OXFORD INSTlTUTE = FOR = ENERGY STUDIES Petroleum Investment in the Arabian Gulf Goran Bergendahl Oxford Institute for Energy Studies F5 1985 The contents of this paper are for the purposes of study and discussion and do not represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright 0 1984 Oxford Institute for Energy Studies ACKNOWLEDGEMENTS Many persons have given valuable comments to the author concerning the content of this report. Special thanks go to John Mugno, Citibank; Lakdasa Wijetil leke, Michael Pearson and Isaac Sam, World Bank; Jens Mb1 lenbach, Leo Drol las, Marshal 1 Hal 1 and John Borkowski, British Petroleum. 1. PETROLEUM INVESTMENTS IN THE MIDDLE EAST 1 2. INVESTMENTS IN KUWAIT 4 3. INVESTMENTS IN QATAR 10 4. INVESTMENTS IN SAUDI ARABIA 16 5. INVESTMENTS IN THE UNITED ARAB EMIRATES 26 6. CONCLUSIONS 34 MOTES 45 REFERENCES 46 FIGURES FIGURE 1 CAPITAL EXPENDITURES FOR THE MIDDLE EAST PETROLEUM INDUSTRY 3 2 FLOW OF GAS PRODUCTS IN QATAR 12 TABLES TABLE 1 CRUDE OIL PRODUCTION AND PETROLEUM REFINING IN KUWAIT 37 2 INVESTMENTS IN KUWAIT 38 3 CRUDE OIL PRODUCTION AND PETROLEUM REFINING IN QATAR 39 4 INVESTMENTS IN QATAR 40 5 CRUDE OIL PRODUCTION AMD PETROLEUM REFINING IN SAUDI ARABIA 41 6 INVESTMENTS IN SAUDI ARABIA 42 7 CRUDE OIL PRODUCTION AND PETROLEDM REFINING IN TRE UNITED ARAB EMIRATES 43 8 INVESTMENTS IN TIIE UNITED ARAB EMIRATES 44 In 1974 the thirteen OPEC countries suddenly received record oil revenues of $114 billion. The disposal of that income was as follows: 35% was used to finance imports of goods - mainly consumer goods and the remainder - the current account surplus - was placed abroad, mainly in the form of bank deposits (see statistics in Bergendahl 1984). When a second, even larger wave of oil revenues ($279 billion) reached the thirteen countries in 1980, a larger proportion (some 64% or $179 billion) was used directly for imports. But this time a substantial part of the remainder was placed into longer-term assets, such as stocks, bonds and real estate. Two years later oil revenues fell slightly to a level of $200 million and the current account surplus almost disappeared. What had happened? Did the OPEC countries choose to direct their surpluses into domestic consumption or into domestic investments? The answer is not a simple one for at least two reasons. First, there is an enormous difference between the four low-absorbing OPEC countries and the other nine. Kuwait, Qatar, Saudi Arabia and the UAE accounted for oil revenues of $62 billion in 1974, $206 billion in 1980 and $104 billion in 1982, with more and more spent on domestic consumption and investments (39% in 1974, 68% in 1980, and 86% in 1982). Secondly, since the "low-absorbers" by definition are unable to consume most of their oil revenues, they therefore had substantial opportunities for investment from 1974 to 1982. Figure 1 shows how the four low-absorbers have taken advantage of this situation by letting petroleum investment grow from $700 million in 1971 to more than $14 billion in 1981. This implies a growth rate of 35% per year, a very high rate in comparison to other OPEC countries and the rest of the third world. The present study will investigate the activities behind these statistics. The purpose will be to fol low up actual investments made by the four low-absorbing Gulf countries during the ten year period 1973-82. The emphasis will be on petroleum- related investments. However, other large-scale investments will also be included. The outline is as follows. The analyses of actual investment alternatives are in Sections 2-5, with one section each for Kuwait, Qatar, Saudi Arabia and the United Arab Emirates. Finally, conclusions and areas for further study will be presented in Section 6. 2 Figure 1 Capital Expenditures for the Middle East Petroleum Industry LNG-PLANTS I OIL b GRS EXTRRCTION ;I 1'1 REFINERIES PIPE LINES CHEHl CRL PLRNTS 3 The small kingdom of Kuwait, with about 1.45 mil1 ion inhabitants in an area of 17,000 km 2 , has one of the highest per capita incomes in the world. Though the country is quite young - it became independent in 1961 - its oil history stretches back over several decades. In 1933, the Anglo-Persian Oil Company (today British Petroleum) and the Gulf Oil Company applied for a concession. One year later they formed the Kuwait Oil Company (KOC) which started to explore the concession area in 1936. In 1938 oil was discovered in Burgan in Southern Kuwait. After the Second World War Burgan was developed, and exports started in 1946. Oil was discovered at Margwa in 1951 and at al-Ahmadi in 1952. After 1955 KOC started to drill in Northern Kuwait. Oil was discovered at Raudhatain in the same year, at Bahra in 1956, at Sabriyah in 1957, at Minagish in 1959 and at Umm Gudair in 1962. In 1974, the Government took over 60% of the assets of KOC including a refinery and an LPG plant at al-Ahrnadi. The f ol lowing year the Government acquired the remaining 40% equity. BP and Gulf Oil were guaranteed liftings of 500,000 b/d and 450,000 b/d respectively at a discount of 15 cents/barrel and with 60 days’ credit. 