Dec 18, 2001
Major non-Opec crude exporters - Russia, Mexico and Oman - have announced their intention to tighten their taps but the size of the reduction still falls short of Opec's demand. Norway said yesterday that it would cut its output by 150,000 bpd, about five per cent. Markets are expected to become more jittery as the deadline for the cuts draws closer.
Experts, however, see room for a compromise as a price war could have damaging effects on all producers.
''It is like a tug of war, a muscle-flexing game or, in other words, a psychological war,'' said Dr. Manouchehr Takin of the London-based Centre for Global Energy Studies, which is owned by former Saudi oil minister Sheikh Ahmed Zaki Al Yamani.
''It is like who gives in first...it appears both parties are bluffing because both of them do not want a price war... we expect them to reach a compromise that could include cuts but not as much as they are looking for.''
Gulf oil sources believe GCC oil ministers will recommend production cuts at the December 30-31 GCC summit in Muscat.
The recommendation will be based on the fact that the oil market will grow by only half a million bpd next year because of the slowdown in the global economy following the September 11 attacks on the U.S.
aThe GCC leaders will reaffirm their commitment to oil market stability but will stress again they want fair prices to avert another economic crisis,'' one source said.
''I expect them to extend an olive branch to producers and consumers but it will be veiled with a threat that the market stability must be the responsibility of all.''
Experts said that in the unlikely event of a prolonged price war, oil prices could collapse to below $10 a barrel. While oil companies in Russia and other producers will be hurt, the impact will be stronger in the Gulf producers given their heavy reliance on crude sales.
The budgets of the six GCC states are already reeling under deficits and sharp spending cuts mean lower allocations for education, health and social services as well as salaries for civil servants.
Since lowering such allocations is unlikely, development spending will be the main victim and this will be at the expense of growth.
The oil market is already suffering from the repercussions of the September attacks, with prices losing nearly $5 so far.
The decline is set to depress the revenues of Opec, including its four GCC producers, by around 19 per cent to $197 billion this year and the income will further sink to $167 billion in 2002, according to estimates by the U.S. Department of Energy.
''The decline in the oil revenues for two consecutive years will complicate efforts exerted by several Opec members to deal with their rapid population growth and tackle public debt and deficits in their budgets and current accounts,'' it said in a report.
BIBA held its 82nd business meeting on the 8 November 2000 at the Institute of Directors. The tenth business meeting of the year was dedicated to ‘Technology.’ The panel discussed business opportunities in technology specifically application of next generation of micro-processor, clean fuel production and industrial manufacturing.
The panel of speakers consisted of Dr Saeed Zahedi and Dr Namdar Baghaie. It was chaired by Dr Esmail Karimi.
Dr Namdar Baghaie is a Biotechnology scientist Assistant manager at BIOFIN technologies in UK. He is involved in research and application of advanced technology to produce fuels chemical energy materials from plants. BIOFIN is aiming to become one of the world leaders in producing ethanol and electricity in its bio-refineries based on its patented technology, in conjunction with the local partners across the globe. 75% of world production of ethanol is used as motor fuel and the market is worth more than 10 billion dollars.
He was a postgraduate research fellow at Imperial College in London when he discovered a bacterium containing a very high amount and value of protein. Their bacteria can use all different types of sugars to produce alcohol and other useful products unlike the conventional fermentation way used by yeast that can only use few sugars like glucose.
So with this innovation they started developing the fermentation technology system. His company, Bio Company started off from a small office in Surrey 1997 and today has its own laboratories in Guildford where they have a small palate plant. This year the company managed to grow to a size where they can float the company market with the help of their investors, which are mainly from Hong Kong and the Far East. Their aim is to become world leaders in producing ethanol.
The major fermentation products are ethanol or lactic acids, but they can also produce other products. Ethanol has many benefits, a low risk of car accidents, and has social economical benefits. The microorganisms that they work with lives in soil and compass heat growing at a temperature of 50/ 70 degree centigrade. It can grow in presence or absence of air. It can ferment all types of sugar in nature. The microprocessor that they have can reduce the production cost of ethanol by 70% a record, which is unparalleled with any other current technologies.
They manage to produce products, which are environmentally friendly and in most cases reduce the evolutions. As a community, we have to become more science-friendly, be involved and invest more in technology. For the sake of the future prosperity and progress, we must encourage and support our scientists, professionals, experts and industrialists, so that they become the role models for the community. For the past seven years BIBA has been promoting our scientists, industrialists, experts and professionals. And today we are heading towards diverting to more productive, profitable and exciting industries and supporting and encouraging our scientists.
Dr Namdar Baghaie talking at the 82nd BIBA meeting.
Mehdi Metghalchi is the founder of Bay oil Supply Co, an oil drilling supply and service company. He studied petroleum engineering in the US, and worked for ARCO. In Iran he worked for Lavan Petroleum Company for four years, drilling in the Persian Gulf. This was a joint venture between Iran and a US oil company. He soon realised that this was an expanding industry in Iran, while the whole operation was operated by foreign companies. He resigned in 1973 to set up his own oil drilling supply and service company.
BIBN) What is your opinion about the Buy-Back schemes?
MM) the demand for energy is increasing at best by 1.5% p.a. and not the optimistic prediction of 2.5% p.a. Oil companies with access to cheap oil can survive in the next century, but those without will have difficulties. Of course, you only find cheap oil in the Middle East. Iran, Iraq, and smaller producers are eager to discuss exploration and drilling. Many European medium-sized oil companies are interested in order to have access to cheap oil.
