Development of Petroleum Production Capacity in Arab Countries - Research Paper Example

Development of Petroleum Production Capacity in Arab Countries Given that the energy industry in the Arab region plays a very important role in encouraging and supporting economic growth and positive developments, there is a need to examine the present petroleum production capacity of Arab nations with reference to the ongoing development projects and their role in meeting global oil demand. The issue has been examined in the context of current production capacity and the ongoing development projects. An analysis has been made in reference to the role of heavy oil and conventional resources in meeting the given demand. The paper has examined the production patterns in Arab nations in determining how production capacities can be improved and how efficiently these nations can meet the prevailing environmental challenges. The paper has highlighted that recent developments in the region are indicative of efforts in meeting the increasing global demand despite the present turmoil in many Arab states. It can be said that the petroleum production capacity in the region will not be much impacted because of the high output capacities of Arab nations and the huge and confirmed oil reserves in the region. Nevertheless, it is imperative to find alternative sources of energy relative to oil and non oil options. Introduction The energy industry in the Arab region plays a very important role in encouraging and supporting economic growth and positive developments in the entire region. The recent developments in the region are indicative of efforts in meeting the increasing global demand despite the present turmoil in many Arab states. It can be said that the petroleum production capacity in the region will not be much impacted because of the high output capacities of Arab nations and the huge and confirmed oil reserves in the region. The Organization of Arab Petroleum Exporting Countries (OAPEC) has ten nations as its members and now holds considerable clout in influencing global oil prices and supplies. This paper examines the development of petroleum production capacity in the Arab countries and the role of these nations in fulfilling the present and future global demand for energy. The paper will analyze the present production capacity of Arab nations with reference to the ongoing development projects and their role in meeting global oil demand. The analysis will also be made in reference to the role of heavy oil and conventional resources in meeting the demand, how production capacities can be improved and how efficiently these nations can meet the prevailing environmental challenges. Current production capacity and ongoing development projects, and its role in meeting the world oil demand The total projected reserves of oil in the Arab region as predicted by OAPEC was almost 683 billion barrels in 2010 while these nations also control about 55 trillion cubic meters of gas deposits (OAPEC, 2010). The huge potential for hydrocarbons will allow Arab nations to continue remaining the major oil and gas suppliers. Some problems such as attacks by pirates in the high seas have enhanced problems for Arab states, which have raised global apprehensions about the security of oil supplies, especially when it is known that the global demand for oil will continue increasing significantly in the near future. The world demand for oil increased from 84.5 million barrels per day in 2009 to 86 million barrels per day in 2010, while in 2011 it was 87 million barrels a day. The high demand for oil is on account of the excessive use of energy in emerging economies such as China and India and because of global recovery from the economic crisis of 2008-2009. Given that the economies of most Arab nations are heavily dependent upon petroleum revenues, they are mostly resolute in making progress in developing more energy projects because they too have to grow their national economies. But consistency in this regard is dependent upon the vision of the oil exporting nations in the Arab region as well as consistency in demand from countries that are major oil importers (OAPEC, 2010). Security of supply is largely determined by consistency in demand and is the main decisive issue in encouraging Arab nations to enhance investments in the energy sector. A continued dialogue is needed amongst oil producing nations and oil importing nations in a transparent environment that should be characterized with transparency through involvement of global organizations related to energy, especially the Saudi based International Energy Forum. Analysts have observed that the Arab states presently possess almost 60 percent of the total global oil reserves and these nations are trying to create better security through export of oil products, natural gas and oil. Arab nations have been trying to enhance their strength in the global economic arena through approaches of bolstering their oil industry and developing their production capacities in order to ensure that the oil markets remain stable (Emirates 24/7, 2011). Arab nations are committed in achieving such objectives because they have enhanced their investment potential and executed projects for the development of the oil industry. Members of the OAPEC drew impressive investment plans in 2010 whereby production capacities were expanded in mainly upstream activities although significant investments were also made in downstream functions such as petrochemicals and refining. OAPEC data reveals that many Arab states were able to enhance their exploration activities significantly in 2010 that led to the discovery of oil at 98 new locations, such as the Abu Khashab and Rashid oil fields in Syria, Jalameed oil fields in Saudi Arabia, Al Jalila oil fields in Dubai and 63 different oil and natural gas findings in Egypt (OAPEC, 2010). In the context of downstream activities, many Arab states made plans to include hydrogen treatment capacities in meeting the increasing demand relative to light and middle distillates. In