Comparison and Contrast of Oil Industry in GCC Countries - Report Example

GCC oil industry Kuwait oil industry Kuwait is the 12th largest oil producer and 6th largest in terms of oil reserves in the world. Kuwait has 102 billion oil reserves and the government controls the oil development sector with a production of 4 million barrels of oil daily (Fromherz, 62). In 1920s, Kuwait depended on the pearl industry that was declining and Sheikh Ahmad Al-Sabah wanted to emulate the oil discoveries in the neighboring countries such as Saudi Arabia and Bahrain (Falola and Genova 87). The ruler was confident that surface deposit discoveries in Bahrain in 1932 were an indication of the precious commodity in Kuwait. Kuwait Oil Company was formed in 1934 to carry out offshore surveys, onshore surveys and oil exploration (Fromherz 51). The first crude oil export shipments were commissioned by Sheikh Ahmad Al-Jaber Al-Sabah in 1938 after commercial quantities were discovered in Burgan field. America’s Independent Oil company (Aminoil) received 60-year concession for oil exploration and production in 1948 in the Neutral Zone and later joined hands with Getty to start exploration and struck oil in 1953 (Falola and Genova 79). The increased exploration led to the expansion of export facilities in North and South Piers, Sea Island and Single Point Mooring and Kuwait Government decided to take 100 percent control of Kuwait Oil Company in 1975 and formed Kuwait Petroleum Corporation in 1980 (Fromherz 107). A turning point of oil industry in the country came in 1990 when Iraq invasion damaged oil facilities in the country thus bring the oil production to a halt. However, production resumed in 1991 (Zuhur 178). In the recent years, Kuwait discovered oil in Sabriya field in 2005, Jurassic reservoirs at Mutriba, Rahiya and Um Niga fields and successfully reduced gas flaring to about 1 percent. Oman oil industry Oman is not a member of OPEC, but is one of the GCC countries in the Middle East and its oil and gas industry accounts for 40 percent of the country’s gross domestic product. Intensive oil surveys in neighboring countries encouraged Oman to start geological surveys in 1925. The first oil concession was granted in 1937 by the Sultanate of Oman to Darcy, and later transferred to Petroleum Concessions Company Ltd, an affiliate of Iraq Oil companies group. The City Services company drilled the first oil well in Oman in 1955 and Petroleum Development company of Oman (PDO) drilled the first well 1965 thus signaling the onset of oil production in the country (Vassiliou 326). However, commercial oil fields discoveries started in 1962 with the discovery of Natih and Fahud oil fields. Oman started building export pipeline in 1964 to Fahal Port in Muscat and the first exports were made in 1967. The new of new agreements to explore oil fields has increased tremendously over the years to about 135 agreements in 2009. Significant growth occurred after the government acquired 60 percent shareholding in PDO and production rose to about 400,000 barrels per day in the 1980s.The subsequent decline in production volumes in late 1980s was occasioned by diminishing new reserve discoveries, lack of new technologies and need to invest in gas industry (Zuhur 175). The country has invested heavily in expanding oil exploration through encouraging foreign investments, investing in the electric power industry and improving the infrastructure. Oman has signed a free trade agreement with US and become a member of the World Trade Organization in 2000. Oman exports almost 95 percent of its oil to Asian countries such as China and has not attained net exporter status of the refined oil due to lack of enough refinery services (Ham, Brekhus and Madden 142). In 2013, the proven oil reserves were estimated at 5.5 billion barrels and Southern Oman Salt basin has the potential of producing over 900,000 barrels of oil daily. Petroleum Development Oman (PDO) is the leading hydrocarbon exploration company and accounts for more than 90 percent of the crude-oil production (Fromherz 59). The government owns 60 percent stake while Royal Dutch Shell owns 34 percent stake and the Total has 4 percent with the other 2 percent being owned by Partex. The oil industry in the country has attained a maturity stage and the country must focus efforts in production-recovery techniques or diversify in to liquefied gas industry (Vassiliou89). Qatar oil industry As early as 1922, Major Frank Holmes, had interest in Qatar oil resources and his meeting with Qatar’s Sheikh Abdullah Bin Jassim al- Thani did not yield any exploration plans since British colonial office had banned all oil ventures in Qatar (Shoult13). The interest in Qatar oil industry was renewed by discovery of oil in Bahrain by Standard Oil Company of California. After years of wrangling between Qatar ruler, British and American companies, an onshore oil concession was granted to AngloPersian Oil company in 1935 and later transferred to Petroleum Development (Qatar), an affiliate to Iraq Petroleum company. Exploratory drilling started in 1938 and later oil reserves were discovered