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GCC upstream oil and gas investments touch $204bn

By Karen Remo-Listana

The drastic drop in oil price and the weakening of world's energy demand has done little to shake investments in the upstream (exploration and development) oil and gas sector, Emirates Business has learned.

This is because national oil companies are looking to continue to replenish their diminishing reserves in the long term. And to build the reserves portfolio, infrastructures have to be put in place even when the price of oil is low.

In addition, unlike the downstream sector (petrochemical and refinery), which has been financed mostly by debt, exploration and development projects are financed by the state's equity. This means financing for upstream projects – which according to Arab Petroleum Investments Corporation (Apicorp) is 90 to 100 per cent covered by the state – will be readily secured.

According to Proleads data, upstream investments in the GCC currently stand at $204 billion (Dh748bn), a nine per cent increase from $188bn in June 2008.

The number of projects has gone up by 10.9 per cent from 239 in June 2008 to 265 in January 2009.

Investments in upstream oil projects were up 6.7 per cent from $118bn to $125bn, while gas upstream projects were up 12 per cent from $70bn to $78bn during the same period.

"The reserve base is a very important issue to ensure supply in the market," Mohammed Husain, Deputy Chairman and Deputy Managing Director of Planning and Gas at Kuwait Oil Company, told Emirates Business.

"Over the last few years we haven't been seeing a change in the reserve base. The main reason for that is the very challenging deep reservoir. The production may come from new discoveries, this is possible, but the way we see it there will be very limited giant oil well discovery unless it's in a very harsh environment."

He said the oil sector has undergone a number of cycles and the fundamentals indicate that there will always be demand for oil. "Securing oil has is now more challenging. Some of the exporting countries are not able to export today, while some are likely to be consumers in the near future," he added.

However, investments in the downstream sector – refining, petrochemical and power – have been hit by the credit crisis. This is because the industry tends to rely more on debt and external equity for less risky downstream activities, particularly when funded under project finance structures. Figures from Apicorp show that most recent trends have continued to point to an average equity-debt ratio of 30:70 in the oil-based refining petrochemical sectors. In the gas-based downstream sector, the ratio is put at 40:60 to factor in higher feedstock risks.

In the power sector, the ratio is put at 25:75 to reflect the still highly-leveraged IPPs and IWPPs. Under these conservative assumptions, Apicorp estimates the resulting capital structure for the period 2009-2013 is likely to be 54 per cent equity and 46 per cent long-term debt. This compares with the equity-debt ratios of 50:50 found in the 2008-2012 review and 47:53 in the 2007-2011 review.

The UAE - which holds the fifth largest proven oil reserves in the Middle East and the fifth largest proven natural gas reserves in the world – has seen the highest increase in investments. Projects in upstream oil and gas projects went up by nearly 30 per cent from $42bn to $55bn, according to Proleads data seen by Emirates Business.

According to Abu Dhabi's recently released economic plan, the emirate – which owns and controls 92 per cent of UAE's hydrocarbon reserves – will see oil production capacity topping the previous target of 3.5 million barrels per day over the next decade.

The document, outlining the emirate's development plans to 2030, did not say by how much capacity in the world's fifth-largest oil exporter would exceed the target.

Officials have previously said the Opec member would pump 3.5 million bpd over the next 10 years. The plan gave no details of capacity plans beyond the next decade to 2030.

Capacity stands at around 2.8 million bpd, although output is less due to production cuts agreed with Opec. The UAE pumped around 2.3 million bpd in December, according to an Opec survey.

Adnoc's onshore unit, the Abu Dhabi Company for Onshore Oil Operations, plans to boost its capacity to 1.8 million bpd in 2017 from 1.4 million bpd. The increase will come from completion of four major projects. The first would cost $4.5bn and was aimed at both sustaining current capacity and adding around 100,000 bpd more. The project includes the replacement of assets over 35 years old, upgrading and adding new facilities in three of Adnoc's fields. It would also connect satellite fields.

The rises in capacity will start with 197,000 bpd by 2013, an extra 94,000 bpd the following year and the remaining 133,000 bpd by 2017.

Other projects in different phases will be awarded from 2009 and they include the Bab field, Al Qemzan, Qusahwira and the North East Abu Dhabi fields. In addition, Abu Dhabi is investing a huge amount of money to develop its sour gas reserves.

Next to the UAE, in terms of investment increase, is Bahrain – the region's smallest oil producer. Bahrain's six upstream projects are put at $2bn, which although modest is 21.2 per cent higher than $1.65bn recorded projects last year.

Bahrain – who exports much of its oil in the form of refined petroleum products rather than crude oil – is overhauling its operations at the 35,000 bpd Awali field and is looking at drilling for deeper oil.