addition, improvement has been made in product specifications in complying with environmental regulations in the context of producing clean fuel. The Arab Petroleum Investments Corporations is an affiliate of the OAPEC, which predicted for the period 2011-2015 that Arab nations will have to invest almost $430 billion for hydrocarbon projects. While GCC member nations will account for about 2/3rd of the total investments in this regard, most projects will be established in OAPEC nations such as Egypt, Algeria, Qatar, the UAE and Saudi Arabia (Naggar, 2011). The establishment of new projects and expansion of current production facilities have increased the total refining production capacity of Arab nations by almost 6 percent in 2009, while output is expected to increase by a minimum of 5 million barrels per day by 2013. The refining capacity of Arab nations has increased from 7.4 million barrels per day in 2009 to as much as 7.9 million barrels a day in 2011. Most of the enhanced refining has taken place in Kuwait, Qatar and Iraq, while in Saudi Arabia and UAE the refining capacity has remained almost the same during this period. After Saudi Arabia and Iran, Iraq is known to hold the maximum oil reserves, and its capacity increased from about 598,000 barrels per day in 2008 to almost 847,000 barrels per day in 2010. This is because the Arab nation is now making hectic efforts to revive from its conflict ridden past. A number of projects have been established in Iraq to revive its war damaged hydrocarbon industries (The Economist, 2011). The refining output in Kuwait increased from about 890,000 barrels per day in 2008 to about 937,000 barrels a day in 2010. Qatar increased its capacity from 137,000 barrels a day in 2008 to 284,000 barrels a day in 2010, which is more than 100 percent enhancement in production capacity. The refining capacity in Saudi Arabia and the UAE remained at 2.1 million and 799,000 barrels per day respectively for the same period. Egypt and Algeria maintained their capacity at 725,000 and 463,000 barrels per day respectively. In Libya, Bahrain, Syria, Oman and Morocco the capacities were 263,000, 241,000, 233,000 and 155,000 barrels per day respectively. In this context, OAPEC has predicted that the combined production capacity of the entire Arab region will increase by over 5 million barrels a day in the coming four years. Most of the increased capacity will be done by Kuwait, Saudi Arabia and UAE, which together hold more than 40 percent of the global oil deposits (Blackwell Research, 2010). According to Longmore (2011), it is expected that the new projects will cost about $100 billion, which will increase production capacity of the Arab states to 12.5 million barrels per day by 2014. The new projects will entail constructing new refineries and expanding the present facilities. They will be designed to comply in meeting the constant growth in internal and global demand for oil. These new projects are slated to increase production capacity by almost five million barrels a day. However, the entire process is weighed down with a number of hurdles and challenges that have the potential to postpone or abandon many of the projects, particularly those that are related to refining activities. Problems relate to funding shortages and low rates of return on investments in view of the fact that refining activities mostly do not give good profits. Additionally, considerable uncertainty prevails relative to the energy market because of ambiguity in the international demand for refined oil products that occurs due to lack of clarity amongst most oil consuming nations about forecasts relative to future demand (Galal and Hoekman. 2003). As per OAPEC, Arab nations have to constantly confront problems from developed nations that are constantly attempting to find new sources and means of alternative energy and fuel with the objective of decreasing their dependence on imported fuel. Another major challenge is the significant fluctuation in the cost of establishing refining facilities. Such developments have made Arab nations to continually reassess the costs. In fact, the situation became worse because of the global financial crisis because it led to apprehensions amongst investors that sought to invest in such projects. However, despite the problems, studies have showed that the total output of Arab nations from a total of about 65 refineries has been increasing consistently; from 7.2 million barrels per day in 2008 to 7.9 million barrels a day in 2010 (OAPEC, 2010). The role of NOCs and IOCs in developing production Both NOCs and IOCs are desirous of working together in expanding the oil industry in the Arab region. NOCs are in need of technology, management expertise and investment capital. IOCs require accessibility to oil reserves and are always on the lookout for their next investment venture. Actually, both IOCs and NOCs have difficulties in finding a common cause. IOCs remain frustrated with the joint exercises of the past, while the enhanced confidence of NOCs in their own capacities resulted in both sides questioning the terms of mutual involvements. For instance, the current understanding does not provide IOCs with appropriate benefits in developing resources to achieve long terms advantages for the country in which they operate. In contrast, they have been adopting practices whereby they have not actively involved NOCs in the administration of the given resources. The current investment arrangements have not facilitated both groups in aligning their interests. It is required for IOCs and NOCs to reframe working systems whereby they work together for each others’ benefits. Options pertain to IOCs operating as incorporated service providers relative to global alliances across the supply chains. There is need for new arrangements and systems that provide solutions to the emerging patterns that continue to shape the characteristics of the oil and gas sector in the region. A noteworthy development in recent years has been the distortion of the two categories because with the