Iran needs the investment where there has not been any for the last 15-20 years. Even with low production costs, Iran lacks the capital to develop its proven oil & gas reserve. Also its constitution allows no production sharing agreement. Iran is using Buy-Back schemes to finance the developments at 18-22% investment cost per year. For example, the cost of developing Siri A and E oil field is about US$580M. TOTAL will receive approximately US$1bn, which is about 18-22% return on the investment.
As repayment is from the oil produced, if the oil price increases the debt can be repaid in a period of 3-7 years, (depending on the price), but if it declines, repayment will take longer. It takes 10 years or more than the investment becomes obsolete, as they will have to re-invest.
Hence the Buy-Back schemes can be considered good because there is no production sharing agreement: in other words the oil companies don't own Iranian oil. But on the other hand they are bad because it is costing Iran a lot to develop its oil fields. Overall Buy-Back schemes are only good if the oil price goes up.
Issuing Government Bonds.
BIBN) What is the alternative?
MM) if a good credit line existed, it would have been possible to issue government bonds to raise money at a much lower cost. The savings would be enormous. Unfortunately Iran ahs little contact with the international financial institutions to be able to issue sovereign bonds which Venezuela has managed with considerable success.
In my opinion, Iran is financially much better off than Venezuela. It could issue sovereign bonds each year for a billion dollars, and award the development of these oil fields to international contractors at reduced cost.
BIBN) Realistically speaking, do you think Iran has the ability to do this?
MM) Iran must find the ability to come to the international financial market and raise money. There are a lot of Iranians working for various banks and international institutions. Iran can invite them and use their expertise. With their knowledge and a little bit of creativity, especially with regards to offshore reserves, they can succeed.
One way is to take proven oil reserves in the Persian Gulf and turn them into collateral. Based on that they can issue international bonds which could be guaranteed by the central bank of Iran, and raise the money to develop these oil fields. It is cheaper than what they are paying now. You can create a company called for example the Siri Oil Company, which has proven reserves of approximately a billion barrels of oil. It would be almost as big as many medium-sized oil company in Europe.
BIBN) Why do you think that this has not happened so far?
MM) The Buy-Back scheme was the easiest solution at the time, and the Iranian government is not ready to attract the Iranian talents outside Iran. However they should create an environment for this. They must also show to the international business community that Iran wishes to develop these oil fields under internationally acceptable criteria.
BIBN) why are so many small and medium-sized companies interested in Iranian buy-back schemes?
MM) mainly because big producers in the Persian Gulf are only interested in the muli-national giants, such as Exxon, Mobil, and Shell. The smaller companies have no entry.
The Iranian Buy-Back scheme offers the small and medium-sized European oil companies access to cheap oil. There is very little risk with a return of 18.22%. The whole project can be financed by the Oil Company's cash flow, without even needing to borrow money. Just imagine what kind of effect it can have on the profit margin, when you start receiving 40-50,000 barrels of oil a day. It is a very good deal for medium sized oil companies.
Future of Iranian Oil Industry.
BIBN) What is the future for the Iranian oil industry with these low prices and other difficulties?
MM) The Iranian oil fields are very old, and in order to meet the domestic demand it requires huge investments to prevent a further loss of pressure in the reservoirs. We are producing 3.5-3.6m barrels a day with great difficulty. If we ignore the Iranian oil wells and fields, it will decline further. Iran would then face many problems.
At the rate the Iranian market is growing, we need a lot of crude oil to meet the local demand. The future lies in gas and petro-chemicals. We have huge gas reserves. Non of which have really been tapped. We need to develop our gas fields, and try to invest in our downstream operations, like building refineries and petro-chemical complexes in order to be an exporter of petro-chemical products.
BIBN) But what future is there with surplus petro-chemical products already on the world market?
MM) Despite excesses there are areas in which Iran can be very competitive because of its low cost feed. By good planning and forward-thinking you can always penetrate any market. It requires the right price, and marketing ability.
BIBN) Iran has a $6billion dollar immediate requirements, $250b over the next two decades. Do you think that they can raise this kind of money?
MM) It all depends on the oil price. If the demand in South East Asia and countries such as China and India really grows at the rate their governments declare, then they would be needing a lot of energy. Some think that India and China will be the biggest users of energy in the future. If the world demand grows over 80-82 million barrels of oil per day, the price would rise drastically. Then the international business community would invest in Iranian oil and gas. It is a long shot. The immediate money needed, though, is already there. There are already negotiating with various oil companies for the US$6bn investment.
BIBN) As a service provider in the middle East, how do you see the existing expertise in the Iranian oil industry?
MM) There is a clause in Buy-Back schemes which states that 30% of the investment has to be made in Iran, and paid for with Iranian Rials. In the case of the Siri oil field, the total investment was US$550M, But there was no Iranian service or manufacturing company to make up the 30%. TOTAL finally made the Iranians agree to drop the clause.
Iran is trying to do everything itself. They have formed a nationalised drilling company that provides all the services. However it sometimes takes them 150-160 days to drill a single well, when the same well can be drilled in 20-30 days; like any nationalised institution deficiencies exist and productivity is very low.
The government has to provide an appropriate environment for the oil service companies to move and invest in Iran. They should be encouraged to set up workshops, repair centres, stock equipment and train personnel. The Iranian government has set free zone areas and it is encouraging foreign investment, but they need to relax import/export regulations and cut the red tape on issuance of various licenses and permissions. If that happens many oil service companies would move to Iran to provide services from Iran to the Caspian Sea.
At the moment it is very difficult for a private company to obtain the necessary licenses to set-up shop or invest in Iran. The matter gets even worse since the nationalised oil companies are exempt from taxes and duties. Therefore it becomes even more difficult to compete with them.
