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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Could Energy Ties Bring Saudi Arabia's Conflict With Iran To An End?

Saudi Arabia

The relationship between the two great indigenous powers in the Middle East – Saudi Arabia and Iran – has become significantly more nuanced in the past few weeks than the pure enmity between the two countries that prevailed before. On the Saudi side, Crown Prince Mohammed bin Salman stated only recently that he seeks “a good and special relationship with Iran…We do not want Iran’s situation to be difficult, on the contrary, we want Iran to grow… and to push the region and the world towards prosperity.” From the Iran side, a high-level delegation conducted lengthy meetings with Saudi counterparts shortly after that statement was made in a secret summit in Baghdad brokered by Iraq Prime Minister, Mustafa al-Kadhimi. Iraq, for its part, is playing a crucial role in this rapprochement announcing in tandem with these recent events that Baghdad will establish a joint US$6 billion with Saudi Arabia and the UAE to invest in various projects in Iraq. This was quickly followed by news that a Saudi oil firm, with significant U.S. intelligence and logistical support – Delta Oil Company – is in talks to develop Iraq’s highly strategic Akkas gas field, alongside U.S. oil services giant, Schlumberger. Whether this series of announcements means that Saudi Arabia is set to decisively join the Iran-China-Russia sphere of influence or that Iraq is set to join the Saudi-U.S. one remains as yet unclear but Iraq announced further enormously significant tie-ups with Saudi Arabia in the past few days. 

According to a comment from Iraq’s Oil Minister, Ihsan Ismaael, lengthy discussions took place last week between him and Saudi counterpart, Prince Abdulaziz bin Salman, over how best to allow for much greater involvement by Saudi companies in Iraq’s gas, petrochemical, and clean energy sectors, including substantial investment by the Saudi firms across these areas. The specific companies involved in the discussions were heavyweights in their respective industries. Saudi Aramco, SABIC, and also ACWA Power were all involved, whilst the Iraqi side was compromised of various key government ministries and representatives for the National Investment Commission. According to a senior source who works closely with Iraq’s Oil Ministry spoken to exclusively by OilPrice.com last week, these discussions began with a reiteration of the Saudi interest in developing Iraq’s highly strategic Akkas gas field, which was previously eyed by Russia as a key element of a triangle of such sites strategically running across Iraq and into Syria. Akkas is not only situated in an area controlled by Iraq’s Sunni minority but also is a vital component of Iraq’s move to better optimize its own gas resources in order to minimize its dependence on Iran for gas and electricity supplies. In addition, Saudi Arabia stated that it was extremely interested in developing the Ratawi gas field, as part of a broader plan to utilize the huge volume of associated gas produced in the development of Iraq’s oil resources that is currently flared. 

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The use of this flared associated gas either by capturing it for export (and providing a much-needed boost to Iraq’s black hole of a budget) or by utilizing it for power generation (and reducing Iraq’s dependence on neighboring Iran for gas and electricity supplies) has long been a focus of U.S. policy for Iraq. Not only would those developments mean that the U.S. could reduce its financial aid to Iraq but also that it would significantly lessen one of the key levers of influence that Tehran has over Baghdad. As it stands, Iraq still ranks as one of the worst three offenders for flaring associated gas in the world, after Russia, burning off around 16 billion cubic meters of associated gas last year. This practice has cost the economy billions of dollars in lost revenue, has contributed to the frequent power outages in Iraq, particularly during the summer months, and has also run counter to the spirit of the United Nations and World Bank ‘Zero Routine Flaring’ initiative aimed at ending this type of routine flaring by 2030 that Iraq joined in 2017. It is true that Iraq pledged earlier this year to finally develop its associated (and non-associated) gas resources in the next two to three years, with the Oil Ministry looking at projects to develop 1.2 billion standard cubic feet per day (scf/d) of associated gas out of the 2.7 billion scf/d produced as an adjunct to oil excavation. It also said that it planned to develop a number of standalone gas fields, beginning with the combined estimated 700 million scf/d of production of Akkas and Mansouriyah. It is also true, though, that Iraq has been saying these things for at least the last 17 years with the intention of keeping U.S. financial aid flooding in whilst continuing to do nothing, except rely on Iran to keep its lights on.