introduction of high profile initiatives, many NOCs have commenced challenging the IOC relative to their territories of entering politically risky initiatives. It is now difficult to confine NOCs within their respective nations and many of them do not restrict their involvement to just production and sale of crude. They are now increasingly involved in international operations, while IOCs have started offering new range of services in catering to the needs of producers. IOCs and NOCs are both are adopting changes but they do not appear to understand the changes that are impacting the other (Marcel, 2007). The arrangements of collaboration between IOCs and NOCs can be discerned from their participation in the large number of industry conferences. During such meetings, both IOCs and NOCs express their intentions of finding ways of partnering with each other but the fact remains that they always find some complexities in having a common working framework. In this context, the issue that arises is whether IOCs and NOCs actually require partnering with each other. Firstly, IOCs are in need of accessing equity, good returns, benefits for recovery and opportunity to repeat investments. But it is known that IOCs have access to only a limited part of the reserves in the region because almost 60 percent of oil reserves are currently under the control of NOCs. Consequently, some oil producers such as Saudi Arabia and Iran are not able to ask for bids from IOCs. In order to have more practical expectations of return, producers wish to have major oil companies to enhance their price expectations that are close to OPEC price offerings. This is because conservative or bullish price expectations directly influence profit estimates relative to investment proposals. Still, some IOCs have been accepting less satisfactory conditions for the short term so as to develop relationships, which they anticipate will provide them accessibility to better long term returns. As per research carried out by Valérie Marcel (2007), NOCs wish to have technology, management expertise and capital. Countries in the Arab region have been ranking these priorities differently and some companies such as Aramco have not expressed such needs so far. Most NOCs want to have the experiences relative to technology as well as management expertise to manage operations effectively. They also need assistance from IOCs to make use of on field and sub surface management. The author was informed by managers at the Kuwait Petroleum Corporation that it needs to develop managerial competence in order to get better returns on investments. Sonatrach from Algeria expressed its need to get help from IOCs in securing its oil reserves in isolated regions of the country. IOCs have the ability to manage efficiently on a large scale even in the face of logistics and technological challenges. In addition, they impart training in areas such as financial engineering, risk management and strategic management. NOCs need to have investment capital because their financial relationships with the government may be such that the need for capital is ignored or sacrificed in meeting the state’s budgetary requirements. This pattern is particularly characteristic of Algeria and Iran. The need for capital is considered very important because increasing demand for oil coupled with economic slowdown in many developed nations means higher investments are required to enhance production capacity. Countries such as Saudi Arabia, Algeria, Kuwait and Iran are having ambitious plans for enhancing capacity. Big national oil companies such as ADNOC, KPC and Saudi Aramco have the ability to fund their own projects only till the time that their capital is not touched by short term government requirements for financing other programs. Other companies have the option of turning towards IOCs for meeting their capital needs. Many of the NOCs are not free to allow their books to be scrutinized by IOCs unless the state permits them. Countries such as Algeria and Libya had allowed their NOCs to book reserves, which helped them in attracting massive foreign investments. Because of historical and political reasons, countries such as Kuwait, Iran and Saudi Arabia that account for about 43 percent of the world’s oil reserves, do not provide equity stake in their oil companies. This pattern in large companies is well recognized but there is another issue that is not clearly agreed to by investors. Many NOCs believe that it is important to hold on to controlling management functions relative to oil reservoirs. A major problem with the current circumstances is that IOCs will not be interested in working on reservoirs unless they have good benefits for effecting optimal functioning of the facilities. It is believed by many that IOCs prove to be very expensive because they use up resources lavishly. It is also believed that it is the responsibility of NOCs to make funds available to meet the government’s social responsibility needs. After all, this money has to be provided from the profits of the NOCs. Managements of NOCs hold that IOCs are not sensitive to the needs of the country and many national companies have a pride in responding to the nation’s needs. However, with the growing population in the Arab countries, the capacity of the state to fund social programs is also increasing and there is now a declining pattern whereby the government expects too much from the NOCs. A new pattern has emerged whereby NOCs are expected to develop unique programs, resembling those that are initiated by private companies, to effect development of the given region at reduced costs. This is done with the prime objective of enhancing the NOC’s image amongst the public at large (Ramady, 2010). The success of new business models depends upon carefully aligning the objectives, assets and needs of all parties. Both NOCs and IOCs can benefit mutually if they join forces. The complex part is to find ventures whereby both groups provide complimentary advantages on the negotiating table. Another problem relates to the manner