Africa and Kurdistan Show Great Oil and Gas Potential

Source: Peter Byrne of The Energy Report   (10/25/12)

With Iraqi sanctions impeding profitability, explorers and producers are flocking to Kurdistan for cheap production and access to international buyers, explains Lionel Therond, head of oil and gas research at Standard Bank. Meanwhile, discoveries throughout Africa hint at vast untapped potential. In this exclusive interview with The Energy Report, Therond gives us the geological lay of the land in key emerging plays.

Companies Mentioned : Afren Plc : Africa Oil Corp. : Apache Corp. : Cobalt International Energy : DNO International : Exxon Mobil Corp. : Genel Energy Plc : Gulf Keystone Petroleum Ltd. : Kosmos Energy Ltd. : Marathon Oil Corp. : Maurel & Prom Nigeria : Ophir Energy Plc : Petrobras : Tullow Oil Plc : WesternZagros Resources Ltd.

The Energy Report: Let's start with Kurdistan, Lionel. It's one of the hottest countries in the world for oil and gas exploration, especially in terms of production share contracts. A few prescient firms, such as WesternZagros Resources Ltd. (WZR:TSX.V) and Genel Energy Plc (GENL:LSE) control promising properties in Kurdistan. What's the back story?

Lionel Therond: Prospects have never been better for players in Kurdistan. The key factor has been the recent entry of Turkey into the export debate. Allow me to explain: Turkey has an energy-hungry economy ready to buy oil and gas production directly from Kurdistan as long as the physical routes exist for exports. In response, the Kurdistan Regional Government (KRG) has started building pipelines toward Turkey, which should be operational at the end of 2013/early 2014.

"International majors are voting with their feet and entering Kurdistan."

That was a paradigm change. We had been waiting three years for an agreement between the KRG and the Iraqi federal government on the commercial conditions for exports, and Baghdad's initial stance was to declare all licenses in Kurdistan illegal. But with new export routes that could potentially bypass Iraqi territory and lead directly into Turkey, Baghdad's agreement is no longer necessary, which has brought the Iraqi government back to the negotiating table.

Meanwhile, poor returns on large oil field redevelopment projects in the south of Iraq are making projects in Kurdistan much more attractive in comparison for large international companies. Iraq's government had been saying, "If you go to Kurdistan, you won't be able to stay in Iraq." But the financial terms of these redevelopment projects were predicated on Iraq being able to export 12 million barrels a day at some point in the future and this is not going to be realized. Therefore, all of those projects are not economic anymore. International majors, from Marathon Oil (MRO:NYSE) to Exxon Mobil Corp. (XOM:NYSE), are voting with their feet and entering Kurdistan. Companies already there with good assets have a bright future. WesternZagros Resources is well positioned, as is Genel Energy. DNO International (DNO:OSE) and Gulf Keystone Petroleum Ltd. (GKP:LSE) also have interesting assets.

TER: What is the geological landscape of Kurdistan's oil resources?

"Kurdistan's oil fields are large anticlines that are part of the Zagros fault belt."

LT: All of the fields are very similar; they are large anticlines that are part of the Zagros fault belt [see image], which extends from southern Turkey into Iran. The reservoirs are mostly carbonates with low matrix porosity and permeability, hence the importance of the fracture system to improve reservoir characteristics. Predicting reservoir sweet spots is a challenge, while oil charge is a very low risk for any valid trap. Mind you, there have been some rare exploration failures, mainly related to poor trap definition. Otherwise, bad news generally relates to poor oil flow rates due to poorly developed fracture systems.

TER: Do companies have production-sharing contracts with the regional government?

LT: All the companies in Kurdistan are on production-sharing contracts awarded by the KRG. Due to a legislative vacuum in Baghdad, Kurdistan's government took charge of the management of the region's oil resources and started awarding licenses to international players in 2005.

TER: Under these international production-sharing contracts, what ratio of the output goes to the private firm and what percentage goes to the regional government?

LT: It depends on the generation of contracts. Obviously, the first entrants received better fiscal terms than the later entrants. But most of the oil goes to the state rather than to the contractor at about an 80/20 ratio. The net present value per barrel (bbl) varies between $3–5, which is quite stringent by global standards. But there are large accumulations and a lot of barrels to be found—that's the attraction.

TER: The oil comes out of the ground in Kurdistan and through pipelines to Turkey. What happens with the exports?

"There are large accumulations and a lot of barrels to be found in Kurdistan—that's the attraction."