Your Own Comapany's Future.
BIBN) what is the long-term future of companies such as yours with low oil prices?
MM) Our operation is now based in Dubai though we have a presence in London, too. We service oil companies anywhere from North Africa to the Caspian Sea. At less than US$10 per barrels, the Middle East is going to remain very busy. Many multi-nationals are now trying to move into the Middle East.
At low oil prices, you don't drill that many wells. The main effect is in North America, where they drill approximately 20,000 wells a year, compared to the Middle East's 100.
If the price of oil remains low, then the activity in North America is going to go down drastically. Since September 1998 when Saudi Arabia flooded the market with cheap oil, US production has gone down anywhere between 700,000-1,000,000 barrels a day.
That caused a lot of small US operators to shut down. The Saudis, Venezuelans and Mexicans who like the US market have picked this up. That is why they agreed to reduce the production in the OPEC meeting, because they have their big chunk of the US market. It fits their operation very well.
It is possible to drill a well in 15 days, and it requires little equipment, 25 years ago the drilling bits only drilled between 50 to 100 metres, and then they had to be changed. Now, they drill 800 or 900 meters without needing change. The revenue for oil service companies is declining every year, and there will be much consolidation.
BIBN) How do you market your company?
MM) The drilling industry is very small and people know each other. Most people who work for us are known by many drilling contractors, so when a contractor comes to the Middle-East do drill a well and encounters a problem he knows we are located in Dubai and calls us. We market our products just by knowing each other, and making ourselves available in various societies such as the National Drilling Society and Petroleum Society.
BIBN) How do you compete with your competitors?
MM) Competition exists but since there are two huge companies, which have more than 75% of the market, the other 25% are shared by smaller ones like ours where we have a tiny market-share. Where the work is very specific and specialised, the oil companies are willing to pay a little extra to make sure the work is done faster, better, better and with greater attention. So we are competing in a very specific area of the oil service.
BIBN) What is your plan for the future?
MM) In our particular case, we plan to expand even further. We are located in the best possible area as far as the drilling industry is concerned. The government of Dubai makes it very easy to import and export equipment and to travel. We can meet requirements anywhere from North Africa to the Caspian Sea. It is our opinion that the price of oil will go up, and stay up in two or three years. We have decided to expand and invest more, and hopefully, if the Iranian environment becomes more receptive, we hope to be able to set up an oil field service centre in one of the islands or free zones that the government has developed.
Sam Darbaghi is the Managing Director of Pipeline Integrity Management Services Ltd. The company offers oil & gas consultancy services. Dr Darbaghi has been attending Iranian oil & gas conferences for some time now. We asked his opinion on the worthiness of these conferences.
(BIBN) What is your reason for going to oil & gas conferences?
(SD) Depending on where the conference is held, for example in the UK or overseas, the prime motivator is to show others that you are committed to the industry. It is really a psychological thing. It is not unlike other exhibitors and conference goers who attend daily. On a more individualistic level, I attend these conferences and seminars to talk to people and to get a clear idea, both within a technical and commercial framework, of what is happening in the industry today, and what is going to happen in the industry in the future, what potential projects people are planning and so on. I believe that, from the organisers point of view, it is an opportunity to bring people together to share their knowledge, commercial and technical expertise, and whatever else they have to offer. People attend such conferences for a day or a few days, and hopefully they come away with new ideas that they can expand on. In brief, it is the coming together of like-minded professionals in order to understand each other and to exchange information.
(BIBN) How much do these conferences cost in general, and have they been useful to you?
(SD) Generally, including travel and accommodation, it would cost anything between £1000-£2000 depending on the location and days attended. They have been useful in so far as they have helped me to understand what Iran's intentions are, specifically in the oil and gas industry. To see how they present themselves to other nations, other operators, and how they interplay with each other. So there is a degree of usefulness.
(BIBN) On a technical level, did you gain anything useful that you might not have picked up elsewhere?
(SD) It depends from which viewpoint or discipline you are approaching. Whether it is a legal, technical, commercial or perhaps a political point of view. Overall, the feel of the conferences have more of a legal or commercial viewpoint. However the technical aspects have to a degree been covered, which I assume satisfied the majority of the delegates, but from a personal point of view I felt that there was a distinct lack of expression or detail dealing with the nitty-gritty of the oil and gas production itself ; no specific issues relating to on-shore or off-shore facilities. These were merely touched upon at times. The critical infra-structures that I am talking about; interfield pipelines, major transmission lines, off-shore installations, are the real nuts and bolts of how oil and gas is extracted and brought ashore for further processing.
(BIBN) Did you develop many contacts from these conferences?
(SD) I would like to have established much greater and deeper contact during various intervals and convenient breaks within the conference period. One obviously comes across certain individuals with whom it is possible to have an exchange of information or ideas. Where it matters is to have good contacts and to meet people from Iran who had come here especially, but there was not enough opportunity, especially if you were not known within that framework of individuals, which was obviously very disconcerting. Although one should try to make contact with the establishment, I found there to be a certain level of reluctance. I feel that when you come from an organisation in which you do nothing but attend these conferences and seminars, it becomes much simpler to become a well known face in the industry, and join the "clique". I have enjoyed that position in the past, but when running your own consultancy business you need to work for your own benefit, and you need to weigh that against the expenses and costs that are incurred as part of this process. It is not good business sense to use a year's profits just to attend conferences. It becomes a tricky situation. The people who benefit most from the major international conferences are the ones who are part of international organisations in the industry.
Building Rapport -
(BIBN) How do you establish a rapport with the Iranian oil and gas authorities?
