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Energy: The new playground in geopolitics PDF Print E-mail
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Written by Sami Moubayed   
Wednesday, 09 February 2011 14:34

01/18/2011 - Issue 47

Share/Bookmark Energy: The new playground in geopolitics by Mariam Ghorbannejad

On the back of increasing economic insecurity around the world, the effects of wars in Iraq and Afghanistan and climate change causing problems in the food supply, securing access to energy is becoming an aim of many governments’ foreign policies.

Syria is no exception. With oil reserves declining at a fast pace, the cost of extraction rising due to the hard-to-reach location of supplies and ageing infrastructure, the country is turning to its neighbours to secure lucrative oil and gas pipeline deals and sure-up domestic energy supplies.

President Assad views Syria as a bridge between Europe and the US and the Middle East, setting out his vision in May 2009: “We are important not [only] in the Middle East. We are at the center of the world, and are bound to become a crucial link for the whole world in terms of investments, transport and the like...”
These are the words of President Bashar al-Assad as reported by Al-Thawra on May 17, 2009.

Syria's natural resources may not seem huge when compared to oil-rich Gulf States. However, its reserves of oil are not insignificant, accounting for 22% of GDP in 2008 according to figures from the International Monetary Fund.
Factor in increased regional cooperation and you get a sense that President Assad’s ideas may have substance.

Drilling down to details

At a joint conference with Turkish President Abdullah Gul in May 2009, President Assad set out his ‘Four Seas policy’ which would link the Mediterranean, Caspian, Black Sea and the Arab Gulf, creating a continuous economic bloc covering Syria, Turkey, Iraq and Iran.

Pivotal to his plans are consolidating the Syrian-Turkish economic relationship and integrating the country’s energy and gas infrastructure with regional energy pipelines. As proof of the expansion of bilateral relations numerous agreements have been signed between Syria and Turkey in the fields of energy, industry, agriculture, telecommunications, banking and technology.

If this policy wasn’t ambitious enough, President Assad recently added a fifth sea to the mix, saying that Syria was the nexus of “a single, large perimeter [with Turkey, Iran and Russia] … We're talking about the center of the world.”

Syria’s potential as a regional transit hub for gas going into Europe and elsewhere is real when you look at gas-rich neighboring countries. The Arab Gas Pipeline, which runs for 1,200 kilometers linking Arish in Egypt to Banias in Syria via Aqaba and Damascus, is already in operation. Phase two of the project will see a pipeline from Syria to Turkey. There is ongoing work to connect the network from Aleppo in northern Syria to Kilis in southern Turkey. This will facilitate access to European markets through connection to the Nabucco pipeline.

Once completed, the Nabucco pipeline will take gas from the Caspian region - Azerbaijan, Turkmenistan and Kazakhstan - as well as Georgia and Iraq, bypassing Russia. From the Turkish grid link-up, it will measure 3,300 kilometers to a distribution hub in Baumgarten, Austria potentially delivering up to 31 billion cubic meters per annum of natural gas to Europe.

Energy hub: Reality or pipe dream?

For Syria to become an energy hub it needs to be an important re-exporter, or transiter of gas or oil to its neighbors.
“The integration with Turkey is rather, as things currently stand, an underlining of Turkey's important role as ‘the energy bridge to Europe’ [from the Caspian and Middle East] since Turkey is the transiter of far larger amounts,” said Samuel Ciszuk, senior Middle East energy analyst at IHS Energy.

“Syria might be located centrally, but not centrally enough to become an energy hub of weight. That role will always be held by Turkey, which sits at the junction between several existing and future supplier and consumer pipelines,” he continued.

Ciszuk believes that Syria might see more supplier pipelines come through its territory, but apart from Lebanon, they would all go to Turkey, which would have the market balancing powers coming with being a hub rather than just a transiter.

