Saudi Arabia Gets Its Way As Ceiling UnchangedDefying predictions of a cut, Opec left its output target of 30mn b/d unchanged. Saudi Arabia hailed a great decision. But cash-strapped members such as Venezuela and Iran were left viewing the prospect of a precipitous fall in oil prices with trepidation.

OPEC

Weekly energy, economic & Geopolitical OutlookVol. 57. No. 4828.November.2014.

Oil & GasTransPOrTaTiOnrEfininG & PETrOChEmiCalsPOwEr & waTErOPECGEOPOliTiCal risk COrPOraTEECOnOmiCs & finanCEsElECTEd daTa

OPEC Oil & Gas rEfininG & PETChEms TransPOrTaTiOn

Oil & Gas Oil & Gas GEOPOliTiCal risk ECOnOmiCs & finanCE

In an exclusive interview with MeeS, egypts Oil Minister Sharif Ismail lays out his strategy to curb the countrys growing gas shortfall.

A reserves boost means Saudi Arabia is raising the capacity of its under-construction Wasit gas plant to 2.5bn cfd. The Neutral Zones Khafji field is still offline.

plans by Libyas elected government to set up a new National Oil corporation and central Bank put Libya further down the path towards civil war and breakup.

Gcc petrochemicals producers face a challenge both from the North American shale boom and tight availability of gas feedstock within the region.

MeeS analysis of crude and products stocks data shows Saudi Arabia has the worlds third largest reserves. This comes as key customer china releases SpR data.

Tehran is to focus on what it sees as a condensate-related loophole in international sanctions to boost exports as new phases of South pars come onstream.

Qatars export revenues areshrinking on the back ofdepressed crude, condensateand LNG prices. But it willweather the storm, MeeS analysis suggests.

Iraq plans 500,000 b/d of northern exports next year: both Kirkuk and KRG volumes. Infrastructure bottlenecks will continue to constrain southern exports.

Iraq Hikes 2015 Export Projections

Egypt Closes In On Payments, Shale Bidding

Saudi Expands Scope Of Key Gas Project

Libya: Parallel NOC Planned By Government

Iran Plots Export HikeDespite No Deal

GCC Needs ToBroaden Feedstock

Qatar Looks ResilientTo Lower Prices

Stocks: Chinese Become A Bit Less Reserved

CURRENT 30MN B/D OUTPUT CEILING

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Iraq Hikes 2015 Export Projections, Includes Kirkuk, KRG Oil

Iraq has penciled in 3.2mn b/d of oil exports, to include Kurdish and Kirkuk oil, in its 2015 draft budget, iraqi

Oil Minister adil abd al-Mahdi says. The inclusion of oil produced from areas under the control of the Kurdistan Regional Government (KRG) comes after a provisional agreement between the federal government in Baghdad and Erbil to allow some Kurdish exports to be had led by state oil marketer sOMO, though the controversial status of Kirkuk, now under Kurdish control, is not one that Mr abd al-Mahdi was willing to discuss.

The number cited by the iraqi oil minister is much higher than his previ-ous assumption of iraqi exports for next year. Mr abd al-Mahdi told parliament recently that he estimated iraqi ex-ports for revenue purposes next year at 2.7mn b/d from oil fields under federal control, mainly in southern iraq.

Mr abd al-Mahdi was speak-ing to reporters after the 27 No-vember OPEC meeting in Vienna, which he attended for the first time as his countrys representative.

The new figure would imply additional exports to come from the KRG and the Kirkuk field at a combined 500,000 b/d. iraq is currently exporting an estimated 2.5mn b/d of crude oil, exclusively from its southern fields. it lost potential exports of 700,000 b/d from the north in March after the main pipeline to Turkeys Ceyhan was knocked out by insurgent attacks around the Mosul area, now under isis control and inaccessible to repair crews. (Even before the outage, actual Kirkuk-Ceyhan exports had been running at less than half of the routes capacity see graph.)

KRG EXPORTS Mr abd al-Mahdi says that he can-

not give precise figures for anticipated Kurdish exports because he has not seen any official documents. Production from fields under federal control is in excess of 3mn b/d, he says. internal supply of 500,000-600,000 b/d should be added to the 3.2mn b/d export figure, he adds, implying an anticipated 2015 iraqi production figure of 3.7-3.8mn b/d.

The KRG is currently exporting crude oil through an independent pipeline completed earlier in the year at a rate of 300,000 b/d with an additional 130,000 b/d from the Kirkuk oil fields avana Dome as well as the Bai Hasan field in the north. The KRG took over the avana Dome and Bai Hasan in July to prevent the islamic state of iraq and Greater syria (isis) from seizing the oil facilities after iraqi troops withdrew. The KRG subsequently linked the avana Dome to the northern Khurmala Dome, which already lies within Kurdish territory, by pipeline and is using Kirkuk oil to feed its 80,000 b/d Kalak refinery and exporting the remainder with its own crude streams from the Taq Taq and Tawke fields. any future exports of Kirkuk oil, should production be ramped up from current levels, would require the cooperation of both sides. The iraq-Turkey pipeline will take at least one year or more to repair if and when the area is secured so in the meantime all northern exports will have to use the Kurdish infrastructure.

The iraqi National Oil Company (NOC), a ministry subsidiary, is still producing from Kirkuks Baba Dome, officials say current output here is around 120,000 b/d, of which 30,000 b/d is supplying the Kirkuk refinery and the rest re-injected into the field.

CONCILIATORY APPROACH Baghdad, under the previous gov-

ernment of Nuri al-Maliki, considered Kurdish oil exports to be illegal and an act of smuggling and launched legal action to deter potential buyers. Mr abd al-Mahdi, however, has taken a more conciliatory approach to the long-standing dispute. Earlier this month, he travelled to the KRG capital Erbil and clinched a tem-porary deal, whereby the KRG agreed to release 150,000 b/d of its production for marketing by sOMO (sOMO is market-ing these volumes as Kirkuk although in practice they appear to be a blend of KRG crude, perhaps with some Kirkuk crude). Baghdad agreed to release $500mn from funds that have been withheld by the federal government since the start of the year. Finance Minister Hoshyar Zebari said last week that the funds had

already been transferred to Erbil. The KRG has previously refused to

allow sOMO to sell its oil, insisting that it has a constitutional right to manage its own resources. The semi-autonomous region also claims Kirkuk as part of iraqi Kurdistan and insists on a referendum to determine the fate of the oil-rich region.

LONG-TERM DEAL UNDER DISCUSSION

Mr abd al-Mahdi would not be drawn into a discussion about conditions set by both sides to reach a more permanent agreement on oil exports and revenue-sharing, reiterating that a hydrocarbon law now being redrafted would help to remove any ambiguity. it is not a question of being flexible. its a question of both of us taking hard decisions, he said when asked if Baghdad would allow the KRG to sell its own crude. all these matters would be discussed during talks expected to be held in Baghdad with Masoud Barzani, the KRGs Prime Minister, possibly next week, he adds. The discussions will cover the modalities of exports and the 17% share of federal revenues to the KRG. in the end, he says, all production from iraq and revenues should go into the federal budget after they are deposited at the New York Federal Reserve Bank.

We have no conditions on our part and i dont think they have any conditions from their part, he says, adding that the constitution should form the basis of any agreement going forward. a first step has been taken and goodwill was shown by both sides, he adds. as for Kirkuk, we will sit at the table and see what we can do. Kirkuk, he says, is a disputed area and he did not want to prejudice the negotiations by commenting further.

ISIS ATTACK ON BAIJI PIPELINE The situation in Kirkuk, however, has

in recent days taken a bad turn with isis forces attacking Peshmerga positions in the area and reportedly damaging the K2

Iraq plans 500,000 b/d of northern exports next year, a combination of Kirkuk and KRG volumes. But, while southern output capacity is up strongly, export volumes continue to be hampered by decrepit infrastructure.

IRAq

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pipeline that supplies the Baiji refinery, which was recently restored to Iraqi mili-tary control after the Jihadist fighters who had besieged the complex were pushed back. Repair crews are now in the refinery, which has capacity to process 310,000 b/d and was previously supplied by the Kirkuk field. Even assuming resumed flows from Kirkuk and securing the area around the refinery, it will take time to repair the crude pipeline and allow the refinery to re-sume normal operations, the minister says.

The Institute for the Study of War says in its latest situation report on Iraq that fighting in northern Iraq has acceler-ated, as ISIS seeks to regain momentum after suffering major territorial losses and setbacks recently in the strategic town of Baiji in Salaheddin province and the towns of Jalula and Sadia in Diyala province. It says ISIS over the last two days concentrated its fighting effort around Kirkuk city in a very likely effort to force a repositioning of Iraqi Kurdish Peshmerga forces from other fronts.

FaO: MORE STORaGE NEEDED The fighting in the north and northwest

has not impacted operations in the south, where foreign oil companies are proceed-ing with further development of Iraqs six major oil producing fields. However exports have been constrained to a current level of 2.5mn b/d by insufficient infra-structure. Mr Abd al-Mahdi says the lack of sufficient storage at the Fao terminal was critical and steps are being taken to address the problem and promised that something very important will be done by the middle of next year. Until then, plans to segregate the main Basrah Light stream into two separate grades, heavy and light, to accommodate a rise in heavier streams from new fields are being pushed back. SOMO had signaled to refiners that it planned to start offer-ing a Basrah Heavy grade from the start of next year, but the minister says this is now not expected before mid-2015 or early 2016. This will require boosting storage capacity to 20mn barrels at Fao before the crudes can be segregated into separate streams at current export levels.

