Energy Developments in Oman and Iraq: Implications for Regional Energy Security

1. NS4960Spring Term 2017MENA: Energy Security 2017

2. Introduction • Four case studies on recent energy developments in three key MENA countries, and the region as a whole • Oman: energy development with potential cooperative arrangements with Iran • Iraq: Energy situation in the North with assessment of developments in a post-IS Iraq • Iran: Energy developments post sanctions with prospects for oil output increases • China in the Middle East with new major oil deals and investments • All have implications for energy security in the region and energy production for the global economy

3. Oman: Overview • Oman announced April 3, 2017 it would potentially support an extension of OPEC production cuts while also continuing to expand output capacity • Government signed up to agreements by OPEC and non-OPEC states in December 2016 to cut oil production for six months in attempt to boost prices • Move demonstrated a desire to show solidarity even though it • Pushed the country below its recently achieved crude oil production record of 1 million barrels per day and • Reduced needed fiscal revenues

4. Oman I

5. Oman II

6. Oman III • Although Oman's economy is heavily petroleum dependent by comparison with its neighbors a small producer • Oman and Bahrain are the only two Arab Gulf states outside the main producers' group OPEC • Still Oman has become an innovator in techniques to produce oil from reserves that are difficult and expensive to exploit • Many deposits contain "heavy" crude which is difficult to extract without first making it less viscous • This is achieved through enhanced oil recovery (EOR) techniques involving injection of gas, steam, or chemicals • Country's dominant producer Petroleum Development Oman (PDO) has pioneered EOR Projects • 60% state owned with Shell holding 34% stake

7. Oman IV • Low oil price last two years resulted in cutbacks • Techniques involved in EOR expensive • Production of a barrel of oil costs $25 double cost for "light" oil • Involves burning gas to heat water, but country facing gas shortage • To overcome this problem Oman pioneering solar power • Difficulties involved dew and sand combining to smudge the heat mirrors

8. Oman V • Other option -- import gas from Iran • Sub-sea pipeline • Would be first joint energy venture between Iran and a GCC state • Nature of project reflects • Oman's insistence on maintaining good relations with Iran (despite Saudi Arabian objections) and • The country's urgent need for more gas • Under proposed $1.5 billion scheme • Oman would import 10 billion cubic meters per year of Iranian gas • Would be processed at a Omani LNG plant and then re-exported

9. Oman VI • Currently • Omani production and exports well below joint capacity of LNG plants because natural gas being delivered to meet rising domestic demand • Country having difficulty in honoring long term contracts with firms in South Korea, Japan and Spain • Revenue from LNG exports fell sharply in 2016 • Fiscal and geopolitical disputes have blocked many proposed pipeline schemes in Middle East • However against Oman's need for gas and with Shell, Total and Korea Gas Corporation (country's main LNG shareholders) keen to invest, project has better chance than others

10. Oman VII

11. Oman Assessment • Positive Omani gas cooperation with Iran might tempt other Arab Gulf states such as Qatar and Kuwait to follow suit • Any deeper economic cooperation with Iran would strain Omani-Saudi relations already tense because of differences over Yemen • If new oil and gas exploitation methods succeed, Oman could become a regional leader in energy innovation • However the country is poorly prepared for its upcoming post-oil transition which will hit the rentier economy • Oman will maintain its commitment to maximize energy sector investment. • Diversification efforts will be a lesser priority even though the country has no long term oil future.

12. Iraq Overview • April 2017 • Iraqi military spokesman said that the Islamic State (IS) had lost more than 75% of the territory it took in 2014 • However successful fight against IS has not forged a new sense of unity among Iraq's communities • Instead it has • Solidified some divides and • Created conditions for future conflict

13. Iraq: Map

14. Iraq: Shia Divisions I • Since the fall of Saddam Hussein three Shia Islamist parties have been particularly prominent: • Movement led by radical cleric Moqtada al-Sadr • The Islamic Supreme Council of Iraq (ISCI) and • Dawa founded in the 1950s as an alternative to the Arab nationalist politics of the time • All three of Iraq's elected prime ministers since 2005 have been from Dawa. • Dawa became internally divided since the government that formed in the aftermath of the fall of Mosul to IS in June 2014 • Saw two term prime minister Nuri -al Maliki replaced by Dawa member Haider al-Abadi

15. Iraq: Shia Divisions II • Maliki had made enemies of most non-Shia parties and also many within the Shia parliamentary coalition • Many blamed him for his heavy handed treatment of the Sunni population for the rise of IS • Abadi seen as a moderate alternative • However Maliki seeks to return to power and orchestrating discontent against Abadi • Has won back support from many MPs opposed to Abadi's efforts to reduce within the government • Sectarianism and • Corruption

