Financial Times World Energy: Middle East Economies develop taste for foreign money
Across the region, governments are changing tack, says Robert
Corzine. Gone are the days when they would turn away foreign
investment. Indeed, in many cases they are now going out of their
way to welcome it
Mark Moody-Stuart, the chairman of Royal Dutch/Shell,
the Anglo-Dutch oil group, began a recent swing through the
Middle East with a visit to Kuwait. Upon arrival his hosts
greeted him with the words: "We see you are going to Saudi
Arabia next." When he reached Riyadh on the second leg
of the tour, his Saudi hosts had a similar welcome
prepared: "We see you have just been in Kuwait."
Mr Moody-Stuart's experience illustrates the high stakes
that countries in the region are playing for as they move
at varying speeds towards what some hope will be an
eventual full opening of their energy sectors to foreign
direct investment. As with most things in the Middle
East, the process of opening the oil and natural gas
sectors of some of the largest reserve holders in the
world has not been particularly transparent. And it is not
even certain that it will happen in all cases. But the
prospect of access to some of the lowest cost oil and
gas reserves in the world has tantalised both big and
small international oil companies, which are busy
opening or reinforcing offices in the region.
To understand why such an uncertain process has
generated such intense excitement one needs to go
back and examine the recent history of oil production
trends outside the the Organisation of Petroleum
Exporting Countries. In recent years billions of dollars
have been spent in exploring increasingly remote or
technically challenging areas of the world.
Although non-Opec production has risen steadily as a
result, most forecasts suggest that in the coming
decade non-Opec will struggle to keep up with growing
world oil demand: "For the past 10 years non-Opec has
had every financial incentive to squeeze the orange as
hard as they can," says Gary Ross of Pira energy
consultants in New York City. "But even with those
incentives the world still needed more Opec oil. It's
simply a matter of who has the reserves."
Gaining access to such low cost reserves has become a
management mantra in the boardrooms of the biggest
western oil companies. But why should the countries of
the region be so keen on foreign capital, given that most
of the region's oil can be produced relatively cheaply and
simply with little need of the high technology equipment
that is required in areas such as the North Sea?
In the case of Iran and Iraq, there is simply no
alternative. Iran's oil and gas infrastructure has been
starved of investment for 20 years. The government's
high dependence on oil revenues for hard currency and
to fund state expenditures means there is little left for
the industry.
The "buy-back" programme now underway is a
compromise that allows foreign investment into the
strategic sector without violating the requirements of
Iran's constitution, which bans foreigners from "owning"
Iranian oil reserves. International companies have
responded enthusiastically, not so much because the
terms of buy-back deals are attractive - in some cases
they are not - but because they hope to use the initial
contracts as a basis for more enduring relationships with
Iran's government and national oil company.
Once United Nations sanctions are lifted, Iraq too will
have little alternative but to invite foreign oil companies to
rehabilitate and expand its oil and gas industry. Unlike
Iran, Iraq has no constitutional restraints, and a number
of production sharing contracts - the usual format for
foreign investment in most producing countries - have
already been concluded or are ready for signing once the
oil embargo is lifted.
But in the case of Saudi Arabia and Kuwait, the two big
Gulf Arab producers which have so far resisted foreign
investment in their upstream oil sectors, the economic
logic appears less clear, with political considerations
likely to play a more important role in any eventual
decision.
Foreign oil executives insist, however, that there is an
economic case for outside investment. In the case of
Kuwait, says one European oil executive, a valid
argument 20 years ago would have said: "We have huge
reserves that are an appreciating asset for future
generations, so why should we allow foreigners to
become involved."
But he claims that argument is no longer valid. The
advent of increasingly tough environmental legislation
around the world, the requirements under the Kyoto
Protocol to reduce greenhouse gas emissions, the
displacement of oil by gas in power generation, and new
energy technologies, such as fuel cells, all threaten to
undermine the pace at which demand for oil will grow.
Given real price trends, it could be argued that oil is a
depreciating asset.
Some have argued that in the case of Kuwait, a direct
presence by US and European oil companies would
cement crucial defence ties and enhance the state's
long-term security. A similar argument is sometimes
advanced for Saudi Arabia.
But others might view the opening of the two countries'
upstream sectors as an admission that oil prices might
not stay high for ever, and that they are preparing for
future price wars.
Financial Times World Energy, April issue |
