VOL. XLVI

No 40

06-October-2003
 

Middle East Crude Oil Production And Exports

The following article comprises extracts from the report Middle East Crude: Production Profile, Export Markets, Pricing Issues and Output Capacity, published in September by Hassaan Vahidy and Shahriar Fesharaki of FACTS Inc., Honolulu.

The Middle East has over half of the world’s proven oil reserves, and remains the center of gravity in the global oil market. There is no doubt that the importance of the region is poised to grow. In 2002 the region’s major oil producers - Saudi Arabia, Iran, Iraq, Kuwait, UAE, Oman and Qatar – produced approximately 18.54mn b/d of crude and condensate. Of this, approximately 5.23mn b/d was consumed domestically in refineries and for direct burning in power generation, and remaining volumes of approximately 13.32mn b/d were exported. Of these exports, approximately 60% went to the Asia-Pacific region, followed by 19% to Europe and 15% to North America. The remaining volumes were exported to South and Central America and Africa.

Saudi Arabia is by far the region’s largest producer and exporter – accounting for approximately 41% of production from the Middle East – followed by Iran 19%, and UAE, Iraq and Kuwait at approximately 10-11% each. Qatar and Oman each account for 4% of total production. These countries produced close to 21mn b/d in 2000. Oil prices declined through most of 2001, and in response to this OPEC output was cut sharply from the 2000 level. However, it is projected that this year the seven producers’ total volume will be slightly over 20mn b/d, assuming that Iraq will be able to achieve a level of 2mn b/d by the end of the year.

Saudi Arabia

With the largest production capacity, estimated at 10.5mn b/d, Saudi Arabia is the biggest oil producer and exports a wide variety of grades. The lightest grade is Arab Super Light, with production volumes and capacity relatively small at 100,000 b/d and 140,000 b/d respectively. The next grade is Arab Extra Light, with production and capacity of 1.2mn b/d and 1.3mn b/d respectively.

Arab Light is the country’s largest crude stream, with production averaging around 4.5mn b/d and capacity estimated at approximately 5.6mn b/d in 2002. Furthermore, most of the future expansions in Saudi production capacity will come though this stream. Approximately 1.2-1.4mn b/d of Arab Light is used domestically, mostly for refining and direct burning (in the range 170,000-200,000 b/d). The remaining volumes, in the range 3.4-3.9mn b/d, are exported.

Arab Medium has a production capacity of approximately 1.6mn b/d and production levels usually average around 1mn b/d. Arab Heavy has a production capacity of approximately 1.3mn b/d, with production in the range 500,000-1mn b/d. Given their heavy output slate and relatively high sulfur content, these two grades  sell at a discount compared to other Saudi grades. Therefore, when revenue maximization is the incentive, the production of these grades is minimized and hence most of the spare capacity is held in Arab Heavy and Arab Medium.

The kingdom accounts for the world’s largest spare capacity. Saudi Arabia has embarked on several projects to increase production capacity, which are expected to add some 1.5mn b/d by the end of this decade. This by no means signifies the kingdom’s potential to add capacity, but we believe this is in line with the country’s role in OPEC and the organization’s anticipated behavior. Saudi Arabia exports oil to each of the three big markets: exports to the US have been in the 1.5-1.6mn b/d range (Saudi 1Q03 deliveries to the US are estimated at 1.725mn b/d, with just below 1mn b/d to Europe); approximately 1.2-1.4mn b/d is exported to Europe; and approximately 1.2mn b/d is delivered to Japan and most of the remainder – over 2mn b/d – goes to other Asian countries.

Iran

Iran Heavy and Iran Light streams make up over 80% of the total crude and condensate output from Iran. Production of these streams has averaged 1.4-1.6mn b/d each. Total production of crude and condensate is estimated at 3.4mn b/d in 2002, which includes South Pars condensate – expected to reach 80,000 b/d by the end of 2003. In terms of quality, Iran Light is comparable to Arab Light and Iran Heavy is somewhere between Arab Heavy and Arab Medium.

Iran is currently facing the challenge of adding and in some cases even sustaining production from its fields, some of which badly need gas reinjection. There is a great sense of urgency in making progress with awarding buyback contracts. Any further delays risk reducing Iran’s production capacity, which is currently estimated to stand at 3.85mn b/d. Our base case forecast for capacity in 2005 is 3.8mn b/d, assuming progress in the Ahwaz Bangestan and Azadegan buybacks. Failure to award these could result in production capacity falling below 3.5mn b/d by 2005.

Iran’s domestic oil products consumption stands at 1.4mn b/d and is growing fast. Iran Light and Iran Heavy are consumed in Iranian refineries, which have a combined capacity of almost 1.5mn b/d. Several expansions are on the way, which will reduce the export availability of these grades. In 2002 Iran’s total crude and condensate exports were just below 2mn b/d, of which almost 1.4mn b/d went to Asia and the remainder to Europe (which has imported 600,000-1mn b/d in recent years), FSU, Africa and South America.

UAE

Abu Dhabi crudes are generally light and sweet by Middle East standards – gravity ranges from 34° API for Upper Zakum to 36.8° API for Lower Zakum to 40.4° API for Murban. Current production capacity from the Emirates (mainly UAE) is approximately 2.55mn b/d. ADNOC has plans to increase capacity to 2.85mn b/d over the next 2-3 years, through a number of onshore and offshore projects. For instance, Bab capacity is likely to be expanded by 100,000 b/d by 2005. There are plans, not finalized yet, to increase Upper Zakum capacity, though it is not clear if this will be completed by 2005. Therefore total UAE production capacity is expected to be around 2.75mn b/d by 2005. UAE domestic refineries primarily run Murban crude, while ADNOC’s 280,000 b/d condensate splitter uses about 240,000 b/d. No new refineries are planned, but debottlenecking of the condensate splitter will result in slightly higher domestic consumption. Almost all of Abu Dhabi’s crude, NGLs and products are marketed to Asia.