LT: Due to disputes between the federal government and the regional government, exports from Kurdistan have had a very discontinuous history. At the moment, there is an agreement for oil to flow through the federal Iraqi infrastructure to a terminal in Turkey. Some oil from Kurdistan also finds its way into Turkey by truck. It is then exported broadly to international markets. China is a big investor in Iraq, but not so much in Kurdistan.

TER: Is there a minimum price per barrel of Brent that needs to be maintained to keep Kurdistan production profitable?

LT: Kurdistan has very low production costs and companies have been producing oil at less than $10/bbl. Hence, oil production is resilient at very low Brent prices.

TER: Your firm, Standard Bank, is one of the largest financial institutions in Africa. Which African countries are the best venues for energy resource exploration?

LT: Africa in general is very attractive, not only in the mature provinces, but also in the frontier provinces where new plays are developing. We tend to subdivide the continent into broad upstream themes.

For example, the West African transform margin [see image below] is a recently established province extending from Ghana to Morocco. The large Jubilee oil field is producing in Ghana and additional large developments will be coming onstream soon. Despite early successes in Ghana, there have not yet been any discoveries of similar size elsewhere in the region, even though some discoveries have been made in Sierra Leone and Liberia. West Africa holds a lot of exploration potential and a number of firms are deepening exploration in Sierra Leone, Liberia, Mauritania and Morocco.

Going down the coast, Nigeria is very interesting, in our view. Changes in the structure of the upstream industry there are opening up the field to local players. There are some very attractive investable entities in Nigeria, mostly listed on international markets.

"Tectonically, these two continents were attached before the Atlantic opened up. Brazil's success points to the potential of the African side."

Further down the continent are Cameroon, Gabon, Congo and Angola. These are established provinces, but they still provide exciting opportunities in deeper plays. The region's geological analogue is Brazil, where a lot of oil has been discovered below the thick salt layers present in the subsurface. Tectonically, these two continents were attached before the Atlantic opened up. Brazil's success points to the potential of the African side, where some exciting discoveries have already been made by companies like Cobalt International Energy (CIE:NYSE) in Angola, for example. Ophir Energy Plc (OPHR:LSE) has an exciting portfolio in offshore Gabon, for a company of its size.

Down in Namibia and South Africa, we find more frontier territories, poorly explored regions. This year, two dry wells were drilled in Namibia, which was disappointing. But I still think that there is potential in Namibia, with the presence of a mature source rock evidenced by the Kudu gas field in Namibia and discoveries in the North Falkland basin on the other side of the Atlantic, providing a good rationale for continuing exploration in the region. South Africa is not very well explored offshore, and there is a large potential for shale gas in the Karoo basin onshore. This is an untapped resource that will take a lot of time to develop, even after the political will to do so emerges. There are a lot of logistical and technical difficulties to overcome before producers there can replicate North American shale success. But the resources are there.

Shifting focus again, the East African margin has been a focal point of late, with natural gas discoveries made in Mozambique and Tanzania, as well as in offshore Kenya, with volumes yet to be quantified by Apache Corp. (APA:NYSE). East Africa is an emerging gas province with large resources as well as some yet unproven oil potential. Across the Mozambique channel, there are about 20 billion barrels of oil sitting onshore in Madagascar. It's such a large area that there are plenty of opportunities for exploration.

And, let's not forget the East African lakes—a "new" hydrocarbon province established by oil discoveries in Uganda and more recently in Kenya, which has enormous oil potential. Geologically, there are other rift basins around the Great African Lakes waiting to be discovered, from the Democratic Republic of Congo to northern Zambia up through Tanzania, Kenya and Ethiopia.

Onshore rift basins of various ages are also present in other parts of Africa—Somalia, Sudan, Chad and Mali, to name just a few—and we have only scratched the surface in terms of their oil potential.

In short, the entire African continent will remain a really exciting place for oil and gas for the next decade or so.

TER: Are there any particular firms that you're following in the spaces we have discussed?

LT: We follow 17 stocks and the list keeps growing. I'm quite keen on the onshore East African plays in Kenya and Ethiopia with my favorite exposure being Africa Oil Corp. (AOI:TSX.V). Africa Oil is a highly leveraged instrument to that region's potential with a lower-risk profile, largely because Tullow Oil Plc (TLW:LSE) is operating the assets. Tullow has a wealth of experience in nearby Uganda and that gives me confidence that its explorations will be carried out smartly and efficiently.