Qatar, the world's largest LNG producer and exporter, is also increasing its investments in the oil sector from $7bn to $10bn. State-owned QP has been focusing on enhanced oil recovery projects to extend the life of its oil fields, particularly at the onshore Dukhan field, Qatar's largest oil field. QP is carrying out similar work at several of its smaller fields, including the offshore Bul Hanine and Maydam Mahzam.

While there is substantial exploration and production work under way, there have not been any major oil discoveries in Qatar during the last decade. Almost all of anticipated new oil production capacity will come from Maersk Oil & Gas of Denmark, which operates the offshore Al Shaheen field.

Meanwhile, Qatar's upstream gas investments went up by 11 per cent despite the gas moratorium. A five-year moratorium on projects using North Field gas was announced in 2005 and is set to be extended potentially to 2013. Qatari Energy Minister Abullah Al Attiyah has indicated that security of supply for domestic industrial users (particularly petrochemicals) will be a priority, and it is therefore believed that the upside for gas supply into international markets is limited.

Kuwait, which is the most hydrocarbon-reliant country among the GCC states, has increased its budget by about 10 per cent from $34bn to $40bn. There has therefore been an increase in investments although the country's parliament remains in a limbo.

The country has in 2007 struck a deal with Exxon Mobil Corp to produce heavy oil in the north of the Gulf state and aimed to boost production to 900,000 barrels per day by 2020.

The deal would see production of 700,000bpd from the field, while KOC, which is in charge of oil exploration added that it also wanted to explore other fields to reach its long-term target.

Kuwait, which sits on about 10 per cent of global reserves, aimed to produce 50,000 bpd of heavy oil by 2011 and 250,000 bpd by 2015 as part of plans to boost its total oil output to four million bpd by 2020, he said.

In addition, Kuwait, which holds a modest amount of natural gas reserves, would also continue all its gas exploration and development programmes despite the drop in the price of oil and the current financial crisis.

KOC's Husain, the company would "not stop" any of its gas projects and added that all KOC gas plans are "on target".

He reiterated that the second phase of non-associated gas project will boost production to 600,000 cubic feet a day (cfpd), a four-fold increase from its current production of 140-145 cubic feet of gas per day.

"It [second phase] will be completed by 2011 to 2012," he said, adding that the third phase would bring the production level up to one billion cfpd.

It is expected that as gas production reaches one million cfpd, more than 300,000 bpd of condensates will also be produced including ethane, propane and butane, which in turn could boost petrochemical production in the Gulf.

Oman, meanwhile, has seen a 29 per cent drop of investments from $18bn to $13bn. The non-Opec producer nonetheless is targeting crude oil production of 800,000 barrels per day this year, up from its current production of 750,000 bpd.

Saudi Arabia, the world's largest exporter of crude oil, has also seen a 7.8 per cent decrease in investments from $63bn to $58bn. However, the Kingdom has the largest investment base among all the GCC states.

Part of Aramco's strategy is to access the Kingdom's more than 720 billion barrels of discovered oil resources, almost half of which are not part of the current reserves.

"We work to keep our currently recoverable reserves at 260 billion barrels," said Abdulla A Al Naim, Saudi Aramco's Vice-President of Petroleum Engineering and Development. "The rest of the discovered resources are not part of our current reserves, and they are considered probable, possible and contingent."

The company, he said, plans to convert those to reserves.

While the technology does not yet exist to access those resources, the company has been expanding its maximum sustainable production capacity from 10 million bpd in 2004 to 12 million bpd this year.

Delays and cancellation

Apicorp's 2009-2013 review has revealed a higher potential for the region's energy capital investment requirements at $650 billion.

However, despite efforts to push ahead with implementation of initial development plans, many projects appear to have been postponed beyond the five-year period or have simply been shelved. As a result, the projects actually in progress amount to $520bn or 80 per cent of the above potential.

But then again, most of the delays or cancellations are happening in the downstream sector. In Saudi Arabia, shelved or postponed projects have been estimated at 13 per cent of the above total, mostly in the petrochemical sector, according to Apicorp data.

There are also some who are thinking of shelving a number of upstream projects, said Mohammed Husain, Deputy Chairman and Deputy Managing Director of Planning and Gas at Kuwait Oil Company.

"The expansion plans announced before used to be of sound reasoning because the price of oil was high but now some are thinking of shelving projects, while others are thinking a thousand times before they proceed," he said.

Husain added: "What I say is that we should develop the life of our reservoirs – which is 30, 50 or even 200 years and it needs time to do that. Unless we behave differently and we position ourselves rationally rather than emotionally we will not succeed.

"And this is even more critical for state oil companies and that is because we are positioning our country. Most of the revenue of a country is from these resources so if we don't capture these opportunities, we will lose big money, big time."