(SD) It depends on the degree of contact, and exchange of ideas. If that is not in place then nothing is ever going to happen anyway. On a personal level, I manage to maintain a small degree of contact but I just felt that there was something lacking. Whether it is a question of people accepting others' personalities or technical or commercial expertise. It is a question of people understanding each other. Such conferences are for well established international players in the industry such as Shell, BP, etc. Their voices seem to be heard more loudly. When you are from Shell, Texaco or some other big company then people do sit up and listen. I did not personally find the conferences very helpful. There seems to be too much of a gap between the big players and the smaller, private firms.
(BIBN) Do you think that the Iranian oil and gas industry should have an extra provision for British-Iranian oil and gas experts in the UK?
(SD) Certainly in order to achieve this there must be better awareness and motivation to do that. It is a barrier, and it is going to be a very hard task indeed. Whether it is a mental barrier, or a technical barrier there are a lot of issues that need to be addressed.
(BIBN) Do you recommend that people attend these conferences?
(SD) I would certainly not tell people not to go, but obviously everyone has their own personal opinion of whether there is an overall benefit or not. It may also be a question of if they can afford to go. It is really an individual assessment. At the end of the day it is a vicious circle. Whatever one's industry, if the conferences are not attended then one is "not in the know" as such. No matter how small the contact is, it may lead to somewhere in the future. I believe that it is really a trade-off between being selective and judgmental about what you feel you may get out of it. Of course some conferences can be a complete flop, but one can never predict these things.
The structure of the Iranian oil and gas chemical industries is a peculiar one. There are a number of organisations each with specific duties and powers which sometimes overlap.
In 1979 the revolutionary government again nationalised the oil industry. NIOC took control of all interests of the international companies. In 1981 all pre-revolutionary contracts were annulled. For the first time an oil ministry was set up in order to supervise the industry and co-ordinate its activities. In 1987 the Petroleum Act transferred all rights and control of the industry to the Ministry of Petroleum.
The current Minister of Oil is Bijan Namdar Zanganes but there are a number of deputy ministers including Deputy Minister of Finance, International Affairs, Planning, Research and Commercial.
NIOC which was established in 1951, is involved in exploration, production, transport, refinement, export and sales and distribution of oil in Iran. It has a number of subsidiaries and its own tanker fleet. It has a monopoly on the supply of oil within Iran. Other activities include the training of oil industry personnel. Bodies affiliated to the NIOC include the Iranian offshore company, National Iranian Tanker Company Limited and the National Iranian Touring Company. The company has investments in various parts of the world including Madras in India, Natref Refinery of South Africa, Senegal, investments in the North Sea through a joint venture with British Petroleum Development Company (a subsidiary of BP) and joint offshore fields with Sharjah. Another important company is Oil Industries, Engineering and Construction (OIEC) which is jointly owned by NIOC Pension Fund and the employers. NIOC is involved with some 16 oil shelves on shore and a number of off shore extension and reconstruction. It is also involved in the running of various refineries in Iran and with geological and geophysical studies and gas injection and pipeline developments throughout Iran. The National Iranian Gas Company (NIGC) deals with the export distribution supply and refining of gas. The total gas produced as at 21 March 1994 was 71.095 cubic metres. NIGC is also involved in pipeline development and reconstruction of various facilities destroyed and damaged in the Iran / Iraq war.
National Petrochemical Company of Iran (NPC)
NPC runs a number of plants across Iran and produces sodium phosphates, fertilisers, ammonium, nitric acid, ammonium nitrate, alkaline, chloride, methanol and chloride acid. The main chemical complexes are Razi Chemical Complex established in 1970 and the Abadan Petrochemical Complex established in 1978. This was heavily damaged in the Iran / Iraq war but has resumed production since October 1989. Other production plants include Iraq Petrochemical Plant, Banda Iman, Kharq Petrochemical Plant, Khorassan Petrochemical Plant, Passargad Petrochemical Plant, Shiraz Petrochemical Plant and Tabriz Petrochemical Plant. Each of these plants are run by separate companies, for example, Abadan Petrochemical Complex Plant is run by the Abadan Petrochemical Company.
This is part of the companies general de-centralisation policy. The company is also actively engaged in various partnerships with the private sector.
In recent years you have heard a lot about the Caspian Sea and its energy resources, and about disputes between the Caspian states over their territorial boundaries and the exploitation of oil and gas in the Caspian region. In the 19th and the first 9 decades of the 20th century, the Caspian Sea had been located between only two countries, Russia/Soviet Union and Iran. The status of the Sea was also defined in Russo-Iranian treaties of 1813,1828 and Soviet-Iranian treaties of 1921 and 1940. In both Soviet-Iranian treaties it was stipulated that the Caspian Sea in totality, and not divided sectors, was the common property of the two surrounding countries.
In 1991, the Soviet Union was dissolved and consequently, new states emerged on the Caspian coastline. At present, five countries are surrounding the Caspian Sea, namely:
Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan. No agreement over the legal status of the sea has yet been signed by the five littoral states.
Oil was discovered in Russian Caucasus (now Azerbaijan) in the 1870s, and the Russian Empire began exploitation in the 1880s, and so became the largest oil producer in the eastern hemisphere at the turn of the century. During the Soviet era Iran, which enjoyed one of the largest world oil resources in its southern part and the Persian Gulf, did not bother to launch an oil operation in the Caspian Sea. Nor was any reference made to the oil operations in the Caspian Sea in the Soviet-Iranian treaties.
