The Islamic Civil War – update – Syria, ISIS and the Kurds

A few months ago I wrote describing the conflict in Syria as part of an Islamic Civil War – between Shiism and Sunnism. On the Shia side are Iran, Syria, Lebanese Hezbollah, and now most of Iraq, while on the Sunni side are Saudi Arabia, Qatar, Kuwait, and the Emirates. Oman, Jordan and Bahrain sit uneasily in neutral ground. I thought now might be a good time to look back over the past few months and see how well events in Syria have fitted my thesis.

In Syria, Shiites (the Allawite western populace of Syria, supported by Iran and Hezbollah) are fighting a war of survival against two varieties of Sunnis, variegated by their religious purity. At one end “moderate” Sunnis (moderate only in comparison with the extremists, but not moderate in the way we see moderate Muslims in the UK) have adopted the warm and cuddly brand of the “Free Syrian Army” and are receiving reluctant support from the US and from moderate Sunni Turkey.

More extreme Sunnis, backed by Saudi and Qatar, are fighting both the Allawites and the moderate Sunnis (they see moderate Sunnis as being almost as bad as Shia). In our frame of reference these extreme Sunnis are pretty extreme in our terms – ready to murder Allawites out of hand if they get the chance, and having no interest in a liberal secular democracy.

Out on the extreme Sunni fringe (in the Salafi branch, technically) we can find ISIS, probably backed by extremist Gulf funders from various states, actively fighting everybody in sight. So far events in Syria seem to continue to fit the idea of a civil war between Sunni and Shia, albeit with an internal low intensity conflict between the different grades of Sunnism. Nationalities appear unimportant – it matters not to ISIS where you come from, only what your beliefs are. The same can be said of the Shia side – the Allawites will happily accept help from Iraqis, Kurds or Lebanese.

Moderate Sunni Turkey’s position on the sidelines (so far) is equivocal. One would have expected Turkey to be more active in support of the “moderate” Sunni rebels, but there are several reasons why it is not, and a few to suggest that it is about to start.

Turkey’s reluctance was partly a product of its “Kurdish Problem”. Turkey was quietly hoping that ISIS would do serious damage to the semi-independent Kurdish autonomous region, and so undermine the independent ideas of Turkey’s own large Kurdish population. Turkey itself tried aggression against the Kurds for decades, without result. Latterly, between about 2008 and this spring Turkey used reconciliation and cooperation, but now seems intent once more on seeing Kurdistan fail. For a while this year it looked as if ISIS might do the hatchet job for Turkey, and one view of Turkey’s inactivity in Syria was to that it wanted to leave space and time for ISIS to overrun Kurdistan. That didn’t happen, and now will not, leaving Turkey with the need now to do something to promote its moderate Sunni interests.

Secondly, Turkey’s agenda is to regain territory it lost in 1919 when the Ottoman Empire was dismembered. Mustafa Kemal tried hard to hold onto territories in present day Syria and Iraq, but was strongarmed out of them by the Anglo-French allies. If the Free Syrian Army succeeded in taking control of the Syrian “state” then a part of that victory would be a preservation of Syria’s 1919 borders, leaving Turkey no chance of quietly moving its border a hundred miles southwards. On the other hand, if the rebels look like being crushed by Assadi Allawites (on the Shia side of the fight) then a Turkish “protective force” would be justified in moving south, transferring a northern slice of Syria to de facto Turkish ownership – a result for both Turkey and the moderate Sunni cause. So, Turkey’s strategy would be to keep the Free Syrian Army weak enough to need help but not so weak as to collapse. That seems to be what is happening.

Allawite Syria came close to military collpapse in August. When Russia’s fast jets and Iranian auxiliaries swept in to save Allawite Syria’s skin Turkey’s calculus changed. With ISIS thrust onto its back foot, and the Free Syrian Army also in retreat, Turkey is now presented with the choice of “act now or act never”. We should therefore expect to see Moderate Sunni Turks oozing their way into North Syria, first as helpers but latterly as occupiers.