16. Iraq: Shia Divisions III • Militia controversy • New fault line in Iraq concerns most mostly Shia militias known as Popular Mobilization Units (PMUs) • Over 100,000 fighters dived into groups associated with particular political factions • Mobilized in face of IS's advance in 2014 • Have played an important role in the war • The PMU's mobilization and influence in post-IS Iraq a key issue • Parliament passed a law in November 2016 that formalized them as part of the security forces • Guarantees their pay, but • Places them under the command of the prime minister

17. Iraq: Kurdish Issues I • Shia militias (continued) • Abadi insists they will have no political role • Maliki has framed himself as the main advocate for the militias' participation in elections • Outcome unclear at this point • Kurdish Splits • Disputes between Kurdistan Regional Government (KRG) and Shia-dominated national government over • Oil • Territory and • Status • Including a long-standing bid for independence will likely take center stage in post-IS Iraq • However unlike 2003-14 Kurds no longer a united front.

18. Iraq: Kurdish Issues II • Powerful KRG block in federal parliament has fragmented since 2014 due to • Fiscal pressures driven by the IS advance and low oil prices' • Failure of leadership in the Patriotic Union of Kurdistan (PUK) which has historically dominated the eastern half of the KRG after its founder Talabani suffered a stroke in 2012 • Deep tensions between the dominant Kurdistan Democratic Party (KDP) led by KRG president Barani and Gorran a reformist party. • Splits mean Kurds likely to focus on more immediate goal of integrating territories disputed by Baghdad into the KRG rather than independence from Iraq.

19. Iraq: Kurdish Issues III • Their core territory was defined around the area they could defend from Saddam Hussein in 1991 with support of an international no fly zone • Roughly corresponds to Iraq's three northern provinces • However Kurds have long claimed an expanded region encompassing areas with Kurdish majorities before Arabization under Saddam Hussein changed the demographics • As the Iraqi army crumbled before advance of IS in 2014 the Peshmerga garrisoned much of this disputed territory. • Part of this area is Kirkuk which has one of Iraq's largest oil fields • Will be a census and referendum in Kirkuk after the ejection of IS to see if area should join the KRG

20. Iraq: Assessment I • As IS loses territory in mid-2017 Iraq will move into election season • Provincial elections in September 2017 • Kurdish parliamentary and presidential elections in November 2017 and • Federal parliamentary elections in mid-2018 will intensify intra-community tensions • Divisions will be particularly acute around • The role of Shia militias • The status of territory claimed by the Kurds and • Representation of the Sunni community during post-IS reconstruction • Mass protests are likely and armed clashes possible

21. Iraq: Assessment II • As things stand in Kurdistan, the petroleum sector has struggled to make progress in the context of • Local political and economic crisis • Continuing fight against IS and • Some disappointing geological findings • Oil production is stagnant at around 650,000 barrels per day • Owing to persistent budgetary shortfalls, payments to international oil companies have faced delays • The defeat of IS could open up potential oil and gas exploration on Nineveh plains and around Kirkuk

22. Iraq: Assessment III • Conflict between Kurdish and Baghdad government forces over dissipated oil and gas fields will rise • Worsening conflict in the Kurdish south-east of Turkey could endanger oil (and future gas) exports • Given uncertainty in the region, there may be limited interest from in foreign oil companies – Chinese investments have underperformed

23. Conclusions • Safe to say • Low level conflict and instability will persist after IS, undermining business environment • If no political consensus can be reached after upcoming elections, Iraq's long term future as a unified country becomes more problematic • Outside Kurdish-controlled areas, the bulk of oil production is in the south, the main risk to output is therefore intra-Shia conflict • A possible Kurdish bid for independence could destabilize Iraq as a whole

24. Iran: Overview • Iran's crude oil output reached 3.7 million barrels per day in late 2016 • Oil sector bouncing back after lifting of international sanctions • Production has risen from an average of 2.8 million barrels per day during 2015 and • Now approaching pre-sanctions level 4.0 mbd • Country has finalized new-style petroleum contracts offering more favorable terms to international investors

25. Iran: Oil Production

26. Iran: Sanctions • UN, EU and US sanctions on Iran's energy sector were lifted from January 2016 under the Joint Comprehensive Plan of Action (JCPOA) nuclear deal. These had prevented • Investment in Iran's energy sector and the transfer of most technology • The supply of refined oil products to Iran • The shipping or insurance of Iranian oil exports • The purchase of Iranian oil by EU countries (US purchase remains forbidden, as it has been since 1979) • The purchase of Iranian oil by most other countries excluding China, India, South Korea, Taiwan and Turkey which were required to reduce their imports • The repatriation of Iranian funds from oil sales, except to buy goods from the purchasing country and • The export of petrochemicals or precious metals

