Roger Vielvoye
International Editor
Middle East countries are preparing for a predicted upturn in demand for their crude oil in the mid-1990s.
Production facilities mothballed for as long as 6-7 years in some cases are being reactivated and investments approved for new production facilities.
The turnaround in the fortunes of the region has occurred suddenly.
One year ago Middle East producers were talking enthusiastically about increased demand for crude from members of the Organization of Petroleum Exporting Countries in the middle of the decade. But they were not prepared to back general forecasts of more buoyant times ahead with investments.
Now, the big producing countries have started to believe forecasts. As a result, the list of development projects is growing.
MIDDLE EAST STOREHOUSE
Among those who believe the Middle East will again see rising importance as the big storehouse of non-Communist oil supply is Conoco Inc.
Its extensive forecast of last summer pointed out that non-OPEC production continues to grow slowly as long lead time projects, under way before oil prices collapsed in 1986, go on stream. However, the long term outlook is not bright, and non-OPEC crude oil production is expected to peak by the early 1990S.
"The eventual decline in non-OPEC supplies, together with steady demand growth, will lead to growing dependence on OPEC," Conoco said. "By the early 1990s, demand for OPEC oil is expected to reach 22 million b/d, or about 80% of current capacity, and OPEC may be able to reestablish control over world oil markets at that time."
The Middle East dominates non-Communist crude oil reserves.
As demand increases and producers outside the Middle East reach productive capacity, incremental demand will be met by Middle East exporters.
Conoco said, "These exporters will have two options as capacity utilization rises: increase production capacity or increase prices.
"If they have learned a lesson from the mistake of letting prices rise too quickly in the past, they will raise capacity sufficiently to put a cap on the price of oil at a level well below the previous high."
REGIONAL OVERVIEW
Saudi Arabia has a program under way to restore sustainable productive capacity to 10 million b/d. That could involve spending of as much as $3 billion. There is speculation that the kingdom may have to come up with $30 billion to meet long term demand on its reserves.
Iran and Iraq are rebuilding their industries after their long war and adding productive capacity for the 1990s. Both countries are looking to foreign oil companies and contractors for expertise and financing for their programs.
Among the other large reserve holders in the region, Abu Dhabi has approved large new onshore and offshore development projects, while Kuwait has indicated it can boost production rapidly in response to increasing demand.
Middle East confidence has been helped by recent trends in the oil market. Last year OPEC production averaged 21.7 million b/d, the first time that figure had been above 20 million b/d since 1981.
In fourth quarter 1989 and the first 3 months of this year OPEC production has been more than 23 million b/d without provoking a slump in crude prices.
In the late 1970s OPEC consistently produced more than 30 million b/d, peaking at 31.7 million b/d in 1977. OPEC hopes to return to the 30 million b/d mark in the second half of this decade with Middle East producers providing most of the added barrels.
Out of OPEC's current 23 million b/d production, Middle East producers are responsible for about 15.5 million b/d. Oman and North and South Yemen, which are not OPEC members, contribute another 840,000 b/d.
In the short term, Middle East producers might be able to produce an additional 3-4 million b/d, which would not be enough to meet sustained demand of the mid-1990s.
Exploration also is beginning to pick up again in the region. However, all the large producers have sizable undeveloped reservoirs. Industry sources believe the real incentive to find more reserves will not begin to emerge for another 2-3 years.
ACTIVITY IN SAUDI ARABIA
Saudi Arabia is preparing to maintain its position as the region's biggest producer with an investment program designed to restore productive capacity to 10 million b/d by the mid-1990s.
Current sustainable capacity is thought to be about 7-7.5 million b/d. First projects in the program involve spending $550-600 million to expand offshore Safaniya field and Uthmaniya, which is part of onshore Ghawar field.
In addition, Saudi Aramco has a program of remedial work on wells and gathering systems that were shut in during the early 1980s when Saudi production slumped in response to surplus supply.
Other projects will follow.
In the boom period of the early 1980s Saudi Arabia produced about 10 million b/d but was forced to mothball many producing facilities when demand for OPEC oil collapsed.
Saudi Aramco pushed production back to about 10 million b/d for a few days in fourth quarter 1988 during OPEC's production free-for-all, but this volume cannot be sustained for a lengthy period.
International companies have been asked to bid on a $400 million project in Safaniya, which will require construction of four large gas oil separation plants (GOSPs).
Saudi Aramco has had plans for the three platform complex on its books for a number of years, but the project has remained on the back burner as OPEC production quotas restrained demand for offshore crude.