Strengthening Syrian-Iraqi energy ties
Iraq offers another potential source of cooperation in the realm of energy. The country is slowly emerging from the aftermath of the 2003 US-led invasion. Its sluggish economy is being jilted into action by various agreements, auctions and projects promoted by the Minister of Economy. Endowed with plentiful natural resources, who Iraq chooses to collaborate with could bring generate notable revenue for both parties involved.
Consolidating the country’s place in the world’s top countries in terms of oil, former Iraqi Oil Minister and current Deputy Prime Minister Hussain al-Shahristani revised national crude reserves upwards to 143 billion barrels in October 2010.

According to figures released by the oil ministry, Rumaila and other fields in southern Iraq contain 71% of Iraq’s revised reserves, or an estimated 125.5 billion barrels. Northern fields, which include the city of Kirkuk, account for 20% while the central region makes up the remaining 9%.

All talk seems to focus on petroleum extraction. However, Iraq is home to natural gas worth $800 billion in proven reserves and estimates run as high as $1.3 trillion. Presently, three fifths of gas extracted is flared off as it cannot be captured and stored.

So far, Iraq has held three energy auctions, two in 2009 with the latest being held in October 2010. Oil fields were up for grabs in the 2009 bidding rounds. Last year it was the turn of natural gas fields. European companies were not among the winning bidders.

South Korea's Kogas and Kazakhstan's KazMunaiGas Exploration & Production won a deal to develop the largest of the three, Akkas gas field in western Iraq. South Korea's Ministry of Knowledge Economy said that total investment will be about $4.4 billion.

Siba gas field in Basra, southern Iraq, was won by Kuwait Energy and Turkey’s TPAO. The Turkish firm pledged to invest $1 billion in the site.
TPAO, Kuwait Energy and Kogas won the deal for the third gas field up for auction, Mansuriyah, in Diyala province near the Iranian border.

Officials from the Syrian and Iraqi oil ministries recently signed a memorandum of understanding to build two oil pipelines and Iraq’s first international gas pipeline from Kirkuk to Banias with a capacity of 200,000 barrels per day (bpd).

Transiting Iraqi oil would be a “significant strategic boon to Syria” according to Ciszuk. Apart from allowing it to earn some transiting fees, Iraqi gas would allow Syria to both import more gas to satisfy domestic need when it arises and export it on.

The idea that Iraqi gas would be transported to the Syrian coast and then liquefied (LNG) is today, he believes, very far-fetched.

“Firstly Iraq will not be a stable gas exporter for many years to come, given the massive pent-up domestic demand need in the country.

“It will take about a decade to properly rebuild and expand Iraq's power generation sector [even that is a best-case scenario] to meet the country's demand, which, as the country meanwhile recovers, will grow strongly during the same period and beyond,” he said.

International players in Syria

Due to political instability and old, poorly-maintained infrastructure it is mainly the major international oil and gas firms who have the capital to invest in costly projects in Iraq. This can be witnessed through the firms active in the country, namely Italy’s Eni Spa, American Exxon Mobil Corporation and Russian OAO Lukoil.

Syria, on the other hand, is considered politically secure so consequently insurance is lower which attracts a wider cross-section of industry players.
International oil companies operate in Syria on condition that they sign production-sharing contracts with the government. These are drawn up to ensure Syria gets a fair deal from foreign firms and international companies fulfill their commitments to exploration. Royal Dutch Shell, Total and Petro-Canada are amongst the big names operating in Syria.
Medium-sized players can also enter the Syrian oil and gas market. One such player is Gulfsands. A British firm listed on the Alternative Investment Market (AIM) of the London Stock Exchange, it has two oil exploration and development projects in Syria.

Gulfsands owns a 50 percent working interest and is operator of Block 26 in north east Syria. The Khurbet East oil field was discovered in June 2007 and commenced commercial production within 13 months of discovery. Production, as at the end of March 2010, stood at approximately 17,000 bpd from seven wells. The current exploration period expires in August 2012.