In the meantime, the increased flows of heavy crude have impacted produc-tion from the Halfaya field in Misan province, the managing director of the Misan Oil Company, Adnan Sachit, tells MEES. He says some 30,000-40,000 b/d of Halfaya crude is being held back because the API gravity of the crude has dropped to levels that do not meet the specifications of Basra Light.

Fields in Misan province in southern Iraq are producing 320,000 b/d with plans to increase production to 400,000 b/d by the end of next year, says Mr Sachit. Production at Halfaya, operated by

PetroChina, is currently at 200,000 b/d, at times falling to 190,000 b/d, while the three Misan fields of Faqa, Buzurgan and Abu Gharab have come down to 120,000 b/d from 130,000 b/d, he adds. The two smaller fields of Amara and Noor, which are being developed by MOC, are produc-ing 7,000-8,000 b/d of heavy oil. Current gas production from the Misan fields is 150mn cfd, most of which is being flared. Some 30% of the gas is supplying a local power station though volumes are set to rise when production reaches 200mn cfd by the end of 2015, he says. Total, a junior partner in the Halfaya development, has offered to handle the associated gas but has not yet heard back from the ministry.

The API gravity of Misan crude is somewhere between 22 and 24, far too low to be marketed as Basrah Light, Mr Sachit says. Overall quality of Basra Light has been deteriorating as new heavy oil streams have been brought online in southern Iraq, mainly from the West Qurna-2 oil field operated by Lukoil, Hal-faya and Badra. One cargo of Basra Light loaded recently showed an API gravity of 26.83. Iraqs main export grade marketed as Basrah Light previously had an API gravity of 34, similar to Saudi Arabian Light. The fall in quality is costly since Iraqs state oil marketer SOMO has to pay compensation of $0.4/B for each degree of API below contracted specifications.

Plans are underway to link the Misan fields by pipeline to the Tuba tank farms, which will also handle heavy crude from the Lukoil-operated West Qurna-2 field, and from there to offshore load-ing berths at Basra, he says. The 7.5km pipeline will be built either by the Iraqi State Company for Oil Projects (SCOP) or by Chinese contractors and can be completed in a relatively short time.

WaTER SHORTaGE HaMPERS DEVELOPMENT

Mr Abd al-Mahdi says the oil ministry is committed to the foreign contractors and payments due to them though he admits that they have faced hurdles, some

related to infrastructure and others to bureaucratic red tape that he says will be addressed. No doubt these and the water shortage in the south were among topics discussed with a large number of foreign oil executives who held talks with Mr Abd al-Mahdi and other OPEC ministers in Vienna. The new Iraqi oil minister held back-to-back meetings over two days with Total CEO Patrick Pouyanne, Lukoil CEO Vagit Alekperov, BPs Middle East boss Michael Townshend and senior executives from Shell and ExxonMobil along with representatives from Chinese, Japanese and South Korean companies active in Iraqs upstream sector. Mr Abd al-Mahdi says the Common Seawater Supply Pro-ject, which is running behind schedule and should provide treated seawater for re-injection, will likely be completed by 2018.

Iraq awarded long-term technical service contracts to international oil companies (IOCs) in 2009 and 2010 for further development or development of major oil fields in the south with initial plans to raise production capacity to over 13mn b/d by 2017. It has since lowered its target to around 9mn b/d and has negoti-ated lower plateau production targets with nearly all the major operators.

Mr Abd al-Mahdi revealed during the press briefing that a lower plateau of 1mn b/d had been agreed with Shell for the Majnoon oil field, initially targeted to reach 1.8mn b/d. He gave no details, nor did he say if the contract would include similar changes as those negoti-ated with BP, ExxonMobil, Lukoil and PetroChina, which extended the plateau period and lowered the stake of state-owned entities in the joint ventures.

Iraq has been allowed to remain out-side OPECs informal system of produc-tion targets as it recovers from over two decades of under-investment and decline due to wars and international sanctions. Mr Abd al-Mahdi said there had been no talk during the latest OPEC meet-ing of Iraq rejoining the quota system, noting that Iraq had already lost years of production and more recently some 600,000-700,000 b/d from Kirkuk.

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iRaq: OFFiCiaL CRUDE EXPORTS* (MN b/D)

*EXCLUDES INDEPENDENT KRG EXPORTS. 2015 FIGURES ARE PLANNED AND INCLUDE THE KRG.3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1q14 2q14 3q14 2015*

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Egypt Closing In On Debt Repayment And New Bid Round, Minister Says

Egypt will next week decide on a bank loan that deter-mines the size of the next tranche of payments to

international oil companies (iOCs) that are owed billions by the govern-ment, the countrys oil minister says.

Producers could be paid up to $3bn, according to sharif ismail, Minister of Petroleum and Mineral Resources, paving the way for a new oil and gas bid round to be launched before the end of the year. The auction will for the first time include shale acreage, and contractual terms are being amended to make unconventional produc-tion commercially viable, Mr ismail says.

The government has doled out two payments over the last twelve months, reducing overdue receiva-bles to $4.9bn by its own account, in an effort to incentivize international investment into Egypts upstream.

lNG imports will commence from next March as a stop-gap solution to the growing gas deficit plaguing the country, and the minister tells MEEs that a third of the cargoes to be delivered over the next five years has already been secured.

Meanwhile, the loan deal to en-able further payments to iOCs is close to being finalized, after nine banks submitted proposals.

Hopefully early next week we will be able to award, said Mr ismail. The scope of the resultant third tranche of iOC repayments depends on which loan the government chooses, but the minister said the payout will be about $2-3bn.

This will be decided once we have evaluated the offers. But the intention is to drastically reduce the arrears, because this will promote more investment in the field of oil and gas exploration and production, added Mr ismail.

in a statement released on 13 Novem-ber, the government announced that it was considering a tender for pre-export financing, guaranteeing a $2bn loan with oil sold by state-owned Egyptian General Petroleum Corporation (EGPC) over the next five years. according to the govern-ment, it had released a second tranche worth $1.5bn to producers at the begin-ning of the month. Debts to iOCs that had accumulated in the aftermath of the 2011 revolution were first addressed with a $1.5bn payment in December 2013.

apart from chipping away at the debt pile, Egypt is managing to meet its cur-rent obligations towards oil and gas producers, the minister said, claiming the government had paid $10.7bn of the $11.2bn accrued as receivables in 2013.

Mr ismail rejected reports that Egypt will be able to repay all its debts within six months, however, instead suggesting a two-year time period.

We will continue to pay all the dues, and try every quarter, or four months, to have something, so that we can reduce it over maximum of two years from now, he said.

Egypt is struggling to contain a natural gas deficit that has caused rolling blackouts over the summer and brought exports to a virtual standstill, leaving two lNG export facilities idled. Output slumped to 4.8bn cfd for the first seven months of 2014 (and a 10-year low of 4.55bn cfd for July the most recent available data), over 700mn cfd down on estimated demand of 5.57bn cfd.

The deficit is the result of years of upstream underinvestment and rampant consumption by a growing population benefitting from heavy energy subsidies. The government slashed these subsidies by a third in the current fiscal year, and pledged to reduce them further in future. This will not only curb consumption, but free up funds to increase production. Together with billions in financial aid from saudi arabia, Kuwait and the UaE, which have lavished Egypt with loans and grants since Field Marshal abd al-Fattah al-sisi wrested power from the Muslim Brotherhood President Muhammad Mursi in 2013, this cash boost provides the platform for upstream growth.

NEW BID ROUND BEFORE YEAR END The government is wasting lit-

tle time, and Mr ismail says a new bid round will be launched just a year after the most recent auction, which was an-nounced in the final days of 2013 and concluded over the summer. so far nine blocks have been earmarked for the new auction, but the minister is aiming to increase this to as much as 15 blocks in Upper Egypt, the Western Desert, and offshore acreage in the Mediterranean.

The last bid round was widely regarded

as a success, with iOCs signing a slew of concessions for gas blocks, encouraged by debt repayments and a higher price paid for gas from cost-intensive offshore acreage, where much of Egypts incremen-tal gas lies. according to Mr ismail, the government signed off on 36 new oil and gas concessions or concession modifica-tions recently, and is looking to sign off on a further 20 before the year is out.

The minister hopes to repeat the trick of tapping into a previously ne-glected resource by including shale acreage in the upcoming bid round. To make shale gas attractive to producers, the government needs to amend the terms of the concession agreements, and raise the price from the $2.65/mn BTU paid for conventional onshore gas.

We are trying to work out something for shale gas, but we need to revisit our master concession agreement to cope with this. some modifications have to be introduced so that we can cope with the requirements of the shale gas. Definitely there will be a new price for the gas, said Mr ismail, who added that the length of the agreements, as well as the percentage of cost recovery and of relinquishment costs borne by iOCs will be reconsidered.

FIRST UNCONVENTIONAL GAS DEAL CLOSE

a first deal with revised prices for unconventional gas extraction will be signed very soon, the minister says, as the government has agreed on terms for a tight gas project for the apollonia forma-tion in the North East abu al-Gharadiq concession with shell and Us inde-pendent apache. Both companies have confirmed to MEEs that negotiations have taken place (MEEs, 14 November).