in which NOCs and IOCs view one another. Both do not appear to understand each other because of suspicions and frustrations that prevent negotiations from moving ahead. They do not tend to entirely appreciate the extent to which the other has compromised or changed because of which NOCs are reluctant to sign turnkey contracts as they prefer to control the management and development process. If the partnerships between NOCs and IOCs are to be successful they will have to develop new business models that are mutually acceptable. The role of heavy oil and unconventional resources in meeting demand for global oil and gas It is known that the world has a massive appetite for energy and the demand for energy is expected to increase by 30 percent by the year 2040. Although production of renewable and nuclear energy will grow to some extent in meeting this increasing demand, most of it will be continue to be fulfilled through fossil fuels. The opportunities relative to convenient deposits of petroleum will decline, the challenge and cost of fulfilling the massive demand for energy will continue to increase manifold. It is thus required to understand unconventional resources in better ways in relation to the advancements in technology. Undoubtedly, technology has improved and should be able to continue increasing the extent of unconventional energy sources that can be effectively tapped. Such advancements will also improve the viability of such projects and will assist in providing the crucial mass needed in underpinning the massive initiatives. Unconventional resources are expected to provide for a much larger proportion of energy supply in the future. The production of energy from oil sands is expected to result in about 25 percent of the fuel required in developed nations (Norton, 2012). Unconventional petroleum is a new concept that is made possible by new technology in making past unconventional deposits to become more accessible and useful. The potential of using bitumen as a source of energy has for long been recognized, it has been accepted only recently that technological developments and high prices entail making use of recoverable oil reserves in different parts of the world. Investing in such heavy oil projects entails some unique requirements and infrastructure challenges. These projects present new challenges because gas feeds are required if insufficient gas is not available for generating hydrogen and steam that are used in up-gradation of production. Large quantities of water are needed along with solvents or diluting agents to help in recovering bitumen and in enabling piping (Alnasrawi, 2001). Heavy oil is not new because the extraction of bitumen and its use dates back to thousands of years. Oil companies have been producing heavy oil for over a century and presently the high risks associated with oil exploration, challenges of accessing resources, low costs of gas and lesser price disparities have helped in making the recovery of heavy oil a very attractive proposition. In general, heavy oil does not have any phase of exploration because its biggest challenge is for oil companies to extract, produce and market heavy oil under changed economic circumstances and with the minimum harm to the environment. During times when markets are stable, heavy oil resources can generate a constant cash flow for several years. Normally, such fields allow production for more than fifty years. But a great deal of energy is required to produce and upgrade heavy oil and only careful strategies can lead to consistent profitability. Methods of recovering heavy oil comprise of basic production, thermal processes and cold enhanced oil recovery. Which methods to use depend on several factors such as fluid properties and stage of formation and reservoir productivity. Other factors are availability of transport, reservoir geology and the principal economics of oil in the given region (Tolba, 2008). Unconventional oil is understood as petroleum that is produced by using non conventional processes that are eventually not simple. Heavy oil is stored in reservoirs and is trapped in thick sand and it does not mostly flow freely in its natural state. Therefore, the processes of extraction and refining are more complex and involve higher costs. However, because of technology advancement and high prices, oil producers find it profitable because high oil prices have increased the prices of unconventional sources also. With increasing oil prices, realization began to grow that discovering oil was becoming scarce, which made unconventional sources to become attractive. It is because o f this reason that more and more oil companies are choosing to invest greater resources in unconventional supply initiatives. The production of unconventional supplies had increased by four times to over four million barrels per day by the year 2010 (Kawach, 2011). Irrespective of the growth in conventional energy supplies, unconventional supplies are slated to grow exponentially in the coming future. Projections indicate that these supplies will increase by more than 650 percent by 2035 and will form 12.5 percent of global supplies. Given such amazing projections, investors in oil will soon start eying more and more opportunities in the area of unconventional sources. Although this area does comprise of some non petroleum based elements, the majority opportunities will emanate from petroleum based elements. It is expected that by 2035, unconventional sources will be as much as 7 million barrels per day and most of it will be produced from heavy oil and oil sands. The positive thing is that there are massive reserves of both across the entire world (CGES, 2011). The bottom line in this context is that demand for oil will be characterized with only the trend of going up because oil lubricates the engine of global commerce and industrialization. Massive industrialization in Asia has remarkably boosted the demand for oil. Given that the conventional deposits of oil are depleting, the supply chain has come under severe strain and the answer