The Nigerian local sector is providing a great investment opportunity. We are keen on companies such as Maurel & Prom Nigeria (MPNG:FP). And let's not forget Afren Plc (AFR:LSE), which has Nigerian exposure with a lot of added diversification in Kurdistan and East Africa. Afren is a good play throughout the continent as it is a stock with a good valuation and good leverage to exposure across these regions.

I'm keen on Mauritania and Morocco, the continuation of the West African transform margin play to the north; Morocco in particular, where the fiscal terms are very favorable for the industry.

I was disappointed by the dry well in offshore Namibia drilled by Petrobras (PBR:NYSE; PETR3:BOVESPA) in July/August, and also by the Mbawa-1 well drilled by Apache offshore Kenya, which was a gas discovery, but lacked oil.

That didn't fly very well for the shares of some of the companies involved and we saw some very dramatic share price corrections. But I believe the potential for oil discoveries still exists in offshore Namibia and Kenya. Watch this space.

Other companies worth watching are Kosmos Energy Ltd. (KOS:NYSE) and Tullow Oil. Both are exploring along the West African transform margin, which is quite a prospective area. Kosmos, in particular, has a lot of value potential.

TER: In the context of recent share price corrections, what are the prospects for junior firms working in Africa to raise working capital?

"The next 10 years will be quite exciting in terms of exploration and discoveries across Africa. There is still large, unexplored acreage remaining and some really good opportunities in the market right now."

LT: There was a drastic share price correction related to dry wells and exploration misses at potentially very high-impact wells. Some share prices have been impacted quite a bit. But in terms of raising working capital, the market still has an appetite for good exploration and production stories. Companies like Afren have been successful at raising debt and equity. A lot of debt has also been raised by firms that have acquired development assets in Nigeria. Gulf Keystone recently raised $300 million of convertible debt. Ophir has raised equity successfully a number of times in the past 18 months.

Obviously, the IPO market has been a bit quiet in the past few months. But a number of other companies have raised equity or are talking about raising equity to continue successful exploration and appraisal programs. Nevertheless, investors remain very cautious—more so than in the boom years, understandably.

TER: Do you have any thoughts about competition between Chinese interests in Africa and the more Western-oriented interests?

LT: Chinese companies tend to take a different view on the way they value opportunities. A Western company looks at an investment on a purely financial basis. State-supported Asian companies have more of a strategic angle regarding the premium they are prepared to pay for accessing production and reserves, which are higher than some other oil companies would consider.

TER: It sounds like now is a pretty good time for investors to get some bargains.

LT: I agree. The next 10 years will be quite exciting in terms of exploration and discoveries across Africa. There is still large, unexplored acreage remaining and some really good opportunities in the market right now.

TER: Thanks for your time.

LT: My pleasure.

Lionel Therond is the head of oil and gas research at Standard Bank. His 25 years of experience in this global sector combines upstream oil and gas industry and fund management expertise. Therond joined Standard Bank from Fox-Davies Capital, where he headed oil and gas sector coverage. Prior to that, he worked for JPMorgan Asset Management. Therond began his career at Royal Dutch Shell Plc as a geoscientist.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) Peter Byrne of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: WesternZagros Resources Ltd.
3) Lionel Therond: I personally own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.

Baker Hughes TechConnect

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The operator's gas well was producing 300 ppm of H2S. To meet specifications to ship gas through a pipeline, the H2S levels have to be 50 ppm or less. In addition, the operator had to scavenge the H2S to 0¬3 ppm to avoid deposition of intractable spent triazine solids. Read more Baker Hughes drills out 79 composite plugs in two wells with one mill Baker Hughes applied its METAL MUNCHER™ AMT milling technology to mill out 79 composite plugs in two wells in one trip, eliminating nonproductive time and substantially reducing rig time. The operator, drilling an unconventional oil well in the Bakken shale, had run two plug-and-perf completions. After drilling the deviated horizontal wellbores, the operator ran a 4½-in., 11.6-lb casing to depth. Next, the operator set 43 composite frac plugs in one 9,500 ft (2896 m) horizontal wellbore and 36 in the second wellbore, and then successfully fractured each zone. Read more News Water-based fluid improves shale drilling The LATIDRILL™ water-based drilling fluid system helps operators enhance wellbore quality and increase drilling efficiency in extended lateral sections in unconventional shale plays. The LATIDRILL system is more environmentally favorable than oil-based fluid systems and offers the hole stability and superior drilling speed and performance normally associated with invert emulsion systems. Read more  Baker Hughes extends SmartCare family of environmental solutions Baker Hughes has added drilling and completion fluids, production chemicals, and additives used in cementing and stimulation operations to its SmartCare™ family of environmentally responsible solutions, becoming the first oilfield services company to apply a comprehensive, standardized environmental assessment process to products beyond those used in hydraulic fracturing. 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Read more  Get connected to the latest Baker Hughes customer publications Published semiannually, the Baker Hughes Connexus magazine brings you stories that illustrate how the people in the energy industry take on difficult challenges and succeed with the right mix of technical ingenuity and fit-for-purpose products and services. To read each new issue of Connexus and other Baker Hughes publications as soon as they are published, sign up today