Kuwait

Kuwaiti Export Crude blend is considered heavy and sour even by Middle East standards, and production capacity has varied in the range 2.1-2.2mn b/d recently. Nominal increases over the next two years will most likely take production capacity to 2.3-2.4mn b/d by 2005, and capacity of 3.0mn b/d by the end of the decade seems plausible and in line with OPEC’s objectives.

Domestic refining capacity has returned to 911,000 b/d after a fire at the 466,000 b/d capacity Mina al-Ahmadi refinery. A further 50,000-60,000 b/d of crude is burnt to generate electricity, but this is an interim measure until gas imports commence. In recent years, crude exports from Kuwait have been in the range 1.0-1.3mn b/d. Most of Kuwait’s crude is marketed in the Asia-Pacific region, with recent exports to the US averaging 250,000-300,000 b/d and to Europe 150,000-250,000 b/d.

Oman

Omani crude produce has fallen from an average 940,000 b/d in 2000 to 830,000 b/d in 2001 and 770,000 b/d in 2002, because some of the major fields reached plateau production prematurely and other fields did not compensate for the loss. Petroleum Development Oman plans major investments to revive output to 800,000 b/d by 2007. The 85,000 b/d capacity Mina al-Fahal refinery accounts for all of Oman’s domestic crude consumption, and remaining volumes are exported. A 116,000 b/d refinery is expected to be built at Sohar by 2008.

Iraq

Prior to the US-UK attack, Iraqi production was averaging 2.0mn b/d during 1Q03. Output declined in the following months to around 200,000 b/d and net output (production minus re-injected volumes) remains in the 300,000-500,000 b/d range. Production is expected to recover gradually through 3Q03 and 4Q03, and the plan is to achieve 2mn b/d production by the end of the year. If this is achieved, average 2003 production would likely be around 1.25mn b/d. Based on the state of Iraq’s refineries, it is anticipated that crude runs will average around 300,000 b/d. Therefore exports are likely to average just under 1mn b/d for 2003.

There are no doubts about the long-term potential of Iraq’s oil industry. However, for the next 2-3 years no dramatic additions to production capacity are anticipated. Hence it is not likely that capacity will exceed 3.0mn b/d by 2005. We believe that in the long run Iraq will continue to be a member of OPEC and will operate in line with the organization’s overall objectives; therefore the country’s production will remain in the 4.0-4.5mn b/d range by 2010. The biggest market for Kirkuk crude is Europe, while the US has been a major market for Basrah Light. Asia-Pacific countries are a relatively small market, with exports there averaging 170,000 b/d over the last four years.

Qatar

Qatari liquids are generally lighter and sweeter than typical Middle East output. Gravity ranges from 30° API for Al-Shaheen to 58° API for North Field condensate and, and sulfur content ranges from 2.15% to 0.22%, respectively. Dukhan and Qatar Marine grades account for almost three-quarters of Qatar’s crude and condensate output. The 137,000 b/d Messaieed refinery has 57,000 b/d capacity for condensate splitting, and runs Dukhan crude and North Field condensate. Remaining crude and condensate volumes are exported. Qatar is building another 140,000 b/d condensate plant, which is due to be commissioned in 2005 as gas exports from Qatar to UAE begin under the Dolphin project.

In 2001 about 680,000 b/d of crude and condensate were exported from Qatar, but this declined to 570,000 b/d in 2002 in line with OPEC cuts. It is estimated that Qatar’s production capacity could increase from the current level of 800,000 b/d to 950,000 b/d by 2005. Increases would come mainly from fields operated by Occidental, Al-Shaheen operated by Maersk, and other smaller fields. Almost all Qatari crude and condensate exports are delivered to Asia-Pacific countries.

Outlook

Most of the major oil producers in the Middle East have embarked on projects to increase production capacity. Most notable are Saudi Arabia, Abu Dhabi and Kuwait. At the same time some of the producers have been struggling to maintain output, including Iran and Oman. Iraq has recently resumed exports, however the country’s progress in restoring production to pre-war levels has been slower than expected. In the longer run we expect the combined capacity of the region’s major producers – Saudi Arabia, Iran, Iraq, Kuwait, UAE, Oman and Qatar – to grow from a 2003 year-end estimate of 23.3mn b/d to 28.8mn b/d by 2010. This forecast assumes that Iraq will continue to be an OPEC member and the organization will continue with its revenue maximization strategy.

Currently over 60% of exports from the Middle East are destined for Asian markets, where they sell at a premium. The geographical proximity of the two regions, growing Asian supply deficit and absence of alternative sources for Asian countries will result in an even larger share of eastern sales for Middle East Oil. However, the relationship between Asian refiners and Middle East producers is not seamless. Asian refiners have complained for some time about the premium they are charged on Middle East oil. In the future it will become tougher for producers to charge this premium, and also for Asia refiners to pay the extra, because of consistently poor refining economics in the Asia-Pacific region, and deregulation in Asian countries exposing domestic refiners to harsher economic realities.

Breakdown Of 2002 Middle East Producers’ Crude And Condensate Exports To Asia-Pacific

(%)

Note: Table compiled by MEES from a number of pie charts in the report. Percentages may not add due to rounding.