Following four decades of war, sanctions, nationalisation and unrest, oil and gas producers are gradually adjusting to rely less on the Middle East.
The countries around the Arabian Gulf still contain the greatest concentration of giant and super-giant fields anywhere in the world and have some of the most attractive oil and gas geology. But the increasingly hostile political environment above ground has forced oil and gas companies to hunt for new reserves in other parts of the world where the geology is tougher but political conditions are much easier.
Diversification away from the Middle East is one of the main reasons why oil prices have remained virtually unchanged as unrest has spread across much of the region since 2011. The region’s importance has been declining in terms of both production and share of proved reserves in recent years.
In 2013, the countries of the Gulf and its neighbours, which the BP Statistical Review of World Energy terms “the Middle East”, accounted for almost 33 per cent of global oil production and 17 per cent of gas output. But the share of both has flattened in the last three years after rising strongly since the mid-1980s.
The shift away from the Middle East is even more marked in terms of proved reserves, which represent future production. Middle Eastern countries accounted for 48 per cent of proven oil reserves worldwide in 2013, down from 56 per cent in 2005 and 64 per cent in 1993, according to BP.
The region contained 43 per cent of proven gas reserves, down only marginally from 46 per cent in 2005, but ending the steadily increasing share that had characterised the market since the 1980s.
For the last two decades, oil and gas producers have been adding reserves more rapidly outside the Middle East. Between 1993 and 2013, oil producers added to proved reserves at an average annual rate of 4.2 per cent in the rest of the world but just 1 per cent in the Middle East.
Over the same period, gas producers added reserves in the rest of the world at an average rate of 1.8 per cent per year compared with 3 per cent in the Middle East. But growth in the Middle East has slowed recently. In the second-half of the period, reserve growth in the rest of the world accelerated to 2.3 per cent a year, while reserve growth in the Middle East eased to just 1.1 per cent.
The metaphorical centre of gravity in the global oil and gas industries is gradually shifting from the Middle East towards North and South America, Africa and Asia. And the trend seems set to continue over the next decade, given the shale boom in North America, and intensive exploration and production in other regions outside the Middle East.
The Middle East was a comparative latecomer to the oil and gas industry and its dominance of global production is a relatively recent phenomenon. During the first five decades of the 20th century, global oil production was dominated by the US, Mexico, Venezuela, Romania, Russia, Malaysia and Indonesia.
The first oil was found in Persia only in 1908, followed by Iraq in 1927, Bahrain in 1932, Kuwait in 1937, Saudi Arabia in 1938, the UAE in 1954 and Oman in 1962. As late as the 1940s, the Middle East was still a relatively small oil producer in global terms. In 1950, the Gulf countries accounted for less than 17 per cent of worldwide production.
Massive field discoveries between the 1940s and the 1960s, and extensive development work by the international oil companies, boosted the Gulf’s share of global output to 25 per cent in 1960 and 31 per cent in 1970.
But disputes escalated over pricing and government revenues. Between 1970 and 1980, a wave of nationalisations saw all production in the region pass into government ownership, after which production growth all but ceased. The Middle East’s share of global oil production peaked at 37 per cent in 1975, a record that has never been seriously challenged since then.
The region has become progressively more hostile for international oil and gas producers. Nationalisations in the 1970s were followed by the Iranian revolution; the Iran-Iraq war; the first Gulf War between Iraq and the US; sanctions against Iraq; the second Gulf War; intensified sanctions on Iran; the eruption of a civil war in Syria; and now an insurgency in northern Iraq.
Only the Gulf states have retained a sort of calm amid the violence and geopolitical instability. With the exception of Saudi Arabia, the UAE and Qatar, the rest of the region has achieved no net growth in oil production since 1976.
Even in Saudi Arabia, production gains over the last 37 years (2.8 million barrels per day since 1976) pale in comparison with the increases achieved during the 1950s, 1960s and early 1970s.
Increasingly locked out of the best Middle Eastern oil and gas fields, international oil companies have been forced to shift their efforts to other, more readily accessible, sources of supply.
Huge new oil provinces were developed during the 1970s and 1980s in Alaska, the Gulf of Mexico, the North Sea and the Soviet Union in response to the oil shocks of 1973 and 1979.
Collapsing oil prices after 1985 led to a big reduction of exploration and production expenditure around the world and stemmed the shift away from the Middle East. But the renewed rise in oil prices in the 2000s has spurred a new exploration boom, and the shift away from the Middle East has resumed.
The shift will almost certainly continue over the next decade unless there is a radical improvement in the region’s political environment.
Saudi Arabia’s enormous oil and gas resources remain closed to outside companies. Sanctions have prevented any increase in oil or gas production from Iran. Syria and Iraq have become failed states where central authority has collapsed and both are convulsed by civil war.
By contrast, the shale revolution has added millions of barrels per day of extra production in the US and Canada, and similar quantities of natural gas. Oil and gas companies are now exploring similar shale deposits around the world — including in Argentina, China and Russia.
Enormous conventional gas reserves have been developed in Australia and the industry is prospecting for more off the coast of Mozambique. Deepwater drilling is developing oil and gas off Latin America and West Africa. The industry is also prospecting in Thailand and elsewhere in Southeast Asia, as well as the South and East China Seas, East Africa and the Arctic.
With the possible exception of shale, none of these resources is as geologically attractive as the giant conventional oil and gas fields of the Middle East. But the politics of the region have become too hard, so oil and gas companies are increasingly looking elsewhere.
Advances in horizontal drilling, hydraulic fracturing, seismic surveying and deepwater drilling have opened a much broader global oil and gas resource base, giving exploration and production companies many more options.
Middle East producers, especially Saudi Arabia, will remain hugely influential in the oil market for many more years. Saudi Arabia, the UAE and Kuwait are the only countries that routinely hold spare production capacity and therefore play a crucial role in helping to smooth out short-term fluctuations in supply and demand.
However, until the political and security situation improves, or oil prices fall, the Middle East’s relative importance as an oil and gas producer will continue its long, slow decline.
— Reuters
