Viable Investment in Energy Complicated  

(MENAFN - Arab News) Syed Rashid Husain

Interesting moves are being played on the energy chessboard. While Hugo Chavez and Ahmedinejad are out to create a block of energy rich, "anti-imperialist" forces, it is now being reported Iraq's massive oil reserves, the third-largest in the world, are about to be thrown open for large-scale exploitation by Western oil companies under a "controversial law" to be shortly introduced before the Iraqi parliament.

Won't it be more difficult now to say that oil was not the driving force behind the US intervention in Iraq?

Indeed, when US Vice President Dick Cheney said in 1999 as head of the oil service company Halliburton, "so (from) where the (additional) oil is going to come from? The Middle East, with two-thirds of the world's oil and the lowest cost, is still where the prize ultimately lies," had a point. The prize is definitely here!

This major shift in Iraqi energy policy is taking place while Baghdad is under occupation. The Independent newspaper says the US government has been involved in drawing up the law. Critics of the plan say that Iraq is being forced to surrender an unacceptable degree of sovereignty, as the new law envisages a "production sharing agreement" — highly unpopular and indeed unusual in the Middle East where oil industry is mostly state controlled. This is also happening at a time when nationalization of the energy assets is very much all around, especially in the US backyard. The battle for oil is on, some claim, and indeed with some rationale. As per reports, the new law would give oil majors 30-year contracts to extract Iraqi crude and allow the first large-scale operation of foreign oil interests in the country since the industry was nationalized in 1972. The new law, once adopted, would permit Western companies to receive up to three-quarters of profits in the early years. Those behind the plan envisage this as the only way to get Iraq's oil industry back on its feet after years of sanctions, war and loss of expertise.

Most of the oil appear to be alive to the galloping global requirements and are taking steps. However, one could definitely debate whether the involvement of oil majors is absolutely required or not.

Interestingly all this is happening as Saudi Arabia has been locked in a multi-billion-dollar program to expand its output capacity to 12.5 million bpd by 2009. Saudi Arabia is in fact planning to accelerate its near and long-term production expansion plans. The country's previous plans called for maintaining its spare production capacity — one of prime metrics that drives crude price levels — at around two million barrels a day. After visiting the country, Guy Caruso, head of the US Energy Information Administration, said last month he believes Saudi Arabia is about six months ahead of schedule and its spare capacity could hit 3 million barrels a day by 2011. The first phase, increasing production to 12.5 million barrels a day from current capacity of 11.3 million barrels a day, has now been placed on an accelerated timeline. The second phase — to grow capacity as high as 13.5 million barrels a day by 2011 — is in the planning stage. Last December, the board of Saudi Aramco board approved an "aggressive" operating plan for 2007, including the largest spending program in the company's history. The plan includes a goal of 121 drilling rigs, up from the country's previous target of 110. The United Arab Emirates and Kuwait have also spoken of plans to boost capacity to four million bpd each, while Iran also intends to raise capacity despite existing financial and technological constraints.

A study "Gulf oil after the war on Iraq — Strategies and Policies," compiled by the Abu Dhabi based Emirates Center for Strategic Studies and Research was released late last week. It says Gulf oil producers would be required to pump $523 billion over the next 25 years to lift their production capacity to meet the growth in global demand. But the book cautioned that ambiguity about world oil consumption, uncertainty in war-ravaged Iraq and socio-political turmoil could hamper such investments.

"Annual spending in this sector has to rise from an estimated $12 billion at present to 23 billion annually in the last decade of the mentioned period," the report emphasized. The 375-page compilation noted that oil investments in the Middle East remain a fraction of the required global oil capital of more than $2.2 trillion, attributing this to the fact that the region has the lowest production costs in the world. Dick Cheney had reasons for labeling the region as "the prize". However, everyone in the region argues that demand security is also equally important to match the level of investments required in the sector. Besides the political issues, the emphasis in the US to wean away from addiction on crude from this region, the question of energy alternatives, seems to be adding to confusion.

The European Commission unveiled sweeping plans last week to diversify European Union (EU) energy sources, slash carbon emissions by 20 percent and enforce rules for fuel competition. ASEAN countries also joined the chorus.

The global energy balance is in a flux. Too many variables indeed. And all these could go a long way in denting the investment enthusiasm. Energy diplomats have a major task in hand. Viable investments in energy sector, so as to ensure sufficient supplies in the longer run, do not appear an easy task in the prevailing circumstances.