John Westwood - Douglas-Westwood Limited
As a firm that mainly supplies services to private equity houses and investment funds regarding the oilfield services sector, the geographic focus of Douglas-Westwood Ltd. is geared to where corporate investors see greatest potential. The latest surge of interest from investors is the Middle East, and with due cause as the region is home of the world’s largest oil and gas reserves and is a recipient of vast income from its export.
Since 2003, the Middle East and North African (MENA) oilfield services market has been undergoing a period of heavy investment both onshore and offshore. The region has been producing for many years and basins are becoming increasingly mature. Continued demand for oil and gas creates a necessity to drill for new wells and to workover existing wellstocks to maintain and/or boost production. Average productivity per existing well is declining, and increasing efforts are required to deliver each barrel of oil to the surface.
Oil prices have increased rapidly in recent years. Unlike previous oil price “spikes” caused by geopolitical tension or temporary supply disruption, this price rise has been gradual and sustained, driven fundamentally by a lack of spare production capacity in the producing countries, many of which (>60 countries) are past peak production and are in decline. Most of these post-peak countries are situated in the Americas, Western Europe, and Asia. As a result, we have for several years been forecasting high oil prices together with the increasing price volatility which we now experience.
With the sole exception of offshore Europe, all producing regions are expected to show future growth with the Middle East leading the pack. From estimates of 9.4 MMboe/day in 2008, Middle East offshore production is forecast to soar by 46% to 13.7 MMboe/day by end of 2012. Source: “The World Offshore Oil & Gas Forecast 2008-2012,” Douglas-Westwood & Energyfiles
With two-thirds of global proven oil reserves, MENA is rightly regarded as the world’s most influential oil province, eclipsing all other regions by some margin. The vast majority of MENA reserves are found in the Middle East, which is estimated to hold over 742 Bbbl of oil. Other significant reserves can also be found in Russia and North America.
Future development of heavy oil technologies threatens to sway the balance of global reserves, especially as Canada and Venezuela are each considered to have over 1 trillion bbl of heavy oil and bitumen. However, this option is not currently perceived as economically viable and therefore is not considered in global estimations. It is the Middle East that will continues to dominate the global oil reserves picture.
Oil exports growth
In 2007, MENA produced circa 21 MMbbl of onshore oil a day and accounted for 40% of global output. As MENA production continues to increase over the coming years, we estimate that by 2012 the region will have an onshore crude output of over 23 MMb/d, an 8% increase over 2007 production levels. Production is dominated by Saudi Arabia, which in 2007 accounted for 35% of MENA production. Despite continued growth over the coming years, maturing fields such as the regions principal asset Ghawar – which produces around half of the country’s oil – will see Saudi Arabia share of MENA onshore production drop to 34% by 2012.
Middle East offshore production. Source: “The World Offshore Oil & Gas Forecast 2008-2012,” Douglas-Westwood & Energyfiles
The MENA region is the world’s largest exporter of oil. Other significant exporters include Russia and West Africa, although these two regions combined total only 50% of total MENA exports. Although the majority of oil-producing regions have increased their year-on-year oil exports, the most significant growth has occurred in the offshore West African basins of Nigeria and Angola. MENA exports also have grown above the global average. This has been driven primarily by increasing demand from Asian markets and also helped by a recent period of re-investment in Libya after the dropping of international sanctions over the 2003-2006 period.
Exploiting gas
Over the past 20 years, MENA gas reserves have been significantly augmented due in no small part to the ongoing exploration of the giant North Dome/South Pars basin in the Persian Gulf.
MENA states currently account for 45% of global natural gas reserves – 82 tcm (7,895 tcf), significantly more than 1986 estimations of 32%. Large gas reserves are located in the Persian Gulf enabling Iran and Qatar to dominate the reserve landscape (accounting for 34% and 31% of total MENA reserves, respectively). Other significant reserves in the area can be found in North Africa, the UAE, and Saudi Arabia.