Reinforced by Iranian boots on the ground, and Russian flying boots in the air, the Allawites are now winning territory at a steady pace, but only in penny packets. The taking of individual hamlets makes the world’s news programmes, in the same way that the taking of Passchendaele did in 1917. However what we are not seeing (yet, anyway) is a wholesale extermination of ISIS ground troops. ISIS retreats where air strikes clear the way for Shia troops to occupy ground, both in East and West Syria, but there is no sign of an ISIS collapse in men or latent fighting power.

The Shiite/Russian alliance appears equivocal about what to do against the Free Syrian Army. The Free Syrian Army is not a homogenous mass, but rather a collection of armed bands with a variety of agendas, ranging from secular democracy (no hope of that) to Wahabbi Sharia rule.

Some of those bands have Turkish support, making them fair game for a Shiite alliance so long as the damage is not too public, but others have US and NATO support. Russia certainly has no desire to escalate its Syrian conflict to the level of a conflict with NATO, so has to tread very carefully around NATO’s aircraft and NATO special forces embedded with the Syrian Rebels targeting strikes and organising logistics support. This necessary caution will serve to deliver some ground held by “moderate” Sunnis to Turkish oversight and control, and it is likely that Damascus has already accepted this privately, while still seeking enough Russian attacks on the Free Syrian Army to keep it on the defensive and moving back to an acceptable line of stabilisation.

For Russia and its Shia allies a much cleaner, clearer and more productive objective is the annihilation of ISIS. Happily this objective also cleanly aligns with NATO members’ objectives. If correct, then expect Russia’s axis of operations to swing away from the Free Syrian Army towards ISIS soon.

For the Shias, a Syria divided between an Allawite/Shia west and an Iraqi/Shia East, with the loss of only a hundred mile slice to the moderate Sunnis in the north would probably be seen as a good outcome of this part of the civil war. For that to happen everyone with useable air power has to focus on ISIS, degrading ISIS’ fighting power to the point that Shia boots (Allawite and Iraqi) can then occupy ground with little opposition. That seems to be what is now happening.

The US is following Churchill’s dictum – that America will usually do the right thing, but only after trying all other alternatives (Churchill should know, he was half American himself). Having begun by treating Assad like a pariah, Washington is now realising that a secular (ish) Shiite (ish) popular (ish) regime in Damascus, willing to put fighting boots in the desert and to fight ISIS is probably worth preserving. It has certainly become an accepted idea in Washington that US ground troops should not be used, and if not them, then who? The only available alternatives are Allawite/Shia and Iraqi/Shia boots.

It is to be sure embarrassing for Mr Obama that the Russians came to that conclusion first, but that probably wont stop the US from acting now in the right direction – namely steady, accurate and effective Hellfire attacks on ISIS fighters wherever they show themselves. It is almost amusing watching the State Department and the UK’s Foreign Office tie themselves in semantic in knots in an attempt to make acceptable today what they described as despicable only a month ago, but the knot will be tied.

The UK’s opinion and values probably count for more than its kinetic effect, as its actions are almost irrelevant for lack of scale. UK defence cuts have been so deep that the RAF can barely deliver a single fast jet sortie per day, and the scrapping of the Royal Navy’s three aircraft carriers took another dozen sorties per day out of the UK’s potential. France is moving the nuclear aircraft carrier Charles de Gaulle to Syria’s littoral, which will bring a handy dozen fast jet sorties a day to the theatre, though with a sortie range of about 200 miles that will translate to only a small number of actual weapons, probably two per sortie. France is also delivering sorties from the UAE.

The majority of the kinetic effort against ISIS will come from Russia, with 30 strike aircraft on the ground in Syria and 25 long range heavy bombers based in Russia allocated to ground attack. Ground-based aircraft can fly with higher payloads because they have long runways. Carrier-based aircraft takeoff weights, and therefore payloads, are limited by the need to take off from a very short deck. When you combine that fact with the longer distance that a carrier strike aircraft has to travel, payloads per sortie plummet to two, three or four weapons. Russia looks like it plans to deliver hundreds of air to ground weapon impacts per day.

