Middle East Energy Outlook

British Business Group Dubai, November 2012

Summary 1. Middle East oil & gas issues 2. Saudi Arabia 3. Abu Dhabi 4. Kuwait 5. Iraq

Middle East Oil & Gas Issues

GCC oil & gas issues

1. Oil • The rise of Iraq • New field developments • Reservoir management, mature fields, heavy oil and EOR • HR and cost pressures • New players; the ‘pivot to Asia’

2. Gas • The challenge of demand: LNG and imports • Unconventional gas

3. Midstream & downstream • New export routes • Increasing domestic refining and cleaner fuels • Petrochemicals and speciality products

4. Power • Fast-growing demand; risks of black-outs • Rising fuel prices & shortages of gas • Alternative energy (solar, wind & nuclear) and interconnections • Pressure for energy efficiency

GCC Economic growth generally strong

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1

2

3

4

5

6

7

2012 2013 2014 2015 2016

Econ

omic

Gro

wth

Rat

e (

% )

ECONOMIC GROWTH

UAE

Saudi Arabia

Qatar

Oman

Kuwait

Bahrain

GCC members face less fiscal pressure than OPEC colleagues

Source: APICORP Research

Limited call on OPEC?

0

20

40

60

80

100

120

2010 2015 2020 2025 2030 2035

Demand

Non-OPEC + NGLs

OPEC

Source: OPEC Bulletin & World Oil Outlook

• OPEC itself sees only slow growth in call for its crude

• Forecasts a slowly-falling market share from 34% today to 32% by 2015

• 5.7 Mbpd increment from 2010 to 2035, compared to: • Iraq +6.5 Mbpd by 2020? • Kuwait +1 Mbpd by 2020 • UAE +0.7 Mbpd by 2017 • Libya +0.5 Mbpd by 2017 • Revival in Iran? • Venezuela?

Oman: Future of Gulf oil and gas, today

700

750

800

850

900

950

Dec-97 May-99 Sep-00 Feb-02 Jun-03 Nov-04 Mar-06 Aug-07

Prod

uctio

n (k

bpd)

Tight gas Heavy oil EOR

Source: JODI; Manaar research

Market Trends Middle East Gas

• High, rising global oil and gas prices since 2000 • Increasing global connection of Middle East gas with the rest of the world

• via Qatar LNG exports... • ...and, more recently, Kuwait & Dubai (& Abu Dhabi) LNG imports • Middle East now exposed to world gas prices

• Fast-growing gas demand • Electricity, desalination, petrochemicals, aluminium, LNG, etc

• Gas shortages in most GCC countries • Successful gas exploration in East Mediterranean, Saudi Arabia and

Kurdistan region of Iraq • Can be repeated elsewhere, given policy changes

• Growing interest in unconventional gas, but early days

Middle East Gas Demand 1990-2011 (BCM)

Source: BP Statistical Review 2011

Gas demand grew faster (7%) than electricity despite rising generation efficiency

• Aim to replace oil-fuelled generation with gas (environmental factors; save oil for export)

• Gas-consuming industries (petrochemicals, aluminium, steel, etc)

0

50

100

150

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40019

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

10

Other Middle East

United Arab Emirates

Saudi Arabia

Qatar

Kuwait

Iran

Gas pricing reform slowly materialising

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5

10

15

20

25

Gas

pric

e eq

uiva

lent

($/M

MBt

u)

11

LOW LEGACY PRICES

HIGH NEXT-GENERATION PRICES

INTERNATIONAL BENCHMARKS

HIGH-COST FUELS

HIGH NEXT-GENERATION PRICES

Source: Manaar research

Risha

Najmah-Sargelu

Lorestan

Rub’ Al Khali

Oman Palaeozoic

Fars

Conventional Tight

UAE Jurassic & Khuff

Bahrain/ Qatar pre-Khuff

Numerous different Gulf unconventional gas plays

Large potential for new conventional and unconventional gas resources

Sour/contaminated

Deep Shale

Tight and sour

Gas policy motivations vary by country (bubble size indicates market size)