Despite the inertia of the Iraqi authorities, however, the progress made on utilizing the otherwise flared gas by foreign firms, Royal Dutch Shell and Mitsubishi Corporation, working with Iraq’s South Gas Company, in the US$17 billion 25-year Basra Gas Company (BGC) project would encourage the Saudis. Began in 2013, the BGC currently captures associated gas from the three major oil fields of Rumaila, West Qurna 1, and Zubair, and in December 2018, BGC reached a peak production rate of 1035 mmscf/d. This was the highest in Iraq’s history and sufficient gas to generate approximately 3.5 gigawatts (GW) of electricity - enough to power three million homes. BGC currently supplies 70 percent of Iraq’s LPG, and through expansion of its export capabilities, helped turn Iraq from a net importer to a net exporter of LPG as from 2017. Interestingly, and a sign of what can be achieved in Iraq – given the country’s huge resources but without any of the usual dodgy dealings – BGC and CitiBank signed a first credit agreement in February 2019, the first commercial loan extended by CitiBank to an Iraqi corporate entity

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Saudi Arabia is also ideally placed to move forward with using associated gas, using part of that massive volume of gas to kick-start Iraq’s equally long-stalled petrochemicals sector. The key project here has always been the Nebras petrochemical complex, with the original design for it formulated between Shell and the Iraq Ministry of Oil and Ministry of Industry and Minerals in 2012 for a project that could produce at least 1.8 million metric tonnes per year (mtpa) of various petrochemicals. This would make it Iraq’s first major petrochemical project since the early 1990s and one of only four major patches complexes across the entire country. The others - Khor al-Zubair in the south, Musayeb near Baghdad, and the Baiji refinery complex in the north – are operated by Iraq’s State Company for Petrochemical Industries. 

The major advantage that Saudi would have in advancing the Nebras project – as it said last week that it wanted to do – is that the earliest design plans for it came from the templates used by Russian companies in the early development of Saudi Arabia’s gas and petrochemicals sector, particularly in the creation of the country’s flagship Jubail Industrial City. “Ethane needs to be the initial feedstock for Iraq’s first few plants in the same way that it was in the development of Saudi Arabia’s master gas system that captured associated gas, which was then fractionated and supplied as primary feedstock to the flagship Jubail Industrial City,” the head of petrochemicals projects for a major international oil company operating in Iraq exclusively told OilPrice.com. “The highest concentration of ethane [10 percent plus] is usually found in associated gas streams, which Iraq has a lot of, and processing ethane produces ethylene with few by-products [mainly fuel gas] to process and manage,” he told OilPrice.com. “This reduces the capital required for construction and minimizes the complexity of the logistics and distribution requirements, which will be important factors in Iraq’s early-stage build-out of a viable petchems industry, but as the industry and corresponding infrastructure grows, heavier feed streams can be utilized, as happened with the use of propane, butane, and naphtha in Jubail,” he said. A world-scale facility for ethylene – one of the most in-demand petchems products in the world, especially from China - is in the range of 1.0 to 1.5 million tons of ethylene production and a 1.0 million ton per year ethylene facility would require a supply of roughly 1.3 million tons per year of ethane, he highlighted. “Additionally, this would need to be a sustainable and reliable supply for at least 20 to 25 years and, to build out all of the necessary parts for a functioning world-class petchems sector in Iraq would require around US$40-50 billion,” he concluded. 

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on June 15 2021 said:
    Energy ties particularly inside OPEC could be a beneficiary from a rapprochement between the Gulf’s regional powers, Iran and Saudi Arabia but they won’t be the reason for the rapprochement.

    The real reason is Saudi Arabia’s desire to protect its oil infrastructure and assets from attacks by the Houthis, Iran’s allies in Yemen. Another reason is that Saudi Arabia is pre-empting a cooler relations with President Biden’s administration and is therefore signalling to President Biden to temper any actions he has in mind.

    I, however, doubt that the Biden administration will be hard on Saudi Arabia because it doesn’t want to lose the cash cow that pays for the most lucrative arms deals in the world.

    Iran knows full well that it has the upper hand in its secret negotiations with Saudi Arabia and that the geopolitical balance in the Gulf region has already tilted towards it. That is why it will extract a very heavy price from Saudi Arabia for ensuring the safety of the Saudi oil industry. Saudi Arabia has no alternative but to oblige.

    Any future involvement by Saudi Arabia and UAE in Iraq’s energy projects are motivated by one and only one factor: extracting Iraq from Iran’s clutches. They are simply acting on behalf of the United States.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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