Russia is also firing ship-based cruise missiles at ISIS targets. With a flight time of a couple of hours, no loitering capability, and single large warheads cruise missiles are useful against fixed infrastructural targets (of which ISIS has few) but of little use as tactical fire support. It looks to me as if this part of the campaign is more a PR exercise to show the world that the US Navy does not have a monopoly on Land Attack Missiles than a real contribution to the attack on ISIS.

Close behind Russia in scale will come the US, using drones to loiter over the battlespace with a large payload of highly effective Hellfire missiles, and strike aircraft based in Turkey and the UAE.

It is hard to be precise, but a rough calculation suggests that these uncomfortable allies will be able to deliver a sustained 250 individual weapon strikes per day. If the targeting is good (courtesy of US embedded targeters, Syrian army ground controllers, and US satellite and drone intelligence) then ISIS should continue to suffer heavy losses.

But how many fighters does ISIS have? The CIA has published an estimate in the 30,000 range. Kurdish Chief of Staff Fuad Hussein thinks it is more like 200,000, but he has good reasons to exaggerate. The ground controlled by ISIS had a peacetime population of around 10 million. If we take men between the ages of 17 and 50, then that generates a military “potential” of 2.3m, with an estimated additional 25,000 muslim men migrating to Syria to fight this year. Military potential does not easily translate into military units. Men must be trained, indoctrinated, equipped and paid. It would be a massive logistic achievement for ISIS to have mobilised one tenth of its latent military potential in two years. ISIS’ military effective strength is certainly larger than the 30,000 CIA number, and probably less than 200,000, with a replacement rate of something like 5,000-10,000 men per month.

A well-targeted air strike might on average kill or disable five men – surprisingly few, but bear in mind that ISIS is not stupid, and will be training its men to dig in and spread out to reduce the impact of any single weapon. Also bear in mind that a Hellfire delivers a very small 9 Kg warhead. Iron bombs are much larger – 250kg or 500 kgs are standard – but less well-guided. Allowing for badly targeted strikes (maybe two in three weapons failing to hit ISIS fighters), a strike rate of 250 weapons per day, and an average five killed/disabled per hit, the air campaign might kill or disable 400 ISIS fighters each day. That sounds like a lot, but is probably only slightly more than the rate at which newly trained ISIS fighters are emerging from training camps.

What these unsavoury numbers tell us is that the coming air campaign against ISIS can do no more than dislodge fighters from positions to allow Syrian and Iraqi troops to move in. Any hopes that an air campaign might “destroy” ISIS (code for extermination) are misplaced. A campaign ten times as intense might begin to have that effect, but I don’t see any possibility of that.

So, what should we expect from the combined air campaign and Syrian/Iraqi ground forces? ISIS will probably be contained, and will begin to be pushed back to more comfortable distances from Damascus and Baghdad, but it’s likely to retain control of its barren caliphate. If so, the result would be a score draw in the Islamic civil war – A largely Shiite Syria with an acidic but contained Sunni middle ground connecting Sunni Saudi Arabia to Sunni Turkey.

Which leaves us with the question of the Kurds. Fitting neatly into no side on the Islamic civil war, the Kurds seem just to want to be left alone in an autonomous homeland to produce oil in peace from their well-endowed fields. Sadly, thanks to Gertrude Bell and Messrs Sykes and Picot in the 1920s, Kurdistan has diasporae in Turkey, Iran and Syria, all of which make their reluctant hosts fearful. Turkey has wrestled with its Kurdish minority and neighbours for nearly half a century. For most of that time the solution has been violent, ending with a short-lived rapprochement up until this year. Iran’s Kurds have been quiescent, and Syrian Kurds (and Yasidis) were resigned to being Syrian until ISIS turned up and started either murdering or enslaving them. Kurdistan’s irregular forces have proved to be rather effective, holding their own (just) with little help from outside, raising the question in their neighbours of whether their domestic Kurds might begin to push for secession.