Hopefully before the end of next week we will have this agree-ment signed, says Mr ismail.

Egypt has already made inroads into unconventional gas exploration. apache and EGPC subsidiary Egypt Natural Gas Holding Company (EGas) have drilled a first exploration well into shale rock at the Khalda concession in

In an exclusive interview with MEES, Egypts Oil Minister Sharif Ismail lays out his strategy to curb the countrys growing gas shortfall.

EGYPT

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the western desert. The minister said that while gas has been stuck, the well was not horizontal and apache did not make use of multi-stage fracturing, the common practice for shale gas exploita-tion through hydraulic fracturing.

The minister adds that apollonias tight gas reservoir has the same characteristics as shale rock, and will require both hori-zontal drilling and multi-stage fracturing. if successful, the project could unlock the areas unconventional potential.

This will open a new era in the western desert for a new play in ad-dition to shale oil and gas and con-ventional drilling, says mr ismail.

according to estimates by the Us Energy information administration (Eia), Egypt holds 100 tcf of recover-able shale resources. shale gas produc-tion has so far failed to take off outside north america, and the success of Egypts efforts hinge on the terms it offers to technologically savvy iOCs.

algeria, holder of the worlds third largest shale resources, failed to at-tract any foreign investment to its key shale acreage in a recent bid round. Unlike algeria, which has stubbornly insisted on retaining some of the most miserly fiscal terms in the industry, Egypt has proven itself to be more flex-ible on concession terms and pricing.

APACHE SHALE OIL PROJECT IN THE PIPELINE

Egypt is also close to striking a deal with apache on shale oil exploita-tion, according to the minister.

we have a big project with apache, this will happen very soon, he said, without elaborating.

a source at the company confirmed that negotiations with the ministry had taken place, and that the deal still needs to be approved by the cabinet.

its an area which we are work-ing with the ministry to gain access to. it requires for certain parts of the cabinet to discuss [as it] involves some sensitivities, said the source.

as both a leading producer in Egypt and a sizeable player in Us shale production, apache is well suited for a pioneering role in developing Egypts shale potential.

LNG IMPORTS TO START IN MARCH after a lengthy negotiation process,

the government finally managed to sign a five year deal for a floating lnG import terminal with norways hegh lnG. The Gallant floating storage and regasifica-tion unit (fsrU) will be moored at the port of ain sukhna in the Gulf of suez, and supply the part of the country in which the gas supply is most stretched.

according to mr ismail, lnG deliver-

ies will start arriving in march, and 13 to 14 cargoes have already been secured. Over a five-year period, a total of 48 cargoes will each deliver 3.4 trillion btu of gas, enough to supply 100 to 110mn cfd over a 30-day period, he said.

we have received offers, and we will be awarding the rest of the cargos very soon, he said. .

in its search for gas, Egypt has cast its eyes across the mediterranean, where Cyprus is intent on developing its offshore resources. mr ismail on 25 november met his Cypriot and Greek counterparts in nicosia, where the three ministers agreed to expedite talks on potential gas exports via a pipeline from the offshore aphrodite gas field in Cyprus to Egypt.

Cyprus Energy minister Yiorgos lakkotrypis said that a technical study for a subsea pipeline would be com-pleted in January 2015. Once Cypruss offshore gas is being produced, it could be piped to lnG export plants in idku and damietta, or sold into the domestic market, mr ismail told reporters. The 7.2 mn tons/year idku plant is operated by BG Group, while the 5mn t/y plant in damietta is operated by Union fenosa.

Egypts government has also indicated it will approve deals to pipe israeli gas to the lnG export terminals, after BG and Union fenosa signed initial agree-ments with the noble Energy-led consortium exploiting israels huge offshore gas fields. mr ismail has in the past said that such arrangements need to also benefit Egypt, suggesting that the government is looking to receive israeli gas for the domestic market.

PETROLEUM PRODUCT IMPORTS apart from gas, Egypt is also suf-

fering from a shortage of petroleum products, and Gulf countries have stepped into the breach by provid-ing vast amounts of product.

saudi arabia alone reportedly sent $5bn worth of refined products to Egypt between the beginning of the year and september.

On 17 november, the government an-nounced it will receive 65% of its oil prod-uct imports from the UaE in the coming year. mr ismail said that at present, Egypt pays for half of its imports from the UaE, with the latter providing loans for the rest.

Total imports of petroleum products average at around 300,000 tons of gasoil a month, 100,000 tons of lPG, and 120,000 tons of fuel oil, as well as small amounts of gasoline, the minister said.

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ALGERIA

We are trying to work out something for shale gas. There will be a new price.-Oil Minister Sharif Ismail

Algeria Prepares New Bid Round For Mid-2015 Launch

ALGERIA

Algeria will launch its next oil and gas bid round by the middle of next year, giving the government time to respond to feedback from international oil companies (IOCs), which overwhelmingly shunned an auction that concluded last month.

Only four out of 31 blocks were awarded in October, a poor result for a bid round that boasted improved terms and was promoted with zeal by state energy regulator Alnaft. IOCs nevertheless remained unimpressed by the acreage and the terms on offer, and the government wants to avoid another disappointment by consulting with companies in the run up to the next auction.

We are discussing with the partners, we are discussing very closely with them, Youcef Yousfi, Algerias Minister of Energy and Mines, told MEES at this weeks OPEC meeting in Vienna, adding that the bidding process would commence by mid-2015.

No decision had been taken on which blocks would be put to tender, said the minister. Many of the blocks offered in the past bid round had been shale prone, and Algeria had hoped to capitalize on its vast shale reserves by amend-ing contract terms to incentivise unconventional production. But none of the blocks in core shale areas were taken up by IOCs.

Improved fiscal terms for shale plays are offset by complaints about bureaucratic red tape, contractual uncertainties, and the stipulation that national oil company Sonatrach holds a majority in every concession.

Algeria needs to attract foreign investment into its upstream to reverse production declines. The International Energy Agency estimates that current oil output capacity of around 1.2mn b/d will drop by 290,000 b/d in the five years to 2019, while the gas yield will only increase by 10 bcm over the same period, much less than envisaged by the government. At an estimated 707tcf, Algerias shale gas reserves are the worlds third largest.

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Saudi Arabia Expands Scope Of Key Gas Project

Saudi arabia is slightly behind schedule in its gas develop-ment but expects to add 3.5bn cfd to gas processing

capacity over the next two years when the Wasit gas processing plant is fully operational. a further 3bn cfd will come from unconventional gas development in the north and southeast within a decade, industry sources tell MEEs.

The Wasit delay is down to the Hisbah gas field turning out to be larger than initially thought, the sources tell MEEs. The Wasit gas plants capacity has been expanded to 2.5bn cfd as a result and will come online gradually in 2015 and 2016.

an additional 1bn cfd will come from associated gas produced at the Fadhili oil field. Earlier reports suggested that Hisbah gas contained a higher than expected percentage of sulfur, forc-ing a recalibration of facilities.

The Fadhili gas processing plant, scheduled for 2018 start-up, will pro-duce 520mn cfd of sales gas. Fadhili is part of the 500,000 b/d Khursaniyah oil development. The associated gas from Khursaniyah will provide the Fadhili plant with some of its feedstock.

saudi arabia, with current oil produc-tion capacity of 12.5mn b/d, has focused more on gas exploration and production as it completes its oil expansion plans. The 900,000 b/d Manifa heavy oil field the last of saudi aramcos greenfield capacity expansion projects will reach full capacity on schedule by end-2014.

The offshore field will provide feed-stock to two refineries, the satorp JV refinery with Total, which is now operating at its full 400,000 b/d capacity, and the newly commissioned 400,000 b/d Yasref JV refinery with Chinas sinopec. Crude runs began in late september, but the plant is not expected to be fully online until well into 2015. The source tells MEEs that commissioning will take six months.

saudi Oil Minister ali Naimi said in a speech in Mexico in early November that the kingdom has no intention of export-ing gas or developing an lNG business, despite plans to double gas production capacity over the next decade. saudi arabias conventional gas reserves are at least 300 tcf: developing these is a funda-mental part of saudi arabias longer-term development and prosperity, he says.

saudi arabias gas development has

fallen to state-owned saudi aramco and some key projects such as the Wasit gas processing plant, which will provide a major boost to supplies of sales gas to the national grid, are expected to come online next year, slightly behind schedule. a much-heralded gas initiative that saw in-ternational oil companies enter into joint ventures with saudi aramco to develop gas deposits in the Rub al-Khali (Empty Quar-ter) desert have so far not been successful.

Until the oil-rich kingdom can substitute gas for crude oil and liquids for power generation and desalination, saudi aramco will find it difficult to cut its oil production and lose much needed associated gas, which might partly explain its reluctance to consider cutting oil production to shore up oil prices (see p10).

saudi arabia has maintained oil production at around 9.6-9.7mn b/d in the past two months despite its decision to shut down the Khafji oil field in the neutral zone shared with Kuwait (see box). Unlike Kuwait, which has been unable to make up for the loss of its 50% share of Khafji production, saudi arabia has made up for the loss by tapping into its spare production capacity.

