PIRINC REPORTS ON mill ilium PIHI Hill i» Ml in in III mill . Hill CONCISE REPORTS ON WORLD OIL AND GENERAL INTERNATIONAL DEVELOPMENTS OF INTEREST TO THE PETROLEUM INDUSTRY Published by the PETROLEUM INDUSTRY RESEARCH FOUNDATION, INC., 122 East 42nd Street, New York 17, New York • Telephone: OXford 7-3774 HARRY B. HILTS, Chairman, Board of Trustee,s JOHN H. LICHBLAU, Editorial and Research Director November 11, 1957 MIDDLE EAST SPOTLIGHTS Page .USSR EXTENDS PERMANENT FOOTHOLD IN MIDDLE EAST Soviet Union Now Permanently Established in Area Purpose: Control of Free World's Major Oil Deposits All M.E. Countries Increase Economic Ties w/Sovbloc 2 ............... PROTECTING EUROPE AGAINST NEW MIDDLE EAST OIL CRISIS Increased Explorations in Other Areas High Level of Tanker Construction Activity Problem of Additional Stock Capacity for Europe Public Ignores Industry's Cost in Providing "Flexibility" THE BIG MIDDLE EAST PIPELINE PROJECT Kuwait -Iraq-Turkey Project Now Questionable Iraq's Dilemma: Turkish Pipeline vs. Arab Unity Alternative Plans to Increase Iraq's Production 6 ............... THE IRANIAN PIPELINE PROJECT Qum-Iskenderun Project Still in Early Discussion Stage .THE ITALIAN ENTRY INTO IRAN The SIRIP Venture Not Necessarily Optimum Deal for Iran No Deviation from Middle East's 50/50 Principle Good Deal for AGIP; Could be Way for More Non-Majors into M.E. Mattel's Public Stature Raised at Majors' Expense Consortium also has Plans for Iran 10 TRENDS IN MIDDLE EAST OIL PRODUCTION Iran only Oil Country Unaffected by Suez Crisis Comparative Oil Output and Growth Rates, June-Sept.-Periods All Oil Countries Benefiting by Iraq's Loss 12, .EGYPT New Sinai Fields Reverse Declining Production Trend Structure of Oriental Petroleum Company Oil Sel-Sufficiency to Decrease Sovbloc Imports Economy Fairly Strong Despite Blocked Foreign Funds Suez Canal Now Egypt's Major Income Earner Current Canal Improvement limited to restoration of 1956 Draft USSR EXTENDS PERMANENT FOOTHOLD IN MIDDLE EAST Political developments in the Middle East continue to be the main event in the world political arena. For the moment the heat is off the Arab-Israel dispute and instead is on intra-Arab feuds as well as the local manifestations of the East-West struggle. The future course of events can, of course, only be sketched in the roughest terms, in view of all the imponderables and unknowable factors entering the situation. How- ever, this much is sure: the USSR is now firmly established in the Middle East and will remain a major factor in all Middle East affairs from here on in. At the same time it has become clear that Arab unity is not nearly as cohesive a factor in the Middle East as it appeared when Israel seemed the only source of trouble in the area. Nevertheless, unity is genuinely desired by all Arab nations and in the absence of countervailing forces can be expected to play an important part in Arab policy-making. Both these factors have a direct bearing on the Middle East oil situation. Since the USSR's exceptional effort to gain a foothold in the Middle East is not caused by any Soviet need for Middle East oil or by any other special economic or strategic considerations, it seems clear that the Kremlin is out to gain control over the Middle East oil producing and trans- porting countries for the purpose of gaining an economic stranglehold on non-communist Europe. Since there is no doubt that the USSR is now fully entrenched in Syria and fairly strongly in Egypt, this means that it already sits astride all existing oil transportation routes between the Middle East and Europe, with the exception of the Cape of Good Hope route. This does not permit the USSR to turn the flow of Middle East oil on and off at will from now on. But in any future crisis - and there will undoubtedly be some - the presence of direct Soviet influence in both Syria and Egypt must be taken into account. Of course, there is always the possibility of a change in government in either or both these countries. But barring such an eventuality, Soviet influence in both countries will continue to grow, as their trade, aid and foreign investment becomes increasingly Soviet-oriented. This is particularly .true of Syria which, being a small and poor country, can easily be totally supplied by the USSR, which can also take most of its exports. According to all reports from Syria, this is exactly what is happening. If this trend con- tinues, the country should be economically completely inside the Soviet orbit within the next couple of years. A preliminary indication of the strength of this trend was given last spring when the Czech firm Technoexport was awarded the contract to build the country's first refinery, at a cost of $29 million. The award