December 17, 2001 No. 15

Special Focus: Oil and Gas Issues

December 17, 2001 | By Dr. Nimrod Raphaeli*
No. 15

A Saudi Call Against Politicization of Oil
An unsigned op. ed. under the above title in the London-based, Saudi paper Al-Sharq Al-Awsat, refers to a "gentleman's agreement" last spring between OPEC and Russia, Norway, and Mexico, in addition to Ecuador and Oman, whereby these countries committed themselves to supporting OPEC's pricing policy. However, as soon as prices began to decline, "these countries reneged on the agreement and left OPEC to twist in the wind."

The commentary goes on to say that some members of OPEC, headed by Iran and Iraq, advocate "a war strategy and a sharp reduction of production… However, this policy is not suitable politically or economically and is not free of dangers."

At the political level, the article stated, "this is not the proper time for OPEC to manipulate the production averages with a view of influencing the globalized energy sector." World public opinion maintains a hostile view that considers OPEC as "a cartel for the wealthy." The time is particularly inopportune because the Middle East situation is heating up and the war on terrorism is on-going. "Any hint," the commentary asserts, "that politics will be applied to determine the price of oil will cause harm to OPEC in the long-term." After assuring the world in the past that OPEC will not use oil as a political weapon, any steps that "raise doubts in this regard will be not helpful."

The economic dangers of playing with production levels are also evident. The global economic slowdown cannot be reversed by "pressing artificial price levels." In the long-term, artificial price increases will "encourage the diverting of more investments toward new types of energy sources which are now still marginal."

In conclusion, the commentary recommends: "instead of pursuing the thinking style that prevailed in the 1970s, members of OPEC should consider the necessary reforms of its policies to make them more in line with the demands of the new century. How this will be accomplished will depend on the special circumstances of each OPEC member."
Source: Al-Sharq Al-Awsat, December 11, 2001.
Note: Saudi Arabia is constructing its budget for 2002 on the assumption that oil prices will average $17 per barrel in 2002.

This conclusion begs the question: if every OPEC member should tailor its oil policy in accordance with its "special circumstances," can OPEC remain an effective cartel? Indeed, can it survive?

OPEC Lacks Long-term Strategy
Dr. Ramzi Salman, a former Assistant Secretary General of OPEC, told the Jordanian paper al-Dustour that OPEC's perspective on the fluctuations of oil prices does not transcend beyond three months. In fact, Dr. Salman says, when "oil market conditions were good, and OPEC was in control" the organization should have established principles to deal with fluctuations in the oil market. The surplus in oil production brings consumers to increase their reserves which acts as a deterrent against price increases when production falls. He cites the case of the United States whose strategic reserves have become "a potent weapon which the U.S. uses in times of emergency."

Dr. Salman pointed out that there are no criteria for predicting the price of crude oil because of a number of factors that go into the equation, including trade, political and military considerations. There is a possibility that prices will decline to a range of $12-15 per barrel. At this level, small oil producers in the U.S. whose cost of production is as high as $20 per barrel (compared with $1 in Saudi Arabia) will exert pressure on their government to raise oil prices to a range of $20 to $25 per barrel.

With regard to Russia, Dr. Salman believes that it (Russia) has taken advantage of OPEC's weakness and has chosen to ignore the previous decisions and even refuse to meet with OPEC's officials. He said oil investments in Russia are made by large foreign companies that are difficult to pressure into reducing their production. In addition, Russia is in a financial bind, and it needs the flow of oil revenues.
Sources: Al-Destour (Amman), December 9, 2001; Al-Hayat, December 11, 2001.

Central Asia: The Great Gas Reservoir
In a comprehensive analysis of the gas reservoir in Central Asia and its strategic implications for OPEC and, more importantly, for the balance of power in the area, oil analyst, Ahmad Mughrabi makes a number of significant points. His starting point is that while oil and gas are treated as two sides of the same coin, the fact remains that fossil (liquid) fuel is "a declining phenomenon" while gas is "a rising phenomenon." The reasons for this are complex, but two stand out: cost and environmental considerations. Increasingly, gas will replace oil in daily use. For example, factories in Europe and the U.S. are beginning to produce fuel cells that make available cleaner energy at competitive prices.

