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Oil Is Thicker
than Water in Persian Gulf
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"One
could not adequately evaluate the impact of globalization without
reference to OPEC, often the source of and solution to the oil industry’s
problems." |
Amid a
mostly-English chatter and abundant card swapping, a thousand or so
participants make their way towards the conference hall. It is not until a
faint Farsi starts seeping through a few headphones, that one might guess that
the 7th IIES Annual International Conference is being held in
Iran. The focus of this year’s conference, held on December 9th
and 10th at the
IRIB
Conference
Center –
Tehran, is the “Impact of Globalization on Middle East Oil & Gas
Industry”. The conference, organized by the Institute for International Energy
Studies (IIES), has over 1000 participants from 72 countries and over 50
companies, providing a truly global mix from
Australia to
America. Sponsored by over a dozen companies, including big names
such as Shell, BP and Total Fina Elf, as well as half a dozen media sponsors,
such as MEED and Eghtessade Energy, the conference forms a remarkable forum
for cooperation and partnership for all those involved.
Sponsors and supporters
took advantage of the conference as an opportunity to advertise and display
their products and services in a colorful exhibition. Many companies used
multimedia presentations to showcase their latest technological advancements,
some (like Shell’s mono-bore well) barely a couple of months old. Very
detailed and technical information packages were available for collection
emanating a sense of true cooperation, sharing and partnership. The
participation of high-ranking officials, such as Iran’s Minister of Oil -
Bijan Namdar Zangeneh, and numerous prominent international figures of the
industry, such as Olav Fjell – Statoil President and CEO, R. W. Weener – Shell
CEO and Masahisa Naitoh – Itochu Vice Chairman to name just a few, attests to
the weight and regard given to this conference and the industry as a whole.
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"Very
detailed and technical information packages were available for
collection emanating a sense of true cooperation, sharing and
partnership." |
Today, it is not disputed that the world
economy largely owes its rapid development over the past century to the
expansion in the use of petroleum, especially oil. Thus, of all of the world’s
major commodities, oil has achieved an unprecedented level of economic and
strategic importance worldwide. Despite attempts at diversification and
substitution, especially by the industrialized world, oil remains the biggest
single source of primary energy in the world. Oil takes on incredible
significance when its key roles as the sustenance of the modern military
machine and the lifeline of international trade are considered.
The world economy’s impact on the price of
oil and vice versa, covers so many political, environmental, economic and
social factors and it is not certain which is the cause and effect of the
other. But it is certain that in this changing industrial landscape, in which
many more markets are vulnerable to international turmoil, lack of cooperation
and foresight will be to everyone’s detriment. The oil industry is of an
inevitably global nature due to the geographical distribution of resources,
with countries host to the richest oil and gas reserves being deprived of the
required technology for its efficient exploitation. Thus exists a mutual
dependency between the resource-rich countries, which need to exploit their
resources for their own financial well-being and the technologically advanced
companies with the substantial capital, who are eager to invest and put their
knowledge and experience to use to gain more access to these resources. This
condition has facilitated the establishment of mutually beneficial
international relationships. These relationships seem to have no end in sight,
and if anything, are increasing as it is forecast that by 2030, world demand
for oil will have more than doubled to 155 million barrels per day, a lot of
which will be coming from the Middle East.
National oil companies (NOC) will direct
this growth, as they control 67% of world’s oil and 61% of its gas. However,
there have been repeated calls for privatization of the industry, as there are
clear economic, technical and managerial benefits to be derived from the
opening of the industry to private investment. Even though nationalization of
the industry was a necessary step to protect the country’s interests at a
time, its continued application is no longer justified, as the industry’s
rapid development and advancement has transformed it from a national to an
international and now a truly global industry.
Still, in the age of constant technological
evolution, much of the region’s industry remains remarkably inefficient and
unproductive. This is widely attributed to the continued monopolization of oil
and gas activities by governments in the region. Governments have rarely been
able to manage economic activities successfully; as it is the private sector
that best understands how to allocate scarce physical, human and technological
resources. In the world of oil, this means that governments in the region need
to engage the leading international oil and gas companies (IOC and IGC), which
know best how to manage major upstream and downstream projects. By becoming
directly and increasingly involved in the region’s upstream activities, IOC’s
will themselves gain a greater incentive to invest more in the region and less
in other areas of the world. Over time, they will gain a growing vested
interest in producing and processing the region’s oil and gas. Growing links
between oil producers and major oil companies will in turn provide useful
lobbying power in outside capitals.