SAUDI ARABIA

a delegate at the OPEC meeting in Vienna this week tells MEEs that the 300,000 b/d Khafji field in the offshore Neutral Zone, shared 50:50 by saudi arabia and Kuwait, remains offline fol-lowing a unilateral saudi decision to take Khafji out of production last month.

a meeting is supposedly scheduled for 30 November, though it remains unclear if a resolution is in sight.

Khafji is believed to have been produc-ing about 200,000 b/d when it was shut down. saudi officials cited environmental concerns as the reason for shutting in production at Khafji, but it appears that the problem runs far deeper. Kuwait stopped issuing new work visas to Chevrons employees operating in the onshore Neutral Zone and refuses to renew expiring work permits. Part of the problem in the shared production zone is that, while decisions are meant to be taken jointly, each side often operates independently of the other leading to confusion and some degree of mistrust. While both sides continue to downplay disputes in the Neutral Zone, the loss of Khafji has far reaching consequences, particularly for the Kuwaiti side which has high hopes of boosting oil output. The

loss of Khafji barrels means that Kuwait produces 2.8mn b/d, and MEEs under-stands that it is currently unable to push beyond this level while Khafji is offline.

Kuwaits share of Neutral Zone output forms a key part of the coun-trys plans to hit its ambitious 4mn b/d 2020 output. Of this 350,000 b/d is slated to come from the Neutral Zone.

Excluding the Neutral Zone, Kuwaiti state firm Kuwait Oil Company (KOC) plans to spend $40bn on upstream development through 2020 in an effort to boost production capacity to 3.65mn b/d. With this in mind Kuwait is set to explore its offshore area for hydro-carbons for the first time since drilling two wells in 1983-84. KOC is process-ing seismic data and will likely spend between $1-1.5bn on the offshore drilling.

Kuwait has equally ambitious downstream plans for its downstream segment: state refiner KNPC expects to spend $40bn in the period to 2022, with major projects including a new refinery and a clean fuels upgrade at two existing refineries. KNPC chief executive Muham-mad al-Mutairi told a conference in Ku-wait City on 24 November that these pro-jects would be completed during 2018-22.

Mr Mutairi says the new al-Zour refinery, which will be the Middle Easts largest with capacity to process 615,000 b/d of crude oil, is scheduled for completion in 2019. He adds that the clean fuels project will see throughput capac-ity at Mina abd allah refinery raised from 270,000 b/d to 454,000 b/d, while Mina al-ahmadi will be reduced from 466,000 b/d to 347,000 b/d. The aging 200,000 b/d shuaiba plant will be closed after al-Zour is fully operational.

KNPC recently extended bidding for al-Zour, for which the most recent cost estimate was $16bn, after bidders asked for more time because of its scale and complexity (MEEs, 19 september). The company earlier awarded three contracts worth a combined $12bn for engineering, procurement and construction under the clean fuel program (MEEs, 14 February).

it remains to be seen, however, if Kuwait will overcome political, lo-gistical and bureaucratic issues to realize its upstream and downstream ambitions according to its schedule. Most of the announced projects on both the upstream and downstream ends of Kuwaits oil and gas industry have already faced years of delay.

KHAFJI STILL OFFLINE AS KUWAIT ADVANCES $80BN OIL INVESTMENT

KUWAIT

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Stocks Special: Saudi Strong, Chinese A Bit Less Reserved

Saudi arabia has the worlds third largest oil stocks, mEEs analysis of Jodi data indicates. The kingdom had

382mn barrels of oil stocks as of end-september, of which 77% was crude. The Us is way out in front with oil stocks of over 1.72bn barrels, up by over 100mn barrels on six months earlier (see tables).

CHINESE RESERVE(S) China is the biggest omission from

the Jodi reserves data (russia and india are also absent). however, China last week for the first time revealed details on its strategic petroleum reserve (sPr).

China is storing 12.43mn tons (around 91.1mn barrels) of crude at the four sites which comprise its 103mn barrels-capac-ity sPr Phase-1. But total Chinese crude reserves are likely to be much larger. The 170mn barrel-capacity sPr Phase-2, set for 2020 completion, is already part full.

China is thought to have stepped up buying in response to lower crude oil pric-es in recent months. Comparing Chinas

crude supply numbers (production plus net imports) to refinery runs indicates that China added 5.2mn barrels (170,000 b/d) to its crude reserves in august and 18.7mn barrels (620,000 b/d) in september with extra cargoes [imported] from saudi arabia, kuwait, iraq and Oman, the iEa says in its november Oil market report.

according to iEa calculations, China added 105mn barrels to its stocks during the first nine months of 2014. This comes on top of an 89mn barrel stock build in 2012 when a portion of Phase-2 sPr capacity was filled.

Chinese transparency only goes so far, however the Phase-1 storage for which data has been released was completed in 2007 and thought to have been filled by 2009.

industry reports and shipping data suggest that [Chinese] sPr filling could well have continued into the fourth quar-ter, the iEa says. That said, the latest data show that Chinese imports fell by 1.1mn b/d to 5.63mn b/d in October. Volumes from all of Chinas key mideast customers eased: those from saudi arabia fell from

1.53mn b/d to 1.07mn b/d and those from iran fell from 502,000 b/d to 338,000 b/d.

Overall the Chinese figures in-dicate crude reserves of at least 285mn barrels rivalling saudi arabia for third place globally.

Of course the 620,000 b/d rate at which (according to the iEas calcula-tions) China built its stocks in september is a big number in terms of the global supply/demand balance. whether or not China has since continued, or will continue, this level of buying is a crucial factor as to the likely demand for OPEC crude over the coming months (see p10).

The iEa has repeatedly criticized China for a lack of transparency on its oil reserves. it will surely welcome the latest Chinese announcement which came a few days after the iEas 14 november re-lease of its monthly report (not necessarily a coincidence). The iEas comment that the Chinese administration does not rou-tinely disclose information on the sPr and thus little up-to-date information is avail-able concerning specific volumes, sites and timescales remains broadly valid.

SAUDI ARABIA/REGIONAL

CRUDE AND OIL PRODUCTS STOCKS (MN BL, END OF PERIOD)

1q12 3q12 2012 1q13 1H13 3q13 2013 1q14 1H14 3q14

CRUDE OIL: Top 5*

USA 1,064.0 1,064.0 1,060.3 1,088.1 1,063.9 1,069.0 1,053.0 1,079.7 1,074.9 1,051.2

Japan 423.5 425.8 423.6 419.4 405.9 403.8 404.5 424.2 420.0 422.6

S Arabia 273.6 269.3 276.6 271.3 275.7 281.9 287.9 287.7 279.4 294.5

Germany 149.1 154.6 156.7 158.8 161.3 160.1 159.2 161.3 161.3 160.8

Korea 107.2 119.0 113.1 122.3 124.3 123.1 111.2 118.3 117.7 119.0

Turkey^ 34.2 35.1 34.0 33.8 35.5 35.8 34.7 34.4 34.4 34.3

Venezuela^ 28.1 29.4 30.3 28.7 25.0 28.1 NA 29.0 NA NA

OIL PRODUCTS: Top 6*

USA 567.8 596.0 603.7 565.1 607.3 616.0 577.6 536.0 588.4 672.3

S Africa 100.8 134.9 111.0 146.1 145.4 NA 159.2 165.5 166.0 166.0

Germany 129.0 122.0 124.9 125.5 121.8 120.1 123.4 121.6 123.8 120.7

Japan 90.5 110.2 99.6 99.5 101.8 114.2 104.3 94.9 96.9 115.1

France 103.9 105.8 103.5 104.7 106.4 105.3 103.6 108.9 107.6 110.2

S Arabia 78.4 82.8 82.7 80.7 86.0 85.6 87.6 82.9 83.6 87.6

Venezuela^ 81.7 68.1 54.0 63.5 27.9 81.3 NA 84.5 NA NA

Turkey^ 28.2 28.5 28.2 28.4 29.2 27.7 27.8 28.7 28.5 28.5

TOTAL OIL STOCKS

USA 1,631.8 1,660.0 1,664.0 1,653.2 1,671.1 1,685.0 1,630.7 1,615.7 1,663.3 1,723.5

Japan 514.0 536.0 523.2 518.9 507.6 518.0 508.9 519.0 516.9 537.7

S Arabia 352.0 352.1 359.3 351.9 361.6 367.5 375.6 370.5 362.9 382.2

Germany 278.1 276.6 281.5 284.4 283.2 280.3 282.6 282.9 285.1 281.5

Korea 164.3 184.0 176.8 187.1 189.4 188.6 177.7 187.3 179.8 187.2

Venezuela^ 109.9 97.5 84.4 92.2 52.9 109.5 NA 113.5 NA NA

Turkey^ 62.4 63.5 62.2 62.2 64.6 63.5 62.4 63.1 62.9 62.8

*NO DATA FOR CHINA, RUSSIA, INDIA. ^TURKEY AND VENEZUELA ARE THE ONLY OPEC OR MENA COUNTRIES OTHER THAN SAUDI ARABIA IN THE

TOP 30. SOURCE: JODI.

SAUDI PRODUCT STOCKS IN DETAIL (MN BL)

1H13 2013 1q14 1H14 3q14

Diesel/Gasoil 27.7 30.8 28.5 26.3 28.1

Gaoline 28.4 26.5 24.7 25.2 27.2

Jet-Kero 16.3 16.1 15.7 16.2 15.8

Fuel Oil 9.6 9.7 10.1 11.1 11.1

LPG 0.3 0.3 0.3 0.3 0.3

Other 3.7 4.3 3.6 4.5 5.0

SAUDI ARABIA CRUDE STOCKS (MN BL, END PERIOD)

SOURCE: JODI, MEES ESTIMATES & CALCULATIONS.