Since 1992, three newly-independent states on the Caspian Sea: Azerbaijan, Kazakhstan and Turkmenistan, which are rich in oil and/or gas resources, approached the Western oil industries for development of their energy resources. Initially, Russia and Iran expressed negative views over the new activities and stressed that the previous agreements over the sea had remained intact and that no individual littoral state was entitled to sign a sectoral agreement over the Caspian resources as long as the status of the sea was not defined by all littoral states.
On the other side of the dispute, the above-mentioned three countries put forth their counterclaim to the effect that the northern part of the Caspian Sea had been divided under the Soviet system between four union republics (Azerbaijan, Kazakhstan, Russia, Turkmenistan) and that Iran's share of the sea was below the Astara-Hassanqoli line.
Dispute over the status of the Caspian Sea did not stop the individual initiatives. In September 1994, Azerbaijan signed its first international oil agreement-known as agreement of the century-with a number of international major oil companies for development of three Caspian oilfields, followed afterwards by more offshore oil agreements. In spite of their objections, Russia and Iran are partners in one or more international oil projects of Azerbaijan.
In summer 1998, Russia made a dramatic change in its position towards the status of the Caspian Sea and divided the northern part of the seas (The Seabed!) with Kazkhstan. Russia's main objective was to maintain a control, even domination, over the oil and gas resources in the Caspian basin by all means. Furthermore, Russia has no strength to challenge the Western oil interests in the Caspian Sea and has no choice but to comply with realities on the ground.
The five Caspian states are still continuing their negotiations to decide the legal status of the Caspian Sea. All of them are actually involved, one way or another, in co-operation with international firms in their national sectors. Last year Iran signed a contract with two Western companies for prospecting in its Caspian waters which was faced with a complaint from Azerbaijan. Earlier, Iran lodged a similar complaint from Azerbaijan's encroachment into Iranian waters. A more serious dispute had surfaced between Azerbaijan and Turkmenistan in 1997 over their national sectors in the middle of the Caspian Sea and a field which is called Kyapaz (Azeri version) or Serdar (Turkmen version). The problem has not only remained unsolved but also affected some international projects in the Caspian Sea, in which co-operations of the two countries are necessary.
What I wish you to bear in mind is that besides the five littoral states in the Caspian Sea, there are international companies, topped by US companies, which have invested in the Caspian Sea oil and gas resources, and also in the costly pipeline projects which are/will transfer the Caspian energy products outside the region. Economies of Azerbaijan, Kazakhstan and Turkmenistan are heavily dependent on their oil and gas revenue, so their rush to rescue their Soviet-devastated economies and to feed their people is understandable. For exploitation of their resources these countries had to call for financial and technical assistance in international markets. They could not wait any longer for a unanimous decision over the legal status of the sea (condominium or divided into national sector) which may, or may not, be achieved. Furthermore, Russia's expression of attitude was not always without blackmailing so the weaker parties legitimately sought a counterweight.
The international involvement in the Caspian Sea has brought a degree of confidence to the weaker parties and a sense of common security. Currently, there are two parallel tendencies in the region: regional restriction and multinational co-operation. The second one not only succeeded to attract its advocates but also forced Russia to submit. In spite of existing disputes, occasionally being publicised by the world media, multinational/international co-operation in the Caspian Sea is prevalent. Iran is also a contributor to this co-operation, e.g. in the Shah-Deniz field in Azerbaijan. However, further flexibility in Iran's position is linked with other concern, i.e. the sanctions imposed by the US administration on Iran.
Under present circumstances, no confrontation in the Caspian Sea is in prospect but uncertainty persists. Numerous letters have been addressed to the United Nations in recent years by Iran protesting the illegality of unilateral operations in the Caspian Sea. Uncertainty makes the investment unsafe no matter how powerful the investors are. The question is that if Iran's economy is suffering under US containment policy, why should US economic interests in the Caspian Sea be guaranteed by the sufferee? Relaxation of tension rests on both sides.
* Dr. Granmayeh is a lecturer, commentator and consultant in international relations. He has served at NIOC, Iranian Ministry of Foreign Affairs, Royal Institute of International Affairs, SSEES and Centre of Near and Middle Eastern Studies, SOAS, University of London.
A Map Of The Caspian Sea
The price of oil, which had been nearing $10 a barrel towards the end of 1998, sneaked above $21 a barrel in August 1999 for the first time during the last two years.
Even today, after so many oil shocks, oil price remains one of the key determinants and indicators of economic conditions around the world. As far as industrialised countries are concerned, the spike in the price of oil in 1973, 1979 and 1990 is regarded as the main culprit causing, or at least preceding, each of the last three global recessions.
It is a generally held view that the following factors have been the main causes for a turnaround in the oil market since the beginning of the year:
i) OPEC's ability to stick to its latest agreement on production cuts.
ii) The continued boom in the U.S.A
iii) Economic recovery in Asia
So where does the price of oil go from here? Is there a plateau at which oil price could be considered "comfortable" for producers, governments and industry? Or is there a price level where it balances the financial concerns of producers with the macro economics of the west and the commercial concerns of the international oil industry?
To be able to answer such questions, let us make an important observation. Long term energy forecasting is anybody's game. In all economic analysis, elements of uncertainty are inherent. But the poor energy economist suffers from three additional drawbacks: that is to say, the political situation of the main oil region, the rapid development of the technologies that affect most producers and consumers of energy, and constant seesawing between players who vie for powerful monopolistic or competitive positions - a classical battle between monopolists and believers in free market forces - in an energy market.
