Of GCC state oil companies and geopolitics

This is from the Khaleej Times. Leave it to an investment banker to set forth the connections between Gulf oil and Big oil and the goings on in national oil companies. An article such as this is worth a dozen of the fluff stuff that passes for reporting in the mainstream press. The GCC is the Gulf States Co-operation Council a body that will merit nary a mention in the puff stuff of the western press.

Of GCC state oil companies and geopolitics

27 December 2007

GEOPOLITICS has shaped the creation, operations and worldview of Middle East owned oil companies ever since the earliest regional oil strikes in Dammam, Persia’s Masjid Suleiman and Kirkuk in the 1930s. Saudi Aramco, Kuwait Petroleum, National Iran Oil Company (NIOC), Algeria’s Sonatrach and Abu Dhabi’s ADNOC own 600 billion barrels of crude oil, half the world’s proven reserves.

Qatargas operates the world’s largest LNG export terminal and owns the world’s third largest offshore oil reserves after Russia and Iran. Middle East oil colossi will determine both the future of the oil and gas markets but also profoundly shape the region’s international relations.

Saudi Aramco, created out of the historic security alliance between the House of Saud and the United States, has acted as the dominant, moderating force in OPEC, the proverbial central bank of black gold. Saudi Arabia, as the swing producer in OPEC, saved the world from catastrophic oil shocks when the Shah of Iran lost his Peacock Throne in 1979, Saddam Hussein invaded Iran in 1980 and Kuwait in 1990, when Hugo Chavez, the Iraqi insurgents and the Niger Delta’s Ogoni rebels triggered speculative oil spirals in 2007.

Saudi Arabia is unique in the energy market because it is not only the world’s largest exporter and lowest cost producer, but also because the Kingdom alone can boost output at short notice. Yet Saudi oilfields, including Ghawar, are ageing. What if Saudi Aramco has overestimated its reserves and future spare capacity, as Houston investment banker Matt Simmons argues in his book, Twilight in the Desert? What if there is no Saudi swing producer to moderate a future oil supply shock?

Iran’s NIOC, born out of nationalist Premier Mohammed Mossadegh’s epic battles with BP and a CIA- M16 countercoup that restored the Shah to power, has a pathological mistrust of Big Oil, particularly the Anglo- American firms. NIOC’s xenophobia was reinforced by the Iranian revolution, the tanker war with Baathist Iraq in the Gulf and the continual threat of American sanctions, military strikes and international banking freezes. Of course, NIOC has also been riddled with corruption and mismanagement on such a scale that its technological capabilities are obsolete, its foreign joint ventures threatened by a suspicious Majlis and White House’s sanctions, its domestic subsidies on gasoline making pollution, smuggling and billion dollar mullah slush funds in the Swiss Alps inevitable.

Kuwait Petroleum shares NIOC’s problem with parliamentary interference. The Kuwaiti Parliament has effectively torpedoed Project Kuwait, foreign investments in Kuwait’s northern oilfields and KPC has often become the victim of power struggles between the tribal / Islamist blocs in the legislature and the Al Sabah ruling clan. Kuwait Petroleum is still traumatised by the impact of Iraq’s invasion in August 1990 (Among Baghdad’s cassus belli was KPC overproduction and attempts to exploits two disputed oilfields!) and the exodus of thousands of Palestinian, Algerian and Yemeni oil engineers and managers from the emirate. Kuwait Petroleum was created after the emirate nationalised the concessions of British Petroleum and Gulf Oil.

Abu Dhabi’s ADNOC has proven the most reliable partner for international oil and gas companies, creating a network of joint venture companies with Big Oil from exploration, production, LNG to shipping and even equity stakes in foreign oil companies from Austria to Canada. Without a contentious Parliament like Kuwait, a xenophobic mindset like NIOC, a vast unexplored hinterland like Algeria’s Sonatrach, a history of corruption and terrorist sabotage like Nigerian General Petroleum, ADNOC has emerged as the most professionally managed, reliable, vertically integrated national oil company in the Middle East with access to the latest drilling, LNG, oilfield management enhanced recovery and downstream technologies.

Qatar is a classic case study of a Gulf emirate where international relations, military alliances and energy policies are inextricably intertwined. Qatar’s offshore North Field gasfield borders Iran, meaning the world’s third largest gas reserves and most extensive LNG export terminals are, in essence, located in the epicentre of a potential war zone. Qatar would not have been able to raise the $20 billion in Eurobonds it floated in the international capital markets in the 1990s had Doha not assured Western oilmen and bankers that its gas assets were not exposed to ruinous political risk. This meant that Qatar negotiated a security alliance with the United States, encouraged Exxon and Occidental Petroleum to invest untold billions in its LNG complex and hosted the Al Udeid Air Base, the Pentagon’s command and control hub for the American wars in Iraq and Afghanistan. In essence, Qatar’s Washington connection not only bought it the political risk insurance to attract the oil patch’s largest companies to help Qatargas replace Indonesia as the world’s largest LNG exporter but also enabled a micro- state to survive in a political chessboard dominated by Saudi Arabia and Iran, Doha’s two powerful regional rivals. Qatar’s acrimonious relations with Saudi Arabia did not prevent its leadership from using the leverage of its huge gasfields to emerge as a significant power broker in GCC and Arab politics. The Dolphin gas pipeline is the most successful cross border GCC energy project that, despite initial Saudi refusal to grant transit rights, is a mission critical for the emerging industrial constellations of Dubai, Abu Dhabi and Oman.

Dolphin Energy has, in essence, linked the economies of Qatar, the UAE and Oman, created a diplomatic triumvirate in the GCC that balances the historic dominance of Saudi Arabia and Iran in Gulf politics. Moreover, with no less than 910 million cubic feet of gas reserves, Qatar is courted by world leaders like Russia’s President Putin, whose secret service sent hitmen to Doha to assassinate Chechen warlords only a decade ago. Qatar has also created an Energy City that seeks nothing less than the creation of a spot market for LNG, a future major trend in the Gulf because of new chilling technologies for gas liquification and the construction of even bigger gas supertankers. Now that the International Court of Justice has resolved the Hawar Islands dispute between Qatar and Bahrain, the scope of Dolphin Energy could well encompass Manama. Gas pipelines, not a common currency or central bank, could well prove the most potent symbol of GCC integration.

Matein Khalid is a Dubai-based investment banker and economic analyst

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