of deep disputes and high costs for both sides.

Outlook and Implications