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The OPITO Safety and Competence Conference focuses solely on two of the most significant issues facing the oil and gas industry - safety and competency. In two years, we have established an influential forum for debating how the industry can improve the standards of safety and competency in the global workforce. 

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October Offshore Magazine

The October 2012 issue of Offshore is available to view or download. Click here to View in your Browser! Click here to Download Qmags PDF Follow us on Linkedin Like us on Facebook Follow us on Twitter Dear Subscriber, This note is your reminder that this month's issue of Offshore is available to view or download. Feature Articles Technological advances spur deepwater Gulf activity Repsol Sinopec targets growth in Brazil's deepwater plays Australian technology push could make it a global LNG leader Advances in 3D seismic tomography enhance subsurface interpretation Empirical relations characterize rig day rates Casing drilling marks a century of progress Industry initiatives address offshore well control, spill response Deepwater Ghana success requires well control finesse Subsea 7 unveils flagship construction vessel Seven Borealis ESP systems enhance reliability in challenging environments Power from shore under review for emerging North Sea production cluster Separating man from machine Regional industry grows to support offshore operations Australian development calls on a variety of technologies Departments Online Vessels, Rigs, & Surface Systems Comment Drilling & Production Data Geosciences Global E&P Offshore Automation Solutions Offshore Europe Business Briefs Gulf of Mexico Advertisers' Index Subsea Systems Beyond the Horizon Other resources available from PennWell Offshore Maps & Posters PennEnergy.com Research and Data PennWell Books Fall 2012 Energy Catalog PennEnergy Jobs Energy Workforce Fall 2012 For DOWNLOAD INSTRUCTIONS: http://www.qmags.com/DownloadingHelp.asp To reach our HELP DESK, please visit: http://www.qMags.com/help To view the archived files on your Qmags account, please click here. . If you wish to discontinue the electronic version and convert back to the paper edition, please reply to this message and type the word "convert" in the subject line (note: due to the increased postage costs, international subscribers may be asked to pay for the print version). To discontinue receiving this publication entirely, please reply to this message and type the word "remove" in the subject line. As lists are prepared in advance, please allow six weeks for your request to be processed. Thank you. If you are not able to click on the links above, please click here to access your magazine: http://www.qmags.com/2FE1151B16B127DC11158032D2FF147F37.htm

Hydraulic Fracturing and Water Use: Get the Facts

Source: Dana Bohan, Energy InDepth  (10/11/12)

"Given that large portions of our nation are facing serious drought conditions, there are justifiable concerns about our water supply. To fully understand this issue, it's important to analyze real-world data relating to water consumption."

Given that large portions of our nation are facing serious drought conditions, there are justifiable concerns about our water supply. Some groups interested in blocking oil and gas development have preyed on these concerns, claiming hydraulic fracturing uses extraordinarily large volumes of water and, by extension, will cause water shortages all across the country. Unfortunately for the public, the whole truth about industries' water usage – who uses water, how much they use, and where they use it – is not commonly discussed, which is exactly what opponents of development want.

To fully understand this issue, it's important to analyze real-world data relating to water consumption.

For example, let's look at Pennsylvania: Power plants in the state use 6.43 billion gallons of water every day. As a state well-known for its farms, the Commonwealth also uses 86.1 million gallons per day for agriculture and irrigation, and private water wells use 152 million gallons per day.

A hydraulic fracturing job, by comparison, only requires about four million gallons of water, spread out over several days.

Here are a few other contextual examples:

• Four million gallons of water is approximately the amount that is emptied every second from the Mississippi River into the Gulf of Mexico.
• New York City consumes four million gallons of water every 6 minutes.
• Four million gallons is about 1.3 percent of the amount of water used in car washes every day.
• Just one of the 15,889 golf courses across the United States uses four million gallons of water in less than one summer month.

