Washington Report on Middle East Affairs, August/September 2000, Pages 96-99

Waging Peace

Jareer Elass Discusses Oil Production Issues

Jareer Elass, managing director and editor-in-chief of Oil Navigator Inc., discussed recent developments in Gulf oil production policy at a June 6 Middle East Institute briefing. Elass, whose Washington-based energy consulting firm has broad access to regional players and key energy officials in the Middle East and the former Soviet Union, discussed the rise in oil prices experienced by the U.S. oil market experienced in the first days of June.

Elass informed his audience that, at the March meeting of the Organization of Petroleum Exporting Countries, OPEC ministers had adopted a price-band mechanism by agreeing to maintain prices between $22 and $28 a barrel for basket crude from six OPEC countries. The price-band mechanism requires that, if the 20-day average price of crude oil either falls below $22 a barrel or exceeds $28 a barrel, OPEC adjust output by 500,000 barrels a day (b/d).

But, as Elass explained, some OPEC delegates, including Saudi Oil Minister Ali Naimi, suggested reviewing the mechanism, saying a question remained on how to automatically allocate 500,000 b/d coming into the market.

Speaking of possible crude oil and energy development in Saudi Arabia, Elass said that the idea of opening the Kingdom’s state-held energy upstream sectors to foreign investments was initiated by the oil companies in September 1998, in meetings between Saudi Crown Prince Abdullah bin Abdul-Aziz Al-Saud and U.S. and European oil firms.

Elass said that one of the factors which encouraged opening up the upstream sector two years ago was the market situation at that time. Crude prices in the U.S. in September 1998 averaged between $15.50 and $16 a barrel, half of today’s price. There was also a major concern as to whether the Kingdom would have the financial resources to develop and maintain its future crude production capacity. With the recovery of oil prices in 1999 and 2000 some of that pressure has been taken off.

“Today, when Saudi Arabia is sitting on 2.5 million barrel a day of its spare capacity, perhaps oil minister Naimi was able to convince the government that with the higher oil prices there was less of a need to develop the crude production capacity,” Elass said. “As a result, today the Kingdom is focusing more on developing natural gas, petrochemicals and power projects.”

The Oil Navigator director described a similar process of opening up to foreign investment in Kuwait. “The Kuwaiti project valued at $1,000 billion focuses mostly on the development of four fields in northern Kuwait,” he said. “The intention is to initially double the capacity of those fields and then turn to the south and west.

“There is some political justification for that development,” Elass noted. “Kuwait wants to make sure that the U.S. presence in the Gulf and U.S. interests in Kuwait are maintained.”

Addressing energy developments in Iran, Elass said that the political and economic developments within and outside the country have affected the pace of crude and natural gas developments.

However, since announcing 43 crude and natural gas projects with a value of more than $8 billion in July 1998, Iran has made only a few deals with foreign investors.

Foreign companies also complain, Elass said, that the contract terms are not very favorable. What are known as “buyback” investment contracts are essentially risk-service contracts in which the contractor funds all investments.

A further reason for the slow progress toward opening Iran’s upstream sector, Elass said, could well be the impact of the Iran-Libya Sanctions Act (ILSA) of 1996, which expires in August 2001.

Speaking of oil production in Iraq, Oil Navigator’s director said that under the U.N. oil-for-food program, spare parts are very slow in coming, due in part to bureaucratic delays. The UK and U.S. often accuse Iraq of ordering items it doesn’t need, arguing that investments should be used only for short-term improvements to maintain Iraq’s export capacity, and not to make long-term repairs.

Because of sanctions, the prospects of foreign involvement in developing Iraq’s vast crude potential remains bleak, even though the U.N. is holding out this option should Baghdad fully cooperate with U.N.’s disarmament program.

According to Elass, Iraqi officials plan to increase oil production capacity to 5 million b/d by 2005—but that, of course, presumes that sanctions are lifted or suspended.

Following his presentation, Elass was asked his opinion on the real attitude of Iran and Saudi Arabia toward lifting sanctions on Iraq. “From the oil prospective,” he answered, “neither Saudi Arabia or Iran wants to see Iraq reach its full potential of 5 million b/d oil production—whether in three, five or seven years. Speaking in political terms, I also do not see those two countries in a hurry to lift the sanctions.”