In many of the region’s resource-rich
countries, export of oil and oil products is the main source of the
government’s foreign exchange earnings. Thus, governments are reluctant to
hand over their precious reserves to the private sector. In an economy where
the energy sector is the only dominant wealth-generating source, governments
see their hold on oil and gas resources as the main source of political power
and stability.
Even though globalization affects the
environmental, economic, commercial and political policies of a country and
infringes on sovereignty to an extent, limitation and regulation of state
interference in the economy, drop in customs and tariff rates, rise in trade
and exchange, OPEC members’ production quota all being examples, it is not
vacant of its benefits. By training the workforce into highly skilled experts
it facilitates the transfer of advanced technologies and managerial methods as
well as absorption of investments. The use of technology has greatly boosted
efficiency, by increasing recovery and waste reduction. However, the industry
is very competitive and today’s cutting edge will become tomorrow’s common
practice in a matter of months, so those who do not have extensive research
programs, such as NOCs in the region, run the risk of wastefully depleting
their resources.
Technology does not always work to the
industry’s benefit, as one cannot rule out sudden leaps in the technological
process, which could undermine the role of oil as the main transportation fuel
within the coming two decades. These and other developments could herald the
gradual demise of the oil age leaving the Persian Gulf producers sitting on
billions of barrels of unused reserves of oil, which will be to all intents
and purposes worthless. As absurd as this may sound, one need only remember
the abrupt demise of the coal age, to give it some reflection.
For the foreseeable future, the Middle East
seems set to reap benefits from the globalization process, as the cost of
supplying oil for the region is substantially lower than anywhere else in the
world and thus worth investing in. In the Middle Eastern countries,
Iran appears to be most equipped to tackle globalization and
benefit from it. The APS Energy Group has concluded in a recent study that if
Iran opts for a production sharing agreement (PSA) good enough to attract the
biggest possible number of qualified companies - a number comparable to or
even exceeding that in Britain’s North Sea – then its recoverable reserves
would more than double within ten years to reach 200 billion barrels of oil
and 60 TCM of natural gas or more. The main factor in this scenario is a
concentration of the biggest number of operators possible. As it has been
proven in the
North Sea, such a concentration of highly qualified operators will
accelerate, as well as reduce the cost of, exploration and production (E&P)
both within and outside the existing fields onshore and offshore. It will
improve seismic collection and interpretation. It will raise the success rate
and the rate of recovery and – here is one of the main keys – will make every
small oil or gas discovery commercially feasible to develop. It will raise the
standard and lower the cost of reservoir engineering, maintenance of field
facilities, and so forth.
To achieve these desired outcomes
cooperation between NOC’s, IOC’s and governmental agencies is of the essence.
The ability of local companies to function and operate at the same level as
global players is subject to the development of communications, legal and
social relationships within the country. Further factors such as Iran’s
relative closeness to the strategic points of the region, the incentives which
are being offered within the Free Trade Zones and the Special Economic Zones,
availability of good infrastructure, cheap energy and construction material
including iron and minerals, ample supply of a skilled and relatively low-cost
Iranian workforce, and the gradual maturing of the political establishment,
all serve to present Iran as an attractive investment option.
There is a steadily increasing demand in the
Persian Gulf and nearby regions for equipment, machinery, spare parts,
tools and products needed for the petroleum, petrochemical and power
industries, rising from new industrial developments and a steady expansion of
production capacities in these sectors.
Iran is in an ideal position to co-produce these items
cost-effectively. The most obvious benefits of such joint ventures are
employment, transfer of technology and increase in revenue, as foreign
companies in nearby areas would not hesitate to import such items from
Iran at a lower price.
Development and exploitation of natural gas
resources are high on
Iran’s agenda, the world’s second largest gas-rich country. Since
natural gas is compatible with most environmental standards and is widely
accepted as the fuel of choice,
Iran endeavors to substitute oil consumption with gas
consumption, in an attempt to curb pollution and raise oil exportation
capacity. Despite some countries’ limited access to natural gas resources due
to long distances, technological advancements in the methods of production,
conversion, and transmission of natural gas such as DME, GTL, and LNG have
eliminated these limitations.
Iran is trying to export natural gas to its neighboring countries
through pipelines and other distant countries in the form of LNG. LNG
production and exportation is regarded one of top priorities of
Iran’s energy policy. In this context, levying taxes on
hydrocarbon fuels is considered among important elements to curb fuel demand
and encourage further use of natural gas. No doubt, such measures inflict
losses on oil producing countries’ revenues. Besides, more expensive
hydrocarbon fuels cause substitution of other energy carriers and thus further
cutback in demand for conventional fuels. This is a point which should be
given due consideration by gas-rich Middle East countries since it helps them
to keep their top status as energy suppliers of the world through more
investment in gas industry and producing higher amount of natural gas.