Now that such a vital caveat has been established, perhaps a scenario could be constructed where an optimum oil price level should be gauged so that, in medium terms, it could meet certain criteria. There are far too many variables, but to name a few, such a price level should be:
i) High enough to limit the threat of social unrest in the most vulnerable producing countries.
ii) High enough to maintain the continuity of the diversified global oil supply.
iii) Not high enough to jeopardise the global economic momentum, so that the maintenance of a low level of interest rate is ensured.
iv) Low enough to continue to have global recovery in oil demand.
v) Low enough to sustain the technological innovation in the oil industry which will ensure that exploration, development and production costs will continue to fall.
It is arguably true that a pre-determined price range of $16 a barrel for North Sea Brent Blend , implying an average of about $18 West Texas Intermediate might embrace the above parameters.
OPEC members, who must be congratulated for a real adherence to their own pact, must not feel complacent now that they have realised that their newly found unity has been a major contributing factor in doubling the price of oil this year.
Equally, they should act very carefully so that they should not miss such an excellent opportunity - a period of world wide economic recovery, as this would allow them to push oil prices moderately higher without rocking the boat. No doubt OPEC members are aware of the fact that they produce about 40% of the world's total oil supply of 75.3 million barrels a day (1998 figure). They must also realise that once they act rationally and in unity, they can additionally control almost all of the world marginal oil production. In that case, any increase in the world's demand for oil will almost entirely be supplied from OPEC's oil fields.
In a meeting organised on 10th May by the British Iranian Business Association (BIBA) and sponsored by LASMO plc, a panel of highly knowledgeable speakers addressed a whole host of issues related to emerging trends in the world scene with particular emphasis on the oil and gas industry in Iran. While, two speakers - Mr Parviz Shahideh, (previously Vice-President of Bechtel International), and Dr Manoucher Takin, (an oil economist) addressed more general topics dealing with Effects of Transport, Fuel Demand, and recent Trends in the Price of Oil, two other speakers, Dr. M Ala and Dr Parviz Mina, concentrated on mainly on the current issues relating to the Iranian oil and gas scene. While, Dr Ala's comprehensive presentation dealt with the current priorities of the Iranian petroleum industry, Dr Mina's presentation focused mainly on the inadequacies of the Buy-Back Agreements, currently favoured by the Iranian regime. In subsequent his comments, Dr Mina said that the Islamic Republic of Iran (IRI), after twenty years of neglect for technical requirements inclusive of an inability for promoting enhanced recovery techniques, has been in desperate need of some US$12-15 billion to cover some 14 or 15 important projects. This situation was exacerbated by rising internal energy demands, which have seen Iran's crude exports come down from a ceiling of 5.2mbd in the 1970's to 2.5mbd at the present. However, 'Buy-Back' was not the answer for many crucial reasons (given, at any rate, that it has only managed to raise US$5 billion), the most important of which is that it does not commit oil companies to Iran's future nor does it provide them with incentive of introducing their latest and best technologies to Iran.
Dr Manoucher Takin at the podium
The entire proceedings were chaired by Mr Andrew Wright, LASMO's head of projects development for the Middle East. In the course of the meeting Mr Wright was somewhat "shaken" by the manner in which the proceedings came to label his company's contracts with Iran's 'exploitative, anti-nationalist, and against the better interests of the Iranian nation'. Previously, Mr Wright had presented a brief profile of LASMO, explaining that having started up in 1973 with a total
Mr Andrew Wright (left) with Dr Parviz Shahideh
capital of £3 million, the company which is now active in 15 countries around the world, with an overall production of some 310,000 b/d, was worth somewhere in the vicinity of £3 billion. He said that in 1998 LASMO after a 4 year experience with Iran, had managed to sign a buy back agreement. He said that his company had the ambition of being with the development of future opportunities for gas, drilling in the Caspian, as well as a whole range of oil swap agreements from central Asia to Iran (via Neka). Based on these anticipations he said that LASMO hopes to increase to 100, the total number of its employees stationed in Iran.
Mehrdad Khonsari (left) talking to a BIBA member
The presentation started by Dr M Ala of the Imperial College, London, who is also the co-founder and director of Hydrocarbons Venture Ltd. A well known academic, Dr Ala began his comments by saying that over the past decade, there have been major radical changes in the petroleum industry that have result in far reaching developments. To begin with, the 90's was the era of "mega mergers and take overs", a process that actually started in the mid-80's with the take over by Chevron of Gulf Oil for a mere sum of US$3 billion. This example had been followed by:
BP taking over Amoco
Total taking over Fina
TotalFina then merging with Elf
BPAmoco taking over Arco
Repsol taking over YPP of Argentina
Exxon taking over Mobil
As a result the worlds top oil companies were as follows:
1. ExxonMobil (US$ 276.7)
2. Royal Dutch Shell (US$ 204.2)
3. BPAmoco (US$ 203.2)
4. TotalFinaElf (US$ 158.2)
5. Chevron (US$ 55.1)
5. ENI (US$ 9.3)
7. Texaco (US$ 28.8)
8. Repsol (US$ 22.7)
Dr Ala went on to say the next important trend was 'Globalisation or in other words the development of capability to build and spread activity around the world. This meant there was a clear move away from the era of state ownership, in favour of privatisation and the emergence of new international business in natural gas. This, according to Dr Ala, has brought with it a realisation that "the problems of today and tomorrow cannot be tackled by applying the remedies of yesterday", as well as the recognition that to prosper in a highly competitive market place, the industry must conduct its operation on the basis of flexibility and efficiency. Dr Ala started in his view, the oil and gas industry has played a major role in shaping the 20th century and he firmly believed it would do so once again in the new century.
An Overview of the current state of Iran's Oil and Gas related industries.
