Gulf states are easing back on oil projects but pushing forward on gas as domestic demand upstages crude exports as the focus for energy investment. While oil export projects continue to fall victim to the global economic slowdown and subsequent weakening demand forecasts, the need for natural gas is surging due to rising populations and industrialisation. Already, Saudi Arabia and Kuwait have pushed back plans to boost production capacity from the Khafji oilfield in the Neutral Zone between the two countries. Late last month, the project operator Kuwaiti-Saudi Khafji Joint Operations said work to increase the field's output by 65,000 barrels per day (bpd) to 350,000 bpd would be completed in 2013, five years behind original plans.
Delays are also expected at projects to raise the production capacity of Abu Dhabi's Upper Zakum oilfield and Saudi Arabia's Berri and Qatif fields. Last week, the US oil firm ExxonMobil said in a study that a surge in costs, rig shortages and geological problems were likely to delay completion of the development plan for the Upper Zakum field - one of the world's biggest crude deposits - by about four years to 2015.
Upper Zakum is the only large oil project the UAE has opened up to foreign participation in recent years. In 2006, Abu Dhabi National Oil Company (ADNOC) and ExxonMobil formed a venture to develop the field. The publication of ExxonMobil's official study of Upper Zakum followed statements by the Minister of Energy, Mohammed bin Dha'en al Hamli, suggesting the UAE's long-term plan to boost production capacity by about one third to 3.5 million bpd had been extended to 2018 from the original target of 2011.
Meanwhile, Global Industries, a US oilfield contractor working on the Berri and Qatif fields, said both projects were losing money due to "continued productivity and logistical issues" that threatened their scheduled completion in next year's third quarter. On Saturday, Saudi Aramco, the world's biggest state-owned oil company, said falling crude prices might curtail investment needed to offset production declines from ageing Saudi fields. A senior company official said earlier in the week that Aramco might re-tender a contract to boost production from the Manifa oilfield, to take advantage of falling costs of steel and other building materials.
Any such action would delay the US$15 billion (Dh55bn) Manifa project, which was set to add 900,000 bpd of heavy crude from onshore and offshore Gulf fields from mid-2011. It would also anger contractors, who warned on Sunday that trying to force down contract prices could cause supply bottlenecks and even bankruptcies for some providers. During times of falling oil prices, most input costs for projects follow the drop in crude by several months, partly because orders for raw materials are based on earlier prices. That can leave both oil producers and oilfield services companies financially squeezed.
Crude prices have fallen about 56 per cent from their record peak of $147 a barrel in July. Nonetheless, Aramco still plans to complete several projects that would expand Saudi production capacity to 12.5 million bpd by next year, Khalid al Falih, the chief executive of the company, said on Sunday. On the other hand, Aramco's entire downstream oil development plan is under review. "The market in general is slowing at a fast pace. Therefore all refinery projects will be reviewed by investing companies," Mr Falih said. "It was difficult to get suitable offers for several projects by the end of this year."
Aramco and ConocoPhillips, a US oil company, said last week they would halt the bidding process for a 400,000 bpd export refinery planned for Saudi Arabia's Yanbu Industrial City. The companies said the project would be re-tendered in the second quarter of next year. There have been unconfirmed reports of delays to other refinery projects in Saudi Arabia, Kuwait and the UAE. But most Gulf gas projects seem to be moving ahead as planned, and some new projects have recently been announced.
The exception is Saudi Arabia's $10bn Karan offshore gas project, which Mr Falih said would be reviewed, along with the Manifa oil project. Still, some analysts viewed Mr Falih's appointment last week as Aramco's chief executive as a sign that the Supreme Council of Saudi Arabia planned a long-term strategic emphasis on gas development to help the kingdom resolve its worsening gas crunch. From 2000, Mr Falih served sequentially as the vice chairman of Aramco's gas ventures study team, its vice president of gas ventures development and its senior vice president of gas operations.
During a major oil industry exhibition and conference in Abu Dhabi last week, Adnoc signed a preliminary agreement with the Anglo-Dutch company Royal Dutch Shell to explore for deep gas deposits in the Gulf. At the same event, ConocoPhillips said it was moving ahead with its joint venture with Adnoc to develop Abu Dhabi's big Shah gasfield - a technically challenging project involving the production of deeply buried gas containing a high concentration of toxic hydrogen sulphide - and Shell said it was reviewing opportunities to deploy floating gas liquefaction technology in the UAE, Iraq and Egypt.
Shell recently signed a framework agreement for a project to capture and market about 700,000 cubic feet per day of gas that is now being burned at southern Iraqi oilfields. Like Saudi Arabia and most other Gulf states, the UAE is short of gas for power plants and industrial developments. Iraq, which is struggling to rebuild its ravaged energy infrastructure, has a desperate need for gas for electricity generation and oil refining.