The Seventh Arab Energy Conference

VOL. XLV

No 21

27 May 2002

OPEC

The Seventh Arab Energy Conference

MEES Editor Walid Khadduri reports on the 7^th Arab Energy Conference, held in Cairo on 11-14 May.

The message that dominated the ministerial opening session of the 7^th Arab Energy Conference was that Arab oil producing countries are intent on ensuring secure oil supplies and have no intention to disrupt exports, while at the same time confirming their full support for the Palestinian struggle against Israeli occupation. The other themes of the conference, that is held once every four years and is attended by around 300 officials and experts from the Arab countries along with foreign participants, include: developments in international energy markets and their impact on Arab countries; regional energy supply and demand; future prospects of Arab downstream industries; the financing of local oil and gas projects; R&D in the petroleum industry and environment; and Arab cooperation in oil, gas and electricity. The sponsors of the conference were the Organization of Arab Petroleum Exporting Countries (OAPEC); the Arab Fund for Economic and Social Development (AFESD); the League of Arab States; and the Arab Industrial Development and Mining Organization. The next conference will be held in 'Amman, Jordan in May 2006.

Global Energy Developments

Robert Mabro (Director of the Oxford Institute for Energy Studies – OIES) assessed the outlook for supply, demand and prices for oil and gas until the year 2015, and drew the conclusions for the Arab countries. The paper argued that while demand for oil and gas will continue to grow, the path will not be smooth because much will depend on the rate of global economic growth which means “that the demand for energy will be as cyclical as the world economy.” The paper concluded that despite the oil wealth, the economic conditions in the Arab world today were more critical than in the previous two or three decades and urged Arab governments to exert more effort to mobilize their resources during the years ahead “when the exclusive dependence on oil revenues will become increasingly unreliable.” Prof Mabro summarized the main arguments of the study as follows:

· Both private and national oil companies face crises, albeit of a different nature, which have a bearing on the future structure of the industry.

· The political nature of oil, a permanent characteristic, has gained significance following the accession of George W Bush to the Presidency of the US, and further importance after the events of 11 September 2001. This may induce the adoption of energy policies in the west that are inimical to the interests of Middle Eastern oil and gas producers.

· The oil price shock of 1998 has caused OPEC and non-OPEC producers to coordinate more efficiently their production policies and display greater solidarity in order to avoid another episode of very low revenues. Yet OPEC has not fully succeeded in stabilizing prices around a preferred level. Fundamental re-assessments of approaches and policies, and the allocation to the policy-making task of greater human resources, are needed to cope with current and future challenges.

· The influence of environmental concerns on the design of energy policies is likely to increase as progress is made on international agreements that followed the Kyoto protocol. There are, however, major uncertainties over how significant this influence, even if it increases, is likely to be in the next 10 or 12 years.

· World demand for oil and gas will continue to increase in the years to 2015 but the growth path, as in the past, will not be smooth. The main determinant of oil and gas demand will continue to be the rate of economic growth in the world which means that the demand for energy will be as cyclical as the world economy. The average trend rate of demand may slowly decline in the latter part of the period as a result of energy efficiency.

· Similarly, the oil and gas supply path will not be smooth. From time to time capacity limitations will manifest themselves, not because of geophysical scarcity, but because of insufficient investment or political crises. Changes in supply patterns are likely to be significant, with new production coming on stream in Russia and the Caspian, for example, and production declining in other parts of the world. Production patterns are also likely to change within the OPEC region.

· The occasional mismatch of the oil supply and demand curves will result in significant price fluctuations over the longer period while short-term price volatility will continue to characterize petroleum markets. Stabilization requires agreements between the main players (exporting countries, consuming countries and major oil companies). Such agreements are unlikely to be reached.