4 In 1947, the American Independent Oil CO (Aminoil) applied for a concession in the Neutral Zone. Drilling started in 1949 and oil was discovered at Wafra in 1953 and at Urn Gudair in 1966. The company was taken over by the Government in 1977 and was transferred to KOC in 1978. The offshore rights of the Meutral Zone were obtained in 1957-8 by the Arabian Oil Company (AOC), end the Kuwaiti Government obtained 10% of the equity of AOC. Oil was discovered at Rhafji in 1960, at Hout in 1962, at Lulu in 1966 and at Dorra in 1967, In 1974 the Kuwaiti Government took over an additional 202 of the equity of AOC. The Kuwait National Petroleum Company (KNPC) was established in 1960 to be owned jointly by the Government and by private Kuwaiti interests. It took over the domestic distribution of petroleum products from KOC, and in 1975 the Government gained complete control of RNPC, The company now operates three refineries, Mina Abdulla (taken over from Aminoil in 19781, Mina al-Ahmadi (formerly operated by KOC) and Shuaiba. In addition, the Kuwait Shell Petroleum Development Company and the Kuwait Spanish Petroleum Company unsuccessful ly drilled in Kuwait. Both companies are now dissolved. The main investments in Kuwaiti crude oil production were made before 1970. Crude oil production peaked in 1972 at about 3,300,000 b/d, after which capacity utilization declined substantially to a level of about 800,000 b/d in 1982. Table 1 gives details of this development, and it can be seen from these statistics that the decline in demand for crude oil is one factor 5 responsible €or the drop in production. The export of refined products has been more stable, although there has been a slight decline from a peak in 1979. Refinery capacities were expanded at Shuaiba in 1973-76 and a new Isomax unit was introduced in 1978 (see Central Bank of Kuwait, 1980, p42). In 1979 there was a reduction in output capacity at Mina al-Ahmadi leading to an almost maximal use of refinery capacities that year. Since then Kuwaiti usage of its refinery capacity has declined to a level of 0.57 in 1981. In spite of this low use, Kuwait has decided to modernise and expand the plants in Mina al-Ahmadi and in Mina Abdul lah. KPC's capital was increased by KD 1.5 bill ion (=$5.4 billion), to cover the outlay (see MEED, May 1983, p9). For Mina al-Ahmadi, Japan Gasol ine obtained a contract worth between $500- 700 million for the installation of 11 new units by 1984. Later the same company obtained an additional contract worth approximately KD 325 million to install an additional desulphurisation unit, a hydrocracking unit, another vacuum distillation unit and 8 fluid catalytic cracking unit. The final structure is planned to be completed in 1986/87. Furthermore, the refinery capacity of Mina Abdul lah will be expanded up to a level of 250,000 b/d at a cost of KD 230 mil1 ion. KPC's subsidiary, Kuwait Santa Fe Braun Engineering and Petroleum Projects Company got this contract, including the upgrading of existing units and the installation of new processing units (for details, see Arab Oil & Gas Directory, 1983 ~162). The aim is to expand refinery output by 93,000 b/d of naphtha, 50,000 b/d of gasol ine, 118,000 b/d of ATK, 117,000 b/d 6 of diesel and 82,000 b/d of low sulphur oil. At the same time fuel oil production will be reduced by almost 100,000 b/d. Altogether, this means that output will be doubled from about 352,000 b/d today to 725,000 b/d when the investment is completed, 1 In the petrochemical sector, Petrochemical Industries Corporation (PIC) is a wholly-owned subsidiary of KPC. In 1964, PIC, Gulf Oil and BP set up the Kuwait Chemical Fertilizer Company (KCPC) to operate a petrochemical plant at Shuaiba (Plant A), producing urea, sulphuric acid, ammonia and ammonium sulphate. In 1973, PIC took over the shares of BP and Gulf Oil in the company. Then in 1977 the plant capacity was expanded from 550 tonneslday to 950 tonnes/day. PIC also operates Plant B at Shuaiba, which includes 2 urea units (670 tonnes/day) and 2 ammonia units (800 tonneslday).