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IPF Exclusive, July 2013


IPFs at a Glance | 1999-2005

Iran Persian Gulf

Global Energy Market


One of the most important solutions for overcoming future energy crises is to encourage investment in major energy production regions and getting international oil majors invest in those regions


Persian Gulf is a watery expanse 600 miles long, which separates Iran from the Arabian Peninsula and is one of the most important waterways of the world, which is 34 miles wide in the narrowest part. The Persian Gulf region is one of the richest parts of the world in terms of energy resources.

By the end of 2003, Persian Gulf littoral countries were in control of approximately 718 billion barrels proven crude oil reserves (more than 62 percent of total global crude reserves) and about 70 trillion cu. m. proven gas reserves (about 40 percent of total global reserves). Iran, Qatar, Saudi Arabia, and the United Arab Emirates ranked the second, third, fourth and fifth in terms of gas reserves in the world after Russia.

Therefore, given global trends and willingness to replace natural gas for other kinds of due (because it is less pollutant), role of this region in global energy markets and supply of natural gas to the world through pipeline and as liquefied natural gas (LNG) will remarkably increase.

Middle East countries exported about 18.9 million barrels crude per day in 2003 accounting for more than 41 percent of the world's oil exports. Persian Gulf littoral states enjoyed a specific status in this regard by exporting 17.2 million barrels crude per day. Among Persian Gulf countries, Saudi Arabia alone accounted for half of crude export from the region (by exporting 8.4 million barrels per day) followed by Iran (2.6 million barrels per day), the United Arab Emirates (2.4 million barrels per day), Kuwait (2 million barrels per day) and Iraq (900,000 barrels per day) as major regional oil exporters.

During 2003, most oil exported from the Persian Gulf (about 90 percent) passed via Strait of Hormuz. Crude oil passing through Strait of Hormuz accounts for about two-fifth of global crude oil trade.

One of the most important points about Persian Gulf littoral countries is that they accounted for nearly all surplus crude oil production capacity in 2003 (as was the case in previous years).

Despite its role in the world's energy markets, the Persian Gulf region has not yet gained its rightful status. Regional countries accounted for more than 62 percent proven crude reserves in 2003, but only about 27 percent of global production and 41 percent of global crude oil exports was accounted for by those countries.

Though these countries enjoyed about 40 percent of proven gas reserves, they accounted for less than 9 percent global production of this valuable energy carrier.

Undoubtedly, regional countries will be able to turn their potential capacities into active ones through correct planning and cooperation and play a suitable role in global markets.

Based on estimates of the US Department of Energy, daily production of Persian Gulf countries will reach 26 million in 2010 and 35 million in 2020. Therefore, share of Persian Gulf from global production of crude oil will increase from 27 percent in 2003 to 33 percent in 2020.

Energy Imports of Big Countries from Persian Gulf: Crude oil imports of the United States from Persian Gulf reached 2.5 million barrels in 2003 up by about 9 percent compared to a year before (imports stood at 2.3 million barrels per day during 2002). Major crude oil import sources for the United States during 2003 included Saudi Arabia (71 percent), Iraq (19 percent), Kuwait (9 percent) as well as Qatar and the United Arab Emirates (less than 1 percent). Saudi Arabia increased crude exports to the United States from 1.55 million barrels per day in 2003 to 1.77 million barrels a day in 2003 while daily export of crude oil from Iraq to the US increased from 441,000 barrels in 2002 to 481,000 barrels in 2003. All in all, Persian Gulf region accounted for about 22 percent of net crude imports of the United States and supplied 12 percent of that country's consumed crude oil in 2003.


Persian Gulf oil-rich countries will continue to play a decisive role in supplying needed oil to the world and the main part of production hike by those countries will be allocated to exports


Average crude import from Persian Gulf by European members of the Organization for Economic Cooperation and Development (OECD) stood at 2.6 million barrels in 2003, showing an increase of 200,000 barrels compared to a year before. Biggest exporters of crude oil to West European countries in the region included Saudi Arabia (52 percent), Iran (33 percent), Iraq (7 percent) and Kuwait (6 percent). Also, Japan's average crude oil imports from Persian Gulf reached 4.2 million barrels per day in 2003. Dependence of Japan on Persian Gulf's crude oil has increased from 57 percent in 1988 to 87 percent in 2003. Saudi Arabia accounted for about 30 percent of Japan's imported crude from Persian Gulf in 2003 while the United Arab Emirates, Iran, Kuwait, Qatar as well as Bahrain and Iraq accounted for 17 percent, 12 percent, 11 percent, and 1 percent of Japan's imported crude.