Yousefieh oil field was discovered in November 2008, located approximately three kilometers away from Khurbet East. Two appraisal wells were drilled in 2009 and commercial development approval was granted in January 2010.

The development and production period for the Khurbet East field expires in February 2033 (25 years after commercial approval) and that for the Yousefieh field in January 2035, but each may be extended for a further 10 years by option of the contractor. The terms of the PSC (contract) comprise a 12.5% royalty, cost recovery allowance, and the sharing of the resultant profit oil between the contractor group and the Syrian Petroleum Company.

“The operating environment in Syria is excellent for a fast growth company like Gulfsands. The Syrian government is very keen to attract technically proficient companies like Gulfsands to operate in Syria, as this increases oil production, exports and essentially revenue to Syria,” said Ric Malcolm, CEO of Gulfsands.
“Not only are the fiscal terms attractive and transparent, the in-country knowledge and expertise within Syria makes it a very attractive environment for an international company such as Gulfsands to work in,” he stated.

For the company, the only significant challenge is geology - you don't know precisely if you are going to strike oil or not, which is the case across the whole oil industry.

“However, as we have found with Khurbet East and Yousefieh, the in-country knowledge of these type of fields is very impressive and has subsequently played a vital role in our drilling success in this region,” Malcolm said.

Another signal of Syria’s attraction came when China’s Sinopec bought Syria-based Tanganyika Oil Company for $2 billion in September 2008. In the biggest ever transaction involving a firm whose operations and activities are solely in Syria, the deal secured Sinopec access to 184 million barrels. State-owned China National Petroleum Corporation (CNPC) already holds a stake in Al Furat Petroleum Company and a 2003 development and production contract for Gbeibe oil field.

Going downstream

Investment is necessary in downstream hydrocarbons capacity due to old, inefficient oil refineries, at Banias and Homs, and rising gas output. Together, they have a capacity of 240,000 bpd, well below domestic demand.

Three new refineries are being mentioned, the first proposed by CNPC, the second by a consortium of governments (Syria, Venezuela, Iran) and a Malaysian firm and the third by Kuwait-based Noor Petroleum.

The six national gas processing plants have a capacity of 29 million cubic meters per day. British Petrofac and Russian Stroytransgaz are in the process of constructing new plants to complement the existing ones. The involvement of Stroytransgaz is slightly controversial, given it is a subsidiary of Gazprom in which the Russian government has a controlling stake. The company has already been involved in grid pipeline development and further involvement could cause Syria’s relationship with the EU to come under strain as European countries have been attempting to diversify their energy supplies away from Russia.

Future role

Although there seems to be consensus among analysts that Syria may not be an energy hub, there is no doubt that the country has a role to play in international energy security. Its strategic location, bordering resource laden Turkey, Iraq and the Caucasus and the energy hungry consumers of Europe make the country an important transit route for oil and gas.
Transit of gas to Turkey (and some more to Lebanon) would provide transit fees, but the biggest benefit would likely come from Iraqi oil exports via Banias.

Various regional and bilateral agreements, such as the one signed with Azerbaijan to start importing natural gas, may serve more to sure-up domestic energy supplies rather than securing Syria’s position as an energy hub.

Viewed in context, these projects are essential for Syria in order to diversify away from a reliance on Egyptian gas. Egypt is over-stretched on the export front as domestic demand has grown and therefore tapping into neighboring countries makes sense.

US sanctions and contract terms may put off some international oil and gas operators but Syria’s proven oil and gas reserves still make the country an attractive place to invest, especially for niche players. With the price of New-York traded crude oil standing at nearly $90 a barrel, and China’s refineries running at record rates signaling that demand in the world’s largest consumer looks set to increase, countries with oil reserves will be able to cash in. According to the 2010 BP Statistical Energy Survey, Syria had proved oil reserves of 2.5 billion barrels at the end of 2009. Despite oil production falling from its 1995 peak, there is still plenty to offer investors willing to take the plunge.

Last Updated on Sunday, 12 June 2011 17:15

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