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GCC Petchems Producers Need To Broaden Feedstock-Aramco

Abundant cheap feedstock remains a competitive advan-tage for GCC petrochemicals firms, muhammad al-mady,

CEO of saudi state-owned petchems giant saBiC, says. But he warns that we cannot rely solely on natural resources for our future growth Transforming natural resources into solutions for our customers is, and will always be, the core capability.

saudi aramcos CEO khalid al-falih sees relatively cheap Us and Cana-dian unconventional oil and gas lead-ing to a doubling of north american plastics and chemicals production over the next decade, while supplies of gas-based feedstocks within the GCC are increasingly constrained.

supplies of ethane are becoming tighter in our region, mr falih told this weeks Gulf Petrochemicals and Chemicals association (GPCa) an-nual forum in dubai, but supplies of alternative feedstocks such as naph-tha and other liquids are plentiful.

BUILDING BLOCKS Ethylene is the GCCs main petro-

chemicals building block, amounting to 21.7mn tons, or 48% of basic petro-chemicals produced in 2013, according to freshly-released GPCa data. mEEs estimates that this would require some 2.1bn cfd of ethane feedstock, almost three times that required in 2003, when GCC ethylene output was 7.4mn tons.

methanol is the second largest GCC basic petrochemical, with 9.3mn tons 2013 output (20.6% of the total), requir-ing 800mn cfd of methane feedstock. methanol output has grown more slowly than ethylene, with most output being exported. nevertheless, output has almost doubled from 4.9mn tons in 2003.

Of the basic petrochemicals, propylene output has risen fastest at 28.6% a year over the past decade, from 600,000 tons in 2003 to 7.1mn tons in 2013. much of this will have come from refinery crackers, but regional propane dehydrogenation capac-ity requiring almost 1.2 mn tons/year of propane for every 1mn t/y of produced propylene is growing. Perhaps more significantly in terms of future feedstocks

trends, aromatics benzene, toluene and xylene output was 7.1mn tons, or 15.6% of GCC basic petrochemicals output, more than five times 2003s 1.3mn tons. aromatics are typically produced by naphtha reforming in refineries and are central to saudi arabias products diver-sification strategy (mEEs, 17 October).

we shouldnt think of feedstocks as mutually exclusive choices, but rather view them as a mixed pool of feedstocks that can be used to leverage each other, says mr falih. liquids are more ver-satile than pure ethane and, when used in mixed feed crackers, offer a broader product slate, including opportunities to produce specialty chemicals, which in turn can help spawn new industries.

mr falih warns that pursuing a mixed feedstock cracker strategy only for newbuild plants would limit its poten-tial. Considering the massive scale of the regions petrochemicals asset base built in the 1970s and 80s, it would generate enormous additional value if we pursued opportunities to restruc-ture and upgrade these legacy assets.

INNOVATION NEEDED mr falih envisages a retrofit pro-

gram including not only changes to the

feedstock mix, but also the deployment of more energy efficient technologies and the addition of further high value specialty products: But to succeed in special-ties, we need to leapfrog in knowledge intensity and accelerate our innovation.

mr mady told the forum: The time to either reap benefits from established com-petitive advantages or react to unforeseen events has tightened. whether on the feed-stock or value chain front, developments are taking place faster. Clear examples are coal-to-chemicals in China or product cycles in the electronic industry.

while GCC chemicals capacity has grown 10% a year over the past decade, GPCa secretary-general abd al-wahab al-sadun warns against complacency: while the emergence of favorably priced feed-stock an advantage the GCC chemicals producers have enjoyed for over 30 years becomes available to other regions as shale oil and gas becomes commonplace, we as an industry need to focus on innovation.

GPCas facts and figures 2013 report, announced at the forum, says GCC petrochemicals revenues hit a new peak of $89.4bn in 2013, an increase of $6bn or 7.2% from 2012. The report says total GCC petrochemicals and chemicals production capacity reached 140.5mn t/y in 2013 (see tables).

Gcc petrochemicals producers face a challenge both from the North American shale boom and tight availability of gas feedstock within the region. They will have to broaden both their product range and their feedstock options.

REGIONAL

GCC PETROCHEMICALS AND CHEMICALS CAPACITY (MN T/Y) BY COUNTRY SOURCE: GPCA.

2003 2005 2007 2009 2011 2013

Saudi Arabia 36.1 44.1 54.4 73.0 83.1 91.5

Qatar 7.8 10.8 11.1 11.2 17.3 19.3

UAE 4.5 5.1 5.6 5.6 9.1 10.5

Kuwait 4.9 4.9 5.0 6.0 8.5 8.6

Oman 0.0 2.8 3.6 7.3 9.0 9.1

Bahrain 1.4 1.4 1.4 1.4 1.5 1.5

Total 54.7 69.3 81.1 104.5 128.5 140.5

AND PRODUCT

Basic Chemicals 14.3 19.4 23.8 32.6 42.2 45.2

Polymers 6.5 9.0 12.1 17.6 21.3 24.1

Intermediates 7.4 9.8 12.0 18.6 20.7 21.7

Fertilizer Raw Material 12.8 14.1 15.4 16.6 19.8 21.2

Mainstream Fertilizers 7.7 10.4 10.9 11.7 16.6 19.3

Downstream Chemicals 4.5 4.7 5.0 5.5 5.8 6.5

Inorganic Chemicals 1.5 1.7 1.7 1.9 1.9 2.2

Specialties 0.0 0.0 0.0 0.0 0.3 0.4

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GCC Grid Growth Stalled As Oman Set To Join

Electricity transfers across the GCC are rising, but use of the interconnectors link-ing the six-member group

remains emergency only: scheduled trading has petered out. nevertheless Oman, which wants cross-border trad-ing to be part of a planned electricity spot market, has agreed to become a full member of the Gulf Cooperation Council interconnection authority (GCCia).

The GCCia says unscheduled electricity exchanges between current

members saudi arabia, kuwait, UaE, Qatar and Bahrain have risen tenfold, from 80Gwh in 2010 to 815Gwh in 2013, though even the higher figure represents less than 0.25% of regional demand.

scheduled trading started at 0.31Gwh in 2010 and rose to 46Gwh in 2011, but has been zero ever since (see chart).

announcing Omans decision to join the GCC grid, GCCia director matar al-niyadi said the grid is preparing to enter a new phase, which will include activating energy trading as a mean of optimizing

energy usage across a joint power market. GCC interconnection would save

$180mn in operating costs on a yearly basis, mr niyadi says. we are hop-ing to launch a GCC market for power trade soon. we have agreed to form a team of GCC experts to deal with this project during the next year.

Transfers among the five current GCCia members whose link capaci-ties range from 600mw to 1.2Gw (see Table 1) have mainly been in response to potential outages. GCCia chief operat-ing officer ahmad al-ibrahim told a recent power trading forum that the GCC grid utilization factor is now 8%.

while the grid has maintained supply stability and supported around 1,100 incidents since 2009, mr ibrahim says it is not used for economic gains through economical trading of energy. he says beneficial trading would re-quire coordinated power generation and improved market processes.

mr ibrahim says the obstacles to GCC electricity market development are: a lack of awareness of electricity costs and the benefits of trading; energy price distortion due to subsidies; differences in national energy policies; differences in local regulation for cross-border power trading; differences in national power sector structures; and the low number of market participants.

Only three GCCia members, including Oman, have an electricity industry regula-tor. four, including Oman, have electricity laws and transmission grid codes. four have a single electricity buyer, while one has a principal buyer and one has vertically integrated companies. The only factor common to all six countries electric-ity markets is identified by mr ibrahim as subsidies (see Table 2). mr ibrahim says the way forward for the GCC grid is a feasibility study for capturing power trading opportunities between member states. This should lead to the creation of a model which includes a pricing structure that is agreed by all members. This model could then be used to revise the existing power exchange and trading agreement.

at the signing ceremony for Omans three agreements to join the GCCia, mr niyadi said that the authority is also studying applications from non-GCC countries to join the grid. when saudi arabia and Egypt signed an agreement last year to link their own power grids, saudi Electricity minister abd allah al-husain said that the GCC grid could be expanded to link a total of 14 countries in the near future (mEEs, 7 June 2013).

REGIONAL/OMAN/UAE

TABLE 2: GCC ELECTRICITY GRID NATIONAL MARKETS STATUS

Saudi Arabia Kuwait UAE qatar Bahrain Oman

Regulator ECRA No Bureau No No AER

Electricity Law Yes No Yes Yes No Yes

Transmission Grid Code Yes No Yes Yes No Yes

Structure* PB VI SB SB SB SB

Subsidies Issue Yes Yes Yes Yes Yes Yes

Authority To Trade Need Permission No Yes Yes Yes Yes

Price For Trade From Ministry Not Ready On Request From QP Not Ready Fuel-Based

Power Offered Not Declared Not Declared On Request Full Capacity On Request Not Ready

*PB=PRINCIPAL BUYER, SB=SINGLE BUYER, VI=VERTICALLY INTEGRATED. SOURCE: GCCIA.