Iran enjoys high geostrategic status due to its position in Middle East as a linking bridge between Persian Gulf and Caspian Sea. The country enjoys more than 130 billion barrels exploitable crude oil and gas condensate reserves as well as 26 trillion cu. m. exploitable gas resources; thus ranking the second in the world in terms of such natural resources and an undeniable role in global energy markets.

According to estimate of OPEC's secretariat, global demand for primary energy sources will be on the rise until 2025. Although share of crude oil from international energy basket will fall from 40.1 percent in 2000 to 36.9 percent in 2025, oil will continue to be the world's biggest source of energy. Share of gas will increase from 23.3 percent in 2003 to 29.9 percent in 2025 indicating increasing importance of natural gas and its exporters in global energy markets.

In view of the said estimates, production of crude oil will increase from 82.3 million barrels per day in 2004 (9-month average) to 114.6 million barrels per day in 2025. during the current year production by non-OPEC crude producers stood at 49.7 million barrels per day, which is expected to hit 56.5 million barrels per day by 2015 at an annual growth rate of 1.4 percent. However, production of non-OPEC producers will start to decline as of 2015 and final production of those countries will fall to 56.3 million barrels per day in 2025. Production of crude oil and gas condensate by member countries of the Organization of Petroleum exporting Countries (OPEC) will increase from 32.7 million barrels per day during the current year at an annual growth rate of 3 percent to reach 40.6 million barrels per day in 2015. Starting from 2015, economic growth rate for OPEC members will rise to 4.3 percent per year and they will be producing 58.3 million barrels per day by 2025. Between 2003 and 2025, crude demand will increase by 35.4 million barrels per day and non-OPEC members will be capable of only producing 18.6 percent of that figure. Therefore, OPEC producers will have to supply 81.4 percent of that demand. Among OPEC members, Persian Gulf member states of the OPEC members will be playing a more prominent role in supplying needed crude to the world. What differentiates them from other crude producers is:

  • They enjoy about 63 percent of the world's total proven crude oil reserves and 45 percent of those reserves is located in three countries, that is, Saudi Arabia, Iran and Iraq;

  • Average production cost in those countries is less than 2 dollars per barrel, which is the lowest crude production cost in the world;

  • To produce one barrel crude oil per day in Persian Gulf member countries of the OPEC, 5,000 dollars should be invested, which is the lowest investment figure for the world's oil fields.

The above figures show that the need of global economy to Persian Gulf crude oil will continue to increase.

In 2003, global natural gas production stood at 2.6 trillion cu. m. with Persian Gulf countries accounting for 8.9 percent total global natural gas output. Meanwhile, the region enjoys about 40 percent of proven natural gas reserves. South Pars, as the world's biggest independent gas field enjoys over 15 percent of proven natural gas reserves of the world with Iran and Qatar accounting for about 30 percent of proven gas resources of the world. Due to raising concerns about environmental pollution, consumption of natural gas is projected to experience the highest growth among fossil fuels over the upcoming years, so that, global demand for natural gas reserves will hit 4.9 trillion cu. m. by 2025. During that period, demand growth in two major natural gas markets, that is, Europe and Asia-Pacific region will stand at 70.3 percent and 105.3 percent, respectively. During the said period, production in Europe will decrease from 314.4 billion cu. m. per year to 300.3 billion cu. m. and, in contrast, natural gas demand in that region will hit 543.9 billion cu. m. in 2025. Production growth rate in Asia - Pacific region will equal 82.5 percent due to booming economic in China and India, but natural gas supply will fall short of demand by about 130 billion cu. m. and Persian Gulf will have to meet the lion's share of that demand.