The Caspian Sea area has gas reservoirs that are triple the amount of gas available in the Gulf area. For this reason, it is considered "the Middle East of the 21st century." For the United States whose companies have heavily invested in the development of the Caspian oil and gas, the situation offers three important strategic advantages:

Diversification: The U.S. strategy has always been to diversify the sources of its imported energy.
Stabilization: Pipelines will extend from the Caspian Sea area to Turkey via Afghanistan and onward to other consumers (bypassing Iran). The countries involved in the trans-shipment are friendly to the U.S.
Cheap Energy: Energy price is very significant for the U.S. It is also an important element in its relations with the other industrial countries and China. (The author suggests that the strong American presence in Central Asia, the proximity of the Caspian energy to the Chinese market, American military presence in Okinawa, Japan, the Marines in Korea and other Asian countries, and the Seventh Fleet in the Pacific, all of which represent a major strategic presence of the U.S. vis-à-vis China and could influence the latter's economic development.)
Source: Al-Hayat, December 11, 2001.

OPEC: Russia to Reduce Production by 150,000 b/d
Russia has agreed to reduce its crude oil production by 150,000 b/d effective January 1, 2002. Commentators described this move as "a Russian winter trick" because oil production in Russia declines by 150,000-200,000 in the winter as a result of frozen ports in the extreme North and the increasing demand for oil in Siberia during the cold season. The real test for Russia's intentions will be in the second quarter of the next calendar year when Russian exports of oil are expected to increase from 2 million b/d at this time to 3.9 million b/d.

The position of the private Russian oil companies reflects the inherent conflict between price levels vs. market share. With the prospects of considerably higher oil production in the future, the Russian companies prefer to garner a long-term market share to a short-term price increase.

While the Russian decision to reduce production by 150,000 was welcomed by Shakeeb Khalil, the president of OPEC, there remains the issue of bringing the total reduction of non-OPEC members to 500,000 b/d to trigger the reduction of 1.5 million b/d by OPEC members.

For its part, Norway hinted that it would reduce its production by 150,000 b/d while Mexico has refused to go above its original offer of reducing production by 100,000 b/d. Both Angola and Oman have agreed to reduce production by 25,000 b/d each. This will leave a gap of 50,000 b/d for non-OPEC members that will force OPEC to reconsider the ceiling trigger.

The alternative to an agreement on reduction by both parties would be a price war that could bring down the price of crude oil to the range of $15-12 a barrel. For Saudi Arabia, in particular, a price fall to this level will precipitate a skyrocketing budget deficit (see item below). In any case, given OPEC's record, some members will always "cheat" by exceeding their quotas.
Sources: Al-Hayat, December 7, 2001; Al-Thawra (Baghdad), December 7, 2001; Al-Sharq Al-Awsat, December 10, 2001.

Syria and Lebanon Sign a Gas Agreement
Lebanon has signed an agreement to buy Syrian gas for its power plant in al-Badawi. The switch to gas from diesel oil will result in savings of $50-60 million annually. The gas agreement will proceed in three stages: Syria will supply 1.5 c/m per annum in the first stage. It will increase to 3.5 million c/m in the second stage and to 6 million c/m in the third and final stage. No information was provided on the duration of each stage.

The gas will be supplied through a 45 km (25 mile) pipeline with one third of it inside Syria and two-thirds inside Lebanon with the Port of Tripoli being the final destination. It is the beginning of an effort by Lebanon to switch from fossil combustibles to natural gas in other domains as well.

The Lebanese Minister of Energy and Water, Muhammad Abd Al-Hamid Beidoon, highlighted the strategic dimension of the agreement that would increase the interconnection between the power systems of the two countries. This effort will be further bolstered with the construction of a rail line connecting the two countries.
Source: Al-Safir (Lebanon) and Al-Sharq Al-Awsat, December 10, 2001.