was so obviously based on political rather than technical or economic considerations that it briefly became a rallying point for all anti-government forces who pointed, in vain, to the fact that the American firm Procon, Inc., had submitted a bid which, at an only slightly higher cost, would have given Syria a far superior refinery, including Procon's high-octane process. FIRING - 2 But the "neutralist" countries are not the only ones in the Middle East affected by Soviet economic infiltration tactics. Even such pro- western countries as Lebanon, Iran and the Sudan are reporting very sharp increases in trade with the Soviet bloc. At the moment there are no polit- ical strings attached to these deals. But since they are all much more im- portant and advantageous to the Middle East countries concerned than to the Soviet bloc, which has no real need for any of the Middle East's export commodities, it is obvious that USSR's real interest in all this is to extend its political influence in the world's richest oil area. PROTECTING EUROPE AGAINST A NEW MIDDLE EAST OIL CRISIS For Western Europe all this means that some 70 percent of its oil needs come from an area whose existing political instability has now been compounded by the successful entry of the West's official enemy No. 1 on the scene. How to protect itself against the obvious dangers of this situation is something that concerns not only the countries dependent on Middle East oil but also the companies which produce, ship and market it. For they can contribute greatly in providing the degree of flexibility which would im- munize Western Europe from the immediate consequences of another Middle East oil shut-down. To a considerable extent this is already being done. The explora- tion of new concession areas in Venezuela (which during the last crisis had little spare capacity) and the opening-up of the Sahara and of new deposits in Sicily and France are all designed to accomplish this. For, were it not for the political risks in the Middle East, there would be much less motiva- tion to find new oil supply sources for Western Europe, in view of the vast and growing reserves in the Middle East. The high level of super tanker construction activity, in the face of the sustained current slump in world tanker trade, is another way to create additional flexibility. For it means that in case any or all of the existing shipping routes from the Middle East become suddenly closed, alterna- tive ones can be used. Of course, not all the 34 million dw tons of existing firm tanker orders are meant to carry Middle East oil to Europe. But since the world tanker fleet is expected to increase at an annual rate of l6 - 17 percent while the annual increase in world oil consumption may not even reach the generally quoted figure of 6-7percent in the next few years, there will certainly be a lot more excess carrying capacity available in the next 3-5 years than we had in any previous post war year. BUILDING ADDITIONAL STOCK CAPACITY Some additional stock capacity in Europe, as a buffer against any sudden emergency, would also be part of the overall effort to increase flexib- ility vis-a-vis the Middle East. Very little has been done on this particular aspect of it, largely because of the exceedingly large amount of unproductive capital that would have to be tied up in order to maintain enough oil stocks to supply all of Europe for any significant period of time. FIRING - 3 Determining the level of such emergency stocks is, of course, an extremely difficult and delicate procedure, since it has to be based largely on hypothetical assumptions, regarding the type and length of future emergencies. The only thing that can be said from recently gained experience is that if the emergency were limited to the Middle East, and not part of a general international conflagration, Western Europe could certainly temporarily get along on 75 to 80 percent of its normal needs. Furthermore, it could count on receiving a combined 50 to 60 percent of its reduced oil requirements from the Western hemisphere together with its own domestic production. Additional coal ship- ments from the U. S. would also help to reduce the oil deficit. This means that, at the most, emergency stocks would have to fill a gap equivalent to only about 1/3 of Europe's normal oil requirements. At the present rate of consumption for Western Europe and adjacent areas this would mean approximately 1 million b/d, disregarding seasonal fluctuations. However, since it would take three to four weeks to call forth the required additional quantity of oil from the Western hemisphere and to complete the necessary tanker transfers, an additional 750,000 - 850,000 b/d would have to be stocked up for this initial period.