Sweet & Sour: Economics of detente comes to the Gulf

Have you noticed how when it rains in the Gulf, it tends to pour? Consider events in the energy world in the last few weeks. Saudi Arabia concluded a deal with Shell and Total for a mega gas project in the Empty Quarter and invited 41 other companies to come in and drill for gas; Kuwait began the selection process of consortia for a project to double its oil production from northern oilfields and Iraq signed its first term crude oil sales contracts since before the Gulf War.

What do all three projects have in common? Not much on the face of it but it does not take much to figure out that the removal of Saddam Hussain was the catalyst in stirring the region's oil powers into the realisation that they had better get a slice of Big Oil's money before sleeping giant Iraq arises and lures it all away.

Kuwait's northern oilfields were the trigger for Iraq's invasion of 1990 when Baghdad accused Kuwait of stealing its oil and flooding the market with crude oil. Iraq, or rather its proximity to Kuwait, was the reason the Kuwaitis were keen to get oil multinationals involved in the northern oil development project which would allow the foreign companies to book political risk but not Kuwaiti reserves.

Kuwait is offering long-term service contracts but not production sharing deals that are banned by its Constitution.

The end of the war against Iraq has accelerated movement on energy projects in the Arabian Gulf region and the new government of Kuwait has put Project Kuwait, as it is called, on a fast track two years after it was first launched only to be held up by political opposition in Parliament.

The project aims to double oil production from northern Kuwaiti oilfields, which are extensions of Iraq's southern Rumaila oilfield, to 900,000 barrels per day. The timing of movement on the project suggests Kuwait wants to get things moving before oil companies start looking to the prolific oilfields of Iraq as a more viable investment opportunity.

Ditto Saudi Arabia, which has restructured its gas initiative to make it more palatable to multinationals and even smaller national oil companies.

Iraq has not yet drawn up an upstream formula or given any indication the type of package it plans to offer the international oil companies when it opens its doors to foreign investment. There appears to be a desire by Western oil companies to enter Iraq in partnership with Arabian Gulf state oil companies, presumably to avoid accusations that they covet Iraqi or Arab oil.

Such an approach would serve the Iraqi people and help to rebuild bridges between East and West that have been battered by terror, bloodshed, misunderstanding and diplomatic estrangement since September 11.

Just look at the make up of one proposed consortium for the Kuwaiti project, an unprecedented partnership that would have been unheard of even a year ago. It proposes a grouping of ChevronTexaco of the U.S., France's Total, Petro-Canada, China's national oil company, Sinopec, and Russia's Sibneft. Forget about the bad blood between Washington and Paris over the war on Iraq and the deep suspicion of China's role in North Korea and Russia's cooperation with Iran on nuclear power. Economic alliances can and do transcend politics when there is a will by all sides to put differences aside and work towards a common goal.

The author is Middle East Editor of energy information and pricing service, Platts, a division of McGraw-Hill Companies.