Jordan Invites Tenders to Construct Oil Pipeline to Iraq
Jordan has invited foreign companies to submit competitive bids for the construction of an oil pipeline connecting the sole Jordanian refinery in al-Zarqa in Northeastern Jordan with the Iraqi city of Haditha, located 260 km (145 miles) northwest of Baghdad. The pipeline will be 750 km (417 miles) long and cost approximately $350 million.

There is a question whether the construction of the pipeline is subject to approval by the UN Sanctions Committee. The Jordanians argue that such approval is not necessary because most of the initial construction will be on Iraqi territory, that the pipeline will merely replace the in-land tankers that transport 80,000 b/d of Iraqi oil to Jordan which the United Nations has sanctioned in the framework of "Oil for Food" program.

Jordan will ask Iraq to increase its supply of oil by 5-10% p.a. to meet rising demands. Discussion between the two governments will take place at the end of the year to determine the pricing mechanism for Iraqi oil to Jordan half of which has been supplied so far free. This is the equivalent of $300 million of annual Iraqi aid to Jordan in current oil prices.
Source: Al-Sharq Al-Awsat, December 10, 2001.

Libya: Qaddafi Foundation Buys Oil Shares
"Nineteen Investment International," which is owned by "Qaddafi International Foundation for Charities" and headed by Qaddafi's son, Saif Al- Islam (Sword of Islam), has purchased shares worth 900,000 Euros in an Anglo-Irish Oil Company.

"Nineteen Investment International" was involved in the release of Western hostages taken by the Abu Sayyaf terrorist organization in the Philippines last year.
Source: Al-Sharq Al-Awsat, December 13, 2001.

Regional Economic News

The Economics of Crises
Many analysts have expected that a good portion of Gulf and Arab investments in the international money markets would be repatriated after the shocks of September 11. However, the investment environment in most Arab countries has frustrated these expectations. This is the gist of an article by the economic editor of the Kuwaiti newspaper, Al-Qabas.

The editor says that if the Arab countries are genuinely interested in attracting "emigrating capitals" they have to improve the investment environment rather than rely on foreign factors and occasional crises to trigger for the repatriation of these investments.

The editor says it is futile to seek foreign investments when "we have failed to repatriate our own money." The reliance on "the economics of crises" will not provide the solution for attracting investments.

On the other hand, the Palestinian economic analyst, Taysir al-Tamimi, suggests that capitalists consider their countries where their money is invested. While Arab banks may offer higher yields, foreign banks offer capitalists the freedom to transfer any amount of money anytime anywhere.
Sources: Al-Qabas, December 7, 2001; Al-Hayat Al-Jadeeda, December 10, 2001.

Inter-Arab Trade Transit is Subject to Various Restrictions
While Arab countries advocate the need for economic complementarities, for confronting global economic groupings and for increasing the volume of trade amongst themselves, the process of completing one transit transaction requires twenty-seven administrative procedures and twenty-two signatures.

Transport companies complain about the lack of clarity and transparency coupled with fees and levies that are subject to change from time to time without being brought to the attention of the officials at border crossings. In addition, there are difficulties with customs, security and agricultural agencies. Finally, there are restrictions on foreign currency transfers and the application of different weights and measurements that impede trade.

All these problems are a result of a transit agreement signed fifty years ago, and has not been amended to reflect modern realities.
Source: Al-Qabas (Kuwait), December 10, 2001.

Country Economic News

Lebanon: Partnership Agreement with EU, Disagreement on Terrorism
Lebanon is seeking the French President's assistance to remove a provision on terrorism in the draft partnership agreement between it and the European Union. Britain has insisted that, prior to its ratification, the partnership agreement should include a provision indicating that Lebanon accepts the European Union's definition of "fighting terrorism." A similar provision is already included in the partnership agreement to be signed with Algeria on December 19 and the pending agreement with Egypt to be signed at an unspecified later date.

