OUTLAY OF $70 BILLION BY GULF PRODUCERS SEEN

The five main oil exporters on the Persian Gulf will have to spend $70 billion to increase production capacity by 5 million b/d during 5 years.

Of that total, $50 billion will be needed just to maintain current capacity, says the Centre for Global Energy Studies (CGES), London.

The capital requirements will strain all the countries except, perhaps, the United Arab Emirates, CGES says in its January-February Global Oil Report.

The group, founded by former Saudi Oil Minister Sheikh Ahmed Zaki Yamani, estimates the average investment requirement in the Middle East at $3,700-4,000/b/d of peak production capacity.

That's low by worldwide standards but high in relation to other estimates, CGES notes. It's also higher than in the past.

CAPACITY AGING

Existing production capacity in Iran, Iraq, Kuwait, Saudi Arabia, and the U.A.E. and Neutral Zone is aging. CGES says half of the 20.1 million b/d total is in fields that came on stream more than 30 years ago, 86% of it in fields that came on stream more than 20 years ago.

As fields age, the group points out, investment requirements increase for secondary and enhanced recovery facilities needed to keep production from declining.

Also, past underinvestment has raised current investment requirements. Early production practices now regarded as poor hurt the oldest Persian Gulf fields.

And the oil price slide of the 1980s curtailed capital outlays for projects such as water or gas injection, evaluation and development drilling, reservoir studies, and exploration.

"The cumulative effect of capital starvation on older fields, which need careful reservoir management, was particularly detrimental," CGES says.

In addition, undeveloped reservoirs from past discoveries and new finds are more costly to bring on stream than the region's old fields were because they tend to be smaller, deeper, and less prolific.

And modern development of new discoveries involves investment in facilities to handle gas, which formerly was flared.

The problem is availability of capital, not profitability, CGES says. Development costs remain only "a few dollars per barrel" of production in the Middle East, "making investment in the upstream sector viable under almost any future oil price scenario."

THE SAUDI CASE

CGES estimates Saudi production capacity at 8.5 million b/d, of which 2-2.5 million b/d was mothballed during the 1980s.

The exact amount mothballed isn't known outside Saudi Arabia.

The kingdom raised production to more than 8 million b/d after Iraq invaded Kuwait last August by demothballing plants and installations. CGES thinks the $5 billion Saudi Arabia is reported to have spent on the recent capacity push includes outlays not directly related to the demothballing.

By far most of the production capacity spending in Saudi Arabia will come in the longer term increase announced by Saudi Arabian Oil Co. (Aramco) in 1989.

CGES cites a $36 billion Aramco capital expenditure estimate for 1990-2000 and estimates $20 billion of the total will apply to development outlays.

The work mostly involves water and gas injection, gas lift, gas gathering, and wet crude handling. The plan calls for development of only one new field - Shaybah near the Abu Dhabi border.

Although the planned work concentrates on fields now on production, CGES says the expenditure will add production capacity as well as slow declines of old producing areas.

CGES expects Aramco to add 4.5 million b/d of capacity during 10 years at an average cost of $2,900/b/d of peak production capacity. The figure includes new field development.

Development costs in existing fields might range from $1,500/b/d of peak capacity for further development of Ghawar field to $3,500/b/d in offshore Safaniya field.

First phase cost of developing a new field such as Shaybah will be at least $8,800/b/d because of infrastructure requirements, CGES says. Second phase development costs might be $3,000/b/d.

CGES points out that Saudi Arabia is considering a shift in its oil field investments toward southern and western parts of the country and away from the Eastern Province, which it considers threatened by war. A shift like that would further raise costs.

COSTS STILL LOW

Although costs of adding production capacity-which CGES calls investment intensity-are rising in the Middle East, they remain low by world standards.

The $3,700-4,000/b/d of peak production capacity range for the Middle East compares with $5,00020,000/b/d elsewhere. And in frontier areas the costs can reach $50,000/b/d.

CGES estimates the cost of developing a new offshore field in the U.A.E. at $4,000/b/d, in Brazil at $10,000/b/d, in Papua New Guinea at $12,000/b/d, and in the North Sea at $15,000-20,000/b/d.

"Similarly, the expansion of capacity is much more expensive in Iran than in Saudi Arabia-probably twice as costly," CGES says.

To assess investments required to maintain production capacity, CGES examined financial and operating reports of companies with global operations. It estimated the annual requirement at $5003,000/b/d of current production worldwide.

Persian Gulf producers, in the low end of the range at $500/b/d, must invest about $10 billion/year to maintain capacity at 20 million b/d and conduct other development.

So to add 5 million b/d of peak production capacity in 5 years, CGES says, the gulf producers would have to spend $50 billion to sustain existing production and $20 billion for the capacity additions.

CAPITAL SOURCES

To raise capital, most of the gulf producers will have to look outside their region, CGES says.

Iraq and Iran needed funds from external sources to reconstruct their oil industries after their 8 year war. lraq's capital requirements have certainly increased since then due to the war over Kuwait.

Kuwait's prewar production capacity expansion plans will be eclipsed by reconstruction needs. And Saudi Arabia's contribution to the anti-Iraq effort will hurt its ability to fund capital projects internally.

The U.A.E. appears better able to finance upstream investments, But its plans are limited, and the war may restrict further expansions.

In all the countries, CGES says, production capacity expansion "necessarily implies either the appropriation of scarce national funds that are generated by the industry itself, possibly to the detriment of nonoil projects, or cooperation with the multinational companies in any of a number of mutually acceptable forms."

The gulf producers are willing to provide a cushion of spare capacity for the benefit of petroleum consumers but need to avoid the massive capacity surplus that wrecked the market in the 1980s, CGES says.

"Ideally, some form of guarantee for their financial commitment in maintaining a reasonable cushion of spare capacity would be desirable."

Copyright 1991 Oil & Gas Journal. All Rights Reserved.