Iran currently partakes in more than a dozen
buy-back contracts. These contracts are designed to engage IOC’s for a short
and limited time and a specific purpose. Even though buy-backs are profitable
for IOC’s, the short and limited involvement has little appeal, as it only
besieges a fraction of the IOC’s capabilities. IOC’s rarely applying their
latest technological findings in buyback conditions, as they rather apply
tried and true methods that guarantee an output, even if it is less than what
it can be. Most IOC’s partaking in the buybacks believe it is a preface to
establishing extensive and long-term PSA contracts.
Iran’s currently advantageous position in
the region may not provide it with bargaining power for much longer. As
military action and the regime change in Iraq becomes ever more imminent,
IOC’s are already anticipating the carve-up of the Iraqi resource cake. The
oil in gas industry is one of fierce competition, where investors take their
capital where it will be confronted with the least obstacles. If party
rivalries in Iran’s political environment serve to create instability much of
the available foreign and even domestic investment would be diverted
elsewhere. To reaffirm Iran’s commitment to this matter, Bijan Zangeneh –
Iran’s Minister of Oil gave the following assurance in his speech: “Iran with
10% of the world oil reserves and 18% of natural gas reserves welcomes foreign
investments in the energy sector, particularly in the oil and gas industry to
meet its customers’ needs in the coming years. The Iranian government also
guarantees any required legal support and provides security for investors in
the framework of new regulations”. He further underlined Iran’s readiness to
“absorb technology and capital from EU and such Asian countries as Japan,
China, and India in the framework of multilateral unions”. He advocated a
peaceful resolution to the Iraq crisis as military conflict could irreparably
damage the security of energy supply and seriously damage worldwide welfare as
a result.
One could not adequately evaluate the impact
of globalization without reference to OPEC, often the source of and solution
to the industry’s problems. These unions have a key role of preparing national
economies for integration into single global economy. OPEC gains immense
significance for economies and people worldwide when its central role in oil
pricing is remembered. The current political uncertainty and tension in the
Middle East has had the effect of placing a political premium on oil prices
for much of this year and there is a strong case for arguing that high oil
prices have had a negative effect on the world economy for at least the past
two years. This has in turn caused undue economic hardship among the
oil-importing countries in the developing world, which have repeatedly called
on OPEC to implement a two-tier pricing system favoring the developing world.
While this system is impractical in terms of actual implementation it shows
that the decisions of OPEC are of real concern to oil-importing emerging
market economies.
Regrettably, OPEC does not always conduct
itself with the prudence expected from such an influential global actor, an
example of this is its current pricing strategy, which is a range set more on
the basis of the domestic economic and political requirements of the member
countries rather than on the supply/demand fundamentals of the oil market or
the needs of the global economy. Currently, the world economy is weak and oil
demand is low, but OPEC production continues to grow, with most OPEC member
states producing over and above their allocated quota. OPEC’s current pricing
strategy has been costing it market share against non-OPEC producers. One can
understand the need to maximize revenues, given the enormous economic and
social welfare needs of the OPEC members but basing an oil-pricing strategy on
domestic budgetary requirements rather than on the supply/demand fundamentals
of the oil market runs the risk of encouraging the very price instability that
OPEC seeks to avoid. This trend cannot continue indefinitely and will place
enormous strains on the OPEC quota system. When the strain becomes too much
for OPEC members to bear, prices will collapse, as they have on several
occasions since 1985. The political and economic cost of this irresponsible
behavior will grow for OPEC over time unless its members look beyond
short-term revenue needs and focus more on the real challenges facing the oil
market from alternative sources of energy, new technologies and the
environment. However, let it not go unsaid that oil embargos and economic
sanctions imposed on some OPEC countries also have an adverse effect on
prices.
The process of globalization is well and
truly underway, transforming local and national companies to international and
global economic powers. The Middle East, with its enormous resource reserves,
is in an ideal position to reap the benefits from this process. As more and
more countries become dependant on the Middle East for their energy, the
region must look to close partnership with technologically advanced IOC’s to
facilitate this increased production efficiently. With environmental
considerations coming to the fore of the global agenda, environmentally
friendly fuels such as natural gas will become increasingly marketable. With
the emergence of political tensions and their adverse effect on the world
economy, organizations such as OPEC are looked to for increased leadership and
guidance for navigating through these times of turbulence and turmoil. |