Now, with an end to the Syrian branch of the Islamic war finally just in sight, it is becoming widely if privately accepted that the Kurds are not going to climb quietly back into an Iraqi provincial box. Ankara reacted to the possibility of a true Kurdish state with an aggressive military assault on Kurdish forces. If it hoped to achieve anything material it was being naïve (the Kurds are too determined and too hard to be knocked back by a short campaign, however vicious).

There is some evidence that the Turkish attack was designed just to persuade wavering voters to switch back to the AKP and Erdogan. That strategy, if it was a strategy, worked in spades, with Erdogan now in a majority government.

After the play today’s reality is that Kurdistan is once more a material part of the “boots on the ground” machine that will contain and diminish ISIS. Rumours can be heard that Washington has promised to back Kurdish independence in return for those boots, and they certainly ought to be true, for the Kurds are unlikely to go quietly into the good night of becoming once more a province of a Shia Iraq, and we need those Kurdish boots to fence ISIS in to its north and northeast.

Iran could suppress Kurdistan, and provoke its own Kurdish minority, or allow Kurdistan to prosper, and so tempt its Kurdish minority to secede. Perhaps a workable middle ground will be to allow Kurdistan to prosper and then to encourage Kurdish Iranians to migrate into it if they wish, taking their personal capital with them. That would keep the peace in both Kurdistan and Iran, build personal friendly links between Iran and its émigrés, foster trade with Kurdistan, remove non-Shias from Iran, and increase Kurdistan’s ability to contain ISIS.

Turkey, with something like 50% of its territory lived in by Kurds, does not have the same option, but being a member of NATO, an aspirant member of Europe, a neighbour of Russia, a moderate Sunni state and with some pretensions to compliance with international law probably cannot and will not take its anti-Kurdish sentiments to the point of actually attacking Kurdistan.

Turkey would benefit from a strong peaceful Kurdistan on its eastern border – offering a landlocked, massively oil-rich client state, whose export lines would run across Turkish territory, whose capital flows would pass through Turkish banks, and whose economy would happily trade peacefully with Turkey’s own. Indeed, that was Turkey’s direction of travel until Erdogan lost his majority in the last election, and I expect that Turkey will begin to travel in the same direction once the dust settles a little.

The overall outcome of this train of thought looks something like this:

  • An Allawite/Shiite (but largely secular) quasi democratic Syria, occupying the western half of Syria down to the Mediterranean. Probably ruled by President Assad, but not by any means necessarily so. Any reasonably strong Allawite leader would do. Some of Syria’s oil reserves will fall into this half.
  • A Turkish-occupied zone in north west Syria, 150 miles long and 60 miles deep. While technically a protectorate, in practice this zone will become a long-term part of Turkey in practice if not in name. Perhaps in the medium term it will hold some sort of plebiscite and vote to join Turkey proper.
  • A Shia/Iran/Iraq-occupied eastern Syria, mostly desert with the rest of Syria’s (not very productive) oil fields.
  • A Kurdish-occupied triangle in the north-east corner of Syria.
  • An ISIS Caliphate sandwiched in the middle, approximately contained on all sides with permanent low intensity conflict around its ragged edge. The Caliphate will not be isolated, with a flow of goods and cash across its Northern border with Turkey and its southern border with Saudi Arabia. Shiite forces will wrestle to encircle ISIS in both north and south, so the Islamic War will continue in the Syrian desert, but with a much lower intensity than now.

This arrangement would result in a moderately peaceful for most of the populations involved, and the return of the millions of Syrians currently camping in Turkey. ISIS would certainly project random acts of violence into Syria and Kurdistan, and probably into Europe and the US as well, but those are probably inevitable in any situation, so not a reason to avoid an uncomfortable but stable peace.

It seems to me that the preservation of President Assad is a small price to pay for the containment of ISIS, peace in most of the region, and the return home of Syria’s refugees. Not least since he has considerable support among Allawite Syrians. To be sure, the 2014 election result was suspect, but in spite of those doubts, objective reporters agree that Assad still has the broad support of a near majority of Allawite Syrians (indeed, one section of Allawite opinion regards him as too soft).

Outside Syria we are beginning to see moves towards a discussion of peace, via the cuddly-sounding International Syria Support Group, but this group leaves out most of the parties involved in the fighting and appears to ignore reality in favour of myths (including the myths that: Assad is evil; the Free Syrian Army is moderate; the Kurds are not a nation; the only reason the war is continuing is because outsiders are supporting its protagonists; Allawite Syrians would welcome a Sunni government; Sunni Syrians would welcome an Iraqi Shia government; Turkey’s motives are benign; and probably a few more that I’ve overlooked).

What else might go wrong? Quite a lot. If the US threw its weight firmly behind the Free Syrian Army and started delivering air strikes on the Allawite Syrians the latter would lose the fight. That would leave some pretty extremist Sunnis in charge of a very rebellious country – Iraq’s insurrection would look like a teddy-bear’s picnic in comparison. Worse, US and Russian forces might come into conflict, with consequences too horrible to contemplate. ISIS would thrive.

If Turkey decided to up its kinetic input to the war and actually invade Syria in support of “moderate” Sunnis we could end up with Turkish forces fighting Russians (a NATO member being the aggressor in this case). That, too, is frightening to contemplate, perhaps providing the trigger which would lead Moscow to self-justify a preemptive invasion of Georgia. I have no doubt that stentorious notes are passing between Washington, London and Ankara demanding that Turkey does no more than creep into the edges of northern Syria, if that.

If we consider remoter possibilities, Turkey might decide that it should use its not inconsiderable navy to blockade Syria’s coast to weaken Allawite opposition to Turkey’s Sunni clients in the Free Syrian Army. That too would bring a NATO member into active conflict with Russia’s logistics tail defended by Russia’s considerable if untested navy.

That is the trouble with wars – they can so easily spin out of control. Much safer for all concerned to look for the quickest, least bloody and least complicated outcome, and accept a few compromises along the way.

Plane speaking between Turkey and Russia

Turkey has shot down a Russian Su24 fast jet, claiming it violated Turkish air space. Russia claims it was over Syria. It seems to be the fact that the pilots (one of whom died while the other escaped) landed in the hands of “Free Syrian Army” fighters, which suggests that their ejection point was at worst only just on or near the Turkish border.

dreamstime_m_22486768One way of looking at this is as a simple error of navigation. Another, better, way is to situate it within the Islamic Civil War.

Turkey (Sunni) is trying to carve out a slice of Syrian territory as a Sunni protectorate. The borders of this slice are not as yet defined. Russia (in alliance with Shia Iran and Shia Allawite Syria) has as one of its minor objective the prevention of this Sunni/Turkish zone.

With that set-up it is no surprise that Turkey is prepared to use violence to deter Russia from using airspace over the disputed zone. The Su24 shootdown is a challenge – “leave the zone to us, or be prepared to fight for it” – from Turkey to Russia. Since Turkey has the ground troops on hand to occupy the Sunni zone, Russia’s calculus will probably be that there is no point fighting an air war over ground which it is not willing to occupy with armed force. Damascus would like to occupy it, but has a larger and more urgent agenda to crush ISIS, so is likely to accept the loss of the Sunni zone, and count itself lucky that it does not have to run a long painful counter-insurgency war there.

There will, without doubt, be a price for Ankara to pay for its Sunni zone – probably in the form of non-activity when Russia eventually makes its move in Georgia. “You have your zone now, Turkey, we will have ours later”. The shootdown looks to me like a Russian trial of strength, to test just how determined Turkey was to acquire its Sunni zone. As it turns out, very determined. It was also proof of Russia’s willingness to accept losses in defence of Allawite Syria. Turkey will have received the message loud and clear.

If this is a correct interpretation of events then expect no dramatics from Russia over the loss of its plane. Expect also a further shift in the focus of Russian violence east, towards ISIS and away from the Sunni zone. Russia will continue to attack the Free Syrian Army at the southern edge of the Sunni zone (remember its borders have not yet been settled while the FSA still poses a potential threat to Allawite Syria) but with a view to containment rather than defeat.

Is Argentina poised for a US-style shale boom?