Subsequent to his meeting with French president Chirac in Paris on December 11, Lebanese Prime Minister al-Hariri declared that a compromise was found. He said the problem was "more technical than political," and that language on terrorism will be included in a special annex to the partnership agreement that will be exchanged in the form of a letter between Lebanon and the Union. Al-Hariri urged Chirac to avoid "embarrassing Syria and Lebanon on this issue."

A unanimous vote is required for the ratification of any agreement with the Union and it is not certain Britain will go along with a watered-down version regarding terrorism.

On the other hand, Sheikh Na'im al-Qassem, the Deputy Secretary General of the Hizbullah Party, condemned what he called "the blackmailing exercised by the Europeans" on the partnership agreement with Lebanon, particularly with regard to the question of terrorism.
Sources: Al-Sharq Al-Awsat, December 8, 2001; Al-Sharq Al-Awsat, December 12, 2001.

Iraq: 50% of External Trade with Arab Countries
The Iraqi Minister of Trade, Muhammad Mahdi Saleh, said that Iraqi trade with Arab countries, in the framework of "Oil for Food," represents 50% of his country's total foreign trade, or $14.5 billion. Among Arab countries, Egypt ranks first with $3.5 billion followed by Jordan ($2.8 billion), United Arab Emirates ($2.6 billion), and Syria ($1.5 billion). The Russian Federation is the largest trading partner with trade estimated at $5.5 billion. All figures are for the approximately 10 years during which the "oil for food" program has been operational.
Source: Babil, December 10, 2001.

Egypt Rejects American Demand to Limit Trade Relations with Iraq
Egypt has rejected an American demand to limit its trade relations with Iraq and to "drag its feet" on the ratification of a free-trade zone agreement with Iraq, signed last January. An official source informed Al-Hayat newspaper that the government would ask the parliament to expedite the ratification of the trade agreement with Iraq so that it would become effective before the end of this calendar year.

Egypt's exports to Iraq, in the framework of the "oil for food" program, include food aliments, pharmaceuticals, construction material, chemicals and cars. On the other hand, Egyptian exporters outside the "oil for food" program are concerned about the Iraqi government's ability to pay for imports, such as animal feed and cotton. This issue is the subject of consultation between the two governments.
Sources: Al-Hayat, December 12, 2001; Al-Hayat, December 6, 2001.

Egypt: U.S. Earmarks $500 million in Cash
In response to an urgent appeal from the Egyptian government, the U.S. government has earmarked $500 million, in cash, from the aid program for Egypt for immediate support of the Egyptian economy which has suffered losses estimated at $3 billion in the last two months. Egypt has asked the U.S. to make available for immediate disbursement all outstanding balances from the aid programs in the last 5 years and to earmark another $750 million in cash from the aid program for the next fiscal year.
Source: Al-Hayat, December 8, 2001.

Saudi Arabia: $12 billion Budget Deficit
Saudi Arabia announced on December 9 a $12 billion budget deficit for 2002. Much of the deficit is attributed to lower oil prices (Saudi oil sells at $2 dollar per barrel lower than the Brent oil which serves as a benchmark) and the projected reduced production beginning January 2002. While there is no breakdown of state revenues, oil revenues are estimated to represent 75-80% of total state revenues. Hence, a reduction in oil prices would normally have an immediate and palpable impact on state revenues. 60% of Saudi expenditures pay for salaries of state employees.

Of course, the Saudi budget deficit could quickly disappear if the price of oil will go up $5 per barrel. Thus: 7 million b/dx$5x365 days = $12.7 billion. On the downside, another decline of $5 per barrel would double the Saudi budget deficit unless painful cuts in expenditures are made.
Source: Al-Qabas (Kuwait), December 9, 2001.

