The Middle East’s upstream energy industry is changing fast. The sector is increasingly looking beyond the region for investment opportunities in a way that would have been considered unthinkable decades ago. Tapping into those changes, and being able to work ever-more closely with the National Oil Companies of the region is arguably the biggest challenge for the traditional oil and gas majors.
Total, with a pedigree in the region dating back to the very earliest days of oil and gas exploration, is carefully positioning itself at the vanguard of building the hybrid relationships necessary to create long-term future partnerships which are appealing to both IOCs and their local NOC partners.
The company can trace its Middle Eastern roots back to Compagnie Francaise des Petroles’ (its predecessor) which acquired Deutsche Bank’s interests in Turkish Petroleum’s assets, which included fields in Iraq in 1924 (under the terms of a WWI reparations treaty) and original Qatari concessions in 1936, and today has Middle Eastern portfolio which accounts for around a quarter of its global production.
Arnaud Breuillac, president of Middle East exploration and production at Total tells Oil & Gas Middle East that the company’s history and future are embedded in the region, and that the business on offer today represents the most exciting opportunity pipeline for the company in more than a generation.
Past & present
“Total is an historic partner and actor in the Middle East upstream industry. We stress partner because everything we do here in terms of exploration and production, be it in the UAE, Qatar, Saudi Arabia, Iraq or Yemen, our operations at their core are in tandem with the goals and objectives of the NOCs.”
The company has an impressive pedigree and regional presence.
“Our track record is relevant today because it is a core part of our corporate and cultural understanding that the Middle East has always been considered an absolute priority for us.”
Despite growing global excitement surrounding unconventional and carbon neutral resources, Breuillac says the Middle East’s energy hub status is unassailable in the near- and medium-term future. “When you look at tomorrow’s world, and even considering all of the unconventional resources which are being identified, there remains a lot of uncertainty in terms of economic value and whether some of these will really play out the way some corners of the industry expects.”
Breuillac says Total’s flexibility on contractual frameworks and its ability to offer stakeholder opportunities in energy prospects outside the region set the company’s ethos apart from its rivals.
“Where we differentiate ourselves quite a bit is our ability to reinvent ourselves and deliver real flexibility, which does not mean a low return on investment - quite the contrary in most cases - but that we do not insist on things that a national oil company, for example, cannot give.”
There are different formulas which IOC – NOC relationships operate under, and Breuillac says in an era of $100+ oil, traditional frameworks of the past may be outdated.
“Whether the NOC would prefer to engage in dollar-per-barrel fees, or production sharing contracts, or even collaborate on an entirely new vehicle, we believe we have the creativity to find something mutually beneficial and that’s critical to future success in the Middle East,” he says.
Breuillac adds that today, finding financial arrangements which suit all parties is only one weapon in the IOC armory. Ambitious NOCs are expanding beyond their traditional domestic territories, looking to replicate domestic success by taking their investment capital and expertise to the international stage.
“The playing field that is emerging today is very different to the typical partnership models employed in the past,” he says. “But we believe we still have creative ways of meeting the aspirations of the national oil companies. We see much more willingness and desire to develop and build their own technology and capabilities, and even go outside their own national boundaries and take their own expertise to the international marketplace, and that is certainly something which is more visible and prevalent in discussions today.”
Breuillac says the evolution of the relationship between IOCs and NOCs has undoubtedly changed the upstream sector’s dynamic for the better in recent years, and that strategic and objective alignments are now closer than ever.
“As companies, we are also culturally closer, which stems from the national oil companies desire to grow internationally,” he explains.
The time when collaboration between IOCs and NOCs only meant staff secondment and financial contribution is over, and has shifted towards collaboration on a world scale such as the opening up of international assets. Reciprocity is the name of the game.