The unit will have a capacity of 270,000 b/d of oil and 100 MMcfd of gas. Oil will be linked into the existing oil infrastructure, and gas will provide feedstock for the gas processing plant at Juaymah. Contractors have until mid-May to bid on the project.
Saudi Aramco will spend about $120 million on two GOSPs in Uthmaniyah. After the units have been upgraded and expanded, production should rise to about 300,000 b/d.
Saudi Arabian Bechtel Co. and Consolidated Contractors Co., Athens, were awarded a lump sum turnkey contract to complete the work in 2 years.
Saudi Aramco also plans a smaller upgrading on another of the field GOSPs at a cost of $25 million.
EXPORT OUTLETS, EXPLORATION
As well as expanding productive capacity, Saudi Aramco is lessening its dependence on export outlets in the Persian Gulf.
Snamprogetti of Italy and Mannesmann of West Germany will increase capacity of the Petroline crude oil pipeline from the Eastern province to Yanbu on the Red Sea to 5 million b/d from 3.2 million b/d.
The higher throughput will be achieved by increasing capacity of the 11 pump stations along the line. Saudi Aramco has ordered 22 gas turbines from Cooper Rolls.
Saudi Aramco has started to step up its exploration program after a lean period when there was little requirement for more drilling or seismic surveys.
The company has four seismic crews at work and has access to five rigs. Most of the exploration effort is concentrated outside the area originally awarded to the former combine of four foreign companies.
Saudi Aramco has drilled a series of discoveries in a previously unexplored area southeast of Riyadh.
Three successful wells about 70 miles apart raised speculation that Saudi Aramco has found yet another giant oil field.
However, there is no firm evidence to show the fields are connected although Saudi sources indicate that the area has considerable potential.
Initial estimates place reserves at 2 billion bbl for the area, which could go higher with further drilling.
Reserves are light sweet crude, which is much in demand and could lead to an early development.
The new fields are close to the Petroline east-west pipeline to Yanbu.
IRAQ NO. 2
Iraq is emerging as the second ranked oil producer in the Middle East. It has productive capacity of 4.5 million b/d and, says Oil Minister Isam al-Chalabi, another 1.5-2 million b/d is planned through exploitation of proved but undeveloped reserves.
Iraq has not revealed the fields that will be developed using foreign contractors.
Al-Chalabi said Iraq is anxious to develop these reserves using oil companies and engineering companies as contractors and paying them in crude oil. The foreign companies will be responsible for all surface facilities, including development drilling, and will connect the newly developed fields to the infrastructure for transportation and export.
The foreign companies will be expected to provide all the required hard currency for the projects, while Iraq will provide local funds for work undertaken by Iraqi companies and Iraqi labor.
In addition to crude to repay initial outlays, foreign companies will be assured of longer term contracts for oil at commercial prices negotiated between the two parties.
The minister said the new development program will include sweet and sour crudes. It is likely to take in the large Yamama formation with its light crudes, which lie at about 9,800 ft. That's much deeper than Iraq's other producing fields.
Iraq has made considerable progress in adding productive capacity. Earlier this year, the country inaugurated Suba field, about 60 miles west of Basrah. Production is 60,000 b/d.
Another 80,000 b/d of capacity will become available later this year when Khabbaz and Saddam fields in Tamin province, north of Baghdad, go on stream.
Elsewhere, installation of new gas oil separation capacity and revamping of existing capacity in Zubair field, combined with a new drilling program, should increase the field's production to more than 230,000 b/d from 70,000 b/d.
The first stage of West Qurna field development is due to produce oil later this year. The Mishrif reservoir will add 200,000 b/d to productive capacity.
Iraq has longer term plans for West Qurna's Ratawi reservoir, which could add 400,000 b/d when needed to meet demand later in the decade.
Iraq has made considerable progress in repairing its war-damaged tanker export facilities through the Persian Gulf. The Mina al-Bakr terminal now has an export capacity of 800,000 b/d, although current shipments are only about 350,000 b/d.
Outline plans are being made to restore the unit to its prewar capacity of 1.6 million b/d and to repair the Khor al-Amaya offshore facility that was more seriously damaged in the fighting.
Persian Gulf tanker terminals supplement Iraq's considerable investment in pipeline outlets to the Mediterranean Sea through Turkey and to the Red Sea through Saudi Arabia.
The IPSA-2 pipeline project to newly dedicated export facilities on the Red Sea at Yanbu was dedicated in January, hiking Iraq's total export capacity to a little less than 4 million b/d.
IPSA-2 was the second stage of a 978 mile pipeline moving crude from Zubair in southern Iraq to a new terminal at Muajjiz, about 30 miles south of Yanbu on Saudi Arabia's Red Sea coast. The terminal has 10 million bbl of storage and two berths that can handle tankers as large as 300,000 dwt and a third that can accommodate 500,000 dwt vessels.
