Unconventional Oil In The Middle East

Jan. 132011 - 5:00 pm |1,423 views| 0 recommendations| 3 comments
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As the conventional and cheap oil and gas start to dry up in theMiddle East, a bigger, even better opportunity seeks to replace it.

For many who aren’t familiar with the region, the Middle East comesacross as an updated version of Lawrence’s Arabia, only with lots ofoil. But this mosaic of cultures isn’t made up of only Arabs or Muslims,and most Middle East countries are neither awash with heavily armed,rather excitable citizenry… nor with black gold, which is what we’reinterested in. Twenty-three countries comprise the Arab League, butonly Saudi Arabia, Iraq, Kuwait, the United Arab Emirates (UAE), andIran are major oil producers.

No matter; with the exception of Kurdistan in northern Iraq, none ofthe oil heavies are currently open to us investors anyway. We’redigging for other finds, with three basic criteria. We’re looking forcountries in the Middle East that:

  • Have potential for unconventional production, such as oil shales
  • Have incentive to develop it, and
  • Are either net importers of oil or soon will be.

Why? In short, conventional production is in decline, but demand foroil isn’t. That means the state-owned oil companies and largecompanies operating in the region either need to find new fields andbasins or apply new technology to get more out of established ones. Orboth, of course. Nowhere is this reality more critical than in theMiddle East, the world’s most important oil region, where oilproduction is the lifeblood of governments.

Our analysis, gleaned from data and on-the-ground experience alike,points to investment opportunities in new, unconventional technology andresources. Exploration costs will likely be lower, as companies aren’tstarting from scratch. And in what we see as early days in thenational drives for energy security, it makes sense to look closearound your own turf.

We believe that blue-sky potential lurks in companies operating inthe Middle East with expertise in unconventional production, access togood source rock, and management that can marry the two.

The Proving Grounds

It’s still early in the game, which can mean both good (highreturns) and bad (high uncertainty) for investors. We believe thepotential upside of unconventional development in the Middle East isjust too big to ignore, however. So what we’ve done, is track down andlay out the most likely go-to countries for those explorers with theright stuff.

The following chart will narrow further the countries that meet thethree criteria we outlined above. That is, who’s “in the red” when itcomes to oil?

We see here that six countries currently rely on imports for their crude oil: Egypt, Cyprus, Lebanon, Jordan, Israel, Turkey.

In addition, two countries appear on their way to becoming net importers of oil: Syria and Yemen.


Outlook:The oil and gas industry are an essential sector in Egypt’s economy, andthe country’s reserves convey its potential to become a significantproducer. In 2009, Egypt produced 678,300 of barrels of oil per day,while consuming 683,000 barrels per day. Egypt has traditionally been anet producer, but production peaked in 1993 and has been in decline.Combine that with its increase in domestic consumption, and Egypt isnow a net oil importer.

Consequently, the Egyptian government has reversed its previouslymuch harsher fiscal regimes and now actively encourages the explorationof domestic oil, which has resulted in an industry dominated byforeign players.

Natural gas, on the other hand, has tripled in production in recentyears due to some major discoveries. Thus Egypt is a net producer here,and more important in the broad picture, a source for European naturalgas. European countries are usually eager to decrease their reliance onGazprom, the state-controlled gas giant from Russia.

Egypt has a developed network of pipelines to export its natural gasto Southern European and eastern Mediterranean countries. It alsosends liquefied natural gas (LNG) to Europe, Asia, and the Americas.

However, as natural gas represents over 80% of Egypt’s source ofelectricity, the government has slowed plans for export expansion toensure all domestic demands will be met before any further moves.


Outlook:Cyprus has no oil or gas production currently, and so must import all itneeds. However, an oil deposit has been found recently in the seabedbetween Cyprus and Egypt. An oil licensing round took place in 2007,when 11 blocks were offered to potential investors.

This first round took place against a backdrop of opposition fromthe Turkish government. As a result of this territorial dispute,companies chose not to bid, and as of now, only Noble Corporation has aproduction-sharing agreement (PSA) with the Cyprian government.

In May 2010, Cyprus announced it was close to commencing a secondoil licensing round for several offshore blocks. It’s again underTurkish protest. Turkey has even warned Lebanon and Egypt againstworking out a deal with Cyprus for oil exploration.


Outlook:Lebanon also has neither oil or gas production at this time. However,Cyprus has signed lineation agreements with Lebanon and Egypt toexploit large hydrocarbon reserves that cross borders offshore, as wementioned above, and hope to begin exploration by 2012.