27. Iran: Production Outlook I • The sanctions will be suspended while Iran continues to comply with the agreed restrictions on its nuclear program • Production Outlook • Under the impact of sanctions crude production fell from 3.6 million bpd in 2011 to an average of around 2.8 million bpd in 2015 • Domestic consumption is around 2 million bpd • Despite swift post-sanctions recovery, in longer term Iran's underlying production capacity likely to fall • Legacy of under-investment and • A shortage of domestic capital

28. Iran: Production Outlook II • International investment will be needed to • Develop new fields • Carry out redevelopments and enhanced oil recovery for older fields. • New contracts provide investor with • long-term (20 year operatorship) involvement, • Flexible work program • Repayment of costs plus a fee per barrel of oil or cubic foot of gas produced with • Bonuses for more difficult fields or if oil prices rise

29. Iran: Production Outlook III • Ministry of Petroleum has finalized a new Iran Petroleum Contract (IPC) governing private/international investment in the upstream oil and gas sector • International investors will have to take a local partner from an approved list • However several of these companies are linked to the Islamic Revolution Guard Corps (IRGC) or other politically undesirable entities • Western companies will need detailed due diligence on any prospective partner • The IPC faces domestic opposition ostensibly on nationalist grounds but mostly motivated • by a desire to hamper President Rouhani's moderate pragmatic government and • to protect the privileged position of the IRGC

30. Iran: Production Outlook IV • Market conditions • Iran has made progress regaining all its major markets • Return of Iranian exports has helped to keep global oil market in surplus and prices low • In September OPEC agreed in principle on an overall ceiling for its production and that Iran would be allowed to increase to pre-sanctions levels • Efforts to increase natural gas output have been successful with a 6% increase in 2015 • Gas Sales to Turkey Iran's only major export market continued throughout the sanctions period • Iran hopes additional production will allow it to • expand exports to Turkey, • begin sales to Iraq and • advance pipeline projects to Pakistan and Oman

31. Assessment • Output will remain near current levels in the short term • Further production increases will require large international investment • Significant investment and production gains are unlikely before 2019-20

32. China in the Middle East I • Overview • China's Middle East energy footprint has been expanding rapidly in recent years • In February 2017 it made a deal for a stake in Abu Dhabi's onshore oil • In March Saudi Arabia's King Salman bin Abdulaziz traveled to China to strengthen trade and investment deals up to $65 billion • Chinese consortium is lining up for a stake in the Aramco IPO

33. China in the Middle East II • The Chinese need new upstream opportunities • Domestic production from the country's highly mature fields has slumped, down by • 6.9% in 2016 and • 8.0% May 2017/May 2016 • Encouraged by the government to guarantee energy security companies' capital budgets are set to increase again in 2017 • Sinopec will spend as much as BP and • PetroChina a unit of China National Petroleum Corp or CNPC will be the highest spending listed oil company in the world

34. China in the Middle East III • The GCC states with concerns over • shale oil competition and • a possible peak of demand in developed countries • Want to secure their position in the Chinese market -- now world's largest importer • They seek to hedge their geopolitical bets as the U.S. seems less reliable as a guarantor • And at a time of tight funds, Chinese direct investment is increasingly welcome • Saudi Arabia in particular has sought to lure China away from its patronage of Iran

35. China in the Middle East IV • Until recently large-scale oil investment by Chinese companies in the Middle East was limited almost entirely to Iraq and Iran • Through NNPC and China National Offshore Oil Company (CNOOC) the country is the dominant player in the southern Iraqi fields while • Sinopec is prominent in the Kurdistan region • Sinopec and CNPC continued activities in Iran thought at a low level through the period of heavy international sanctions • Iranians regard Chinese companies with skepticism over • Delays • Alleged lack of quality and • Overcharging • But realize they cannot do without them

36. China in the Middle East V • By contrast direct investment by China in the GCC's oil industry was limited until recently • Formal joint ventures with Saudi Arabia centered on the downstream: refineries at Yanbu and Rabigh in the kingdom and • One at Yunnan in China and petrochemicals in both countries • Did not give China what they sought -- access to oil production -- until Aramco IPO • Also the concession of the Abu Dhabi Company for Onshore Petroleum Operations (ADCO) offers more direct participation • CNPC picked up 8% and • China energy (CEFC) got 4%

37. China in the Middle East VI • CNPC’s interest in Abu Dhabi’s long-life reserves understandable • CEFC, a private company is more surprising • Company has risen swiftly to prominence with close links to the Chinese government, military and the “One Belt, One Road” grand strategy • Company which has minimal upstream assets to date claims deal has brought about 200,000 bpd. • CNPC’s technical skills do not appear to be ideally suited to Abu Dhabi’s fields and • CEFC has close to no upstream experience

38. China in the Middle East VII • Their participation brings an assured market while strengthening China’s political and security commitment to the UAE • Like the potential consortium for the Aramco IPO they illustrate China’s ability to mobilize engineering and financial expertise in support of China Inc. • Major issue remains – will Chinese firms be able to deliver quality projects on time and within budget?