The two most compelling words in the Middle East oil industry today might be “natural gas.”
Wait. Not “OPEC quotas”?
“The OPEC quotas are limiting production in some areas, but really the key issue is that investment is continuing across all the countries – most of that in oil capacity, but gas is a big theme,” said Liam Yates, research analyst for Wood Mackenzie in Edinburgh.
And there are other, increasingly important word pairs not usually associated with the Middle East oil industry, like “unconventional resources” and “renewable energy.”
The natural gas picture in the Middle East combines several components, including exploration, field development, unconventionals, investment by international oil companies and the build-up of liquefied natural gas infrastructure for gas exports.
“In Abu Dhabi, the focus there is on exploration. Abu Dhabi is looking to become self-sufficient in gas. They’re having to do that through pretty expensive projects,” Yates noted.
Last year, state-owned Abu Dhabi National Oil Company launched its first competitive lease bid round.
That effort concluded in March 2019 with offshore blocks going to a consortium of Italian major Eni and Thailand’s PTT Exploration and Production, and onshore blocks to India’s Bharat Petroleum and Indian Oil Corporation, Occidental Petroleum and Inpex Corp.
In May of this year, ADNOC and Abu Dhabi opened bidding for five additional blocks, three offshore and two onshore. That lease round will end in November, followed by bid evaluation.
Abu Dhabi has announced an intention not only to attain self-sufficiency in natural gas supply but to become an overall gas exporter. It’s having to turn to sour gas in the supply mix to chase that goal, Yates said.
To develop the Ghasha offshore ultra-sour gas project, ADNOC extended stakes to several IOCs, with Eni now holding 25 percent, Germany’s Wintershall 10 percent and Austria’s OMV 5 percent.
ADNOC expects the project to produce in excess of 1.5 billion cubic feet of gas per day when it goes onstream around the middle of the coming decade. Earlier this year, ADNOC awarded a $1.36 billion contract that includes construction of multiple artificial islands for the Ghasha Concession.
Natural gas production in Oman, which has seen declining crude output, could surpass oil on an energy-equivalent basis within four years, according to analysis and consulting firm Rystad Energy.
Oman contains the Middle East’s largest unconventional tight-gas resource, the giant Khazzan field. BP operates the field and is providing development expertise.
“In Oman, BP is bringing in some technology from the Lower 48 to help with their drilling,” Yates said.
French major Total has a long-time presence in Oman. In April, it signed an agreement with Oman’s Ministry of Oil and Gas for an exploration license on the country’s onshore Block 12, where Total will be operator with a 100 percent working interest.
Qatar contains vast natural gas reserves, estimated to be the third largest in the world, and the largest non-associated gas resource. Its North Field is part of the world’s largest gas-producing expanse.
“LNG in Qatar is going to be a big story, with the award of the LNG train contracts,” Yates said.
Earlier this year Qatar Petroleum awarded a number of contracts related to the country’s effort to increase LNG production capacity to 110 million metric tons per year by 2024. That effort includes building four new LNG mega-trains at Ras Laffan Industrial City, an industrial hub north of Doha.
“In Iraq there’s a lot of potential. They’re flaring off a lot of gas and the objective there is to capture some of that gas they’re flaring off,” Yates said.
But “the big story is Qatar. The North Field is huge,” he added.
Unconventionals and Renewables
Renewables and unconventionals will become increasingly important in the Middle East “if some of these countries want to meet their growth objectives,” Yates observed.
“Unconventionals are coming in, especially in Saudi Arabia. Oman has been doing that for years with its tight gas capacity,” he said.
Saudi Arabia has set a target of producing economic unconventional gas for export. The country’s focus areas are the north, where it already produces some unconventional gas, south Arabia and the Jafurah basin.
Renewables are projected to climb in the Middle East’s energy mix, with solar energy a leading contributor, but analysts expect natural gas to dominate as the region’s future electric-generation driver.
In its Energy Outlook, BP forecast the share of non-fossil fuels in the Middle East’s energy demand mix to increase to 13 percent by 2040. That’s small potatoes compared to much of the rest of the world, but a remarkable shift in a region known for cheap and plentiful hydrocarbons.
Unconventional possibilities in the Middle East include both shale plays and tight gas, with large prospects available for exploration in Saudi Arabia and elsewhere.
“These plays are enormous. There’s a lot of potential to tap into that resource,” Yates observed.
As an example, last year’s Khalij Al-Bahrain discovery offshore Bahrain was initially assessed to hold at least 80 billion barrels of tight oil and 10-20 trillion cubic feet of deep natural gas. Evaluation is continuing and Bahrain has sought outside help and expertise to develop the resource.
In addition to the offshore Ghasha Concession, ADNOC has emphasized the importance of offshore exploration and production to its gas self-sufficiency and export plans. And “Kuwait recently signed a contract to do offshore exploration in their sector, so that’s interesting,” Yates noted.
Halliburton in May announced signing an integrated offshore drilling services contract with Kuwait Oil Company for six high-pressure, high-temperature exploration wells on two jack-up rigs in the Arabian Gulf, in Kuwait’s territorial waters. Drilling is expected to begin in mid-2020.
In oil markets, “sour barrels have become more valuable lately. That’s more to do with the supply picture from Venezuela and Libya,” Yates said.
U.S. crude oil exports as a challenge to Middle East supply in Asia and other areas have drawn attention recently, although the inroad is small. The main effect of increasing U.S. oil production is global oversupply.
“For the Middle East oil producers, what needs to be remembered is that they are by far the lowest-cost producers globally. It makes more sense for them to cut production and get a higher price,” Yates noted.
At the same time, Middle East oil resources are maturing. Several countries are struggling to cope with declining crude production.
“Costs are rising. Some countries are having to look at secondary recovery methods, or even tertiary, which increases costs,” Yates said.
In the macro view, the essential Middle East story might be a regional rebound after years of conflicts and the global industry downturn following an oil price collapse.
“I think it’s most obvious in Iraq,” Yates said. “They’re pushing toward 5 million barrels per day, and they should be able to achieve that fairly soon. Iraq is the real success story.”