in West Coast. In 1940, Qatar produced about 4,000 barrels per day, but the onset of Second World War halted the oil drilling until 1949 when oil exports resumed. In 1952, Royal Dutch Shell subsidiary was awarded a concession for offshore exploration and oil fields were discovered in Halul, Idd ash Sharqi (1960) and Maydan Mahzam (1963) and offshore oil production started later in 1964. Between 1960 and 1970, the country experienced double increase in the annual oil production from 60.4 million barrels to about 165,00 million barrels (Vassiliou 217). After independence in 1971, Qatar National Petroleum Company was formed in order to handle oil operations and the oil industry was ultimately nationalized in 1977 and previous service contracts given to the former concessionaries. The production peaked in the late 1970s and early 1980s to 520,000 barrels per day due to demand for revenues and need for economic expansion in other sectors (Ham, Brekhus and Madden 94). In 1991, Qatar Petroleum upgraded oil production facilties and in Dukhan filed and carried out similar works in offshore Bul Hanien and Maydam Mahzam fields. Qatar remains the world’s largest producer of liquefied natural gas (LNG) and also exports crude oil and petroleum products. Currently, Qatar produces about 1.6 million barrels of liquid fuels daily and similar aount of oil barrels per day. UAE oil industry United Arab Emirates (UAE) is a member of the OPEC and 10th largest oil and natural gas producer in the world. UAE is made of seven federations that include Dubai, Ras al Khaymah, Sharjah, Abu Dhabi, Ajman, Al Fujayrah and Umm al Qaywayn (Darraj and Puller 16). The UAE was a later starter in oil exploration due to the outbreak of the Second World War in Gulf region in 1939 (Darraj and Puller 18). The British oil companies played critical role in oil industry in UAE and most Sheikhdoms including Bahrain had to seek approval of oil exploration from British authorities who residented in Bahrain (Vassiliou 208). A 75-year concession to explore oil in Abu Dhabi was awarded to Petroleum development company, a subsidiary of Iraq Petroleum company that comprises of joint venture of major oil companies such as Shell, Total, BP and Mobil. Abu Dhabi Marine Areas (ADMA) initially owned by British Petroleum was the first to discover commercial quantities of oil in 1958 at Umm Shaif close to Das Island (Abed 33). Other fields such as Bab oil field were discovered the same year and first shipments from Das Island started in 1962 (Tetreault 126). In 1962, UAE produced 14,200 barrels per day and production quickly jumped to 186,800 barrels per day by the year 1964. Zakum off shore oil fields were discovered in 1965 by Zakum Development Company. A third concessionary (Abu Dhabi oil Company) was established in 1968 and discovered oil in 1969. In 1970, the government acquired majority shareholding in main oil companies (Shoult 93). Hydrocarbon exports account for more than half of the country’s exports and almost 80 percent of the government revenues. UAE is currently engaged in $ 1.6 billion program that aims at developing infrastructure in poor cities in order to boost oil exploration, refinery and investments in those cities (Vassiliou 98). Abu Dhabi accounts for more than 90 percent of UAE’s oil production, but the country has diversified in to other sectors such as tourism, hospitality, finance and transportation (Tavern 107). The economic environment allows for 100 percent foreign ownership of enterprises, free profit repatriations and minimal taxation thus encouraging foreign direct investments. Comparison and contrast of oil industry in GCC countries The Gulf Cooperation Council (GCC) countries have similar structural economic features such as high dependency on hydrocarbons in their export revenues. However, countries like Saudi Arabia and UAE have diversified their economies to other emerging sectors such as tourism, steel industry, textile industry and fertilizers (Shoult 82). The oil industry across all countries is characterized by nationalization of the leading companies and high dependency on expatriate labour for exploration and refinery (International Monetary Fund 67). The similarities in the oil industry across the GCC countries require reduction in the hydrocarbon sector and significant investments in the private sector in order to reduce dependency on the dwindling oil reserves (Oxford Business Group 122). The GCC countries have attained consistent GDP growth rate of about 7 percent over the recent years and non-oil GDP growth has been impressive in certain countries. The GCC countries have encountered inflationary pressures due to dynamic credit and monetary growth and some countries have resorted to prudential and administrative measures to curb the growing inflation. Iraq holds the second largest proven oil reserves in the world and its current production is estimated at about2.8 million barrels per day and its average annual revenues from the sector are estimated at $ 89 billion. Oil production in Iraq is centered on three fields that include North and South oil field, and Kirkuk and Ministry