According to Dr Ala, NIOC (National Iranian Oil Company) has been starved of investment as the result of what he called "the 1979/80 reorganisation", which had brought Iranian petroleum sector under the control of the Ministry of Oil he was adamant to state that the consequence of this under-investment have been particularly and acutely felt over the past decade. Moreover, institutional beaurocracy which has seen the number of NIOC personnel balloon from 54,000 in 1979 to over 120,000 at the present, has created a situation whereby reliance upon revenues from crude export sales - something that cannot grow without fresh investment, has become the fundamental national problem.
Raising Capital from the Private Sector.
According to Dr Ala, the remedy for NIOC's future was he raising of new investment through privatisation. This, he said was all about raising capital from private sources based on NIOC's asset base that was conservatively valued at US$1.35 trillion. He said that this could be achieved in a number of ways:
1. Unlocking capital from, within the countries own economy by adopting long-term pro private sector investment policies.
2. Encouraging individuals to channel funds from non-productive investments - such as the acquisition of luxury goods and real estate - into the oil and gas related industries through the issue of government bonds and other credible schemes.
He felt that under the fiscal and legislative regimes, Iranians would be willing to invest the construction of the country's refineries, pipelines and petrochemical plants . He said that in the last 2 years, certain initial steps had been taken in this direction to prepare the way by turning the countries refineries and petrochemical plants into separate entities. He said that some petrochemical companies have already issued shares which can be traded on the Tehran stock exchange comparing this with similar privatisation that has taken place in countries such as India, he was of the view that this initiative has already met with some success in Iran and there has been a several fold increase in the price of shares since they were issued.
However for Iran to seriously promote this notion, it would mean the state would have to follow the domestic prices of refinery products - probably the lowest in the world and not conducive to private investment - to rise by withdrawing subsidies so that the operation can become commercial. However, political considerations and past experience demand that the subsidy withdrawal be gradual to lessen the impact of price increases.
According to Dr Ala, this domestic private sector would be for the government to sell shares in the NIOC or one of its major subsidiaries to individual, industry and institutional investors at home and on the international equity markets. The political consequences of such a policy would be enormous and are fully recognised particularly in view of the highly restraining article 81 of the constitution which is interpreted as barring foreigners and foreign companies from investing - and by implication owning assets - in the strategic Oil and Gas sector.
Dr Ala said that the petroleum sector has traditionally been the subsidiser of oil of other industry in Iran by providing low priced oil and gas. Privatisation of the NIOC will mean a rise in the price of goods produced and the services provided by these industries. This would present a whole host of new social and political problems, with which any government would need come to grips with. In conclusion, Dr Ala pointed out there was no shortage of capital worldwide, but he noted that it would only be attracted to projects that offer the best rate of return. He felt that Iran can gain access to this capital for its Oil and Gas related industries. For this to happen, the Iranian government would need to institute political and economic reforms and bring about stability on the domestic front. Moreover, it was essential for NIOC to follow consistent, long-term and commercially viable objectives, and avoid half-hearted measures and sudden policy changes.
An interview with Parviz Shahideh about the disintegration of the oil industry. Mr Shahideh is the Vice-President of Bechtel International, the world's largest oil engineering company.
The Future of the Oil Industry -
(BIBN) Where is the oil industry heading?
(PS) The oil industry has been experiencing major changes in recent years. Major companies now face a number of challenges. The first is the nationalistic feelings of the host governments. The next thing is the insistence of the host nations in engaging their own resources in building the oil fields and facilities. For that reason a lot of the services that the oil companies wish to provide under their own organisation have to be outsourced. These are services such as drilling, shipping, some of the reservoir engineering, production of service facilities and so on. Those items are being re-organised because they now have to work on tighter profit margins. This is why there are so many mergers and takeovers in the oil industry, because another way of consolidating these services is actually through mergers. In simple terms we are going to see many more multi-national companies with the smaller and middle-sized ones merging, like BP-Amaco. The whole industry will be consolidated, and it will almost be like having four or five "married" couples. Of course, all this will have a great impact on all the businesses that are associated with the oil industry, because as part of the consolidation the investment will be consolidated, the production rates will be consolidated in to the most effective and cost-effective way, and we will see a general decline in investment. The only area in the oil industry in which you would find expansion is the gas side. We are of course talking about up-stream, because the major oil companies in the market are now trying to get out of down-stream as quickly as possible because it is not making any profit. There is no interest in investing in refineries, for example. In 1999 the major oil companies have not invested a single dollar in them.
(BIBN) Why does down-stream no longer make a profit?
(PS) It is a competitive market, and again you find that a number of national oil companies have come into the market providing products at subsidised values, because they get subsidised value out of crude oil. In the past, the shape of the oil companies was vertically integrated. In other words, they produced crude oil and they delivered it to their own refineries on their own tankers, and it was sold from their own outlets. But now it is not carried on their own tankers; for example in Iran it is carried on the Iran National Tanker Company. From there it goes to someone else's refinery, and then it is sold in someone else's outlet. So that vertically integrated system has disappeared. For example, the refineries do not process their own crude oil, they get it wherever it is cheaper. They do not sell it in their own outlets but to whoever gives them a better price. So it is becoming disintegrated.
(BIBN) Where will this all end?
(PS) Oil is becoming like any other commodity, so if anybody has the know-how, they could get into the refining business. In the past, this was monopolised by the major oil companies because nobody was prepared to give them crude oil, but now you can buy crude in the Caspian, in the North Sea, in the Middle-East, in the Gulf of Mexico. You can just buy it like any other commodity, and that is why the control of pricing is becoming a kind of supply and demand which can relate to the economic growth of other commodities.
(BIBN) Do you mean that there are more opportunities for smaller companies to enter the market nowadays?
