A sign of the times

Graeme Simpson on the challenges facing Middle Eastern National Oil Companies.

There are a number of challenges facing NOCs in the Middle East today that differ significantly from those facing similar companies outside the region. In order to look more closely at these factors, it is useful to look at why they exist. Specifically, it is the long-term viability of the province that raises these challenges. A useful benchmark to gauge the long-term viability of an oil province is the ratio of total reserves (R) to annual production (P), ie. the number of years of production remaining. Published R/P ratios show that for the Middle East as a whole this ratio is 79 years, (Kuwait 102), compared with the rest of the world at 25 years, (USA 12, Europe nine, the UK six). This creates significant opportunities for the Middle East as well as enormous challenges in realising those opportunities.

The challenges of realising Middle East oil opportunities:

Maintaining current production rates/fulfilling quotas: Many of the producing fields are mature, needing careful reservoir management, including infill drilling, pressure maintenance, and installed capacity handling significant volumes of produced water.

Extending field life for the next generation: Many producing fields are huge, thus a small percentage increase in recovery efficiency can mean very large incremental volumes. Current state-of-the-art modelling techniques allow screening, selection and detailed design of enhanced/improved recovery (EOR/IOR) programmes, allowing particular techniques to be more effectively targeted at areas providing maximum benefits.

Finding and producing new accumulations: These are often "difficult", involving; high temperature and pressure reservoir conditions; tight reservoirs, unconventional hydrocarbons (heavy oil and tight gas); environmental issues, including CO₂ disposal.

Operating in hazardous former-conflict areas: Areas that are potentially dangerous due to the risk from unexploded ordnance and landmines is a key issue in planning and implementing exploration/development activities.  It is believed more than 1700 people have been killed or seriously injured. All operations should include an assessment of risks posed by landmines or other munitions to alleviate risk to human health and understand potentially significant financial implications.

Maximising net cash flow: All of this must make sound economic sense and therefore should involve detailed economic modelling of projected revenues and costs and, given the multitude of investment opportunities and strategic resource constraints, should include portfolio optimisation analysis.

The question, then, is how can NOCs most effectively face up to these challenges? History shows that this can only come from a collaborative effort. Many NOCs have very good, highly competent technical staff, but these are not sufficient, even with aggressive efforts to train in local and international universities. Organic growth of national capability is a long term process which requires a commitment to recruiting and retaining quality staff. In this interim period, NOCs need to collaborate with IOCs, technology providers [3], and large consultancy companies in order to continue delivering in spite of these challenges. The relationship between NOCs and IOCs can lead to a conflict of interest. IOCs have capital, but so do NOCs, while IOCs  have the expertise needed by NOCs.  On the other hand, IOCs want access to and ownership of the petroleum produced, and this is sometimes understandably not acceptable to NOCs.

NOCs have long-term relationships with major technology providers. However here too there is a potential conflict of interest. For when technology providers give strategic advice, this could be construed as directing the NOCs towards using that provider's own tools. Consultants [4] have no tools to sell (although they might have their own in-house tools which can be deployed effectively to complement industry-standard tools available from the major technology providers) and no interest in ownership of hydrocarbons.  Additionally, they have a very experienced staff, usually with many years experience (RPS Energy's 25 senior advisors have an aggregated 700 years of oilfield experience in 20 or so IOCs). These consultants are able to provide expert, independent advice, on demand, very cost effectively. Long term, the most successful NOCs will be the ones that are able to balance and manage multiple relationships most effectively.

Graeme S. Simpson is a Director with RPS Energy in London, responsible for business development in the Middle East. He has 33 years experience in the international oil and gas industry, and has published and lectured widely on reserves, resources, risk and uncertainty and their application to portfolio analysis and strategic decision-making.