of Oil takes a key role in exploration and production. Saudi Arabia is the largest of all GCC countries with a population of about 24 million people which is almost half of the total GCC population. The other countries are considerably smaller since the second largest is UAE with a population of about 5 million inhabitants with foreigners accounting the majority of the residents in the country. However, Qatar has the highest purchasing power parity at USD 36,600 followed by UAE at 34, 100 and Saudi Arabia has the lowest at USD 16, 500 (Vassiliou 78). However, it is worth noting that GDP per capita increased in all GCC countries over the last five years with Qatar registering the highest increase of 42 percent in terms of purchasing power parity. Saudi Arabia is still the world’s largest oil producer with about 8.75 million barrels per day as of 2007 and Kuwait and UAE are among the ten top oil producers in the world. Saudi Arabia has more than half of all proven oil reserves in GCC countries and accounts for fifth of the global proven oil reserves (Oxford Business Group 88). Iraq has high proven oil reserves, but relies heavily on oil revenues since it finances two-thirds of its budget with oil revenues. Iraq’s GDP is estimated at $ 242.5 billion and economic growth rate stands at an average of 8 percent annually while the GDP per capita income is at low of $ 7,500. Iraq has a high political risk due to ethnic tensions, terrorism organizations and geopolitical tensions with Iran and Kuwait and must strengthen its re4lations with neighboring countries. In this case, it is clear that Iraq must diversify in to related industries such as chemicals, textiles, construction materials and food processing. Indeed, Iraq must strengthen partnerships with main trading partners like the United States and India and adhere with its international law in order to avoid trade embargos that have crippled the sector since the Iran –Iraq War during the 1980s. On the contrast, Bahrain has started economic diversification in to financial and transport services while UAE has diversified its economy in to tourism sector (Tasneem 71). Saudi Arabia has a focus on the manufacturing sector while Qatar remains focused on hydrocarbons production. Oman offers favorable foreign investment destination and is focused in growing the manufacturing and tourism sector (Sassanpour 43). The GCC countries will continue to play critical role in meeting the growing global energy demand for crude oil unless the destination markets such as Europe and North America invest heavily in alternative energy sources such as biofuels and synthetic oils (Aldosari 34). Almost all the GCC countries have established free trade agreements and are currently integrating with the global economy through membership in regional trade blocs and World Trade Organization (WTO). SWOT (strengths, weaknesses, opportunities and threats) analysis of oil industry in GCC countries Strengths weaknesses Opportunities Threats Kuwait High standards of living and accounts for 9 percent of global oil reserves, High country credit rating and democratic system of governance that has allowed women to participate in political process, Solid baking system and ratification of United Nations anticorruption agreements that has increased investor confidence in the oil industry (Aldosari21). Significant overreliance on oil industry and lack of economic diversification , Restrictive labor regulations and mismatch in the educated and skilled workforce to work in the oil industry (Cordesman 18). Inefficient law making bodies and centralization of the economic policymaking, Foreign ownership restrictions and distortive taxes that hinder competition (Ehteshami 68). The country can attain competitive edge through investing in exploration and refinery infrastructure , The country can diversify in to other related industries such as manufacturing, finance and transport (Cordesman 22). Unstable political environment in the Middle East region, Possible increase in oil industry business costs due to emerging terrorism threats and Syrian conflicts (Gause and Centre 45). Oman Favorable business environment that encourages foreign ownership and free trade agreements with major importers like the US (Spilsbuy and Spilsbury 113). Dwindling oil reserves and thus country is relying on tourism and natural gas (Ehteshami 74). The country should diversify in to related industries such as manufacturing, electrical and tourism (Kechichian 65). High terrorism threats and possible spill-over of conflicts in Iran and Syrian in to the country Qatar The country has limited oil production since it accounts only 1 percent of global output The country is still ruled by Sheikh Abdullah bin Khalifah Al Thani monarchy, Crude oil and natural gas account over 80 percent of exports The country can diversify in to textiles, cement and fertilizer industries Declining domestics skills in the oil industry and overdependency on expatriates Saudi Arabia Has world’s largest proven reserves and largest OPEC oil producer, The kingdom has invested heavily in infrastructure and has undertaken measures