Gee, hydraulic fracturing doesn't seem to have the large water-use-impact it is often prescribed, does it?

Still, water is water and certain regions are more susceptible to shortages than others. From water withdrawal limits to recycling standards, the use of water is strongly regulated throughout numerous industries. Many river basin commissions and authorities overseeing water withdrawals set protective limits in low flow periods to ensure enough passby flow to support wildlife and other water uses. And when our nation is in a period of drought it is of even greater importance that these types of regulations and guidelines are properly carried out.

But how does the practice of hydraulic fracturing factor in to water use in these states?

Let's look at Colorado, certainly no stranger to oil and gas development, and where water scarcity is of constant concern:

• Agriculture and irrigation are two of the largest users of water, consuming 85.5 percent of the state's supply.
• As the New York Times reported in September, "Oil and gas companies estimate that they will use about 6.5 billion gallons of water in Colorado this year, and that figure makes up only 0.1 percent of overall water use, according to state data. Their consumption represents more water than is used making snow on the ski slopes or greening the state's golf courses. But it is paltry compared with the deluge needed for irrigation and agriculture, which accounts for 85.5 percent of Colorado's water use."

In Texas, a state well known for oil and natural gas development, the use of water for production is minimal – which is good, because large portions of the state are dealing with drought or near-drought conditions.

• According to the Tarrant Regional Water District, oil and natural gas development represents 0.5 percent of total water demand.

• Darrell Brownlow, geologist and member of the South Central Texas Regional Water Planning Group, states that "for every one acre-foot of water used in fracking, 280 acre-feet acre used for other purposes in South Texas." (San Antonio Express, 11/2/2011)

• According to the Texas Water Development Board (TWDB), water use for mining activity (which includes oil and gas) wasonly 0.5 percent as compared to other water use categories such as municipal demand, manufacturing, steam electric, irrigation and livestock.

Similarly, Oklahoma has found energy development plays a relatively minor role in its overall water usage:

• The Oklahoma Water Resources Board states that many if not most of their permits issued, "including those specified for hydraulic fracturing, range from one to about thirty acre-feet of water. Regular permits issued for public water supply, irrigation, and other large-scale uses often authorize hundreds to thousands of acre-feet annually. And while significant growth is anticipated in the state's oil and gas industry, that particular use sector is projected to account for only five percent of Oklahoma's total water demand in 2060." (Oklahoma Water Resources Board, May 2012)

In the Northeast, development of the Marcellus shale has brought countless benefits to communities, including jobs, revenues and clean-burning energy. And compared to the state's rich agricultural business, water demand is comparatively low:

• According to the Pennsylvania Fish and Game Commission, irrigation and aquaculture practices alone account for over500 million more gallons of water use each day than all natural gas development in the Marcellus Shale. In fact, daily water consumption rates for drilling activities in the Marcellus shale rank below the amounts used for nuclear power generation, agriculture, livestock, irrigation, mining and all public and domestic use.

• According to a report for the U.S. Department of Energy, "Estimates of peak drilling activity in New York, Pennsylvania, and West Virginia indicate that maximum water use in the Marcellus Shale, at the peak of production for each state,assuming 5 million gallons of water per well, would be about 650 million barrels per year. This represents less than 0.8 percent of the 85 billion barrels per year used in the area overlying the Marcellus Shale in New York, Pennsylvania, and West Virginia." (DOE, June 2010)

• John Arway, Executive Director of the Pennsylvania Fish and Boat Commission, noted in 2011 that the Marcellus Shale used 1.9 million gallons of water per day. (PFBC, January 2011)

• The Susquehanna River Basin Commission (SRBC) indicates total Marcellus Shale water use "represents a little more than half of the amount currently used consumptively by the recreation sector (golf courses, water parks, ski resorts, etc.)" (SRBC, February 2009)

• According to the New York Department of Environmental Conservation, "peak activity high-volume hydraulic fracturing would result in increased demand for fresh water in New York of 0.24%." (NY SGEIS, p. 6-10 [p. 20 in PDF], September 2011)

All energy sources require water, and natural gas development is no different. But how do natural gas and hydraulic fracturing stack up to other energy sources?

• According to the Union of Concerned Scientists, a typical 500-megawatt coal-fired power plant draws about 2.2 billion gallons of water each year from nearby source to create steam for turning its turbines – the equivalent of 550 hydraulic fracturing jobs.