(PS) There are more opportunities for the smaller companies but only in specialising in the smaller parts of the industry. They would be companies that would be specialising in niche petro-chemical products, for example PVC. Therefore the major oil companies would primarily be the up-stream side of the business, which still has a great risk of investment. It is only the big companies that could really afford to take such risks. The exploration and up-raising of a field requires a huge investment, and the risk lies in the fact that if they do not find the right oil then they lose their investment. On the other hand, if they make it then the returns are high, which is the risk and return nature. The smaller companies cannot afford to do this. So for the next ten to fifteen years it will still be the major oil companies that will be investing in oil and production field development. The opportunities would be in drilling, in down-hole facilities, service facilities, pipelines and so on. That would be where large contractors would be concentrating. That is why we have now gone into a major alliance with Shlumberger, so that we even go into the sub-surface facilities.
(BIBN) What services can the local national companies offer?
(PS) Their main strength is that they are the owner of the assets. By assets we mean the reserves, the reservoirs. When it comes to engaging local resources we do not mean high-tech items. Naturally, a lot of labour can be supplied locally, as well as services such as transport and infra-structure. It so happens that every field that you find is in a remote and hostile environment, and it needs a lot of infra-structure. For example, in Khazakstan now we are building railways, roads, dams to control floods, hospitals and so on. So you need the infra-structure and that is the area in which the local services can be fully engaged.
Parviz Shahideh, VP Bechtel International
Oil Prices -
(BIBN) On the subject of price, just over a year ago we were looking at $10 a barrel, and now we are looking at $21. What do you think has been the real reason for this?
(PS) The turning point usually would be the economic situation of the major consumers. The major consumers of the future are in Asia and the Far-East. I believe we found out two reasons for the collapse of the price, which was the collapse of the economies in the Far-East and also in Russia. Russia is a major consumer of oil. There has been a turnaround in economic growth. Of course this is like going round in a circle, because when the oil price collapses then the cheap energy helps the economies to pick up, and of course then the oil price rises. So if you link the oil price now to the economic growth of Japan, India, Malaysia, even America because it is a major importer, then you will see that there would be a period of stabilised oil prices of around $20 for around three years. The other thing is that there are a great number of marginal fields that cannot produce economically have gone, and they generally will not come back.
(BIBN) So do we need to worry about a recession because of higher oil prices?
(PS) It is not oil prices that cause a recession. In the past it has been convenient to blame recession on oil prices, but really it occurs due to over consumption, lack of productivity, high inflation and so on. In 1979 for example, the immediate reaction was cutback in consumption. Suddenly in Europe the consumption dropped by 15%. That was not due to recession, it was due to the fact that people could not drive their cars because it was not economical. People then started to look into alternative sources of energy, such as coal. The time has passed since oil was a political or economic tool to control events. Now it is purely a supply business, and that is why I relate it to economic growth. The growth in demand in energy in Asia is up by about 2%, and that is where about half of the population of the world lives. The energy growth in the Western world is about 1%, so you can see where the market is. When the market flourishes then it can afford high energy costs, if it does not flourish then it can not, so it has to be sold cheaper.
(BIBN) Do you think that OPEC has changed as an organisation?
(PS) There has been a change in the region generally, because in the past most of these organisations were politically orientated. But now, with the political changes in the region, and some of the changes of the aligned OPEC member companies, it is becoming more economic oriented. And it is working. For example, most of the Middle-Eastern countries have some of the consumers on their side. The tendency is how to effectively market the oil, and effectively protect the market, rather than depend on the political mind of the partner or protector. That is why now they can sit and talk about real market economy type aspects. For example what to do with the Caspian oil. Rather than having it as competition to the OPEC market, why not have them regionally together and market it together. People now are more market economy than politically orientated.
Caspian Sea -
(BIBN) What will happen with the pipelines. Will there be a pipeline underneath the Caspian Sea or through Iran?
PS) We will have both. Now, all the focus is on the market in Turkey for gas. Everybody is running pipelines into Turkey to supply them with gas, but there is only so much that Turkey can consume as far as gas is concerned. Gas is a major problem for the producers of the Caspian region, because they don't have any outlet for the associated gas. The associated gas is sour, they cannot clear it, it is very costly to process it and then clear it, so they have to get a market for that gas. The present pipeline under the sea to Turkey is an option which would provide an answer for 10% of the problem. There are two major initiatives; one is led by British Gas and is to bring all the producers in the region and consolidate the views, and the idea is to run pipelines through Iran for gas markets in India and Pakistan, and of course Turkey could be involved. The other one is the initiative taken by Italy and the French, Total and Sofri Gas, who again are advocating actively for a pipeline through Iran for a terminal close to East of the Hormuz Strait. So a lot depends on how quickly this could be organised, because generally, as far as crude is concerned, there is a clear $2 a barrel margin if it is exported from Khazakstan through Iran, compared to the Black Sea, the Baltics or even the Mediterranean, and that is a lot of money. Within the next five years we could see through the south and west of Iran a major alternative route for the export of oil and gas.
The concern is that this could be competing with the oil and gas produced in Iran. That is really the issue that has to be worked out. If there is enough revenue from the transit of the oil and gas through Iran compared to the margins that we could pick up from exporting the same from Iranian resources, then it will fall into place. These are the issues that are now being discussed at the highest level. If economically there is the same return, then it will happen. It will be a long-drawn negotiation of maybe a year or so more, because the negotiations have been going on for almost two years already. But when these things go public, then that is the time that you are getting close to a final solution. They have now become public, and without having laid the groundwork, they would not have done so. In five years or so I believe that we will see the pipelines running.