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GLOBE


Reopening of Upstream
Oil & Natural Gas to Foreign Interests:
Views and Actions of Iran, Iraq, Kuwait & Saudi Arabia
(Second Edition - september 2004)

The widely accepted forecast is that the global demand for oil will increase at a steady rate from the current 82 million barrels per day (mbpd) to 120 mbpd in 2030. On the supply side, the major assumption has been that the key producers of the Persian Gulf region will meet most of the growth in future oil demand. Yet, a majority of these countries face stringent self-imposed restrictions on their ability to invite foreign companies to assist them in developing their hydrocarbon resources.

These restrictive policies, of course, are not limited to the Middle East or to OPEC countries. Mexico, for instance, remains firmly closed to foreign equity interests in its upstream oil sector. In addition, some of these producers are or have been for sometime subjected to vigorous economic sanctions by the United States or even by the United Nations. As a result, there has been no significant foreign investment in the Persian Gulf region’s oil and natural gas exploration and production for almost three decades.

Looking over the horizon, it becomes more and more apparent that there will be a serious supply/demand imbalance within the next two decades. Indonesia and Malaysia, Southeast Asia’s largest oil exporters, are expected to become net oil importers before 2010. In Latin America, Venezuela and Mexico may need several years before they have the will and the means to increase oil production and additional delivery capacity. In West Africa, oil companies are only focusing on offshore due to the constant struggle to do business onshore. Nigeria specifically has to grapple with internal strife, with a fairly polarized rivalry between the North and the South, which will not go away soon. Finally, the hopes of exporting oil from the Caspian Sea region became mired in the politics of running pipelines through regions where the national interests of U.S. and other major players are often at odds with each other.

Over the past decade, however, for various economic and political reasons Iran, Iraq, Kuwait and Saudi Arabia, have been actively searching for mechanisms to facilitate foreign investment in their upstream oil sector. These four countries, collectively, possess over 53% of the world’s proven oil reserves, currently provide 23% of the world’s oil production and are expected to supply 31% of the global oil requirement by 2020.

We are now at a turning point. Despite widespread rhetoric of how diverse oil supplies are at the present time, the Middle East is still the “oil king” destined to play a much larger role on the world stage of energy. Meanwhile, the strategic choice that these resource-rich countries have to make involves the inclusion of foreign oil companies for capital, managerial capabilities, and cutting-edge technology to meet the world’s future energy demands as well as socio-economic and political expectations of their own increasingly youthful population.

This newly updated, 240 plus page, in-depth report is the result of an ongoing independent investigation and analyses of the thought processes, views, and actions of the original members of OPEC in the Persian Gulf region that International Petroleum Enterprises (IPE) has been focusing on since September 2001 regarding reopening of upstream oil and natural gas to foreign interests. The report discusses the oil and natural gas situation in Iran, Iraq, Kuwait and Saudi Arabia and their respective experience with the concept of reopening; aspirations and requirements of the international oil companies (IOCs) related to opportunities in the region; risks; and a realistic outlook. Particular emphasis has been placed on two innovative, yet controversial, concepts that have attracted considerable attention worldwide for almost a decade: “buyback” and “Project Kuwait.” Access to relevant information selected from various sources and carefully evaluated such as those contained in this report is an essential prerequisite for a comprehensive understanding of the global energy industry.

 

TABLE OF CONTENTS

 
Executive Summary
 
PART I
World Oil and Natural Gas: Overview & Trends

     Projected Energy Trends

         Demand

         Supply
     Forgotten Issues
The “Call” on the Restricted Countries
     Key Persian Gulf Producers
     Prospects for Higher Output in the Persian Gulf Region
         Analytical Inattention to Oil Production
         Issues Common to OPEC Countries
Alternatives Confronting the Restricted Countries
     Reliance on National Resources
     Inclusion of IOCs
         Importance of Rate of Return
         Competition for Capital
         Importance of Fiscal Terms
         Technical Aspects of Contractual Models
     Potential Impact of IOC Investment
         IOC Impact on Production Levels
         IOC Impact on Market Management
 
PART II
Iran’s Petroleum Industry
     Post-Nationalization Era
     Constitutional Constraints on Foreign Investment
New Energy Policy
     Buyback Contracts
         The First Implemented Buyback Contract
         The 1995 Buyback Tender
         The 1998 Buyback Tender
         The “Discounted” Buyback
         Azadegan Agreement
         Amended Buyback Terms
         Stalled Buyback Projects
     Buyback Approach: Evaluation and Outlook
         Iranian Interests
         IOC Interests
         Impact on Iran’s Energy Strategy
         Domestic Political Opposition
         Contractual Issues
     Energy Strategy
     EPC Contracts
         Projects Restricted to EPC Contracts
         Projects Open to Buybacks or EPCs
    Caspian Sea Projects
    Production Sharing Agreements
 
PART III
Iraq’s Petroleum Industry
     The 1958 Revolution
     The Saddam Era
Oil Policy Changes
     Iraq’s Post-War Offer: February 1990
     Iraq’s Contractual Approach: September 1991
     Contract Negotiations: May 1991 to July 2000
     Iraq’s New Approach: July 2000
     Other Approaches
Impact of U.N. Sanctions
     The “Oil-For-Food” Program
     Oil Smuggling
     Possible Exemption for Upstream Oil Investment
     Post-Persian Gulf War Iraq
     The Social Divide
Changing of the Guards
     The Regime Change
     Post-U.N. Sanctions
     Transition Era
     Economic Perspectives
     Federalist Model
Iraq's Petroleum Industry Perspectives
 
PART IV
Kuwait’s Petroleum Industry
     Offshore Development
     Kuwaiti Concerns
         Security
         Required Technology
         Natural Gas Shortage
         Economic and Social Issues
New Energy Policy
Project Kuwait
     Kuwait’s Contractual Model: OSA
         Kuwaiti Interests
         IOC Interests
     Implementation of Project Kuwait
         Progress with IOCs
         Opposition in the National Assembly
     Future Outlook
 
PART V
Saudi Arabia’s Petroleum Industry
     Neutral Zone
     Plan to Maintain Sustainable Spare Capacity
     Saudi Oil Wealth
New Oil Policy - Clarity and Separation of Roles
     Saudi Gas Initiative
         Core Venture No. 1 (Ghawar Project)
         Core Venture No. 2 (Red Sea Project)
         Core Venture No. 3 (Shaybah Project)
         Production
         Water Desalination
         Electricity Generation
         Petrochemicals
         Summary of Negotiations
     Redesigning and Relaunching of the SGI
Royal Succession
     Short-Term Outlook
      Post-Fahd Era
 
PART VI
Conclusion

 

ABOUT THE COMPANY

International Petroleum Enterprises (IPE) is an independent research and consulting firm of energy professionals with diversified background in petroleum and related fields and extensive experience in the world’s important oil and natural gas producing areas. Since 1988, the company has been providing resource assessments, strategic direction and input, quality personnel, technical assistance, and consulting services to various public and private entities around the world with focus on the Middle East, enhancing the client’s overall in-house capabilities.

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