Syria: Unemployment - Most Serious Challenge to New Government
A number of parliamentarians and economic experts believe that the primary tasks of the new government (to be formed by outgoing Prime Minister Mustafa Miro) is stimulating economic growth and creating employment in order to maintain social stability. Al-Ba'ath, the mouthpiece of the Ba'ath Party that has been in power for 40 years, stated: "Unemployment is one of the most serious challenges facing the desired economic transformations." Population growth of 3% or even higher will create a demand for 250,000 employment opportunities this year.

While this objective may be feasible, the newspaper says, given Syria's potentials in oil gas, agriculture and tourism, the country "suffers from bureaucratic impediments in addition to rooted corruption, and lack of clarity in the laws, an outdated banking system and backwardness in the information technology" which deny the country the capacity to benefit from its potentials.

An economic expert pointed out that "a strong economy and social stability are necessary for Syria to maintain its independence and to take whatever political decisions are required," referring to the conflict with Israel.
Source: Al-Sharq Al-Awsat, December 12, 2001. See also the interview with Khaled al-Muhaini, Syria's Minister of Finance in Al-Hayat, December 9, 2001.

Syria: Presidential Decree to Offer Grants to All Government Employees
President Bashar Al-Asad signed a presidential decree on December 11 granting non-taxable grants amounting to 50% of current salaries to all government employees including civil servants, teachers and the military.

No information was provided on the total amount of expenditure and whether it was budgeted.
Source: Teshreen, December 12, 2001.

Syria: Two Senior Officials Imprisoned
The Court of Economic Security sentenced Salim Yaseen, the former deputy premier for economic affairs and Dr. Mufeed Abdul Hakim, the former minister of transportation, to 10 years in prison for allegedly receiving a hefty bribe in a transaction involving the purchase of 5 Airbus A-320 airplanes to Syrian Airways. The two officials agreed to pay $373 million for the planes whose market value at the time was $250 million.

The suit against the former premier, Mahmood al-Zu'bi, was dropped because of his death. However, the state will seek damages from his inheritors.
Sources: Babil (Baghdad), December 9, 2001; Al-Sharq Al-Awsat, December 9, 2001.

Iran Provides Electricity to Iraqi Kurds
The local government in Arbil, northern Iraq, under the rule of the Kurdish Democratic Party of Masood Barazani, has signed an agreement to purchase electric power from Iran to meet the needs of the areas bordering with Iran. Iran technicians have already started to connect the city of Suran, in Iraqi Kurdistan, with the Iranian grid across the border. The agreement provides for the supply of 70 megawatt of electricity on a continuous basis.

The agreement was expected to draw strong reactions from the Iraqi Government that has refused to create independent sources of supply to Kurdistan under the "oil for food" program.
Source: Al-Sharq Al-Awsat, December 4, 2004.

Israel: Country President Expresses Concern About Social and Economic Conditions
Moshe Katzav, the President of Israel, expressed his concern about the economic and social conditions of large segments of the Israeli society. In an interview with Yediot Ahoronot Mr. Katzav drew attention to "the disconnect" among those who live well and those who live below the line of poverty, estimated at 1.1 million people. There was inequality in income distribution to the extent that the lowest 20% of the population earn 3% of national income while the highest 20% of the population earn 48% of the national income. "This," he said "is a national and social catastrophe. We are in the midst of serious security problems but we cannot separate them and the economic and social problems. The social condition in Israel could lead the State of Israel to social explosions and to confrontations."
Source: Yidiot Ahoronot (magazine section), December 7, 2001.

PA: Saudi Arabia Paid Full Contribution to Intifada Fund
Saudi Arabia has made fully its contribution of $200 million to Aqsa Fund and $50 million to the Intifada Fund, as part of a total Arab contribution of $1 billion authorized by the Arab summit in 2001. The Aqsa fund is meant to finance projects that would retain "the Arab and Muslim identity of Jerusalem." The Intifada Fund supports the families of "the martyrs of the Intifada" as well as the education of their children and the training of those injured.
Source: Al-Sharq Al-Awsat, December 8, 2001.

*Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.

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