$53 billion question

Background

Since 2003, the Middle East and North African (MENA) oilfield services market has been undergoing a period of heavy investment. The region has been producing for many years and basins are becoming increasingly mature.

Continued demand for oil & gas creates a necessity to drill for new wells and workover existing wellstocks in order to maintain and/or boost production. Average productivity per existing well is declining and increasing efforts are required to deliver each barrel of oil to the surface.

Oil prices have increased rapidly in recent years, however, unlike previous oil price ‘spikes’ caused by geopolitical tension or temporary supply disruption, this price rise has been gradual and sustained, driven fundamentally by a lack of spare production capacity in producing countries, many of which (>50 countries) are past peak production and are in decline. Most of these post-peak countries are situated in the Americas, Western Europe and Asia.

With two thirds of global proven oil reserves MENA is rightly regarded as the world’s most influential oil province, eclipsing all other regions by some margin.

The vast majority of MENA reserves are found in the Middle East which is estimated to hold over 742 billion barrels (bbls) of oil – North African reserves are currently slated at 59 billion bbls. Other significant reserves can also be found in Russia and North America.

Future development of heavy oil technologies threaten to sway the balance of global reserves; especially as Canada and Venezuela are each considered to have over one trillion bbls of heavy oil and bitumens.

However, with this option is not currently perceived as economically viable and therefore not considered in global estimations. It is the Middle East that continues to dominate the global oil reserves picture.

Building reserves

Over the past twenty years MENA gas reserves have been significantly augmented due in no small part to the ongoing exploration of the giant North Field/South Pars basin in the Persian Gulf.

MENA states currently account for 45% of global natural gas reserves; 82 tcm, significantly more than 1986 estimations of 32%. Large gas reserves are located in the Persian Gulf so it is Iran and Qatar that dominate the reserve landscape accounting for 34% and 31% of total MENA reserves respectively. Other significant reserves in the area can be found in North Africa, the UAE and Saudi Arabia.

In 2006, MENA produced circa 23 million bbls of onshore oil a day and accounted for 42% of global output. As MENA production continues to increase over the coming years we estimate that by 2015 the region will have an onshore crude output of just under 27 million bpd; a 16% increase over 2006 production levels and 46% of global onshore oil production in 2015.

Production is dominated by Saudi Arabia, which in 2006 produced 7.8 million bbls of onshore oil and accounted for 34% of MENA production.

Despite continued growth over the coming years depleting fields such as the regions principal asset Ghawar – which produces around half of the country’s oil – will see Saudi Arabia share of MENA production drop to 31% by 2015.

Historically the MENA region has focused on the crude oil industry and whilst it does not dominate world gas markets it is still a significant contributor to global output. In 2006, the region accounted for just under 16% of both global onshore and offshore gas with around 325 Bcm and 141 Bcm respectively.

However, changing appetites in the West and the adoption of natural gas as a primarily source for electricity generation, coupled with the development of the global LNG industry, will prompt the MENA region to exploit its vast reserves of natural gas. As a result we expect that over the 2008-2015 period MENA gas production will witness faster growth than that of the rest of the world.

With regards to global supply the MENA region is the world’s largest exporter of oil by some distance and in 2006 exported 23 million bbls of oil a day. Other significant exporters include Russia and West Africa although these two regions combined total and only 50% of total MENA exports.

Although the majority of oil producing regions have increased their year on year oil exports (including North America and Western Europe), the most significant growth has occurred in the offshore West African basins of Nigeria and Angola. MENA exports have also grown above the global average.

Growth has been driven primarily by growing demand from Asian markets and also helped by a recent period of re-investment in the North African region of Libya after the dropping of international sanctions over the 2003-2005 period.

The MENA region has long had generous reserves of gas but the lack of a substantial local market has hindered its exploitation – however, the introduction of LNG and the ability to ship natural gas at an economically viable rate has created a new market for MENA natural gas.

Over the next five years, greenfield, expansion and replacement LNG liquefaction plants are expected to be built in Qatar, UAE, Oman, Yemen and Iran. In Qatar, the world’s largest LNG exporting nation, six trains with a combined capacity of 46.8 million tons per annum (mmtpa) are expected to be added to the country’s export capacity between 2008 and 2011. Around 90 development wells will be required to bring this capacity onstream.

Production maintenance work and possibly further development wells will be required over the duration of the production life of these projects in order to ensure that the six trains have sufficient feedstock to operate at full capacity.

International geopolitics

International geopolitics have traditionally played an important role in the energy markets of the MENA region with historic events such as the Yom-Kippur and Iran-Iraq wars of 1973 and 1981 respectively having a huge impact on global oil supply and price with these events followed avidly by international observers.

Today, similar concerns have arisen over the invasion of Iraq and the Straight of Hormuz, a strategically important waterway between the Gulf of Oman and the Persian Gulf, which transports approximately one fifth of the world’s daily oil production as exports from MENA. Any disruption due to political reasons would result in huge oil shortages and economic rifts throughout Europe.

The MENA OFS market

In the report Douglas-Westwood presents its view of the MENA Oilfield Service market over the 2008-2012 period. In order to clarify market trends we present a ten-year view of the market with historic data covering the 2003-2007 period and forecast data for the 2008-2012 period.

The MENA region is a mature producer with average well productivity in decline, driving the need for increased drilling to replace depleted reserves and work over activity to optimise the life current reserves.

As a result, for the focus countries of Algeria, Egypt, Iran, Libya, Kuwait, Neutral Zone, Oman, Qatar, Saudi Arabia, Syria, UAE and Yemen, total onshore and offshore drilling and work over expenditure on oilfield services reached $7.7 billion in 2007 and we expect this to increase 61.1% to reach $12.4 billion by 2012, assuming conservative levels of price inflation.

Although growth is expected from all examined countries to varying degrees Saudi Arabia will remain the most important country in terms of total expenditure. Due to its major ongoing work programmes its share of regional expenditure will grow, on a five-year basis from an historic 18% to a forecast 24% – an increase in total expenditure of $8 billion.

By 2012, Egypt is likely to rank second in terms of total expenditure (18% by value) followed by Iran (10%).

Comparing the two five-year periods, we estimate that the combined MENA onshore and offshore OFS market totaled some $25 billion over the period 2003-2007. Over the 2008-2012 period we expect the market to grow to $53 billion, with onshore spend growing from $13 billion to $28 billion and offshore $12 billion to $25 billion.

Overall, the MENA OFS market is projected to expand at a CAGR of 8.84% over the period 2008 to 2012. In summary, DWL believe the sector represents a major opportunity for both indigenous and appropriately-positioned international players able to capture the projected growth in the market.

Further information is available at www.dw-1.com. The authors can be contacted via publications@dw-1.com or +44 1227 780999.