Breuillac cites Qatar Petroleum as an example. “QP has recently joined Total in an exploration venture in Mauritania. In this way we are offering opportunities for NOCs to invest and to take risks outside of their own countries,” he says. “If you want to enter into a constructive dialogue with a national oil company today it means developing with them, partnering with them, and we have to accept that may mean leveraging the global breadth of our international portfolio and sharing some of the assets with them.”
Breuillac adds that an interesting upside of such partnerships is that for NOC employees, when operating in another NOC’s jurisdiction, bring experience and tangible benefits to the Total operation, as well as breathing fresh perspective into their own partnerships when they return.
Middle East Future
The company’s current engagements in the region are extensive and cover a broad spectrum of upstream activity, as well as a giant solar energy project underway in the UAE.
In Abu Dhabi, Total holds interests in the Abu Al Bu Khoosh field (75%, operator), and stakes in both ADCO and ADMA-OPCO, as well as GASCO and ADGAS.
In conjunction with the company’s activities in Qatar and Yemen, Syria and Iraq, paints a picture of a company at the heart of some of the region’s most striking and important energy projects.
The adverse aspect of Total’s reach across the region has been highlighted by its volatility in 2011, and the firm has some operations in areas of the Middle East which have been blighted by unrest. Last year was a far from comfortable ride for some of the company’s key regional partners.
“We are sorry we have had to stop our activities in Syria and Iran because of the EU restrictions,” says Breuillac. “We really hope those sanctions will be lifted and that we will be able to go back soon.”
Despite the civil unrest which led to the departure of former President Saleh, Total’s major Yemen project performed remarkably well in 2011, and is in good shape at the end of January 2012. Breuillac underlines that the top priority for the company throughout 2011 has been the safety and welfare of its employee in the country. “I am hopeful that the current situation will evolve positively for the benefit of the people of Yemen” he adds.
Yemen LNG, of which Total is a 39.55% partner, completed 2011 with the delivery of 106 LNG cargoes. This represented the full complement of scheduled annual deliveries committed to the gas buyers. First LNG export on 7 November 2009 was followed by first export from second LNG train on 1 April 2010; 2011 was therefore its first year of operation at full capacity, despite well-documented domestic troubles.
Pipeline sabotage occurred in mid-October 2011 was promptly repaired, allowing full delivery of the annual contracts quantities. Around 60% of the produced LNG was delivered to Asia, with the rest bound for markets in the Americas or Europe.
The company has made a softer entrance to Project Iraq than many would have expected, though has secured access to exciting developments around the Missan province north of Basra. The PetroChina-led consortium that includes Total (18.75%) was awarded the development and production contract for the Halfaya field during the second call for tenders held in December 2009. Partners have started development operations to lift current production to 70,000 barrels per day later this year.
“It’s a fair comment to say people may expect us to be more prominently involved in Iraq than we are today. We actively participated in the three bid rounds that have taken place so far. The situation for the fourth round is not really clear in terms of what exactly will be the economic value of what is on offer,” he explains.
Breuillac is refreshingly frank about fee-per-barrel contracts which have left many IOC executives grumbling in private.
“We don’t think the terms and remuneration on the existing deals were great. Return on investment is heavily dependent on the speed of implementation. For those contracts to deliver real value the speed of implementation was key, and what we see in Iraq today is delays. Our project has been less delayed than the others, but most of the projects in the south are behind schedule,” he adds.
Despite slower than expected progress, Breuillac says that, all things considered, progress is being made. “In April last year the construction contract for processing facilities at the first phase of production at Halfaya was approved. Initial production is targeted for 70,000 barrels of oil per day by the end of 2012, rising sharply to 535,000 boe/d in 2017, and we are broadly on target.”
The Halfaya project represents around $13 billion worth of investment, he says, in which Total has a 25% paid interest and an 18.75% supplied work interest.
“We have further ambitions in Iraq and we are very interested to get more involved. We are trying to find a way. It is clear that for us, with the amount of contracts that have already been awarded, that the next big opportunity will not be tomorrow, but right now we are working to be involved in a further gas project in Misan,” he reveals.
