Crescent rising

EXCLUSIVE: Badr Jafar, executive director of Crescent Petroleum, speaks candidly about Iraq, the need for gas liberalisation, and arbitration with Iran’s national oil company.
Crescent rising
Badr Jafar is executive director at Crescent Petroelum, and chairman of Gas Cities and Pearl Petroleum.
By Daniel Canty
Wed 04 Nov 2009 04:00 AM

EXCLUSIVE: Badr Jafar, executive director of Crescent Petroleum, speaks candidly about Iraq, the need for gas liberalisation, and arbitration with Iran’s national oil company.

In 1969, two years before the Trucial States joined to form the United Arab Emirates, and predating the era when National Oil Companies shot to the fore of the regional oil and gas industry, Sharjah-based Crescent Petroleum marked itself out as a first-mover and incorporated itself as the region’s earliest indigenous, private energy company.

The company’s first major project was the Mubarak Field which is offshore Sharjah, which began production in 1972 and produced over 60 000 barrels per day at its peak in 1976. In turn, that led to operations right around the world, at one point holding petroleum concessions in Argentina, Canada, former Yugoslavia, France, Tunisia, and the UAE and in the 1990s adding Egypt, Pakistan and Yemen to its global portfolio.

“Our diverse international operations throughout the 80s and 90s brought valuable experience as an upstream petroleum company, in a wide range of operating conditions,” explains executive director of Crescent Petroleum, Badr Jafar. From that global presence, the company in the 1990s began a process of reining back its international positions, a strategic move in a turbulent time for the industry. “At least 40% of the world’s remaining gas reserves and 60% of global oil reserves are here in our region. We felt that with our well-developed core competencies, and being an indigenous Middle-Eastern upstream operator with regional business know-how, meant we had advantages over many of the IOCs (International Oil Companies) operating here,” he says.

A coveted presence in the most prolific hydrocarbon region in the world remains the ultimate aim of IOCs from across the globe, but entry into National Oil Company interests comes at a price many deem steep. Better to be known as a local company, says Jafar.

“We decided to bring back our original focus on the Middle East and North Africa. Over the years, we divested these operational assets and brought the core of our business back home.”

In the 1990s the company pioneered the development of a real Middle Eastern integrated project by recognising the region, even then, was heading towards a gas imbalance. “There was an emerging disparity between gas rich producers and energy hungry gas short markets. As a company we saw that disparity would continue and exacerbate.”

Initially the company began looking at filling that gap, starting with the major asset holders, Qatar and Iran. “As a private sector company we wanted to facilitate the supply from those countries into the gas short regions in the Gulf and beyond.” Widening its net, the company also began looking at hugely ambitious international projects, such as feeding the energy hungry India and Pakistan markets with surplus Middle East gas.

The Gulf-South Asia Gas Project (GUSA), first launched by Crescent in 1990, was the first workable scheme for producing, transmitting by pipeline and delivering natural gas from Qatar to South Asia and was initially developed by Crescent to service markets in the UAE as a result of rapidly increasing gas demand. Due to prevarication in Pakistan over the years, the project has yet to come off the drawing board and enter an execution phase. “Pakistan missed the opportunity which would have saved the country over US$50 billion at current prices,” Jafar says. When this project did not go ahead the Dolphin project emerged and implemented the Qatar-UAE pipeline. “The Mubadala-led Dolphin project did a great thing to engage with this opportunity, and the benefits and successes of this particular project are evident to all,” Jafar said.

The desire to build a truly regional, private sector, but publicly listed gas company spurred the development and launch of Dana Gas in 2005. “ Dana Gas was the first and still is the only private sector and publically listed firm really concentrating on the full natural gas value chain and with a regional focus in the MENASA (Middle East, North Africa, and South Asia) region,” he says.

Crescent Petroleum essentially became the founder of private-sector monetising of the region’s natural gas, and is striving to deliver value throughout the value chain. “From upstream, through midstream distribution and transportation, even into downstream gas processing and facilitating gas based industries, we as a local regional company have sought to realise the maximum added-value of locally-produced gas, as opposed to focusing just on exports as many IOCs tend to do.”