• By nature of its design, solar energy is the most effective in regions where the sun is most intense. As a result, it tends to be most effective in areas with scarce water supplies. In California, disputes over solar projects in the Mojave Desert, the city of Bakersfield and elsewhere have been delayed due to massive water needs in areas with little access to natural sources. The Mojave solar farm being built by Abengoa Solar plant will require 705 million gallons of water annually to operate – equivalent to more than 176 hydraulic fracturing jobs.

• Similar concerns over water use are seen in the production of biofuels. According to the Arizona Water Institute, "A significant potential issue with biofuels, especially in an arid state such as Arizona, is that they require large amounts of water to produce feedstock. With an average annual evapotranspiration rate of between 3 and 8 feet, there are very few locations within the state that receive enough rainfall to get by with no or even little irrigation."

• According to the USDA, when the feedstock in biofuels is corn or soy (used to make ethanol and biodiesel, respectively) and grown on irrigated land, then the water consumption per gallon of fuel produced can exceed the water consumption for refining by a factor of one thousand.

As Tisha Schuller, president of the Colorado Oil and Gas Association, noted in the New York Times this September, "This is an important use of our water — to produce energy, which is the foundation of all we do." Schuller continued: "Think about the big users of water — agriculture, industrial development. All these things require energy."

As technological advancement continues, industry is reducing the use of freshwater sources, enhancing recycling efforts and decreasing the natural gas industries footprint on America's precious water resources. Along the way, the development of natural gas from shale has created immense benefits across the nation while providing an affordable and clean burning fuel for American consumers.

So yes, hydraulic fracturing uses water. And when opponents present the total volume used – millions of gallons – without any context, it can sound frighteningly large. But the public should be made aware of facts like relative use and total demand, because when the whole story is told, water needed for hydraulic fracturing sounds a lot less scary. That might not make great fundraising emails for groups opposed to oil and gas development, but it's the truth.

Dana Bohan
Energy InDepth

October 2012 Issue of Offshore Engineer

Your October 2012 Digital Issue of OE (Offshore Engineer)  is available for viewing or download! Click here or on the magazine cover to access your issue or copy and paste the link below directly into your browser. http://interactive.offshore-engineer.com Inside This Month's Issue: Deepwater Intervention: Our special supplement to October OE (Offshore Engineer) looks at some of the challenges & opportunities surrounding deepwater intervention. Brazil to Play Key Role in Energy Future: With massive investment and aggressive technology development required to match world energy demand in coming decades, South America's 'southern cone' will have a big role to play. Russell McCulley reports from Rio de Janeiro. Safer Hands Across The Sea: New software for the offshore and shipping industries, including optimal voyage planning for safe journeys and minimum fuel consumption, are expected to emerge from a partnership agreement between Star Information Systems and weather experts StormGeo. Meg Chesshyre explains. Rig Delays Dampen Deepwater Carnival: Brazil's oil & gas potential continues to grab the industry headlines, with Petrobras confirming more than a score of offshore discoveries, most of them deepwater, in the last 18 months alone. Newcomer OGX confirmed a number of discoveries too, albeit in the country's shallower waters. It's not all plain sailing though, as Jennifer Pallanich notes. Revitalizing The Norwegian Shelf: A number of operators on the Norwegian shelf revealed updates of their field development plans at the recent Offshore Northern Seas (ONS) conference in Stavanger, with a substantial list of projects and refurbishments going forward as part of the revitalization of the Norwegian shelf. Meg Chesshyre has the details. Tight-gas Horizontal Well Fracturing in The North Sea: The effective development of low-permeability tight gas reservoir resources requires operational efficiency to improve production performance. In this opener to OE's two-part drilling & completions review, Erik Schrama, Robin Naughton-Rumbo and Fred van der Bas, Shell; Josef Shaoul, Fenix Consulting Delft; and Mark Norris, Schlumberger discuss the North Sea's first true tight-gas horizontal well fracturing application. HELP DESK: For assistance with your digital edition, or navigational issues, please click here. YOUR FEEDBACK IS APPRECIATED: Email your comments and thoughts on the OE Digital Edition to jamess@offshore-engineer.com. ADVERTISE IN OE (OFFSHORE ENGINEER): OE & OilOnline.com offers advertisers many integrated media opportunities for reaching offshore professionals.  For more information, contact your sales representative at: www.oilonline.com/About/Advertise-Options/ SUBSCRIPTION SERVICES: For assistance with your account i.e. change your email address, change your format preference, or update your contact information, please click here or call +1(713)831-1786.