In addition to IPSA-2 and the 800,000 b/d capacity of the Persian Gulf terminal, Iraq's pipeline outlet to the Mediterranean through Turkey has a capacity of 1.5 million b/d.
IRAN TO REOPEN?
Iran also is exploring the concept of bringing in international companies to assist in development of its oil and gas fields during the coming decade.
After the OPEC ministerial monitoring committee meeting last month, Iranian Oil Minister Gholamreza Aghazadeh said his country is talking to international companies about development of oil and gas reserves on a contract basis.
He told Middle East Economic Survey the companies will not be offered equity or production sharing agreements. Companies will be paid from production of fields they develop or from other reservoirs.
Iran's main effort will be concentrated on developing new oil and gas reservoirs, although there are negotiations for help with secondary recovery projects. Pars gas field and the Mond very heavy oil reservoir might be developed with international help.
Aghazadeh did not rule out the possibility of foreign companies becoming involved in exploration, although he said, "Up to now we have not gone into this matter very seriously."
Iran's sustainable capacity is 3.3 million b/d, which is to be increased to 3.7 million b/d this summer.
Next year, capacity will be raised to 4 million b/d. Aghazadeh expects Iran within 5 years to have the ability to sustain production of 5 million b/d.
Aghazadeh also said Iran is ready to resume gas exports to the Soviet Union near the end of this month.
The two countries have agreed on volumes of 106 bcf/year but are still talking about the price formula.
REBUILDING WORK
One of the key elements in Iran's reconstruction program is rebuilding Kharg Island terminal in the Persian Gulf, which was seriously damaged during the war.
Last month ETPM of France was awarded a $225 million contract to rebuild the terminal. Work, to start in October, is expected to take 2 years.
First contracts also have been placed for replacing storage capacity at the terminal. Sangyong Construction will build five 1 million bbl tanks and one 500,000 bbl tank.
Throughout the war, Kharg Island remained Iran's major oil export terminal.
The project to link Iran with the Mediterranean through a 1,150 mile, 1 million b/d pipeline through Turkey has been dropped and there has been little activity on plans for a pipeline to a new terminal on Iran's Indian Ocean coast.
ETPM also was awarded a $45 million contract to repair and expand Nasr platform in Sirri field. Prewar output of 50,000 b/d will be increased to 80,000 b/d.
Other fields were also badly damaged in the fighting.
Salman field, on the border with Abu Dhabi, was hit by Iraqi air attacks and U.S. naval action. Before the war it was producing about 150,000 b/d. Under a $300 million contract, two Japanese companies will restart production at 50,000 b/d and then install facilities to boost production to 220,000 b/d.
South Korean companies are expected to participate in the offshore reconstruction program as a result of closer ties between Seoul and the Iranian government.
Korean companies also will participate in the second stage of the Vali Asr gas processing plant, where capacity is being raised to 2.8 bcfd from 1.2 bcfd to handle production from Nar and Kangan gas fields and boost gas export capacity.
INCREASE IN OMAN
The non-OPEC state of Oman is planning to increase production to 700,000 b/d this year after raising 1989 flow to 640,000 b/d from 600,000 b/d.
Petroleum Development Oman, which dominates the Omani industry, will increase its production to 650,000 b/d from 610,000 b/d last year, and Japex Oman will contribute with start-up of its Daleel field at an initial rate of 8,000 b/d.
The remainder of the increase will come from Occidental of Oman's Safah field and a marginal rise in production from small Sahmah field operated by Elf Oman.
Reservoirs in Oman are small.
PDO will develop 25-30 fields to achieve its target of increasing production by about 40,000 b/d after allowing for declines in some existing fields. The major exception will be Lekhwair field, where production has increased via waterflood to more than 20,000 b/d.
Omani Oil Minister Said bin Ahmed al-Shanfari said approval has been given for development of a deeper Lekhwair reservoir, which should boost total flow to 100,000 b/d by 1992.
Oman also runs one of the most intensive exploration programs in the Middle East. Last year it found about 300 million bbl of reserves while producing 233 million bbl. Shanfari said that the nation's reserves now stand at 4.3 billion bbl.
Exploration, like production, is dominated by PDO, which expects to exceed last year's exploration spending of $300 million'
Twenty-one rigs are operational in Oman. Sixteen are involved in development drilling, one on workovers, and four on exploration. More rigs may be added to the fleet later this year.
Omani authorities are making strenuous efforts to encourage domestic natural gas consumption to restrain growth in demand for oil products.
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