Historically, the MENA region has focused on the crude oil industry and therefore does not dominate world gas supply but it is still a significant contributor to global output. In 2007, the region accounted for over 22% of total global onshore and offshore gas production with around 354 bcm (12.5 tcf) and 184 bcm (6.5 tcf), respectively. However, the decline in gas production in the West and the adoption of natural gas as a primarily source for electricity generation and water desalination in the Persian Gulf, coupled with the development of the global LNG industry, will prompt the MENA region to exploit its vast reserves of natural gas. As a result, we expect that over the 2008-2015 period MENA gas production will witness faster growth than that of the rest of the world.
Growth of LNG
The MENA region long has been known for its large reserves of gas, but the lack of a substantial local market has hindered its exploitation. However, the development of LNG and the ability to ship natural gas at an economically viable rate has created a new market for MENA natural gas. Over the next five years, we expect greenfield and expansion LNG liquefaction plants to be built in Qatar and Yemen, while offshore import terminals are forecast to come onstream in Dubai and Kuwait
Expenditure on LNG Facilities MENA 2003-2012. Source: “The World LNG Market Report 2008-2012,” Douglas-Westwood & Energyfiles.
Over $15.8 billion is forecast to be spent on LNG facilities over the next five years (compared with $5.1 billion in the previous five). In Qatar, the world’s largest LNG exporting nation, six trains with a combined capacity of 46.8 MMtpa are expected to be added to the country’s export capacity between 2008 and 2011. Around 90 development wells will be required to bring this capacity onstream.
Production maintenance work and possibly further development wells will be required over the duration of the production life of these projects in order to ensure that there is sufficient feedstock to operate at full capacity.
Geopolitics
International geopolitics traditionally play an important role in the energy markets of the MENA region, with historic events such as the Yom Kippur and Iran/Iraq wars of 1973 and 1980, respectively, having a huge impact on global oil supply and price as well as raising international concerns. More recently, similar concerns have arisen over the invasion of Iraq.
The Strait of Hormuz, a strategically important waterway between the Gulf of Oman and the Persian Gulf, is used for the transportation of approximately one-fifth of the world’s daily oil production. Any disruption would result in huge oil shortages, massive price rises, and global economic chaos.
MENA is home to seven of the top 10 world’s largest oil companies measured by reserves. Leader of the pack is Saudi Arabia with its Saudi Aramco company, followed by Iraq NOC, Kuwait Petroleum, Abu Dhabi NOC, National Iran Oil Co., Libyan NOC, and Qatar NOC. To put their importance into context, Saudi Aramco holds near 22 times the reserves of ExxonMobil, the world’s largest international oil company, according to published reserves estimates. With other regions oil reserves in decline, the global economy will become increasingly dependant on these MENA giants.
Offshore production
The Persian Gulf is the most significant area of offshore production in the Middle East. Here Saudi Arabia, the UAE, Iran, Qatar, and Kuwait are the main producers of both oil and gas, while Bahrain also produces offshore oil. A small part of Oman borders the southern end of the Gulf, where limited amounts of gas and condensate are delivered to the mainland.
All but two of the countries with offshore rights to the Persian Gulf are major producers. Iraq has a very short coastline at the less prospective northwestern end of the Gulf, while Oman owns a small area at the southeastern end. But neither have the potential to produce significant amounts of offshore oil or gas.
As well as the Persian Gulf, Iran has a coastline on the Caspian Sea, on the Gulf of Oman, and on the Arabian Sea, while Saudi Arabia also borders the Red Sea. Southern Oman and Yemen both border the Gulf of Oman and the Gulf of Aden, while western Yemen also borders the Red Sea.
To the west of the region, Syria and Israel/Palestine lie on the Mediterranean Sea. Finally, Turkey in the north has an extensive coastline along the Mediterranean, Aegean, and Black seas. The remaining Middle Eastern countries are land-locked or have no known prospective offshore acreage.
Although Middle East offshore oil production has grown by 16% (nearly 900,000 b/d) since 2000, gas production has grown by 290% (1.4 MMboe/d). But the next five years should see combined offshore production grow from 8.4 to13.2 MMboe/d.
Offshore drilling
A total of 1,211 wells were drilled offshore the Middle East from 2003 to 2007 with 98% in the Persian Gulf, almost all of which were development wells. A total of 1,910 exploratory and development wells are forecast over the next five years. Drilling levels have increased with a surge in gas drilling and drilling to maintain production rates in some older fields
Despite its importance in global terms, the Middle East currently attracts a relatively low amount of offshore drilling spending, almost all of which is in the low-cost Persian Gulf. There are few areas of high-cost deepwater activity in the region.
