Financial Times: Soaring revenues push Middle Eastern producers to invest in energy sectors: “International oil companies, such as Anglo-Dutch Royal Dutch Shell and Total of France, will remain restricted to the less profitable areas of refining and marketing and natural gas, especially while high oil prices mean Saudi Arabia has little need of their deep pockets, analysts say.”: Friday 9 December 2005

By Thomas Catan and Carola Hoyos

Published: December 9 2005

With oil prices tripling over the past six years and generating enormous extra revenues for producers, countries in the Middle East are again investing heavily in their energy sectors.

In Algeria, Qatar and Libya, international energy groups are gaining part of the windfall. But in Saudi Arabia and Kuwait, high oil prices have reduced big foreign oil companies' chances of playing a significant role in oil extraction soon.

How much and how wisely countries in the Gulf invest will determine to a large degree the future level of international oil prices, and therefore the speed at which countries such as China and India are able to develop.

Oil production from ageing fields outside the Middle East is falling and companies are finding few alternatives beyond the region, which holds two-thirds of the world's remaining oil reserves.

Fatih Birol, chief economist of the International Energy Agency, the consuming countries' watchdog, doubts governments of the Middle East and North Africa have the political will to come up with the $56bn (€47bn, £32bn) the IEA says they need to invest in energy each year to meet demand.

No country is more important than Saudi Arabia, which holds the world's largest untapped reserves of easily available oil.

Ali Naimi, energy minister, announced recently that Saudi Arabia would invest $50bn in its energy industry. It hopes to increase production from 9.5m barrels a day to 12.5m b/d by 2009.

But so far Saudi Aramco, the kingdom's state oil company, is sticking to achieving the task with the help of only international oil services companies.

International oil companies, such as Anglo-Dutch Royal Dutch Shell and Total of France, will remain restricted to the less profitable areas of refining and marketing and natural gas, especially while high oil prices mean Saudi Arabia has little need of their deep pockets, analysts say.

Iran and Iraq are the next most important producers, according to the IEA, but they also come with more political hurdles than most of their neighbours. Iran's worsening relationship with Europe has made it riskier for foreign companies to operate there, while the upheaval in Tehran's oil ministry in the past months has added unwelcome uncertainty.

But the biggest issue Tehran's restrictive investment climate. The "buy-back" contracts the country offers do not allow companies to book the reserves as their own and expose them to high levels of downside risk if the oil price falls or costs rise.

Meanwhile, Iraq remains too dangerous, and the lack of a viable, long-term energy policy means big companies are unwilling to risk billions of dollars by signing contracts that could eventually be deemed illegal.

Kuwait is another important Middle East oil producer and member of Opec, the Organisation of the Petroleum Exporting Countries. It faces declining fields and is in need of large-scale investment. However, the five-year negotiations last month over opening the industry to international oil companies stalled again when parliament delayed discussing "project Kuwait".

Several hardliners continue to block any move that could be seen as taking the country's most important resource from its people.

A more promising place for international companies is Qatar, which sits on the world's largest pure natural gas field. The tiny emirate has become a hub of international activity, attracting almost every big oil company and securing $6bn of annual capital investment for the next five to 10 years.

Libya and Algeria are also drawing much foreign interest. Tripoli secured some of the industry's best deals, seeing fierce international competition at its two oil and gas licensing rounds since sanctions were lifted.

Meanwhile, Algiers has opened up its industry, making it easier for international companies to participate.

Abu Dhabi, home to the world's fifth-largest oil reserves, plans to invest billions of dollars to increase its oil production from 2.5m b/d to 4m b/d by 2015. Its oilfield upgrades will be done in conjunction with international oil companies such as BP of the UK, and Japan's Inpex.

In Abu Dhabi last month, the initial public offering of Aabar Petroleum Investments, which aims to become the leading public pan-Arab petroleum company, was 800 times oversubscribed, indicating the vast regional appetite. The government is also investing overseas, in North Africa and across the Gulf.

Abu Dhabi is not the only Middle East producer to reach beyond its borders. Opec countries are investing billions of dollars in downstream (refining and marketing) in the region, and as far afield as Asia and the US.

Sheikh Ahmad Fahd al-Sabah, Kuwait's energy minister and Opec president, said last week: "Although Opec believes that solving the problem in the downstream sector is the responsibility of consumer countries, many of our member countries have taken it upon themselves to build additional refineries, both domestically and abroad, with a view to helping solve this problem.''

This is the fifth article in the FT series on the Arab financial boom. Next and last article: recycling petrodollars

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