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Why an Islamic Revolution in Saudi Arabia Will Send Oil to $300/bbl

Source: Marin Katusa, Casey Research  (10/2/12)

"Is a 1973-style oil crisis about to engulf the entire world?"

There is little that would rock the oil world more than a revolution in Saudi Arabia.

But with a coming leadership crisis, it is becoming all too likely.

Saudi is facing major economic challenges as dramatic increases in social spending and domestic fuel consumption eat through the kingdom's all-important oil revenues.

Saudi Arabia is smack in the middle of the Middle East, an ever-tumultuous region currently rocking and rolling more than usual as the Arab Spring challenges longstanding autocratic assumptions, while war-torn Syria and defiant Iran tip the delicate Sunni-Shia religious balance in the world's most important oil region.

While the House of Saud might present itself as a stable, strong, and cohesive royal family, in truth the king and his successors are growing old and incapacitated in a throne room full of competing contenders. Meanwhile, the only other organized social group in the country—the Islamists—are waiting just outside the door.

Want to See Oil at $300 a Barrel?

To see $300/bbl oil, or to watch the news as Saudi troops attack Tehran, or to see a stranglehold on U.S. oil imports, watch what a failed succession battle in the House of Saud that ends up destroying the whole family and ushering in an Islamist age in Saudi Arabia would do to the price of oil.

It could happen sooner than you think.

A Shaky House of Saud

The king of Saudi Arabia, Abdullah Aziz bin Saud, is almost 90 years old. In Saudi Arabia's royal system, the throne passes not from father to son but from brother to brother. The problem with the system is that none of King Abdullah's brothers are exactly young and full of vigor.

Crown Prince Salman, next in line to the throne, is already 76. He got the Crown Prince nod after two of his elder brothers died. The remaining brothers now average 80 years of age.

A king who ascends the throne in his seventh or eighth decade is unlikely to have the energy or even the time to enact significant reforms. And reforms are needed. I'm not pushing democracy—Saudis don't generally want democracy. What I'm talking about are the endemic problems that are battering the world's biggest oil producer: high unemployment, a corrupt bureaucracy, a crippled economy, a weak education system, and a society full of frustrated youth.

While the country crumbles, the three pillars that have long supported the royal family are also weakening. Massive oil revenues, which have long been used to buy public support, are being squeezed by sharply increased domestic demand. The Wahhabi Islamic establishment that supported the House of Saud is increasingly fractious and is losing credibility. And the royal family itself is struggling to maintain its rock-solid façade after losing two crown princes to old age in just a few years.

The country's foreign relations are little better. The Middle East is in turmoil, and Saudi Arabia's longstanding alliance with the United States is in distress.

Alongside these tangible problems is a multitude of intangible challenges that are revolutionizing the country. The regime used to control the population by controlling access to information, but of course that age is now almost over. The Internet has connected young Saudis with the rest of the world, and that worldview is prompting them to question some of the rules of their society.

Even the religious establishment in Saudi Arabia is seeing its power eroded. Young Saudis are increasingly independent, using the Koran to guide their decisions without following specific decrees from a particular religious leader.

The fact is, Saudi society today bears little resemblance to the passive masses of just a decade ago, and a decade from now the difference will be even bigger.

Trying to lead his country through these modern challenges is a 90-year-old king, backed by a 76-year-old crown prince and their octogenarian brothers.

Not surprisingly, it's not working very well.

New Battles, Old Tactics

When the Arab Spring in Tunisia and Egypt sparked protests in Saudi Arabia, the protesters were not demanding democracy or trying to oust the royal family. No, the young Saudis who filled those streets had more basic demands.

At the top of the list is jobs—60% of Saudi's citizens are under the age of 20, and the unemployment rate for young adults is nearly 40%. These young people want to be given the opportunity to better themselves and their country, but instead they cannot find work and live on government handouts.

Adding fuel to the fire, those handouts have been shrinking. Saudi Arabia's population has skyrocketed in the last half century. In 1972 the country had 6 million inhabitants; by 1992 that number had climbed to 17 million; and today there are 28 million Saudi Arabians. Oil incomes have climbed too, but not nearly apace. As such the government has been struggling to keep the population appeased with fewer dollars per head every year.

The population keeps growing, and each person in the kingdom keeps using more oil. The result: shrinking oil revenues have to go further. It's not a recipe for success, but when you're 89 years old, you go with what has worked in the past.