And according to Lebanon’s parliament speaker, Nabih Berri, gasreserves found off the coast of Israel are located in Lebanon’sterritorial waters as well. These fields, however, may run intodevelopmental difficulties as Israel and Lebanon to this day stilldispute their maritime borders, leaving large fields such as Leviathanand Tamar in a state of limbo.


Outlook:Large corporations have been eyeing the unconventional potential inJordan for quite some time, but were put off due to both political aswell as economic reasons. However, with advancements in oil shaletechnology and a gradual shift towards liberalization by the Jordaniangovernment, which has long been envious of the hydrocarbon wealth ofits neighbors, Jordan’s government has established plans to liberatethe oil market in the next five years. If that happens, it will be afirst for investors since 1958. Under the National Energy Strategy’sinitial phase, four companies will be offered 25% of the kingdom’sreserves. The remaining 75% will remain under the control of thestate-owned Petroleum Refinery Company (JPRC) until fullliberalization.

This development will pave the way to exploit Jordan’s oil shaleresources. Oil shale deposits underlie more than 60% of the Kingdom ofJordan and have enormous potential. The World Energy Council estimatesJordan’s oil shale reserves at approximately 40 to 60 billion tons,making it the second richest state after Canada in rock oil reserves.

Furthermore, the oil shale quality is very high compared with theoil shale in the United States. Jordan has recently signed a deal withShell Oil to extract oil shale in the central part of the country. Firstcommercial quantities are expected by 2020, with an estimated amountof 50,000 barrels of oil per day.

Modest natural gas reserves were discovered in 1987, and the Rishafield near the Iraq border produces approximately 30 million cubic feetof gas per day. However, production is pretty flat and looks to staythat way. That means imports.


Outlook:Israel relies on importing resources to meet the majority of its energyneeds. It boasts no major reserves, and thus oil production is minimal.However, as we said above, Israel has found substantial natural gasreserves located in Mediterranean deep water. This discovery hasprompted increased exploration off Israel’s coastline, not to mentionincreased territorial disputes.

The U.S. Geological Survey reports that Israel’s offshore reservescould hold 122 trillion cubic feet of recoverable gas. That makes itone of the world’s richest deposits.

As a result of this discovery, Lebanon has rushed through approvalof a law that outlines the guidelines of surveying, exploring, andproducing of gas. The legislation also calls for a sovereign wealth fundto manage the potential revenues.

Nevertheless, Lebanon is still three to four years behind theIsraelis, as it still must secure investors, select bidders, and beginexploration work. Israel is already well on its way.


Outlook:Although Turkey has both oil and natural gas reserves, the country is anet importer for both resources. It may become energy independent asnew oil and natural gas reserves have been discovered off the coast ofthe Black Sea, Eastern Thrace, the Gulf of Iskenderun, and in theregions near the borders of Syria and Iraq.

Due to its location, Turkey is vital in energy transportationbetween major oil-producing areas, in the Middle East and the CaspianSea, and consumer markets in Europe. In 2009, the pipeline network inTurkey covered over 3,636 kilometers for crude oil and 10,630 kilometersfor natural gas.

One of the pipelines, the Baku-Tbilisi-Ceyhan, is the second largestoil pipeline in the world. It’s responsible for delivering crude oilfrom the Caspian Sea to the port of Ceyhan on Turkey’s coast. FromCeyhan, the crude oil is distributed to oil tankers, which will furthertransport it to the world’s markets.

Another pipeline, Nabucco, is in the planning stages. It is expectedto provide European markets with natural gas from the Caspian Seabasin.


Outlook:Compared with some of its neighbors, Syria’s oil and gas production isfairly unassuming. On the other hand, Syria is the only significantproducing country in the Eastern Mediterranean region. Oil productionhad declined, then flattened out for several years before new fieldswere discovered. They’re expected to bump up future production.

Syria’s known oil reserves are located mainly near the Iraq borderand along the Euphrates River, while some smaller fields are located inthe central part of the country. Upstream production is controlled bythe state-owned Syrian Petroleum Company (SPC). The main foreignconsortium which is currently producing is Al-Furate Petroleum, a jointventure made up of SOC (50%), Shell Oil (32%), and a collection ofother companies.

Contracts have been awarded to Shell, in 2008, and TOTAL, earlierthis year, for exploration at greater depths in existing oil fields inthe Euphrates and central areas. Offshore exploration came up dry in2007, but recently there’s been renewed interest. The SPC has commencedplans to issue tenders for the offshore blocks in the future.