Crescent Petroleum, as the key founder, holds around one fifth of the stock in Dana Gas . The scale of enthusiasm for the company is undeniable, judging from the IPO which attracted US$80 billion in less than two weeks, setting a world record for an IPO over-subscription.

Traditionally, gas reserve development partnerships in the Middle East with IOCs tend to be based predominantly on the concept of sourcing energy for exports. With natural gas, that usually entails export pipeline projects when markets are close, and LNG shipping for farther export markets. “Once that gas molecule reaches the border you’ve exchanged its value and that’s it. However, by using that molecule locally, whenever possible, you maximise the netback value of that gas, and that has a major economic multiplier effect,” enthuses Jafar.

This logic led to Jafar establishing Gas Cities LLC in 2007, a joint venture between Crescent Petroleum and Dana Gas , which is developing mega gas-based industrial cities in the region, based on the concept of clustering. Jafar, also chairman of Gas Cities, says “The Gas City concept is unique in that it is a private-sector initiative that provides a one-stop-shop for gas-intensive industries and communities in an integrated and energy efficient environment.” Gas Cities is now well on its way to signing up a number of these cities in the region, including in Iraq, Egypt and most recently Yemen.

The idea of a country using its gas is a relatively simple concept, but Jafar is passionate about how much such a basic change could transform regional gas, and gas-based industries. He concedes that export has many positive effects beyond the cash flow, and that better use of gas domestically, whilst a priority, should not rule out export deals where reserves are sufficient to support both.

“I’m not saying everything should be hoarded for domestic consumption. Gas is a great facilitator to build political and economic bridges between two countries. I think that gas has something that oil doesn’t and that is the fact it can act like an umbilical cord between two nations, which in-turn promotes long-term stability and good relations between them because the economic imperative is there.”
 

Gas liberalization

One topic which comes to fore in conversations with Jafar is the real and pressing need to liberalise gas markets in the region. Population growth and rampant economic development is driving a huge demand increase for desalination, and the growing burden of air conditioning the region in summer.

Of course, the Middle East is more fortunate than much of the rest of the world, in that it has the resources to hand to support these demands, but without a liberalised pricing structure, a vast amount of those assets will be squandered in the years ahead.

“Regionally speaking, natural gas rich countries are underselling their product to subsidise power generation and many of the downstream projects. In my opinion, without gas market liberalisation going forward there is little prospect of the Middle East to capitalise fully on its reserves. Why? Simply because artificially low gas prices have a double-whammy effect. On the one hand it increases demand unrealistically and leads to wastage without regard to conservation and the detrimental environmental impact, while on the other hand robs our people of the economic incentive to develop our vast reserves,” he says.

Meaningful reform in the Middle East will require a dramatic shift in regional government’s long term policies. In order to promote the diversification of economies, most of the Gulf States have for a long time set gas prices well below unsubsidised market rates to support their rapid expansion and building of nascent industries. Additionally, consumers have been largely blessed with access to low price, heavily subsidised electricity and water.

“What happens in this situation is that the provision of low cost electricity and gas feedstock to consumers and downstream industries becomes economically unsound when all the other factors are included in the picture, such as population growth and future power generation investment. This then leads to major drains on government budgets and its ability to keep subsidising, which in turn leads to gas and power shortages, eventually heavily taxing the consumer.”

Despite the political implications of charging the real price for power, water and fuels, it is a topic which has sailed up the agenda across the Middle East. Egypt and Iran have already seen proposals drafted at the highest levels of governments.

However, political will is just one bump on the road to a fully liberalised natural gas market. If one jurisdiction hikes its gas prices, the temptation for energy intensive industries would surely be to locate to a cheaper environment. Jafar does not seem deterred.

“We’ve seen in the past that a unified approach doesn’t necessary work in this region, or even worldwide for the gas industry for that matter. What drives fundamental shifts in policies is first movers. You have to set examples, and we have done that in the past, including when we pioneered the region’s first two cross-border gas pipeline deals in the 80s.”

The landmark deal Jafar is referring to was the Sharjah to Dubai onshore gas transmission and supply project promoted by Crescent in the mid 80s, followed a few years later by an offshore pipeline built and owned by Crescent. Back then, Dubai burnt liquid petroleum fuels for power generation in the summer, whilst in Sharjah gas was being flared.