-10%

10%

30%

50%

70%

90%

-100% -50% 0% 50% 100%

% p

ower

gen

erat

ion

from

oil

Net gas imports

Iran

Saudi Arabia

Yemen Iraq

Libya

Kuwait

Syria

Egypt

Oman

Algeria Qatar

Abu Dhabi Bahrain

Tunisia

UAE - Northern Emirates

Morocco

Jordan

Dubai

Lebanon

Bring gas to domestic consumers

Limit dependence on gas imports

Save domestic oil for export

Grow domestic gas to sustain exports

Implications of soaring MENA gas demand

• Need for improved efficiency and end to gas flaring

• Challenges to gas-based industrialisation & job creation

• Need for new gas exploration & development • Power cuts and economic damage

Cost of alternative energy

0 2 4 6 8 10 12 14 16 18 20

Gas, $1

Gas, $8

Gas, $15

Oil, $20

Nuclear

Coal CCS

Solar PV ($2.50/W)

Solar PV ($2/W)

ELECTRICITY GENERATION COST ($C/KWH)

• Alternative generation (solar, nuclear, coal CCS) is cheaper than LNG or oil

• However, high-cost domestic gas (e.g. unconventional) at ~$8/MMBtu is still

competitive against alternatives

15 Source: Manaar research

Impact of Alternative Energy

• Growing interest in alternative energy to save burning expensive oil-based/LNG fuels and/or save gas • Environmental drivers exist but are secondary

• Solar & wind power (Abu Dhabi, Dubai, Saudi Arabia, Jordan, Iraq, Jordan) • Solar cost-competitive around $80/bbl / $13 / MMBtu • But mostly meets peak summer daytime demand (~10-20% of total

generating capacity); does not displace much gas • Nuclear (UAE, Saudi Arabia, Jordan)

• Nuclear cost-competitive around $60-70/bbl ($10-13 / MMBtu) • Runs as baseload (practical limit ~40% of generation) and potentially

displaces large amounts of gas • CCS (Abu Dhabi, Dubai)

• CCS can replace gas for EOR • Energy efficiency programmes (Abu Dhabi, Dubai)

Saudi Arabia Energy Issues

Saudi Arabia Energy Issues

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601/

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11/1

1

1/12

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5/12

7/12

9/12

Rigs

Oil Gas

SAUDI RIGS DRILLING • Current drilling more focussed on

onshore oil due to need to sustain elevated output levels (Libya, then Iran)

• Oil-directed rig count now at 58, a record high

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500

1000

1500

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2500

Oct

-10

Dec-

10

Feb-

11

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11

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-11

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Cons

umpt

ion

(kbp

d)

Gasoline

Fuel oil

Diesel

Direct crude burn

• High, seasonal demand for direct crude burn for power generation

• Fuel shortages this summer • Delays to Wasit gas development • Refining mismatch – too much

fuel oil, not enough diesel & gasoline

• Major refining expansions, but essentially all for domestic use

Saudi Arabia Energy Issues • No increase beyond current capacity of 12.5 Mbpd until at least 2015 • Capacity maintenance in existing fields

• Safaniya • Dammam revival

• Growing domestic demand – need to develop gas to limit oil consumption for power • Wasit gas development delayed by 1+ years over H2S content • No moves yet on domestic gas price increases

• Major campaign on unconventional gas (tight in Ghawar area, shale in NW) • Disappointing results in the Rub’ Al Khali – some finds, but tight/sour • Red Sea exploration campaign

• Deepwater, sub-salt • 900 kbpd potential 2020+

• Major longer-term fiscal challenges

Abu Dhabi Energy Issues

World’s 9th largest crude producer and 5th largest net exporter

Abu Dhabi accounts for over 90% of UAE’s upstream sector

Major capacity expansion program underway from 2.5m bpd (2011) to 3.5m bpd (2017); 40% increase