Given the security situation in some countries in the region it is not a stretch to imagine investor sentiment for Middle Eastern business may have taken a knock. Breuillac thinks otherwise.
“I think what is important for us as a companyis to have a balanced portfolio, in terms of geopolitical risk, in geological risk, in terms of exploration versus acquisition, and of striking a balance between existing reserves and exploration activities.”
He adds that diversity is a core strength of being a major. “Our portfolio width is such that we do not feel overexposed, and for us, a key element to balancing that portfolio is being involved in the Middle East. We fully understand that there are certain risks and certain opportunities in the region.”
Gone are the days when all that was needed to open up exciting new channels of business in the Middle East was a low-tech solution to an easy reserve pile. National Oil Companies have mastered their giant and super-giant fields and are no longer beholden to IOC involvement to kick off and run with mega-projects, some of which rank among the biggest and most complex in the world.
That said, there are technical challenges which are right at the envelope of current understanding, and partnering up with innovators to explore and exploit ever-more complex and challenging resources is good business for all concerned.
“Clearly the Middle East today is a region which requires more and more advanced solutions and technology. There was a certain mindset and reputation that the Middle East was predominantly low-tech and low-cost production. The balance in the future will be far more technological, partly because of the reserves being pursued now, and partly because of the role of gas in the future energy mix,” Breuillac explains.
The ascendancy of gas has been made famous by the story of Qatar, but in many countries of the Middle East fuel oil is still heavily used for electricity generation.
“There are exciting gas resources in pretty much every country in the region, and the current oil consumption, for power and desalination in particular, is clearly not the optimum solution, environmentally or on a purely economical basis either,” he says.
Total has played a significant role in the region’s gas development to date, with stakes in Qatargas 1, Train 5 of Qatargas 2, and a 24.5% involvement in the Dolphin Energy project, which became the first cross border gas project in the GCC when it linked gas from Qatar’s North Field to the UAE and Oman five years ago.
However, Breuillac says opportunities abound now that sour gas deposits are being coveted wherever they are found.
A large number of untapped reservoirs in the Middle East contain gas that is too sour or acid to be produced to commercial standards by conventional methods.
Recently the giant Shah gas field in Abu Dhabi has begun its development (Occidental eventually replaced ConocoPhillips), and expectations are that a multitude of other fields in the UAE and Saudi Arabia will follow suit in the next few years.
“We very much want to trumpet our sour gas processing technologies – that’s certainly an area where we think we have industry leading solutions and are looking for exciting opportunities to bring that to bear in the Middle East,” Breuillac says.
“Sour Gas is an important part of the history of the company. We picked up a great deal of experience in France on the Lacq Field which is 25% sour content. The processing capabilities learnt there are transferable worldwide. For resources with very high sulphur content the Sprex solution is a very cost effective way of managing those resources,” he enthuses.
Looking at the decade ahead, Breuillac says the challenges facing the energy industry, from every quarter, are enormous, but that the scale of what must be done fills him with excitement about future collaboration and a new era of IOC and NOC relationships.
“Quite simply, to be able to mobilise all of the resources – human capital, finance, the technology, as well as the access to the resources necessary to meet the oil and gas production the world will need, closer ties between the national and the integrated energy companies is basically a prerequisite.”
Total is heavily engaged and invested in the Middle East’s burgeoning downstream sector, and shares local desires to enhance national resources beyond the crude or LNG export stage.
By partnering with downstream companies, such as its involvement with QAPCO and QATOFIN, two successful petrochemical ventures in Qatar, as well as numerous projects in Abu Dhabi and a truly world-scale project in Saudi Arabia with SATORP, he says Total contributes effectively to development and diversification goals.
“Our involvement then goes far beyond the exploration and production of oil and gas, and we add value to the local economies, whilst helping meet some core challenges such as employment and training in industries with a long future. We look forward to developing further mutually beneficial partnerships with Middle East NOC’s” he concludes.
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