· The Arab world faces today the same challenges as it did in the early 1970s when the oil price revolution produced ephemeral wealth. The message delivered by different authorities in all the Arab Energy Conferences remain not only as valid today as it was almost 30 years ago but has become more urgent. The message is that economic development objectives should be given greater and greater priority. The economic, financial, political and demographic situation of the Arab world is more difficult today than it was in the 1970s and early 1980s. The task is therefore more challenging. Governments need to mobilize the courage and the resources of imagination, skills and creative intelligence to promote policies that will secure the welfare of their citizens in the years ahead when the exclusive dependence on oil revenues will become increasingly unreliable.

In his comment on Prof Mabro’s paper, Adnan Shihab-Eldin (OPEC’s Director of Research) stated that the principal task facing Arab oil exporters “is to ensure that they can meet the steadily increasing levels of world demand in a timely and adequate manner.” This means, according to Dr Shihab-Eldin, that there must be sufficient but not excessive production capacity at all times, and that production capacity decisions “should not adversely affect market share.” The OPEC official estimated total required investment in the upstream sector globally at around $70bn per year up to 2020, with investment in the OPEC states alone put at $10bn annually, a fact which requires opening-up and cooperation with the international oil companies (IOCs). At the same time there was a “need for producing countries to ensure that they continue to exercise their full sovereign rights over their indigenous resources,” and that “care must be taken to ensure that partnerships with private investors do not undermine the legitimate role of national oil companies (NOCs).”

Domestic Demand

Energy consumption in the Arab countries increased from 700,000 b/doe in 1970 to 4.37mn b/doe in 1989 and 6.57mn b/doe in 2001, according to a paper by OAPEC’s Economic Department, which put the average energy consumption growth at 12.75% during the 1970s, 5.04% during the 1980s and 3.49% during the 1990s for an annual average of 7.4% during the period 1970-2000. Although petroleum products continue to be the primary source of energy in the region, their share is gradually decreasing in favor of natural gas. According to the OAPEC paper, petroleum products contributed 69.5% of total consumption in the 1970s, 66.8% in the 1980s and 56.4% in the 1990s, while natural gas’s share was 23.8%, 29.4% and 39.7% respectively.

Forecasting Arab energy demand until the year 2015, the OAPEC paper projects demand will rise from 6.57mn b/doe in 2001 to 7.97mn b/doe in 2010 and 9.1mn b/doe in 2015 – or an average annual growth during the period of 2.37% (see Table 1).

Table 1

Projected Energy Consumption in the Arab Countries

(Mn B/Doe)

					Average Growth (%)
Countries	2001	2005	2010	2015	(2001-2015)
OAPEC States	5,910.8	6,387.8	7,169.9	8,231.1	2.36
Non-OPEC States	660.4	717.6	807.4	926.9	2.40

Total Arab Countries	6,571.2	7,105.4	7,977.3	9,158.0	2.37

Source: OAPEC.

Investment Requirements in the Petroleum Sector

The OAPEC-sponsored Arab Petroleum Investments Corporation (Apicorp) presented a comprehensive survey of projected investments in the Arab upstream and downstream sectors during the period 2002-2006 (for Apicorp’s earlier report on investments during the period 1998-2003, see MEES, 25 May 1998). The paper, given by Apicorp’s Chief Executive and General Manager Rashid al-Mu'raj, also surveyed project financing in the Arab oil and gas industry, particularly the role of regional banks and financial institutions.

Apicorp estimates total investments required for oil, gas, refining and petrochemical sectors in the Arab countries during the period 2002-2006 at around $84bn, of which $21bn will go for increasing oil production capacity (25% of the total), $36bn for the gas sector (43%), $7bn for refining (8%) and $20bn for petrochemicals (24%) – Tables 2 and 3. Apicorp projects that commercial financing will provide approximately $35bn, or 42% of the total amount of funds needed, and that on the basis of the experience of the past five years, Arab financial institutions will provide around $10-15bn, or 30-40% of the funds to be extended through commercial financing.