TABLE 1: TRANSFER CAPACITIES

System MW

Saudi Arabia 1,200

Kuwait 1,200

UAE 900

Qatar 750

Bahrain 600

Oman* 400

SOURCE: GCCIA. *PLANNED.

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dubai Electricity & water author-ity (dEwa) has selected 10 bidders to build a 100mw iPP solar PV phase-2 of the dh12bn ($3.37bn) mohammed bin rashid al maktoum solar Park be-ing built at seih al-dahal, 50 km south of dubai, which is slated to have 1Gw capacity when completed in 2030.

Phase-2 is slated for 2017 start-up. Phase-1, a 13mw capacity solar PV plant was connected to the dubai grid in October 2013. dubai aims to gen-erate 5% of its electricity from solar plants by 2030, although gas will still be the main provider with 71%.

while dEwa is keen to build solar capacity, it is also looking to nuclear and coal to help meet rising power demand. Each is slated to meet 12% of dubais 2030 power needs. abu dhabi has a

four-reactor, 5.6Gw nuclear project under development at Barakah, while dEwa is developing the 1.2Gw hassyan coal-fired project (mEEs, 26 september).

DUBAI SOLAR SHORTLIST

BIDDERS FOR 100MW DUBAI SOLAR PLANT

Company Country

Huaneng Power China

First Solar US

NRG Energy US

Fotowatio Spain

SunEdison US

Abengoa Spain

EDF France

ACWA Power Saudi Arabia

Hareon Bulgaria

Masdar UAE

OPEC

Middle East Petroleum and Economic Publications (Cyprus) Ltd Reproducing MEES Is Strictly Prohibited 28.November.201410

Global oil prices dropped by 7% im-mediately after OPECs decision on 27 november to hold its production ceiling at 30mn b/d despite a more

than 30% slump in the Brent price since mid-June. with forecasts for much lower demand for OPECs oil in the first quarter of 2015, the decision to roll over the current ceiling level till the middle of next year was a bearish signal that sent the market into a tailspin. in the end, it was saudi arabias default position that prevailed.

it took the heads of delegation from the 12 member states 11 ministers and a deputy premier from libya four hours to come up with a decision to maintain the status quo despite efforts by Venezuelan foreign minister rafael ramirez to orchestrate a production cut of 2mn b/d, equal to the anticipated fall in demand for OPECs oil in the first quarter of next year (see graph). delegates say there was no discussion of numbers during the confer-ence with only a vague proposal presented for a 5% reduction, which would have done little to pacify an oversold market. standard Chartered Bank immediately cut its Brent forecast for the first three months of 2015 by a whopping $21/B to $68/B, saying it expected a chaotic first quarter as a result of OPECs decision. its forecast for the whole of 2015 was lowered by $16 to $89/B despite expectations of a significantly tighter market in the second half, given the low level of the current surplus.

in a report issued just hours after the meet-ing concluded in Vienna, the banks respected analyst, Paul horsnell, said that for at least one quarter it appears that the oil market has been left free to discover how much damage is done to non-OPEC output at lower price levels. January Brent futures fell below $72/B on 27 november after the OPEC meeting concluded, taking the total loss in the value of Brent since mid-June to nearly $44/B.

at least one quarter of chaos is likely to ensue, with the cash constraints on the industry tightening significantly, mr horsell says, add-ing that OPEC might have to meet sooner than the next scheduled meeting in June 2015. next time around, he adds, OPEC is likely to have to cut more aggressively than it needed at this lat-est meeting, given what he says is the deep mar-ket skepticism that is likely to surround the an-nouncement of any emergency meeting. most analysts had predicted that OPEC would take action to trim supply, by at least 500,000 b/d if not 1mn b/d (to 29mn b/d) to counter the price slide. mr horsnell says any price rebound is now likely to be put back by one quarter and price weakness in the early part of the year is likely to continue until the level of distress within the industry at prices below $80/B becomes clear enough to support some stabilisation.

RUSSIA DEAL GOES NOWHERE The build-up to the OPEC meeting had

hinted at the possibility of a grand deal between the arab-dominated producers club and rus-sia to halt the damaging slump in oil prices. Venezuela had taken the lead in trying to broker a deal between OPEC and russia with a possible contribution from mexico, which has cooper-ated with OPEC in the past. saudi arabia was OPECs representative at the highly anticipated meeting held at a former Vienna bank turned luxury hotel. But the attempt at coordinated ac-tion ended in disarray on 25 november and the market dropped by close to $2/B in response.

it was clear from the day saudi arabian Oil minister ali naimi arrived in the austrian capital that riyadh was not prepared to bear the brunt of a production cut without the participation of russia, the worlds largest oil producer, and perhaps the Caspian states. nor were the saudis willing to accept a lower OPEC ceiling only to see iraq ramp up its produc-tion at the expense of saudi arabia and others in OPEC, a senior Gulf delegate tells mEEs.

we came to Vienna prepared to consider a production cut but we were not going to do it without a contribution from russia, the delegate said on the eve of the ministe-rial meeting at OPEC headquarters. libya and iran, where oil production is constrained by violence in the former and sanctions in the case of the latter, must also coordinate further increases in their output above certain levels, he added. Given all this conditionality, it was difficult to see any outcome other than a decision to maintain the 30mn b/d ceil-ing, which now appears to be set in stone.

LEAKY CEILING The collective ceiling has been in place

since 2011 but has been leaky with members consistently failing to comply with their individual allocations. monthly surveys of OPECs production by mEEs show that the group has overproduced the ceiling since June, despite erratic production from libya

due to shutdowns and the absence of some 1mn b/d of potential iranian exports that are off markets because of sanctions (see p13).

mr naimi, representing the most influ-ential member of OPEC, gave an early hint of the saudi position when he told reporters on 26 november that he believed the market would stabilize itself eventually. This was taken as an indication that riyadh was leaning toward a rollover despite the dramatic slide in oil prices since the group last met in June.

mEEs soundings indicate the saudis are not overly concerned with the prospect of further oil price weakness, which they believe will be short lived because of the relatively high cost of the marginal barrel. russia, for example, needs oil prices of between $100/B and $120/B, the higher number reflecting the cost of developing remote siberian fields. north american shale and oil sands production cannot be sustained at current price levels between $70-$80/B, they think. The saudis expect to see an impact during the second half of next year should prices remain at current levels. Yet Us oil production is rising steadily: it reached a 28-year high in august with november on target to set a new record. imports of OPEC crude have fallen to less than 40% of total Us imports for the first time in three decades (see p19).

at some point, something has to give and riyadh is betting that its low-cost production will ultimately trump the higher cost barrel from tight oil fields, deep offshore and the siberian steppes.

RIYADH CAN TAKE THE PAIN saudi arabia, which has built up a comfort-

able foreign currency cushion of some $800bn during the past four years of stable $105-110/B prices, can sustain lower prices for one year or

AFTER THE HYPE, OPEC MEETING ENDS WITH A WHIMPER

Continued on p11

CALL ON OPEC CRUDE VS OPEC PRODUCTION (MN B/D)

1q13 2q13 3q13 4q13 1q14 2q14 3q14 *4q14 1q15 2q15 3q15 4q15

32.0

31.5

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30.5

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29.5

29.0

28.5

28.0

27.5

27.0

26.5

*OCTOBER FOR PRODUCTION.

IEA (NOV MOR) OPEC (NOV MOMR) OPEC PRODUCTION (MEES EST)

CURRENT 30MN B/D OUTPUT CEILING

OPEC

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two even if need be. Although production costs in the kingdom have nearly doubled in the past decade, they remain well below $10/B, several multiples below even the lowest estimate of the cost of shale oil, which experts say can be sus-tained at least in some shale plays at far low-er prices than the $70-80/B OPEC estimate. The Saudis and their Gulf allies, who put up a united front in Vienna, are willing to take the pain in anticipation of longer term gain. As the UAEs Energy Minister Suhail al-Mazrui put it, cur-rent market oversupply is not OPECs doing and it is not fair to ask one player to fix the market.

He too expects prices to move higher because further investment in shale and unconventional oil cannot proceed at current price levels.

VENEZUELAN EFFORTS FAIL The problem is that a weaker price hurts

fellow OPEC producers like Venezuela, Iran and Iraq, all of which need an oil price in excess of $100/B to balance their budgets. This explains why Venezuelas Ramirez, the former oil min-ister and current head of his countrys delega-tion, spearheaded an initiative to bring about a production cut and help prevent a further dete-rioration in his countrys economy, which is on the verge of collapse. But something went ter-ribly wrong: the attempt to show a united front between OPECs heavyweights and Russia, with Mexico in a cameo role, backfired. It makes little sense for Mexico, which is opening its oil sector to foreign investors, to consider cutting its already declining production at this time.

The idea for coordinated action with non-OPEC was mooted by Mr Ramirez during a meeting earlier this month with Mr Naimi on the sidelines of a climate conference in Venezuela. The Saudi minister reportedly indicated willingness to consider a production cut if Mr Ramirez succeeded in convincing Moscow and other non-OPEC producers to share the burden.