Over US$50 billion of investments required in upstream in the UAE alone during this 5-year plan

APICORP (January 2012) ranks UAE as second highest investor in the MENA region with US$ 76 billion of energy investments expected in 2012-2016 across the full value chain

UAE Energy - Overview

2.5

3.5 OIL PRODUCTION TARGET MBPD

21

0

2

4

6

8

10

12

2009 2010 2011 2012 2013 2014 2015

ADCO ZADCO Upper Zakum ADMA Shah Gas Other Fields

Capi

tal E

xpen

ditu

re (U

S$ B

illio

n)

PROJECTED

7.8

6

9.7 10.5

9.1

7.3

UAE Historical & Projected Capex in Upstream (2009-2015) ______________________________________________________________________________________

HISTORICAL

5.9

2014: Expiration of ADCO current Concession Expected Additional Capex notably in EOR

Abu Dhabi Vision 2030 - Upstream Objective: Oil production capacity ramp up from 2.5 Mbpd in 2011 to 3.5 Mbpd by 2017

22 Source: WoodMackenzie, MEED

Kuwait Energy Issues

Sustaining and increasing oil exports

• Major production increase this year to replace oil lost from Iran • Longer-term need to increase production (4 million bpd target by 2020)

• Mature field management & EOR in Burgan • Continuing development of northern and western fields • Unconventional (tight) oil in Jurassic • Neutral Zone heavy oil (Wafra etc) – 2020 target reduced to 170 kbpd • New exploration, including offshore?

• Dependence on Gulf/Hormuz for exports

0500

1,0001,5002,0002,5003,0003,500

Jan-

02M

ay-0

2Se

p-02

Jan-

03M

ay-0

3Se

p-03

Jan-

04M

ay-0

4Se

p-04

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Oil

prod

uctio

n/co

nsum

ptio

n,

kbbl

/day

Crude oil exports

Product exports

Domestic consumption

Source: JODI; Manaar research

Meeting domestic energy needs

0.0

5.0

10.0

15.0

20.0

Prim

ary

ener

gy

cons

umpt

ion

(toe

/cap

ita)

• Rather high energy consumption per person • Issues

• Upgrade of domestic refining (Al Zour refinery and Clean Fuels project) • Permanent LNG import terminal (3 Mtpa by 2017?) • Increase in domestic (unconventional, Dorra) gas production • Iraq gas imports, and relations with Iraq in general? • Alternative energy and efficiency measures

Iraq Energy Issues

Iraq: export constraints

Iraq Energy Issues • Improving government capacity and delivery • Delivery of major infrastructure projects

• Export facilities and pipelines • Water injection • Power

• Capturing associated gas; developing new non-associated gas • Replacing ExxonMobil in West Qurna-1

• Expulsion of Total, Gazprom? • Iraq growing dangerously dependent on a few companies/countries

• Delays and downward revisions to plateau targets • Contracts must be renegotiated

• Resolution of Kurdistan issue • But current escalation over disputed territories

• Negotiation of a new OPEC quota • Relations with Iran

Conclusions • Gulf oil exports pivot towards Asia • Limited growth in call on OPEC, with several competitors • Robust GCC economic growth forecast

• But some challenges on rising fiscal burdens on governments • Gulf oil entering a new era

• Technical challenges significant but surmountable • Significant capacity expansion/renewal • New resource types and technology required

• Some radical changes required in Gulf gas/electricity policies to continue meeting demand • New developments, including unconventional • More regional/extra-regional gas trade

• Arrival of alternative energy • Major projects in Iraq, Kuwait need to progress

Robin Mills, Head of Consulting, Manaar Energy Consulting, Dubai, UAE robin.mills@manaarco.com +971 4 326 6300 +971 50 293 4668 www.manaarco.com

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