“Crescent came in as a private company to talk to the Dubai government. The logic was simple. At the time the price Dubai was paying for fuel oil was approximately $2.50 per MMBTU. We were burning the gas at zero value! Between the willing buyer and the willing seller, we ended up splitting the difference. So the very first cross border sale of gas in the Middle East was set at $1.25 per MMBTU. Unfortunately this mindset with gas pricing continues until today where the alternative is more than seven times what it was back then, ultimately to the detriment of the consumer and producer.”

Jafar says that when Saddam Hussein was looking to sell gas to Kuwait in 1989, the Ministry had no idea what to charge for it. So he asked his Ministry to look for precedents and they came and found the Crescent Petroleum gas price to Dubai, and so the Iraq-Kuwait price was set at the exact same $1.25. When the Dolphin Energy pipeline began deliveries the price was thought to be in the $1.25 - $1.35 price range, at a time when energy commodities were trading at record levels.

“This illustrates that the mentality in this region is usually set by first movers. Gas is more efficient, cleaner, cheaper, and producers need to start to set prices at a rate that is mutually beneficial for everyone in the region in the long-term, and I don’t think this will happen if we wait for a unified approach. It just needs to get done. When it is successful, it will then be used by all as the correct and sustainable benchmark.”

 

New Iraq

Amongst the most well-known activities of Crescent Petroleum’s group of companies is it’s participation in Iraq’s Kurdistan Region. Crescent Petroleum is in partnership with its affiliate Dana Gas , and is currently implementing a major integrated natural gas project there. The company is working under a risk service agreement with the regional authorities to, as a first phase, produce, process and deliver 200 million cubic feet per day of gas supplies urgently needed for power generation free of charge to the government, in return for guaranteed off-take of associated liquids by the government, and subsequently to ramp up production of petroleum for local sales and eventual exports. The Kurdistan interests are currently held by Pearl Petroleum, of which Crescent Petroleum and Dana Gas are the major stakeholders, with Austria’s OMV and Hungary’s MOL each acquiring minority stakes earlier this year. Pearl Petroleum’s interests are concentrated on the Khor Mor and Chemchemal gas fields in the Kurdistan Region of Iraq.

The combined project investment of around $700m (spent to date) is the largest private-sector investment ever undertaken in Iraq, and involves the fast track appraisal and development of the gas fields, construction of two LPG plants and laying of 180km of pipelines. The project will sustain two power plants to generate 1250 MW providing cost effective electricity for over 4 million Iraqis, freeing the extra 300 MW of electricity to other provinces and saving Iraq over $2.5bn a year in fuel subsidies. “We were asked by the Prime Minister of the Kurdistan Regional Government to assist with a problem they had. They had contracted two Independent Power Plant projects (IPP) – one 500MW plant and a 750MW plant – and as is standard, they guaranteed feedstock for these power plants. The plants were one year away from completion, with no gas supply which was promised to them by the central government, in sight,” explains Jafar. That presented two problems for the Kurdistan Regional Government. First, contractual obligations to provide gas for the IPPs, and second, it had promised the people of the region, who were greatly neglected during Saddam’s era, that they would have electricity.

“They requested us to come in and solve this major problem. We quickly undertook major studies on two fields, which at the time had uncertain reserves, but were good candidates. On this basis, we entered into a risk service agreement which provided for the very fast-track appraisal and development of these fields, as well as installation of all the related facilities and infrastructure.”

The company rapidly embarked upon getting the fields ready for production, and building the 180km of pipeline in difficult rocky and mountainous terrain. “We literally had to move mountains, clear many square kilometres of minefields, and import over 65 000 tonnes of equipment into Kurdistan, all in record time!” explains Jafar.

The initial risk service agreement was signed in April 2007, and by the end of summer 2008 Crescent was delivering gas. That gas is now feeding turbines, which in turn is providing much needed electricity to over 4 million Iraqis.

On top of the gas needed to fire up the power stations, recent appraisals of the fields have revealed that the reserves are sufficient to support local industry, and also enough to export. “During our efforts on the appraisal we discovered that the reserves in place could satisfy not just local - which is the priority - but also parallel export plans,” beams Jafar. Kurdistan is a landlocked country, but neighbours gas hungry Syria and Turkey. Crucially, of course, Turkey is a gateway to Europe. “Natural gas, unlike oil, is worth nothing unless you develop markets for it, and this is what we have set out to do for the region.”