—Alima Bissenova

Scottish Professor Discusses History of Arab Pipelines

On June 15, Paul Stevens, professor of petroleum policy and economics at the Center for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, Scotland, discussed the history of the Arab transit pipelines and its implications for the prospective Trans Caspian pipeline routes at the Middle East Institute.

In recent years, he said, there has been a renewal of interest in transit oil and gas pipelines due to the necessity of transporting hydrocarbons from the landlocked Caspian region. However, he pointed out, the discussion over the prospective pipelines bringing Caspian oil to world markets suffers from two serious failures: “It either ignores the poor performance of transit pipelines in the past or, where problems are analyzed, the concentration is exclusively on politics.”

Professor Stevens said he started analyzing problems associated with transit pipelines as early as 1980, immediately after Iraq’s invasion of Iran, which caused considerable concern over oil supplies.

He studied the operating history of IPC (Iraq Petroleum Company) routes via Syria and Lebanon and via Turkey; IPSA (Iraq Pipeline Trans Saudi Arabia) via Saudi Arabia; the Tapline (Trans-Arabian Pipeline Company) from Saudi Arabia through Jordan, Lebanon, and Syria; and the later Transmed gas pipeline from Algeria via Tunisia to Italy.

Professor Stevens said that the first result of his study was, as he expected, that the operating record of most of the TransArab pipelines was very poor. ICP, IPSA and Tapline pipelines either had frequently been closed due to disputes over transition fees or off-takes amounts, or had been operating at very low capacity. The only exception was the later Transmed gas pipeline, which was inaugurated in May 1983 and had an exemplary operating history, even in view of the political turmoil in Algeria.

His second finding was that, surprisingly, the poor operating results had little to do with Arab politics. Most of the problems, in fact, proved to be economic rather than political.

Briefly explaining pipeline economics, Stevens said that there are two major rules of profitability:

The first rule is that “big is beautiful.” One big pipeline carrying a certain volume is far more efficient than two pipelines carrying the same volume. From this purely economic point of view, Stevens said, “the theory of multiple routes is good for politicians but not for accountants.”

The second rule is that “full is beautiful.” Once a pipeline is built it needs to operate in its full capacity. In this respect, again, two half-full pipelines are bad news compared to one full pipeline carrying the same volume.

Another nuance on pipeline economics, according to Stevens, is that pipelines can lose huge amounts of money and still keep pumping. This is what economists call the “bygones rule,” resulting from the fixed costs associated with securing rights of way and building the pipeline and pumping stations. It means that, even if the pipeline operates at a loss, it is still better to continue the loss-making operation, providing that variable costs are covered and some contributions to fixed costs are made.

Stevens offered his audience a checklist of economic characteristics to determine whether a given state would be a “good” or “bad” transit country. On the top of his list for a “good” transit country is an ability to attract foreign investments. According to Stevens, a country which wants foreign investments will not risk its reputation by ripping up its transit agreement. If a country is unable to get foreign investments, however, the temptation to break the agreement is higher. Syria and Turkey, for example, although on the transit routes for the IPC line, were not eligible for foreign investments, and both proved to be disastrous transit countries. Several times they closed the pipeline, demanding renegotiation of fees or preferable prices for the oil lifted from the pipeline.

In the matter of the Baku-Ceyhan pipeline, Stevens said that today, when Turkey has broad access to foreign investments, it is very unlikely that Ankara will break the terms of multilateral agreements and thus threaten its investment reputation.

Another significant factor in considering a prospective transit country, according to Stevens, is the relative importance of the transit fee to the transit country’s revenue and foreign exchange access. If transit fees represent a large proportion of revenue and foreign exchange, he said, there could be a strong pressure to push for more. But if the fees are of only limited importance, the potential damage to other foreign investment may not justify the risk.

Professor Stevens also emphasized that a country’s dependence on off-take from the transit line for domestic use may inhibit aggressive behavior, for fear of losing supplies. But, he pointed out, there are some notable exceptions to this rule. A country can sometimes refuse to pay, but continue to lift. “Ukraine provides an example of such behavior,” he said, “When Ukrainians are not paying for the gas they consume and demand higher transit fees, Russia cannot cut off the supplies because of the consumers further downstream.”

