Middle East observations

The Middle East is worried about oil resource maturity, and practical peak oil is becoming broadly recognized as a critical issue. Other concerns are rising resource nationalism and a realignment of economic and national security interests in the region.

These are not my observations but those of Tom Petrie, vice chairman of Merrill Lynch & Co., who recently returned from a week-long trip to Dubai, Abu Dhabi, Kuwait, Qatar, and Saudi Arabia. Petrie sold his Denver-based boutique investment bank, Petrie Parkman & Co., to Merrill in 2006 and was named vice chairman of ML at that time. He is a widely recognized authority on geopolitics and global energy and appears frequently on Fox, CNBC, Bloomberg TV, and other national newscasts as an expert on energy matters.

I had the privilege of sitting next to Petrie and discussing his trip with him during Merrill Lynch Petrie Divestiture Advisors’ annual breakfast at the Hotel Americas in Houston during NAPE in early February.

Surprisingly, at least to me, he said he found that interest in alternative energy in the Middle East is high. He cited a number of investments in renewables, including Nakhoil, a bioethanol fuel from the palm tree being promoted by Dubai-based Oasis Ltd. Nakhoil is derived from date groves – either through fermentation or through the conversion of palm tree biomass into fuel.

There is also an emphasis on diversification, said Petrie. For example, the Saudis are looking to be a major supplier of aluminum to China. Since the manufacture of aluminum is energy intensive, this will mean extra energy consumption by Saudi Arabia (and, possibly, less for export).

Of course everyone is impressed with the economic development going on in this part of the globe. Saudi Arabia and Dubai in particular are pouring vast amounts into building world-class cities, and this is attracting international corporations and additional capital.

Petrie said that we shouldn’t forget about resource maturity, especially in the large oil and gas fi elds in the Middle East. Many of these fi elds are approaching a 30-year maturity and surely are approaching a peak in their life cycle – including giant fi elds in Saudi Arabia, Iran, and Kuwait.

Once these fi elds begin to level off and decline, it will be a challenge for us to fi nd production to replace that lost here, he said.

Taking these future declines into account, Petrie said, “I believe the new fl oor for oil will be in the $70 to $80 range – not $40 or $50.

Petrie noted the potential for a realignment of economic and security interests and what he calls “new and evolving resource priorities” that are trumping historic relationships. For example, Russia and China are expanding both their oil and gas linkages. Iran and Russia have announced nuclear cooperation for civilian reactor needs. China has become a large purchaser of Iranian crude oil and products, and Iran, Pakistan, and India are considering a gas pipeline link.

Looking at this from a Western perspective, I’m reminded of a Satchel Paige quote: “Don’t look back. Something might be gaining on you.”