Tuesday, September 04, 2007

The need for transparency in the Gulf oil markets

Commentary – Executive magazine August 2007

While the Middle East makes baby steps towards implementing greater financial transparency, accountability and the rule of law, the region’s best-known commodity – oil – lacks transparency in the way tenders are allocated and, more disturbingly, in actual reserve estimates.
Information on oil, the lynchpin of the Gulf economies and the catalyst for numerous conflicts, coups and much other skulduggery in the Middle East, is being held back from not only the people of the region, but also the very markets that rely on that energy.
The most glaring examples are Iraq and Saudi Arabia.
In Iraq the issue is over the proposed oil law, which would give multinational oil companies such as Conoco, ExxonMobil and Chevron first dibs on developing the country’s oil fields under contracts of up to 30 years.
Iraqi politicians have complained that they don’t know what is going on with oil resources as the formulation of the law is being stage managed by a US consultancy firm. Furthermore, in a recent poll carried out by Custom Strategic Research in Iraq, only 4% of poll respondents felt they have been given “totally adequate” information about the oil law while a further 20% describe information provision as “somewhat adequate,” and 76% as “inadequate”. The poll also indicates that Iraqis are not happy with the sector being developed by foreign companies, with 63% replying they would prefer Iraq’s oil to be developed and produced by Iraqi public sector companies.
The need for greater transparency in allocating oil tenders and the drawing up of the new oil law – the bedrock for future development of the country – is essential for Iraqis to decide on how their oil wealth is to be used.
Of greater concern to the global markets are the oil reserves of Saudi Arabia, the world’s top oil producer and exporter. Future supply projections are largely based on the fact that Saudi Arabia will be producing as much as 20 to 25 million barrels of oil per day (bpd) within the next two to three decades. Yet current production capacity is 11.3 million bpd, around half of that estimate.
Although Saudi Arabia is carrying out several multi-billion dollar projects to raise capacity to 12.5 million bpd by 2009, such an increase is not enough, certainly to prove to the world that the kingdom has the reported 261 billion barrels of proven oil reserves. That information, on how much each field contributes to total oil reserves, is treated as a state secret. The problem is compounded by Riyadh not allowing third-party verification of their ability to deliver. Additionally, there is speculation that the kingdom’s three most important fields, which have been producing at high rates for over 50 years and require a staggering 12 million barrels per day of water to be injected to create pressure for extraction, are reaching the end of their shelf life.
Saudi Arabia assures us that it can meet projected targets – which, to its credit, it has always done – but unless national oil company (NOC) Aramco provides more information on reserves, it will be hard to know how long they can effectively meet demand.
Such secrecy among NOCs is somewhat understandable, but not helpful in making future projections in a time of rapid global economic growth or holding NOCs– the dominant energy firms in the region – more accountable to their citizens.
Equally, a lack of transparency is also limiting NOCs’ access to external capital that could help raise capacity and resultantly meet surging world demand. And with the International Energy Agency (IEA) projecting that over the next 30 years some $2.2 trillion in new investments will be needed in the global oil sector to meet surging demand, much of this cash will be destined for the Middle East - but into whose pockets and for what ends?
There is an exception however to the secrecy so predominant in the Gulf: Bahrain. In 2005, Bahrain streamlined its oil operations from three authorities into one, the National Oil and Gas Authority (NOGA), with the head of NOGA, Abdul-Hussain Ali-Mizra, a technocrat, also the Minister of Oil and Gas Affairs. Such an approach has given NOGA greater flexibility in meeting both domestic and international demand, attracting capital, and helping to remove bureaucratic obstacles that hampered growth. All tenders are now put online for companies to bid for.
“Oil and gas has been very secretive in the past but we want to change that as there is nothing to hide,” Ali-Mizra told me earlier this year. “Countries should be transparent and responsible, so we are setting the benchmark.”
With Bahrain relatively low on the global energy supply rankings, Manama has perhaps the least to lose in being transparent (we all know its supplies are running out), but Saudi Arabia and the other Gulf countries would do well to take a leaf out of Bahrain’s book to be more forthcoming in information on tenders and reserve estimates. The markets demand it, and the people deserve it.

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