Monday, May 21, 2012

Sanctions take their toll on Syria’s oil sector

Black smoke is seen from the Homs refinery, which was targeted by rebels in December, 2011

Petroleum Review

The Syrian energy sector is currently reeling from the sanctions imposed by the European Union (EU) and the US in the last quarter of 2011 in response to Damascus’ severe crackdown on protests that began in March last year. Oil production has since slumped by 35% according to the Syrian government, the country lacks storage capacity, there have been attacks on pipelines and the regime is struggling to find buyers for its heavy crude, reports Paul Cochrane in Beirut. 

‘People said the sanctions wouldn’t have any effect, but the impact on the oil sector shows it has,’ said Andrew Tabler, a Next Generation Fellow and Syria expert at the Washington Institute for Near East Policy. The new bilateral sanctions prohibit the purchasing of Syrian oil, blacklisting state-owned firms and banning any new investments in the hydrocarbons sector by international oil companies (IOCs). Syria is not a major oil producer by any means, however, with production estimated at 385,000 b/d before the crisis began. Output had also been declining steadily – by 5% year-on-year until the sector attracted renewed interest following the oil price spike in 2008. A number of E&P projects have been carried out in conjunction with Syrian companies by Russia’s Tatneft, Dove Energy, Loon (now Kulczyk Oil Ventures), Stratic, France’s Maurel & Prom and London-based Gulfsands Petroleum, to name just a few. Energy giants Shell and Total were not amongst those engaged in expanding operations in Syria, but focused instead on the production of Syrian Light crude and marketing refined products for the domestic market.
Last year, Syria exported 145,000 b/d, valued at $4bn by the International Monetary Fund, with the European Union (EU) accounting for 96% of sales and Germany, Italy and France representing more than 70% of exports.
Because of this, the EU sanctions introduced in September 2011 were not fully implemented until 15 November, to allow European countries time to find oil from alternative sources following the disruption to energy supplies during the conflict in Libya. This extended deadline turned out to be largely unnecessary, however, as European countries were easily able to re-source oil from Russia – and later Libya – according to Keily Miller, Research Associate for the Energy Forum at the James A Baker III Institute for Public Policy at Rice University in the US.
In fact, exports effectively stopped the day after the EU sanctions were first announced. ‘IOCs had until mid- November, but there were no tanker shipments after 3 September – even Italy didn’t need this window of time,’ said Martijn Murphy, a Middle East analyst at Wood Mackenzie. ‘For Syria, the sanctions are undoubtedly a big blow.’
Indeed, oil exports accounted for 25% of the government’s revenues, and by December 2011, according to Syrian Oil Minister Sufian Alao, oil production had dropped by 30–35%, with output at 260,000 b/d. While most analysts believe that drop in output to be a realistic figure, others warn that the actual slump could be much worse: ‘The Syrians consume quite a bit domestically and mostly export heavy oil – Soueideh [or Syrian Heavy] – and refine lighter oil from the Euphrates area in the north-east, so there is probably more production offline than they say,’ noted Tabler. Syria’s refining capacity has long been 240,000 b/d.
Meanwhile, Ayham Kamel, a Syria expert at risk consultancy firm Eurasia Group in the Middle East, said that the actual oil output is difficult to quantify given the lack of reliable information coming out of the country. ‘Part of the reason is the government is trying to keep a closed lid on how the sector is doing,’ he commented. ‘From a regime perspective, it [the information] could be used to further weaken it.’
So, while the IOCs pulling out of Syria has significantly affected operations in the country – further compounded by the difficulties state oil companies are facing to ensure the safety of workers – it comes down to the regime’s inability to sell oil internationally that is having the biggest effect, despite the fact that Damascus has signed agreements with Russia, Iran, China, Indonesia and Malaysia to buy its oil.
‘There is a lot of talk about these agreements but they are having a hell of a time trying to sell oil as it is heavy and hard to refine,’ said Tabler. ‘I think the Indians, Chinese and Iranians could refine it, but don’t produce that much [heavy crude], so they would have to have their refineries tuned to take a certain amount, and it is expensive to do so. Damascus tried to sell oil to the Iranians but the tankers have not made it there.’ Unfortunately, it is not just the sanctions posing problems, he added, but issues with insurance, re-insurance and financing have contributed to Syrian oil being taken offline. To try and entice buyers, the Syrians have offered major discounts on oil. However, this has failed to work. ‘No one will sign a long-term agreement as it involves too many risks – even at discount prices – simply because the shipment might not make it if the situation escalates over the next few months,’ said Kamel. ‘Traders will buy spot shipments and that will continue to be the trend until there is stability, as
dealing with Syrian companies right now is more difficult, never mind long-term contracts.’
Another factor potentially making buyers nervous is the fact that the country’s oil sector has been plagued by sabotage, with three cases of bomb attacks on pipelines last year – including one in central-eastern Syria in December, on a pipeline carrying 140,000 b/d. And with Syria’s 6,300-km of gas and oil pipelines, there is a high probability of more attacks on infrastructure in the future.
The closure of the Euro-Arab Mashreq gas pipeline, which runs from Egypt through Jordan and was due to have been completed by the end of 2011, has also had a significant impact on Syria. ‘That pipeline was attacked in Sinai, Egypt, 10 times last year, and because of these attacks no gas is reaching Syria,’ said Murphy.

The exit of Gulfsands 

The company that has been affected the most, overall, by sanctions has been Gulfsands, according to Murphy: ‘For larger IOCs, like Shell and Total, Syria accounted for such a small percentage of production that the effect was fairly negligible.’ Gulfsands has operations in the Gulf of Mexico, Tunisia and Iraq; however, the jewel in the crown of its portfolio was Syria. Having discovered oil in the country in 2007, and reporting profits of $48mn by 2009, the British company was one of the last to stop operations there, having just made a discovery at the Al Khairat-1 field in north-east Syria in early December 2011.
‘Total pulled out in November and Gulfsands did so in December under tremendous pressure from the EU,’ said Miller. ‘If you read Gulfsands’ press releases, they were clearly extremely angry about it.’
An even further blow to Gulfsands recently has been the realisation that its licence to develop block 26 in north-east Syria is expiring in August, and may not be renewed in the current climate. ‘My viewpoint is, at this point, that the priority of the Syrian government is to keep the status quo and minimise the amount of work they have to do with IOCs,’ commented Kamel. ‘There is also significant risk that companies involved with certain figures in the regime will not be given contracts again.’
One such figure is billionaire businessman Rami Makhlouf, who has been sanctioned by the EU and the US for financing the regime. ‘Makhlouf is much weaker now and several pro-Makhlouf figures were removed from power. He has an involvement with Gulfsands, and this could be a negative factor,’ Kamel added. ‘The long-term trajectory, under any scenario, is that the possibility of any new contracts have diminished; it will be difficult to give Gulfsands further contracts as everyone is aware of Makhlouf’s involvement.’ In the meantime, the outlook for Syria’s energy sector looks relatively grim: ‘In the long-term there will be an accelerated reduction in production and reserves as state companies are not likely to have the technology or finances to develop fields, particularly where secondary or tertiary recovery techniques are required, as Syrian crude is becoming heavier and more difficult to exploit,’ noted Murphy. ‘Reserves will not be replaced which will further accelerate decline. It is a bad picture. '

Photo credit: Xinhua/Reuters Photo

No comments: