Mike Salter

What’s the Future for Oil and Gas in the Middle East?

Well the past couple of weeks have been interesting, with a negotiated settlement with Iran over nuclear affairs, and one of the biggest take overs in the UK with Shell bidding to take over BG, and on a slightly smaller scale Apache confirming its exit from Australia.

As I thought in my last blog the settlement with Iran with the resultant relaxing of sanctions and the potential for Iranian oil to be traded again on world markets did cause the price to fall with Brent in the region of $55/bbl and WTI below $50.

Although Iran, post the revolution has had mixed fortunes in terms of crude oil production and with various sanction regimes constraining the use of up to date development and drilling technology and equipment, the Iranians have in fact done really well in maintaining and continuing to develop their production. It is probably not quite up to the most modern western standards but the fact remains that Iran has the third highest proven oil reserves in the world, behind Saudi Arabia and Venezuela by quite a margin but ahead of Russia (discounting Canada’s Tar Sands oil). When it comes to Gas, Iran comes second only to Russia in terms of proven reserves, ahead of Qatar. It is the export of Gas as LNG which has probably the most potential for Iran. Currently Iran trades quite a lot of gas via pipelines, but as yet has no export infrastructure for LNG.

It is not the easiest country to work in, but if the sanctions are lifted and the Iranian government allows western companies back in then there will be opportunities but these may require diplomacy as the Iranian constitution says that natural resources cannot be owned by foreigners, the last time IOCs were allowed in, it was as ‘contractors’ via Buy Back Contracts, rather than via Production Sharing Agreements, however this may change in the near future.

If Iran has the potential to be a developing gas story then the other event in the last few days is a real gas story. Shell’s bid to take over BG valued at £47bn is one of the biggest deals in the UK.

It implies a significant premium over the market valuation of BG and it assumes a significant recovery in Oil and gas prices. Ben van Beurden, Shell’s Chairman is reported as saying that at $90/bbl the deal really ‘sings’. It of course requires shareholder approval and a multiple approvals from a wide range of jurisdictions, all of which will take time- some estimates as long as a year.

It gives Shell access to a very wide range of gas assets which adds to what observers may gather has been Shell’s strategy for some time; to move the balance of the company’s portfolio to gas rather than oil. The deal also in one go, fills in the shortfall in Shell’s reserves bank, something for which the Company has been criticised in the recent past.

There will quite likely be a number of spin offs and disposals and it won’t be long before buyers are circling for the juiciest bits. One area which will almost certainly be the targets for some sales will be the North Sea, not just in the UK but also in Norway, another is Australia where there is some scope for consolidation and synergies.

Staying with Australia meantime the much heralded disposal of Australian assets by Apache appears to be going ahead with a consortium which includes McQuarrie as the lead purchasers. This is to allow Apache to focus on is N. American production which some shareholders feel is more secure than those in foreign parts. Apache made a very interesting Oil discovery not so long ago in Australia and had contracted a rig or two to do some drilling.

This is an interesting prospect as most of the developments in Australia are Gas, which makes this an important asset for the future.

As I said in my last missive Australia is a key player in the Australasian market, Shell will become one of the leading players going forward.

For now though, with the Oil price where it is, shakeouts are continuing and contracts for Rigs and other services are being curtailed, although there are some bright spots, West Africa still shining in particular.

Finally I suppose I could come round to some discussion on the upcoming General Election in the UK, but I won’t.

All the best


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