lies in exploiting the economic gains of unconventional sources such as heavy oil and oil sand. Unconventional sources of oil had not been very well known till the recent past. Economic and technology constraints had so far not allowed commercial development of these resources. But innovations and high oil prices are proving to be a major factor for boosting development of unconventional resources. Improving production capacity and environmental challenges For several decades, oil has been the main source of development in Arab nations but this era appears to be nearing its end and the Arab world is not adequately prepared for this change. Oil represents high costs in the region because every year the damage to the environment is growing. It is a fact that environmental protections continues to be low in priority but Arab nations do not have a choice now and they urgently need to protect the environment. There is a strong need to bring together environmental specialists and other private and public organizations to find solutions to the increasing environmental problems. More and more people need jobs but the environment also has to be protected. According to Mona Naggar (2011), the costs in terms of environmental damage because of the oil sector is about $95 billion every year. This accounts for about five percent of the combined gross national product of the entire Arab region. This is because Arab nations have been depending on oil for very long and environmental damage is now amongst the main problems faced in the region along with issues relative to unemployment and poverty. However, there are some good examples of economies that are environment friendly, such as Abu Dhabi that has instituted the Masdar project, which is a planned carbon dioxide neutral hi tech township. Jordan, Egypt and Lebanon have established projects that use geo-thermal energy and biologically organic agricultural practices, but overall, sustainable development is something that is still in the infancy stage in the Arab world. There is a strong need to introduce effective environmental measures in waste and water management. Presently, of the 80 percent waste that can be recycled, only five percent is recycled and the remaining is burnt or buried. Regulation should be introduced in adhering to minimum standards in this regard by making consumers and producers responsible. Additionally, extensive educational programs should be introduced to educate people about environmental practices such as recycling, composting etc. These practices are currently not being implemented vigorously in the region. It is suggested by experts that the foremost step to be taken in this regard is to lift subsidies relative to water, electricity and fuel and the saved money should be used for creating a green economy and for providing capital to carry out research and to create green jobs. Demographic and population pressures have the potential to enhance demand for crucial resources such as agricultural land, water and energy in Arab countries. Because of scarcity of natural resources the chances of economic stagnation increases, which can lead to mass migration of people. Therefore, there is a need for developing patterns that resolve complexities arising from the issue of sustainability. It is important to ensure human security and growth in the region. It is known that Arab nations have not demonstrated a high level of environmental involvement that is in keeping with safeguarding the security of the environment. It is thus required to develop and implement a sustainable environmental strategy on a national basis. Water scarcity is amongst the most crucial challenges for Arab states that can be met by adopting appropriate water resource management principles relative to demand and supply. In regard to the oil industry in the Arab region, it is known that because of the nature and scale of oil operations, there is immense risk for the environment to be adversely impacted. In comparison to conventional operations, oil operations require excessive use of water and greater amounts of energy. The development of unconventional sources of energy in the Arab nations is not without controversy. They create greenhouse gases and entail high costs to remediate the extraction areas. Conclusion Water and air emissions have an adverse impact on human health and the environment and for several years, the oil industry in the Arab region did not give importance to this issue. No action was taken to find remedies to the given issues although the oil industry in the region has now become responsive to issues arising from environmental concerns. Governments in the Arab region have now begun to work in coordinated ways to resolve the given issues. There have been considerable improvements in regard to greenhouse gases and emission levels. The oil industry has been involving in different ways to reduce emissions through the use of better technology relative to flue gas desulphurization, sour water treatment and low nitrogen oxide burners. In all, there is considerable improvement in reducing greenhouse gas emissions although the extent of emissions has been increasing over the years, which means that over all, the emissions have not been reduced. The present environmental focus should be on developing an effective monitoring system for oil operations in ensuring that accurate information is compiled for making relevant plan decisions.   References Alnasrawi, Abbas. 2001. Arab Nationalism, Oil, and the Political Economy of Dependency. Greenwood Press. Blackwell Research. 2010. Oil and Energy Trends. http://www.oilandenergytrends.com/ger/ger_opec.asp, Accessed on 3 March, 2012. CGES. 2011. Is OPEC’s spare capacity adequate? Global Oil Insight Emirates 24/7. 2011. Arabs repeat calls for oil demand security, http://www.emirates247.com/business/energy/arabs-repeat-calls-for-oil-demand-security-2011-09-24-1.420198 Galal, Ahmed., and Bernard Hoekman. 2003. Arab Economic Integration: Between Hope and Reality. 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