Syria is also strategically important as a transit hub and willprovide a larger role with the ongoing plans for pipeline networkexpansions in the area.

As for gas, new fields are expected to ensure that Syria’s domesticdemands are met after several years of decline in production. About 35%of natural gas production is reinjected into oilfields for enhanced oilrecovery techniques, with the remainder going mostly to generateelectricity and for domestic use. By the end of 2010, Syria expects todouble its natural gas production.


Outlook:Like Egypt, Yemen is a strategic hub for oil shipping. More than 3.7million barrels of oil pass daily through shipping lanes off its coast.The alternative is a very costly trip around the southern tip ofAfrica, so governments and oil companies are anxious to avoid anydisruptions.

Hydrocarbons currently account for approximately 25% of Yemen’s GDPand over 70% of government revenues. Accordingly, the government isactively seeking to increase foreign capital in this sector.

Barring significant change, however, its harsh fiscal regime isstrangling exploration. Yemen is currently a net producer of oil, but itwon’t be for much longer at this rate. Production is currently limitedto two major sedimentary basins, but another 10 basins are believed tohold oil reserves.

A number of companies are interested in the area of Yemen’s borderwith Saudi Arabia, though activity has been very limited due to acombination of limited infrastructure and continued security concerns.An initial licensing round in 2007 for offshore exploration alsostirred interest, but the rise of Somali pirate activity in the Gulf ofAden has more or less put the kibosh on that. A fourth round ofbidding was postponed in August 2009 because of the pirates and theexorbitant insurance rates that companies would need to pay to operatein the region.

Up until 2009, all natural gas produced was reinjected to provideenhanced oil recovery. Natural gas export only became viable when amilestone agreement was signed in 2005 with Korea Gas Corp. Yemen alsosigned an agreement Swiss GDF Suez Company and TOTAL. All threecontracts run for 20 years.

Yemen’s first liquefied natural gas (LNG) plant, located on the portof Balhaf on the Gulf of Aden, went online in October 2009. Yemen hasthe ability to export over 200 million cubic feet of LNG per year, andmuch of the future investment into Yemen is expected to be used in thenatural gas infrastructure.

What It All Means

So the question is, what do we have and, more importantly, how can we make money?

When investing in the Middle East, there’s evaluatinginfrastructure, fiscal policies, and, perhaps most important of all,Middle East politics.

Much of the Middle East is well developed, particularly around urbancenters. But many places where a company would be looking forunconventional oil are a ways off the beaten track, and that meansadditional infrastructure. A prominent example is Kurdistan, wherebillions of dollars’ worth of infrastructure upgrades are needed toturn the region into prolific oil-producing center. A junior companyalone could not possibly have the connections to build suchinfrastructure. Countries such as Yemen and Oman have similar stumblingblocks to investment and development. The Catch-22 is that theseplaces are precisely where the remaining “elephant deposits” could behiding.

Behind the scenes in the Middle East is always politics, much of itnuanced and layered by generations of history and family ties.

It takes a management team that has been in the arena before andknows the intricacies of the particular area of interest. A goodsecurity detail may be a must in some places as well.

Lastly, the fiscal systems in the Middle East are relatively toughcompared with the rest of the world, and in some countries, such asSaudi Arabia, there are very few, if any, opportunities for foreigncompanies to even come in and share the wealth.

Countries with the highest petroleum shortfalls tend to have thelowest government take. But that’s relative. Any company that operatesin the area needs to remember the Middle East holds the dubious recordof the highest number of “two-stars” (80-90% government take) and“one-stars” (90%+ government take) in the world, leaving contractorswith very little with which to recuperate their costs and justify theirinvestments. Southern Iraq and Kuwait can even reach 95%+.

Who’s Got It

Nevertheless, opportunities are definitely available for thoselooking for them. Some are conventional, but the big upside that we seein the Middle East is in its unconventional potential. Reconnaissanceand seismic data for the region are readily available due to decades ofexploration in the area, saving companies millions, if not billions ofdollars that would have been needed to do the same work. There arealso a good number of pipelines here that, where geography and geologymeet, can convey a premium to any unconventional oil production. Asseveral countries begin to look for the oil shale opportunities, theunconventional story has the potential to be the biggest boom in theenergy market in decades.

Month after month, Marin and his energy team analyze the globalenergy markets to find the best small-cap companies that provide vastupside potential. And with oil prices shooting up again, returns couldeasily match – or even surpass – the 400% and 818% gains subscribersmade within the past year. Try Casey’s Energy Report now for 3 months with full money-back guarantee… details here.

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