Middle East upstream 5-Year forecast

With two thirds of global oil reserves and an estimated 45% of the world’s natural gas reserves, the Middle East & North Africa (MENA) region is rightly regarded as the world’s most influential oil and gas province. In this article the author discusses the market for drilling and workover operations in the region over the 5-year period to 2014.

Onshore Oil Production

In 2009, MENA produced circa 21 million bpd of onshore oil and accounted for 40% of global production – although this is far below the region’s production capability and a reduction on 2008 levels. OPEC’s desire to influence, stabilise and increase oil pricing – in tandem with a reduction in exploration incentives reduced production by an estimated 11.9%.

As MENA production continues to increase over the coming years, we estimate that by 2015 the region will have an onshore crude output of around 27 million bpd (a 28% increase over 2009 production levels). At this time, the region will represent an estimated 45% of global onshore oil production.

Evidently, the MENA region plays a highly influential role in global oil supply and disruption (both planned and unplanned). It can therefore severely influence the global demand/supply balance and oil prices worldwide.

It is anticipated that Iraq will be a prime onshore growth country; in 2000, Iraqi oil production was the third highest in the Middle East, estimated at 2.6 million bpd – 12% of MENA onshore production. The effects of the second Gulf War had a significant impact on Iraqi production and by 2003, production had dropped to 1.3 million bpd. However, improvement in the political stability of the country and an injection of Western investment has the potential to lead to a significant augmentation in production levels. Hence, by 2015, Iraq has the potential to succeed both Iran and Kuwait to become the second largest MENA producer at 4.3 million bpd – 16% of total MENA onshore output at that time.

In 2009, the North African states of Algeria, Libya and Egypt accounted for around 18% of MENA onshore oil production. However, maturing fields in Algeria and Libya coupled with the revitalisation of the local North African gas industry will see this share drop to an estimated 15% by 2015. This was highlighted at the latest licensing round in Algeria, which took place in December 2008, where only four out of the eleven contract areas were awarded due to a lack of interest from foreign players. Concern has also been made by some western companies about the amount of government involvement in the sector, especially in Libya where demands include the appointment of a Libyan chief executive for joint ventures.

Offshore Oil Production

MENA offshore oil production is focused on two key areas; the Persian Gulf states of Saudi Arabia, Qatar, UAE and Iran in the Middle East and the Mediterranean states of Algeria, Egypt and Libya in North Africa.

At present, the region does not hold the same influence over the offshore oil industry, although 2009 production still accounted for 23% of the global total at an estimated 6.5 million bpd (equivalent to Saudi Arabia’s onshore output). The economic downturn and OPEC’s influence on oil supply drove a 7.5% decrease in offshore oil production between 2008 and 2009, although recovery is expected to be swift given stabilised oil pricing and recovery from the global recession. By 2015, total production will have grown to reach an estimated 9.3 million barrels of oil per day, at which point offshore territories will be responsible for more than a quarter of total
oil production.

Offshore, the majority of MENA oil production is accounted for by five countries – Saudi Arabia, UAE, Qatar, Iran and Egypt – countries that together produced 95% of the region’s oil offshore in 2009. Kuwait, Libya and Oman have minor production capabilities which are extremely limited. They are unlikely to impact significantly on future investment. Algeria, Iraq, Syria and Yemen have no offshore production at all. Heavily-developed Egypt is the only offshore territory expected to see decline over the 2010-2015 period – by 12.2%. The most significant growth stems from KSA and Iran.

Gas Markets

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 2009, the region accounted for just under 18% of global gas production.

Given its large gas reserves, the MENA region has the potential to dramatically increase its gas production. The continued development of LNG and GTL technology will enable MENA countries to export gas and gas-derived products to new markets worldwide such as China. In 2008, MENA exported 168 billion cubic metres of gas, 56% of which was transported using LNG technology.

Qatar is currently the largest LNG exporter in the world and is undergoing a significant expansion of its Qatargas and Rasgas facilities. By 2011, Qatar will be capable of exporting 77 million metric tonnes per year of LNG, accounting for approximately 27% of global liquefaction capacity in that year. Iran, following Qatar’s lead, is developing a number of LNG projects utilising gas from the giant South Pars field. Expansions are also planned for LNG terminals in Algeria and Libya.