And that is precisely what happened in the wake of the Arab Spring: King Abdullah drowned the protestors in money—a $130-billion social-spending package that built new housing, increased payrolls, and boosted unemployment payouts. Saudi Arabia's entire annual budget is just $180 billion, so the king almost doubled spending to appease the protestors.

This tactic cannot work forever. Even in Saudi Arabia there is only so much oil money. The Saudi royals already need an oil price of at least $80 a barrel to support all their social programs, and with domestic oil consumption rocketing upward, that baseline price will keep climbing.

But the unrest continues.

The Summer of Saudi Discontent

After King Abdullah offered billions of dollars in social spending, many protestors went home. . .except in the country's oil-rich eastern provinces, where the protests never stopped.

For the last 18 months Saudis in the eastern Qatif region have been demonstrating regularly, demanding the release of all political prisoners, freedom of expression, and an end to ethnic and religious discrimination. When Saudi security forces turned on the demonstrators last November, killing five, the protests took on a distinctly anti-Saud tone.

In June, King Abdullah ordered the country's security forces to go on a state of high alert due to what he called a "turbulent situation" in the eastern region.

The unspoken side to the situation is that the turbulence is distinctly religious.

Most Saudis are Sunni Muslims, and Sunni Islam is the only allowed religion in the country. However, 15% of the country's inhabitants are Shia, and they have faced direct and indirect persecution for decades.

Guess where the Shia live? In those turbulent, oil-rich eastern provinces.

That is one aspect of Saudi discontent. But there are more.

For example, last week Saudi security forces raided al Qaida cells in Jeddah and Riyadh. Evidence recovered during the raids supports the suspicion that a new branch in the Arabian Peninsula is gathering momentum for a wave of attacks. The royal family is at the top of their list of targets. Toppling the House of Saud would be a major victory for al Qaida, simply because of the instability that would ensue.

All told, between external threats, internal divisions, and domestic struggles, the Saudi royal family looks very unstable indeed. So what would happen if the House of Saud crumbled?

Remember, religion is the only social structure in Saudi Arabia. There are no political parties, unions, or social organizations, aside from a few charities run by members of the royal family. Were the House of Saud to fail, the only candidates ready to step up would be the Islamists.

The shift to Islamist rule in Egypt has made the world pretty nervous. Longstanding allegiances are in limbo, and long-term relationships are changing.

Imagine if it happened in Saudi Arabia.

Islamist leadership in Saudi would not be the moderate, democratic version we're seeing in Egypt. The Islamists in Saudi Arabia are Wahhabi Muslims, who practice the strictest and most conservative version of the religion. I can see these imams making several moves.

First, a Saudi Arabia led by Wahhabi Islamists would not stay at peace with the Shia Islamic Republic of Iran. Both branches of Islam believe the other has strayed so far from the path that its followers are infidels. Odds of open war between Saudi Arabia and Iran would shoot sky-high the moment Islamists took power in Saudi Arabia.

Even worse, a Wahhabi Islamist Saudi Arabia might well turn its strongest weapon against the infidels of the West—by turning off the oil taps. It would be the 1973 oil crisis all over again, but in an even more oil-dependent world.

The price of oil shot up 300% in six months during the oil crisis. Today, that would mean an oil price of $300 per barrel.

It would also mean the end of the era of friendly U.S.-Saudi relations. . .and the demise of the petrodollar. That is a story in itself—one of great significance to anyone who owns U.S. dollars. I have discussed previously how a U.S.-Saudi deal to only use dollars to trade oil created a deep pool of support for the U.S.'s currency - and what will happen if the petrodollar dies. The short version is that as the global oil trade moves away from U.S. dollars into yuan, yen, rubles, and pesos, the world would have yet another reason to devalue the dollar.

Expensive oil, open Sunni-Shia war in the Middle East, the loss of one of the world's biggest oil producers as a stalwart ally, and an inevitable increase in religious politics across the Arabian Peninsula—such are the likely outcomes if the House of Saud comes tumbling down.

It is not inevitable. There are 7,000 princes in the Saud royal family, the result of multiple wives and lots of progeny. In that mix there is undoubtedly a prince with the right mix of progressive thought and religious reverence to lead Saudi Arabia through its succession and into the future.

But whenever a throne room is that crowded, it is very easy for a brawl to break out, depriving that perfect prince of his chance and giving the Islamists their opening.

Either way, oil investors with the right picks in their portfolio will prosper, and the Casey Research energy team will be available to guide you along the way.