Another characteristic of a “good” route is the availabilty of at least one alternative route for transporting the oil, though it will result in more than doubling the cost of getting the oil to market. An actual or even potential alternative route, he explained, can force “good behavior on the existing transit country.

“Presuming sanctions are lifted,” Stevens said, “Iran is apparently the most reasonable transport route for Caspian oil, the only ‘but’ being that it is a competing exporter. Even if it is not a major route in light of Baku-Ceyhan,” he continued, “it still may serve as a cheap alternative for playing off Baku-Ceyhan.”

When asked about the problem of pipeline security, Stevens replied that the issue of security and military vulnerability is always exaggerated. “Contrary to popular opinion,” he said, “the history of Arab oil pipelines shows that, providing that access to repair a pipeline is possible, it is extremely difficult to sabotage pipelines effectively.”

—Alima Bissenova

Azeris Hold White House Rally During Clinton-Kocharyan Meeting

The Azerbaijan Society of America and Azeri Students Association held a protest in front of the White House on June 27, during Armenian President Robert Kocharyan’s meeting with Presidents Bill Clinton.

Demonstrators said their goal was to protest Kocharyan and his administration’s stance in the long-running Azerbaijani-Armenian dispute over the Nagorno-Karabakh region.

As a result of the conflict in the Nagorno-Karabakh enclave of Azerbaijan, 20 percent of the territory in southwest Azerbaijan, along the borders with Iran and Armenia, is occupied by insurgent forces, and nearly one million Azeris are internally displaced. Holding signs saying “1 Million Refugees are Victims of Greater Armenia” and “Right to Existence to Karabakh Azeris,” rally participants called on Armenia to end its occupation of Azerbaijani lands and its policy of ethnic expansionism. Azeri activists also brought public attention to President Kocharyan’s past as a separatist military leader of the self-proclaimed Republic of Nagorno-Karabakh, particularly his involvement in conducting ethnic cleansing on a grand scale in the occupied territories and possible participation in the massacres of Azerbaijani civilians. Students chanted: “Kocharyan is a War Criminal.”

Calling for an objective U.S. stance in this conflict, the protesters also expressed their disappointment with congressional legislation known as Section 907 of the Freedom Support Act which, they contend, rewards Armenia for aggression and punishes the Azerbaijani victims of the conflict. Enacted in 1992 under pressure from Armenian interest groups, Section 907 restricts U.S. government assistance to Azerbaijan until the country takes “demonstrable steps to cease all blockades and other offensive uses of force against Armenia and Nagorno-Karabakh.”

“The so-called ‘blockade against Armenia’ is a skillful subterfuge that has served well, especially among uninformed Americans, to cover the actual aggression against Azerbaijan and genocide committed against the Azeri population of Karabakh,” said Leila Mamedova, a member of Azeri Students Association. “It would be completely absurd for us to supply Armenia, which continues to occupy 20 percent of our territory, with energy.”

—Alima Bissenova

Women Activist Discusses Pioneering Bahraini NGOs

Nadia Ahmed Al-Mulla, head of the Bahraini Information Center for Women and Children (ICWC), was invited by a group of Arab-American and Muslim-American activists on July 6 to share her experiences working with Bahraini NGOs.

Al-Mulla’s organization, ICWC, was established in 1995 under the auspices of the Child and Motherhood Welfare Society, and serves as a regional information network center for the State of Bahrain, neighboring GCC states and other Arab countries. The center collects and documents information relating to developments in demography, economy, education, health, culture, and media that have relevance to women and children. In addition to the wealth of information available at the center, Al-Mulla said, the ICWC also provides computer and research training to Bahraini women.

The center’s development projects reach out to Bahraini village women, attempting to teach them necessary skills for self-sustenance. The center’s “Micro-start” Project facilitates interest-free loans, with no credit, to women attempting to start their own businesses. The center also encourages interregional coordination on various projects. One such initiative focuses on challenging youth issues with the assistance of the Childhood Council in Egypt.

Al-Mulla cited the large number of Bahraini women in recent years who have attained higher education, saying this makes her work very rewarding. She also mentioned the autonomy enjoyed by the center, enabling it to continue its work independently from the government. More information on the ICWC is available at its Website <www.infoent.com.bh>.

—Asma Yousef