MENA Energy Policy

During the 2008-2009 global recession, OPEC made a series of supply cuts in order to boost oil prices to a floor level of approximately $75/bbl, on which most OPEC members rely. OPEC believes that at this level, oil producers are incentivised to continue investing in projects that will produce the oil and gas needed once the economy recovers.

This opinion is shared by most western oil companies who warned that a sustained period of low oil prices would bring under-investment and an eventual supply crunch. Saudi Arabia, which is the world’s biggest oil exporter, has declared $75/bbl a “fair” price as this would, in their opinion, encourage investments in more marginal oil and gas reserves across the world, including the Middle East.

Drilling & Workover Expenditure

For the focus countries of Algeria, Egypt, Iran, Iraq, Libya, Kuwait, Oman, Qatar, Saudi Arabia, Syria, UAE and Yemen, total onshore and offshore drilling and workover expenditure on oilfield services reached $17.5 bn in 2008 (inclusive of all major cost segments but excluding certain aspects of expenditure such as logistics). The impact of decentivised operator spending and OPEC production cuts saw expenditure decrease by an estimated 2.2% overall in 2009. Growth has the potential to be swift throughout 2010 and we believe that spending could grow to reach $27.9 billion per annum by 2014 based on expectations of oil price recovery and increased capital expenditure budgets, particularly offshore.

The combination of OPEC production cuts and the impact of reduced oil prices on operator exploration plans caused an inevitable dip in drilling activity between 2008 and 2009 – an estimated decrease of 6.9% onshore and 12% offshore (where costs are far higher, particularly in terms of rig & crew expenditure). Recovery is expected to be faster in onshore areas than offshore – however, beyond 2010 it is unlikely that onshore drilling will see strong growth given the maturity of the basin and an increased focus on remedial operations. Growth in onshore drilling-related oilfield services will therefore be cost-driven over the forecast period.

Saudi Arabia is responsible for approximately 18% of onshore drilling expenditure at present within the MENA region – however, we expect this to decrease to 17% by 2014 when Saudi Arabia will be succeeded by Oman. Over the next five years, growth in offshore drilling expenditure has the potential to average 11.8% per annum. Iran and KSA will be responsible for a large portion of this given, for the former nation, the development and production of offshore gas in the South Pars field.

The economic climate has had less of an effect on the workover markets, given the relative low cost of intervention operations and the significant benefits gained. Most commonly, full workover rigs are not required and less costly wireline or coiled tubing units are used as deployment method for downhole tools and pumping. Oman and Saudi Arabia together represent the largest expenditures on workover operations onshore, given the maturity and significant wellstocks contained within these nations.

Offshore, workover expenditure will be lower than onshore based on a less mature producing environment. The economic downturn has impacted some countries, whilst others that are in an earlier stage of offshore development or have long-term plans in place for the extraction of huge reserve bases, for example Iran and Saudi Arabia, are thought to have seen some growth to 2009. An average annual growth of 13.0% is expected over the next five years, in order to service a wellstock predicted to grow by a total of 38.1% over the same period.

Conclusion

Despite experiencing a drop in production in 2009 due to the global recession and OPEC’s price stabilisation methods, the MENA region is expected to see a growth in oil and gas production, both onshore and offshore from 2010 through to 2015. Offshore areas and gas production is forecast to grow at higher levels than onshore oil production due to the maturity of many onshore basins. Much of the growth will be driven by increased drilling in Iraq which is seeing a revitalisation of its oil and gas industry after several years of decline. Gas production in Iran is another important growth market due to the development of the South Pars field.

Onshore markets have dominated MENA drilling and workover expenditure historically, although it is expected that given increased focus on the offshore environment will see offshore expenditure on grow and the gap will narrow. Offshore and onshore drilling segments will be almost equal by 2014 whilst larger, more mature onshore wellstocks requiring high volumes of workover activity will maintain onshore expenditure in this segment throughout the period and beyond.

Douglas-Westwood Limited is an independent company that carries out business research for the international energy industries. Its market analysis, surveys and forecasts are used by many of the world’s major energy companies, the leading industry contractors and manufacturing companies.

The author: Rod Westwood

Rod Westwood is a senior analyst with Douglas-Westwood Limited. His market modelling experience spans a wide variety of sectors, having contributed to a multitude of studies examining a variety of oil & gas sectors, onshore and offshore, including drilling, workover, enhanced recovery and ROVs.