The purpose of the sideshow directed by Mr Ramirez is a mystery since it was obvious that the Russians came to Vienna with no intention of playing ball. Mr Naimi brought forward his trip to Vienna to be available for rare pre-OPEC discussions with Russian Energy Minister Alexander Novak, Igor Sechin, the powerful chief executive of state-owned oil company Rosneft, and the Mexican Energy Minister, Pedro Coldwell, who flew all the way to Austria for the meeting. A promised communique was not issued at the end of the talks and sources privy to the discussions say the Russian officials argued over the proposal to join OPEC in a production cut. Russian media had previ-ously reported the possibility of a 300,000 b/d contribution from Moscow, which has seen the

value of the rouble slide as a result of sanctions imposed by the US and the EU over the Ukraine crisis, and would benefit from higher oil prices.

Mr Sechin, a close ally of Russian President Vladimir Putin, is believed to have vetoed any proposal of joint action, telling the Saudis that the Russian system would not allow a steep cut in production. Mr Sechin, who has attended OPEC meetings as an observer in years when re-lations were more cordial, returned to Moscow and predicted that oil prices would fall to $60/B or lower by the end of the first half of 2015.

NAIMI: GREAT DECISION Yet Mr Naimi hailed the agreement as a

great decision even as the oil market took an immediate dive on news of the rollover. It was left to Libyas Abd Allah al-Badri, the long-serv-ing OPEC Secretary General whose mandate was extended yet again till the end of 2015, to explain the decision to skeptical journalists and analysts. OPEC, he said, had extended the ceil-ing to the middle of next year and would wait to see how the market behaves. The decline in the price does not reflect fundamentals, he adds.

OPEC has to adapt to change and we have to live with the new circumstances, Mr Badri said, suggesting that the group, which accounts for a third of global supply, was abandoning its fate to market forces rather than taking a pro-active stance with regard to supply.

We will produce 30mn b/d and we will watch how the market will behave to it and follow it accordingly, he says, add-ing that OPECs 12 members would be able to adjust their budgets to lower revenues and that not all needed a price of $100/B.

The Saudis seem to believe that most of the marginal barrels will disappear at a price of $70-80/B, if not immediately then possibly during the second half of next year, though they anticipate a difficult pe-riod during the first six months of 2015.

They also dismiss the latest data from the US showing a sharp decline in imports of Saudi crude oil as normal fluctuations in seasonal demand from refineries.

Numbers released by the US Energy In-formation Administration, the statistical arm of the Department of Energy, shows a steady decline in the market share of OPEC producers in the US market. September crude volumes from OPEC fell below 40% for the first time in 29 years, while provisional October statistics point to a further decline to 34% of the total. Although Saudi Arabia remains the top exporter to the US after Canada, imports of Saudi oil in October fell to a five-year low of 847,000 b/d though volumes picked up in the 1-21 November period to 940,000 b/d. At the same time, US crude production at 9.05mn b/d, slightly below Saudi output estimated at between 9.6mn and 9.7mn b/d, was the highest since February 1986.

That year marked a watershed for oil

markets and for Saudi Arabia in particular. Mr Naimi was at the time Chairman of Saudi Aramco and remembers well the collapse in oil prices that year below $10/B as a result of what was then a real price war and a battle for market share amongst OPEC members. Saudi oil production fell from 10mn b/d in the early 1980s to just 2.3mn b/d. That, says one delegate, will never be allowed to happen again.

Saudi Arabias oil minister at the time was the charismatic Shaikh Zaki Yamani, whose words on the 27th of November in 1986 could easily be allied to todays market. Sheikh Yamani, who subsequently lost his job after his experiment with netback pricing contributed to the price collapse, stressed the need for cooperation between OPEC and non-OPEC producers if a price war was to be averted. The solution to the problem Shaikh Yamani said at the time can come through coordination and cooperation among all oil producers OPEC and non-OPEC - to agree on a production ceiling instead of engaging in a price war.

Although Mr Naimi has denied speculation that Saudi Arabia is taking on rival producers, Mr Yamanis words in Baghdad nearly three decades ago are a reminder that history has a tendency to repeat itself. It is worth remem-bering that lower prices then did not halt the rise in North Sea oil production, which had emerged as a threat to the cartel just as US shale production has now displaced OPECs barrels.

In his opening address to the 166th OPEC ministerial gathering, Abd al-Rahman al-Ahirish, Libyas Vice Premier for Corporations in his capacity as President of the conference, noted that non-OPEC supply was anticipated to rise next year by 1.4mn b/d, more than enough to cover the 1.1mn b/d expected increase in demand. OPECs own calculations forecast demand for its oil in the first quarter of 2015 at 28.4mn b/d, more than 2mn b/d below October production (see graph), which makes the decision to uphold the ceiling rather baffling.

IN IT FOR THE LONG HAUL? In its final communique, OPEC said that

while the group was concerned over the rapid decline in oil prices in recent months, the conference concurred that stable oil prices, at a level which did not affect global economic growth but which, at the same time, allowed producers to receive a decent income and to invest to meet future demand were vital for world economic wellbeing. Weaker oil prices may produce a silver lin-ing by encouraging higher demand growth, particularly in Asia, where it has flagged due to lower economic growth in China and India, the continents two powerhouses. Yet analysts argue that it takes years not months for lower oil prices to translate into higher demand. OPEC may have to adapt to a lower price environment until then.

Continued from p10

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Plans by Libyas elected govern-ment to set up a new National Oil Corporation and Central Bank put it further down the path towards

civil war and a breakup of the country.libyas elected government is seeking to

replicate existing state institutions in order to gain access to the countrys oil revenues, which would give it the upper hand in the struggle against an islamist movement in control of the capital Tripoli. These efforts are likely to be op-posed by the international community, amidst fears that current tension could escalate into civil war and a break-up of the country. But the government made some progress on its plans this week, when its newly appointed head of the national Oil Corporation (nOC) was accepted as a delegate to OPEC in Vienna. al-mabruk Bou seif was introduced to the press as the new nOC chairman by deputy Pm abd al-rahman al-Tahir on 26 november. By taking part in the OPEC meeting the following day, he affirmed his governments claim over libyas oil resources.

mr Bou seif replaces mustafa sanallah, who is based in the nOC headquarters in Tripoli, where islamist militia prop up the self-declared national salvation Government. The elected parliament sits in the eastern city of Tobruk, while the government is based in the nearby city of Baida after being expelled from Tripoli by the libya dawn militia alliance in July.

The reshuffle will have no impact on the nOC, which is firmly under islamist con-trol. instead it is regarded as a step towards establishing parallel state institutions that will enable it to access oil revenues. mr Bou seif confirmed that the government was attempt-ing to set up a payment mechanism to channel oil money to Baida. Yes, there are discus-sions, he told mEEs at the OPEC meeting.

sources in libya say the government has over the past month worked towards estab-lishing an overseas bank account to receive oil revenues. at present, oil money flows into an overseas account held by the Tripoli-based Central Bank of libya (CBl), and can only be accessed by the central bank. while the government claims that the new account would be under the auspices of the central bank, it is intended to be independent of it, and could serve as the basis for a new central bank controlled by the administration in Baida, said Claudia Gazzini, a libya expert at the interna-tional Crisis Group. mr Bou seifs appointment also serves to create a new state institution.

They are not appointing someone that is going to take over the nOC in Tripoli, they are trying to start it from scratch, says ms Gazzini.

The islamists in Tripoli seem aware that something is afoot. On 27 november, they issued a second warning against buy-ing oil from any other source than the nOC. we warn against dealing with any other body, the statement said. The nOC is the only executive body for the administra-

tion and investments in oil resources. Efforts to create a new national oil company

are still at a very early stage, and the govern-ment lacks qualified staff. little is known about mr Bou seif, and the nominal new nOC head certainly does not come with an accomplished resume. according to rumors emerging from libya, he was either working at the nOC subsidiary sirte Oil Company, or as a driver at one of the oil companies operating in libya.

so far, both sides stress the independ-ence of the central bank, which continues to receive oil revenues. The Baida-based gov-ernment has accused the bank of withhold-ing payments, however, and has sacked CBl Governor sadiq al-kabir. in the absence of a budget for the current fiscal year, the bank claims it is only releasing funds for govern-ment salaries and for basic subsidies.

The nOC also claims to be free from political partisanship, but the national salvation Gov-ernment has installed its self-declared oil min-ister mashalla Zwai in its headquarters. mr Zwai earlier this week said he aimed to attend the OPEC meeting, but that he had failed to secure a visa and was nowhere to be seen in Vienna.

mr Bou seifs attendance at the OPEC meet confirmed the international recognition of the government in Baida, and underlined the national salvation Governments lack of legitimacy.

after the islamist Justice and Construction party lost heavily in the June parliamentary elections, libya dawn overwhelmed pro-government armed groups from the town of Zintan to claim control of Tripoli. This forced the new parliament, the house of representa-tives, to flee to Tobruk. Backed by libya dawn, which consists largely of militia from the city of misrata, islamist lawmakers resurrected the previous parliament, the widely discred-ited General national Congress (GnC).

in spite of the undemocratic nature of the self-appointed Tripoli government, the Un has pushed for negotiations between the two sides, anxious to prevent the country from slipping into civil war. The Un security Council is said to be considering an escrow account that would re-ceive oil revenues, keeping funds that could find a military campaign from reaching either side.

i think it would be dangerous if unlimited funds would be going to an internationally recognized parliament that is advocating a total military solution. it hinders the possibil-ity to push forward with a negotiated politi-cal solution or ceasefire, says ms Gazzini.

recent Un-mediated talks between the government and islamist elected lawmakers that are boycotting the house of representa-tives failed to achieve a rapprochement, and the situation has since escalated. a renewed offensive by a military strongman khalifa haftar against the Jihadist ansar al-sharia militants in Benghazi was endorsed by the government, but irked Tripolis islamists.

last week, Prime minister abd allah al-Thinni stepped up the sabre-rattling by declaring that government forces had Tripoli surrounded; this week, the prime minister said the government was responsible for two air strikes on mitiga, Tripolis last operational airport. national salvation Government head Umar hasi responded by declaring that while his side was open to talks, it was being forced into a confrontation and war. in an interview with the london-based Times a week earlier, he had rejected any dialogue with the govern-ment, and admitted to libya dawn forces fighting alongside ansar al-sharia, a group designated a terrorist organization by the Us and the Un. apart from the air strikes, fighting between Zintani militia and libya dawn was also reported in the town of kikla near Tripoli.

in spite of mr hasis bellicose rhetoric, ms Gazzini believes that there is a willing-ness amongst libya dawn for talks with the government. To bring the two sides to the negotiating table, the Thinni government must be dissuaded from pursuing a military solution and the creating of parallel state institutions, both of which could result in a civil war and the breakup of the country.