Middle East offshore well spend. Source: “The World Offshore Drilling Forecast 2008-2012,” Douglas-Westwood & Energyfiles.
However, development and exploratory spending both have grown significantly as the Gulf is called upon to maintain and increase output to satisfy world oil and gas demand. This has resulted in large investments in relatively undeveloped heavier oil fields in Saudi Arabia and in the North Dome gas field in Qatar.
“The World Offshore Drilling Spend Forecast 2008-12” estimates that a total of $9 billion was spent by oil and gas companies from 2003 to 2007. However, spending on offshore drilling is forecast to grow to nearly $19 billion over the next five years. Comprising 4% of global spending in 2007, this percentage will rise to 5.5% by 2012 as drilling levels pick up, even though wells in the region are relatively lower cost than the rest of the world.
Over the period to 2008 to 2012, we expect spending on drilling offshore wells in the MENA region to grow from $3.2 billion to $4.5 billion. The focus will continue to be on development wells. Exploration wells spend is expected to range from $628 million to $769 million, with only a small deepwater content.
MENA OFS market
Compared to many geographic areas, the market is relatively fragmented, and many players in the region provide drilling and workover services, both onshore and offshore, while some cover the entire Middle East and North Africa region. We will now consider this wider situation.
The MENA region is regarded generally as a mature producing province with average well productivity in decline, driving the need not only for increased drilling to replace depleted reserves but also intense workover activity to ensure the life current reserves are optimized.
As a result, Douglas-Westwood estimate that for the key countries of Algeria, Egypt, Iran, Libya, Kuwait, Neutral Zone, Oman, Qatar, Saudi Arabia, Syria, UAE, and Yemen, total onshore and offshore drilling and workover expenditure on oilfield services reached $7.7 billion in 2007 and we expect this to increase 61.1% to reach $12.4 billion by 2012, assuming conservative levels of price inflation.
Although growth is expected from all examined countries to varying degrees, Saudi Arabia will remain the most important country in terms of total expenditure as a function of its large onshore activity. Due to its major ongoing work programs, its share of regional expenditure will grow on a five-year basis from an historic 18% to a forecast 24% – an increase in total expenditure of $8 billion.
By 2012, Egypt is likely to rank second in terms of total expenditure (18% by value) followed by Iran (10%).
Comparing the two five-year periods, we estimate that the combined MENA onshore and offshore OFS market totaled some $25 billion over the period 2003-2007. Over the 2008-2012 period we expect the market to grow to $53 billion, with onshore spend growing from $13 billion to $28 billion and offshore $12 billion to $25 billion.
Overall, the MENA OFS market is projected to expand at a CAGR of 8.84% over the period 2008 to 2012.
To summarise, Douglas-Westwood believe the sector represents a major opportunity for both indigenous and appropriately-positioned international players able to capture the projected growth in the market.
Further information on the reports is available at www.dw-1.com. The authors can be contacted via [email protected] or +44 1227 780999.
About the Author
John Westwood, chairman, Douglas-Westwood
With a background in underwater technology, Westwood began his career in the North Sea, then in 12 years in the offshore oil and gas industry worldwide. He formed industry analysts Douglas-Westwood Ltd. in 1990. He is a widely published commentator on the energy industries, interviewed on channels such as BBC, Bloomberg, and CNBC, plus Dow Jones, the Wall Street Journal and regional media worldwide.
Acknowledgements
This article summarises work by colleagues Steve Robertson, assistant director, Douglas-Westwood; Rod Westwood, senior analyst, Douglas-Westwood; Lucy Miler, analyst, Douglas-Westwood; and Dr. Michael Smith, managing director, Energyfiles.
John Westwood of international energy industry analysts Douglas-Westwood will be the plenary session speaker at PennWell’s inaugural Offshore Middle East Conference being held in Doha Oct. 28-30, 2008. Douglas-Westwood’s published studies indicate strong market growth for oilfield services in the region over the next five years. In this article he explains some of the thinking behind their views and a taste of his forthcoming presentation.