Economic growth in Southeast Asia, especially China, during past years has had a great role in increasing global oil demand. During first half of 2004, oil demand in China increased 17 percent and is projected to grow at an annual rate of 3 percent in the long run. In that case, China's oil imports will exceed imports by member countries of the Organization for Economic Cooperation and Development (OECD) and will even reach 10.5 million barrels per day by 2020. At that time, China's crude imports will exceed total imports of Japan, South Korea, Australia and New Zealand. Based on estimates by OPEC's secretariat, gross domestic product of China will equal 24 trillion dollars by 2025, surpassing corresponding figure for North America by 22 trillion dollars and that of Western Europe by 16 trillion dollars to be known as the world's biggest energy consumer. Due to propinquity to China, Persian Gulf reign will become the most important source of crude oil and gas for that country.

Existing Challenges: Available statistics and estimates presented by creditable international institutes show that despite many efforts made to reduce dependence of international economy on crude oil and its products, the increasing trend of crude oil and natural gas consumption will continue.

Recent increase in price of crude oil, which was due to limitations in upstream and downstream sectors, is reminder of the undeniable reality that lack of adequate and timely investment in upstream and downstream sectors, will show its untoward effects after a while and at that time, measures taken to make up for the defect will not be effective because projections for meeting consumers' demand should be made beforehand.

Therefore, some of the most important challenges facing global oil market over the next two decades are, firstly, to create enough new oil and gas production capacities to assure sustainable growth of global economy; and secondly, increased capacity should create reliable surplus production capacity for the world markets to lessen concerns about energy supply security as much as possible. If there is no reliable surplus production capacity, global energy markets will be vulnerable to unpredicted fluctuations. In view of all estimates and huge reserves in Persian Gulf littoral countries, a large part of capacity increase should take place in OPEC members around Persian Gulf to increase their share from market.

Despite some concerns, if the said surplus production capacity is not realized, global economy and especially major energy consumers would incur heavy costs in the long run and signs of such a situation will surface during next few years, though early signs were seen in late summer and early fall of 2004 when global oil price surpassed 50 dollars per barrel.

Sanctions: One of the most important solutions for overcoming future energy crises is to encourage investment in major energy production regions and getting international oil majors invest in those regions. However, policies adopted by some major consumers including the United States during recent years and using inhibitory methods to prevent investments, especially imposing economic sanctions against some major oil producing countries, have killed those opportunities. Though the United States is the world's biggest consumer and importer of energy and is badly in need of sufficient and secure energy, it has imposed sanctions on some major energy suppliers during past two decades or has been influential in sanctioning those countries. Restrictions considered by the United States against some energy exporters is incompatible with the United States' policy to diversify and increase global supply of crude oil, because the goal of United States in diversifying energy supply sources is reducing risk of any possible disruption of energy supply by any specific group or region.

On the other hand, in view of globalization and reduction of barriers to international trade, success rate of imposed sanction, especially when they are unilateral, will be low. On the whole, unilateral sanctions in a changing global economic system have lost their application and will be very costly for the country imposing such sanctions.

Iran sanctions led to serious confrontation between the United States and its European allies because those countries had important strategic and economic interests in Persian Gulf and Middle East region.

Reduced energy production capacity as a result of sanctions and in view of limited production capacity of OPEC, prevented unhealthy rivalry among member countries and was an important factor in protecting the interests of producers while being harmful to major energy consuming countries. Final result of this situation will be elimination of sanction. Therefore, presence of international oil majors and signing contracts, which were once worth more than 30 billion dollars as well as defining many development plans for Iran's oil and gas fields, especially various phases of South Pars gas field declared failure of US sanctions against Iran. Phase 2 and 3 of South Pars Project were made operational by TOTAL, Gasprom and Petronas companies a long time ago, while phase 1 of the same project, which was mainly implemented by Iranian specialists, was officially inaugurated on November 20, 2004.

Therefore, though such sanctions will reduce production capacity of target countries,  due to increased global oil price revenues of those countries and, on the whole, revenues of oil producers will greatly increase so that the price hike can even make up for low revenues resulting from reduced oil supply by target countries.

Investment in Persian Gulf Oil and Gas Industry: Oil industry as pioneer of various industries in terms of investment attraction during past decade owes its superiority to its globalization aspect. The global feature of the industry is mainly due to distribution of oil reserves in various parts of the world, especially those countries, which enjoyed a lower role in the evolution of complicated oil exploration and production technology. This characteristic of oil industry led to a bilateral willingness for expanding international relations in this field. On the one side, countries possessing oil resources had to exploit those resources due to the hard need for currency while, on the other hand, companies enjoying technology and capital were more than willing to have a role in exploiting those resources to avail of enormous profits of energy resources and the bilateral nature of this relationship has contributed to global aspect of the industry. In view of projections regarding changes in world crude reserves, Persian Gulf oil-rich countries will continue to play a decisive role in supplying needed oil to the world and the main part of production hike by those countries will be allocated to exports. In fact, due to changes in geographic location of production sources, the issue of energy exports will become more important and this will help Persian Gulf energy exporting countries to get more attuned to global economy.