The Un security Council in a 26 no-vember statement warned it is not afraid to use sanctions against those who threaten libyas peace, stability or security or that obstruct or undermine the successful completion of its political transition.

The Un last year applied sanctions against oil shipped out of libyas eastern ports after a separatist movement had taken control of the export terminals. The standoff was resolved when the separatists dropped their demands and agreed to take part in the June elections. They handed over the terminals, allowing for a revival in libyan production and exports.

The creation of parallel institutions and the diversion of oil revenues were some of the key aims of the separatists, led by ibrahim al-Jath-ran, who commands several thousand former oilfield guards. his separatist demands are increasingly mirrored by the Baida government, and it may be no coincidence that mr Bou seif is from the same tribe as mr Jathran. all this will have alarmed the Un, which has made it clear that it remains opposed to a fracturing of libya.

The members of the security Council reaffirmed their strong commitment to the sov-ereignty, independence, territorial integrity and national unity of libya, it said in its statement.

OUTPUT SUBDUED Oil output remains hit by the outage of

the sharara and El feel fields in the west of the country. de-facto nOC chief Zwai told reuters on 25 november that out-put stood at 757,520 b/d. waha (200,000 b/d) and agoco (155,000 b/d) are the big-gest contributors, mr Zwai says.

LIBYAS GOVERNMENT PLOTS ROUTE TO OIL RICHES

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Iran Oil Exports To Rise In 2015 Despite Nuclear No-Deal

Iran expects its oil exports to rise over the coming months, despite Us and EU plans to keep sanctions on its oil

sales after iranian negotiators in Vienna failed to strike a comprehensive deal with their counterparts from six world powers over its nuclear enrichment program.

Negotiators from iran and the five permanent members of the UN se-curity Council plus Germany agreed on 24 November to extend nego-tiations for up to seven extra months. Talks have already lasted a year.

Real and substantial progress has been made in both sides pursuit of a deal with neither side prepared to walk away, Us secretary of state John Kerry said following the extension announce-ment. We have earned the benefit of the doubt, he told reporters.

in theory the extension changes little for the islamic Republic EU and Us sanctions will remain in place. But iran has hinted that is has plans to raise oil exports even before sanctions are lifted.

iranian crude output fell by close to 1mn b/d in the first half of 2012 as key Us and EU sanctions were imple-mented hitting a low of 2.7mn b/d in 2013. Exports too are down, averag-ing less than 1.3mn b/d for the first ten months of 2014 (including condensate), versus 2.53mn b/d in 2011 (see graphs).

CONDENSATE BOOST speaking in Vienna this week, irans

Oil Minister Bijan Zanganeh said that despite the sanctions, iran is still target-ing an increase in exports over both the short and medium term -- beyond 2014s near 200,000 b/d year-on-year gains.

Given the clear restrictions Washing-ton has given irans buyers with respect to how much crude oil they can import, the focus in iran has shifted at least for now to condensate. iran would take advantage of a loophole in Us legislation, which allows irans customers to buy condensates without fear of Us sanctions.

With new output set to come online soon, the minister has set his sights on irans condensate as a way of mitigat-ing at least in part the loss of about half of its export volumes on account of the sanctions. We are trying to increase our production, and particularly our exports, the minister told reporters on 26 November. He put irans current oil exports at around 1.5mn b/d some 300,000 b/d above MEEs estimates based on consuming countries import figures

of which around 1.1-1.25mn b/d is crude. Condensate exports are running at

between 250,000 b/d and 350,000 b/d, the minister said, with these volumes set to increase with the imminent expan-sion of output from irans massive south Pars gas field. There is fluctuation [of condensate exports] between months, but on average we have been exporting close to 300,000 b/d We expect this to increase month-on-month, because of the new phases of south Pars, he added.

Unlike crude oil, condensate is not restricted by Us sanctions, as long as the buyer nation was granted a 180-day waiver from the sanctions by gradually winding down the amount of crude it imports from iran. among others, all of irans main buy-ers China, india, Japan south Korea and Turkey were regularly granted waivers by the Us until November 2013, when, as per the terms of the interim nuclear deal, irans consumers were no longer required to continue winding down their purchases.

SOUTH PARS PHASE 12 This boost, should it come, would

continue a trend which has seen conden-sate exports increase steadily over the course of the year. according to iranian customs data, exports of gas condensates from the giant south Pars gas field were up close to 85% in the first half of this iranian year (21 March to 22 september), versus the corresponding period last year.

This is a trend also picked up by the OECD energy watchdog, the international Energy agency (iEa), which recently touched on the increasing presence of condensates from irans assaluyeh terminal on the south coast. Volumes averaged 195,000 b/d for January-October 2014, up 110,000 b/d up on the same period last year the iEa said this month.

as mentioned by Mr Zanganeh, the lions share of irans upcoming incremen-tal condensate production going forward will come from south Pars in particular from those 15 phases which are as yet

unfinished. iran has previously said it plans to complete all phases by end-2017, but MEEs sees 2019-20 as more likely.

south Pars currently produces some 10bn cfd of gas, and around 500,000 b/d of condensates, according to MEEs estimates. Once complete however, this should rise to 27.1bn cfd of gas, and more than 1.1mn b/d of condensate.

Of the south Pars phases yet to be fin-ished, Phase 12 is the furthest along, which the ministry says should be completed and fully operational by the end of the current iranian year (March 2015). The injection of processed gas from Phase 12 gas into gas trunklines began this week, said Rasoul Fallahnejad, the projects director, bringing total sweet gas produc-tion from the phase up to 1.77bn cfd, from 500mn cfd. Once complete, the phase should produce 2.9mn cfd of gas, and 120,000 b/d of condensate, which could easily be diverted to assaluyeh for export.

Phases 15, 16, 17 and 18 are next in line for completion, according to irans Oil Ministry.

REVENUE BOOST at a time when the economy is being

squeezed by sanctions, this condensate boost and the resulting revenue boost would provide state coffers shot in the arm in the face of falling oil prices.

Question marks over the price at which iran sells its oil exports, and over how much of the revenues iran has ac-cess to given financial sanctions hinder attempts to quantify the effect of such an export boost (MEEs, 21 November). any additional revenue will be welcomed by Tehran, which this week committed itself to a budget for the iranian year beginning March 2015 based on $70/B oil down from $100/B this year. as per this weeks extension of the nu-clear talks, iran will continue to receive $700mn in past frozen oil revenues per month for the remainder of this exten-sion (December 2014 July 2014).

IRAN

IRANIAN CRUDE OUTPUT (MN B/D)IMPORTS OF IRANIAN OIL* (MN B/D)

*JAN-OCT 2014. SOURCE: MEES ESTIMATES.

*CRUDE & CONDENSATE. SOURCE: OFFICIAL TRADE STATISTICS, MEES ESTIMATES.

4.0

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J F M A M J J A S O N D 2009 2010 2011 2012 2013 2014*

2012 2013 2014

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Gulfsands, Vitol Subsidiary In MENA Tie-Up

Uk minnow Gulfsands Petro-leum looks to finally emerge from dormancy after sanctions halted its syria operations,

its only producing assets in late 2011. On 19 november, Gulfsands announced

that it has entered into a strategic partner-ship with arawak Energy an upstream subsidiary of swiss trading giant, Vitol to jointly acquire projects in the mEna region. any future joint ventures will see Gulfsands hold a 30% stake and operator-ship, while arawak will hold a 70% stake and will provide financing a condition that Gulfsands says will help it pursue projects that might otherwise be con-sidered to be beyond its reach. Though Gulfsands did not specify which countries it will target, the company said during a conference call that it has been given the go ahead from Vitol to continue with its morocco operation, where it is in the pro-cess of commercializing a small onshore gas discovery. however, the two firms will target oil developments: id imagine [Vi-tol is] looking wherever possible to expand their existing business, said Gulfsands CEO mahdi sajjad during an analyst call.

INSURGENT INVESTOR? Just days before Gulfsands announced

a $20mn loan facility and the partnership with arawak, waterford finance and in-vestment a Uk-based energy investment firm with a 26.5% stake in Gulfsands c