to diversify the economy to petrochemicals and steel industry, Lack of skilled domestic workforce to work in the industry and high population of the country that has put pressure on oil reserves The country should train its own workforce, invest in high drilling technology and diversify to other sectors like manufacturing Overdependency on expatriates, Increased threat of terrorism and geopolitical conflicts Bahrain Limited proven oil reserves The country can diversify to other sectors such as food processing and building materials Political instability in the region (Gause and Centre 48). United Arab Emirates High economic diversification and attractive foreign investment climate, Efficient infrastructure and tourism destination opportunities, 90 percent of oil reserves are located in Abu Dhabi , The country has low-skilled workforce The country should invest on infrastructure and continue diversification program to other sectors such as tourism Possible political conflicts and decline in global crude oil demands to emergency of renewable energy sources like biofuels Iraq Iraq is the second world’s largest in terms of proven oil reserves with high grade crude oil, The change in Iraq constitution in 2005 has attracted several foreign players that have negotiated production sharing agreements, The country has maintained steady oil production volumes annually after the infamous Iraq invasion of 2003, The powerful oil workers unions have strongly opposed the de-nationalization of the industry, Crude oils account for over two-thirds of the GDP, Export infrastructure bottlenecks The country must ensure a stable political environment, The country must invest heavily in infrastructure and modernizing the production process and diversify the economic activities , The country must sign delineation agreements on the shared oil fields with Kuwait and Iran in order to avoid future military confrontations High political instability and possible terrorist threats that may hinder oil production, Economic sanctions that will hinder the country’s ability to export to lucrative foreign markets like the US, Possible internal conflicts due to ethnic tensions between the two main clans and instability in the neighboring Syria Conclusion The GCC countries contribute immensely to the global oil industry. The main objectives of the GCC countries are to foster technical and scientific progress in oil industry and encourage the cooperation of private sector. The countries are committed to formulation of similar rules in the supporting fields of finance and customs, and have gone further to establish joint research ventures and are at advanced stages of implementing a common currency. GCC countries account for about 40 percent of global oil production and supplies 19 percent of the oil exports to countries in Europe, Asia and Africa. The GCC countries are all characterized by high dependency on the oil industry and low-skilled domestic workforce since most of the oil exploration , drilling and refinery companies are foreign multinationals. The oil reserves in some countries such as Bahrain and Oman have declined thus forcing the countries to diversify in to other sectors of the economy. Iraq relies heavily on oil revenues to finance it budgets and has limited export infrastructure. Oil sanctions against Iraq have hindered mass exploration and production. Iraq faces high threat of terrorism-related activities and internal activities that may disrupt oil production thus the country must focus efforts in diversification of the economic activities. The GCC countries have experienced sustained economic growth, high foreign exchange reserves and increase in the purchasing power parity over the past few years. Accordingly, the countries have started economic diversification programs in to other sectors such as manufacturing, steel industry, tourism, and building industry in order to avoid overdependency on the declining oil reserves. The GCC countries are committed to global economic integration as evidenced by the signing of various free trade agreements and forming a favorable business environment that encourages foreign investments. However, most of the countries are ruled by monarchies thus making enforcement of contracts and participation of private sector difficult. In addition, some countries have high political risk due to emergency of terrorism related threats and geopolitical conflicts such as Syrian and Iran ethnic conflicts in the Gulf region. However, the GCC countries will continue to dominate the global oil industry if crude oil destination markets such as North America and Europe do not aggressively invest in renewable energy sources like biofuels. Works cited: Abed, Ibrahim. United Arab Emirates: a new perspective. London: Trident Press. 2001. Aldosari, Ali. Middle East, Western Asia and Northern Africa. New York: Marshal Cavendish. 2007. Cordesman, Anthony. Saudi Arabia enters the twenty-first century. London: Praeger. 2003. Darraj, Susan and Puller, Meredyth. United Arab Emirates. New York: Chelsea House. 2009. Ehteshami, A. 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