Since not meeting the world's energy demands during next decades will lead to crises in global economy, supplying needed technology, capital and financial resources for increasing oil and gas production in Persian Gulf region is not only a must for developing countries, but also for continued economic development of advanced countries. Therefore, Persian Gulf oil and gas industry enjoys sufficient motives for attracting foreign investment and globalization through enhanced transfer of new technologies as well as attraction of investment and managerial capabilities which is an important factor for bolstering technical and executive capacities of developing countries.

In view of complicated nature of global communications and more dependence of countries and global economic on one another, globalization has offered oil and gas producing and exporting countries of Persian Gulf with opportunities and threats. Those countries should take advantage of all opportunities without losing any time while thwarting intimidations through cooperation and even turn them into suitable opportunities.

Oil and Gas Outlook of Iran: Iran is fully aware of technological capabilities as well as managerial and financial facilities of international oil majors for development and exploitation of its energy resources and is providing suitable grounds for attracting their cooperation. Foreign Investment Encouragement and Protection Act, was approved by the Islamic Consultative Assembly (Majlis) on March 10, 2002 and part of it was passed by Expediency Council on April 24, 2002. To encourage foreign investment, the Islamic Republic of Iran has joined member to Energy Charter Treaty (ECT) as an observer and is mulling full membership in the treaty.

Development of consumption markets and increasing demand has provided producing countries with opportunities to take advantage of experiences of transnational companies in forming mergers as a result of globalization exigencies to facilitate trade regulations and pave the way for the establishment of big oil and gas companies in the region.

Undoubtedly, this will facilitate use of economy of scale and, as a result, less expensive and more competitive production. Perhaps it is time to think about establishment of major oil, gas and electricity companies at a regional level in the Persian Gulf.

Global demand for energy has prompted OPEC members in the Persian Gulf to embark on economic reforms to boost their financial, technical and executive capabilities, especially in the field of oil and gas industries. To do this, Iran has targeted economic reforms, especially privatization and increased economic competitiveness in addition to attraction of foreign investment within frame of the Fourth Economic Development Plan. A major task in this regard is to expand cooperation with international oil and gas companies with an eye on expanded future cooperation. Expansion of Iran's relations with the European Union and Southeast Asian countries can pave the way for attraction of more foreign investment to domestic oil and gas industry.

Despite all obstacles created by the United States, Iran is trying through diligence of domestic specialists and cooperation of friendly countries in the region and the whole world to gain its rightful position in global energy markets and has delineated bright outlooks in this regard.

Based on a 20-year outlook plan, which stretches up to 2025, Iran will be a developed country ranking first in the region in economic, scientific and technological terms having preserved its Islamic and revolutionary identity, inspiring other countries in the world of Islam while engaging in constructive and effective interaction in the field of international relations.

To realize the said national outlook, a desirable picture of Iranian oil and gas industry would be as follows:

  • Number one producer of petrochemical substances and commodities in the region in terms of value,

  • The second oil producing member of the OPEC capable of supplying 7 percent of the global energy market's demand,

  • The third producer of natural gas in the world accounting for 10 percent of global gas trade.

Therefore, by relying on revenues sources resulting from added value of this national bounty, Iranian oil and gas industries should rapidly increase their potential, strategic capabilities through pursuing the following policies in the oil sector within general frame of the Islamic system's policies:

1.   Streamlining oil, gas, refining, and petrochemical companies to the level of active international corporations capable of economic competition in the said sectors and whole accurate determination of their financial relationship with the government according to principles of trade and methods used by corporations;

2.   Increasing added value of oil and gas industry through synergy of relative advantages through increasing investment in resources as well as oil, gas, refining, petrochemical, energy-intensive and engineering service industries;

3.   Supporting establishment and bolstering activities of the private sector in oil industry to pave the way for presence of Iranian companies in regional and global markets;