The addition of OMV and MOL, central Europe’s largest energy companies, is particularly exciting for Jafar. “The great thing about this partnership is that it brings four private-sector energy companies, two from the Middle East and two from Europe, together with the support of host governments, to create a market for this gas and bring excess Middle Eastern gas supplies to Western Markets,” he says. The JV company, Pearl Petroleum, (which Jafar serves as chairman), is an integrated natural gas partnership with 40% Crescent, 40% Dana Gas , 10% MOL and 10% OMV shared ownership.

Whilst declining the opportunity to reveal the full extent of the resources at the Khor Mor and Chemchemal Fields, Jafar notes that the often cited figures of between 2.2 and 4 trillion cubic feet may well fall short of the real figures.

“Those figures are based on estimates published by the Ministry of Oil in Baghdad from studies done a long time ago. Nothing has been done since. Based on our extensive appraisal work we felt confident enough to announce that we would be in a position to produce and supply over 3.5 billion cubic feet of gas daily from these fields combined, which would leave ample supply left after satisfying local requirements to support additional export projects, such as the Nabucco Project.”

 

Mega-Project

The Nabucco project represents a new, 3,300 km gas pipeline connecting the Caspian region, and Middle East via Turkey, Bulgaria, Romania, and Hungary to Austria, and further on to the Central and Western European gas markets. When the project was initially conceived, it was thought the main source of gas supply will be the second stage of the Shah Deniz gas field in Azerbaijan, slated to come on-stream in 2013, but that date has since slipped to 2016.

Slow progress on the Azerbaijan projects has opened a massive opportunity to Pearl Petroleum. Through Turkey, the Khor Mor and Chemchemal gas-condensate fields in Kurdistan will now at least be able to provide the initial supplies of gas to Europe, and potentially substantially more. “Initially 2014 was announced by the Nabucco consortium as an aim for the Nabucco project to commence gas supplies. At that time they were relying predominantly on Azerbaijan and Turkmenistan. The estimate of supply from those countries recently got revised to 2016. More recently the Nabucco management announced they are sticking to 2014 because the first gas supplies will be coming from Northern Iraq, which is the Pearl project,” says Jafar.

Despite the political, logistical, and financial challenges that lay ahead, Jafar is confident in Pearl Petroleum’s ability to deliver gas to Europe.

“We will absolutely not be the bottleneck in terms of supplying Nabucco, or any other European projects that get their act together.”

Constitutional wrangling and uncertainties surrounding Iraq’s Hydrocarbon law, has kept many players out of the Iraqi energy arena, but Jafar remains utterly confident in the company’s presence, and role in the embattled nation.

“We providing a tremendous service to the Region and are operating fully within the bounds of the Iraqi Constitution which has been ratified by over three quarters of the population, and the Kurdistan Oil and Gas Law which is constitutionally recognised. We are fully confident of the legal, technical and moral status of our operations in Iraq. We wouldn’t have invested over $700 million dollars in pure equity if we had not been comfortable with that!” he concludes.

 

Badr Jafar - In his words: The Iran gas deal

“After 4 years of intensive negotiation, we signed a long-term internationally binding gas supply agreement with the National Iranian Oil Company (NIOC) in 2001. Both sides invested over 2 billion dollars in facilities in our respective countries to prepare for this project. Due to huge delays on the upstream development in Iran, which was being carried out by NIOC’s contractors, that gas which was due to commence delivery in Dec 2005 has not been supplied yet. The pipeline is built and connected, the upstream facilities are in place, but the commissioning of their facilities has not yet been completed.

We were extremely patient with NIOC’s contractors’ delays; however, we had relied upon this contract and committed to our customers as a result. NIOC is now almost four years late. As a result, and because of the stress that this delay was placing on our customers, we felt we had no option but to proceed with the arbitration route to seek independent judgement on specific performance to put an end to negative public debate, and that’s where we are today. We always strive to maintain good relations with our contractual counterparties, but contractual commitments are just that, and business is business. We are totally confident about our contractual position. Incidentally, NIOC has never defaulted on an internationally binding contractual commitment and we don’t expect that NIOC will start reneging on its deals now.”
 

 

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