Table 2

Projected Financial Requirements for Maintenance and Expansion of Arab Oil Sector, 2002-06

($Bn)

	Cost of Maintenance	Cost of Expanding
Country	of Available Capacity	Capacity	Total Cost
Saudi Arabia	9.3	5.2	14.5
Iraq	2.5	3.0	5.5*
Kuwait	2.3	0.9	3.2
UAE	2.8	2.1	4.9
Qatar	1.0	0.1	1.1
Algeria	2.7	3.0	5.7
Bahrain	0.1	-	0.1
Egypt	1.1	-	1.1
Syria	0.9	-	0.9
Libya	2.5	4.5	7.0
Tunisia	0.1	-	0.1
Oman	1.5	0.2	1.7
Yemen	0.8	0.7	1.5
Sudan	0.2	1.1	1.3

Total	28.8	20.8	49.6
________

* Inclusive of rehabilitating the production capacity and raising it to its previous level and assuming the lifting of the UN

sanctions.

Source: Apicorp.

Table 3

Projected Investments in Arab Gas, Refining and Petrochemical Projects, 2002-06

($Mn)

Country	Natural Gas	Refining	Petrochemicals	Total
UAE	3,400	900	-	4,300
Jordan	400	-	-	400
Bahrain	-	600	-	600
Algeria	5,050	-	2,930	7,980
Oman	980	870	2,060	3,910
Syria	200	500	-	700
Saudi Arabia	5,000	1,500	5,085	11,585
Qatar	9,390	400	2,800	12,590
Kuwait	-	126	3,500	3,626
Lebanon	-	300	-	300
Libya	4,500	550	400	5,450
Egypt	7,600	600	2,980	11,180
Morocco	-	500	-	500
Yemen	-	350	-	350

Total	36,420	7,196	19,755	63,371
__________

Regional projects were incorporated in the producing country figures.

Source: Apicorp.

In his prepared remarks on the Apicorp paper, Majed al-Moneef (Advisor to the Saudi Minister of Petroleum and Mineral Resources) was critical of studies that inflate future world oil demand and the projected investment needs to increase Middle East production capacity to meet this assumed demand. As for the survey on investment in gas and refining, it was based on projects already under way, so the estimates were more exact, Dr Moneef said. He also pointed out that the Apicorp paper projected estimates for export-oriented gas projects at $22.6bn, compared to $14bn for domestic use, hence raising several challenges for the financing of investments, since commercial financing would meet 55% of the cost.

Among the challenges that Dr Moneef listed was the raising of capital, investment appraisal and project finance, as well as the particular financing of the interrelated projects in the gas chain (E&P, development, liquefaction, transportation, re-gasification, and connection to power, desalination and petrochemical plants). Some of these projects, he said, were interrelated through long-term supply and price agreements. At times, a gas chain had one or more sponsor, and sometimes particular projects in the chain needed separate financing. This necessitated detailed agreements and contracts concerning the rights and responsibilities of each party. Another challenge was related to the degree of risk – in the state, in the industry or in the project itself.

A further challenge, according to Dr Moneef, relates to the different perspectives towards investments adopted by oil companies, power firms and banks. Oil companies use internal rates of return or present net value for the cashflow of the project by way of a discount rate and a risk premium. Power companies use RoE as a yardstick, while banks look at their loan portfolios, liquidity and other factors. These differences complicate the legal and financial aspects of projects. Dr Moneef listed a final challenge – relating to gas projects for domestic consumption where there is need to restructure local energy prices to reflect marginal costs and the mechanism to receive payments from the end-users. Putting together the necessary regulation covering all these aspects, he said, was very important.

Finally, Dr Moneef touched on the side-effects of petroleum investment, particularly on support services. “We in Saudi Arabia estimate that every $1bn invested in the oil, gas or petrochemical sectors generates indirect investment of around $300mn in the form of plants and support industries. Every job in a core industry creates four jobs in the service industries.”