4.   Creating a center for attraction, production, transfer and promotion of new technologies in oil, gas, refining and petrochemical industries in Persian Gulf through constructive interaction with effective countries in the field of oil and gas technology and bolstering domestic scientific, technical and research institutes active in oil industry;

5.   Encouraging and protecting foreign investment in developing oil, gas and petrochemical industries and production of oil products;

6.   Taking advantage of joint investment with regional countries or merging related companies in petrochemical and downstream oil industries to create bigger, more efficient companies capable of working at global level;

7.   Creating a center for financial services, money and capital markets, insurance, stock exchange, goods, equipment as well as oil and gas facilities and rendering needed services through those markets to regional countries while creating a center for attracting capital and supplying needed financial facilities from global markets by establishing joint financial institutions;

8.   Partnership and expansion of regional and international cooperation in the field of exploring, prospecting and exploiting oil and gas reserves as well as implementation of foreign upstream and downstream investment projects while giving priority to regional countries with the goal of assuring market and strengthening international bonds;

9.   Export of oil, gas and petrochemical products in place of crude oil and natural gas while supporting and strengthening downstream production chain of the oil industry;

10. Affecting management of global oil and gas markets while taking advantage of geopolitical condition of the country for transportation of crude oil, oil products, natural gas, and petrochemical products as well as exchange of crude oil;

11. Concentrating on the establishment of needed infrastructures for development of oil, gas, petrochemical, and energy-intensive industries in suitable regions giving priority to Iranian coasts and islands in the Persian Gulf;

12. Optimizing energy consumption by reducing energy intensity in all economic sectors of the country;

13. Investment by Iran in oil, gas, and petrochemical sectors of other countries;

In line with the said outlook and to achieve the above-mentioned long-term objectives, the following goals should be realized as preliminary steps up to 2015:

1)   Creating a production capacity of 5.5 million barrels per day for crude oil by the end of the Fourth Economic Development Plan and 7 million barrels per day by 2015;

2)   Daily production of 900 million cu. m. natural gas by 2015;

3)   Producing as much as 20 billion dollars petrochemicals by 2015 through development of petrochemical industries;

4)   Special attention to energy-intensive industries to gain higher added value;

5)   Attracting foreign investment and foreign financial resources to assure the market, bolster international bonds and support them to develop oil industry in a bid to realize about 100 billion dollars investment in oil industry up to 2015;

6)   Increasing refining capacity of the country to about one million barrels per day emphasizing refining gas condensate and ultraheavy crude oil and attaining a total refining capacity of about 2.3 million barrels per day through optimizing existing refineries to produce lighter products and reduce production of fuel oil.

Having the world's second biggest gas reserves, Iran cannot be indifferent toward gas exports. Therefore, Ministry of Petroleum as the main authority for supporting national economy and assuring economic security of the country is considering plans for the export of this energy carrier to major global markets. For example, apart from exporting gas to neighboring Turkey, Iran is pursuing gas exports to India via a pipeline that will run through Pakistan to the east and, at the same time, the country is mulling gas export to Europe in the west and Armenia in the north. On the other hand, Iran is thinking about exporting gas and liquefied natural gas (LNG) to more distant market such as China and India and other natural gas markets of the world and to do this, the country is planning to establish four LNG production plants whose feedstock will be supplied by phases 11, 12, and 13 of South Pars gas field as well as two GTL (gas to liquid) plants whose feedstock will be supplied by phases 12 and 14 of South Pars gas field.

Obstructionism by the United States in the form of unilateral sanctions imposed on political grounds, will not only interfere in transactions of free capital and technology markets, but also will limit supply and prevent upstream cooperation, and downstream investment as well as implementation of oil and gas transfer projects in a free, economic way. At the same time, it encourages energy producing countries to use oil for political purposes. Therefore, such obstacles should be removed as soon as possible.

By relying on capabilities of its experts and specialists, as the main asset of the country, and having the world's second biggest oil and gas reserves, Iran can work with Persian Gulf littoral states as well as European Union and Asia countries for the attraction of investment and technology to develop its energy resources aimed at long-term supply of energy to the said countries. Access to capital, technology and market among a number of countries will, undoubtedly, assure long-term and sustainable interests of all those countries.

 

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  July 2013
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