Since shale drilling revolutionised the US energy sector, the global industry has been looking around to identify where the next unconventionals hotspot might be.

Europe’s hopes have fallen by the wayside owing to a combination of a strong environmental lobby, the prevalence of population centres near drilling sites and comparatively high costs.

Australia has been touted as a potential development zone for unconventionals – particularly coal-bed methane – but conventional oil and gas development remains the primary focus in the country and elsewhere in Asia.

Several Latin American countries have talked up their shale prospects, notably Colombia and Brazil. But the frontrunner, and only country with realistic ambitions of replicating the US shale boom, is Argentina.

A perfect confluence of scenarios has positioned the country on the cusp of an unconventionals revolution. Conventional oil and gas output has been in decline for years, the economy is a mess and the government is loath to splurge precious dollar reserves on expensive energy imports. These factors have provided the impetus to reinvigorated national oil company YPF to court aggressively investment in shale development. Its goal is to reverse oil and gas production declines and spur wider economic growth on the back of a drilling ramp up in the country’s shales, with the Vaca Muerta play at the front of the queue.

The reserve numbers are impressive. The country has shale gas reserves of 23 trillion cubic metres and 27 billion barrels of tight oil. On top of this, the conditions for drilling and a rapid expansion of development are positive. Vaca Muerta and other shale plays are located in remote desert areas of Argentina that are analogous to Texas. This presents challenges in terms of infrastructure ramp up and the creation of a well trained workforce. But it avoids the problems seen in Europe in that there are no major populated areas to impede the pace of development.

Environmental protests have been minimal and the authorities both at the federal and provincial levels are fully supportive of shale development. This all points towards Argentina being ripe for a shale oil and gas boom.


The challenges are significant though. The country remains an economic basket case. Some have opined that the Vaca Muerta is a great asset but its location could only be worse if it were in North Korea in terms of its political context.

With the incumbent President Cristina Fernandez de Kirchner due to leave office at the end of this year, there is hope that the country’s politics and economy will improve. This would in turn have a benign effect on investment. But Fernandez’s favoured candidate Daniel Scioli, the governor of Buenos Aires Province, is the front runner in the race for the presidency, which does not bode particularly well for future investment if the current administration’s wonky economics were to continue.

On the ground in the Neuquen Basin where Vaca Muerta and other shale plays are found, things are looking more promising.

YPF has struck major deals with big names such as Chevron, Petronas and Sinopec. YPF and Chevron are already producing over 40,000 barrels of oil equivalent per day (including over 20,000 bpd of light crude) from wells in the Vaca Muerta. Other super-major such as Royal Dutch Shell, Total and ExxonMobil are all also scoping out opportunities, along with a raft of active independents like Andes Energia.

But there are several critical steps required to elevate Argentine shale oil and gas development to the levels seen in the US.

First, operators must bring down drilling costs, with longer horizontal laterals, slim-hole drilling, walking rigs and new proppants being introduced.

Second, there is pressing need for a well-trained workforce. Thousands of more engineers and field workers must be recruited and trained to put Vaca Muerta into full swing.

This in itself brings new infrastructure challenges. New pipelines and roads are required to support a production ramp up. But at a more basic level, more houses, hotels, school and hospitals are also needed in nearby towns to support the expanding workforce.

A vibrant services industry is also required. Local companies have started producing frac sand to support development and other niche services providers have also emerged. Italian, Russian and other foreign oil services companies are now looking to break into the market, with local firms preparing for a surge in competition.

This is all very positive. But one cannot forget the economic and political context in which this opportunity exists.

Fiscal constraints in Argentina have kept oil companies on the sidelines for years. With inflation soaring and limited access to foreign funds, the cost of doing business is higher than elsewhere. The next government must restore confidence and return the country to the global financial markets to ensure investment continues to flow into the nascent shale industry.

The current administration has taken some positive steps forward, most notably with the creation of a new hydrocarbons law in 2014. The reform included incentives for shale development, but a key challenge remains to attract more operators in the fields.

A perfect storm of events is necessary to spur a shale gale in Argentina like the one that has blown through the US. But if the wind keeps blowing in the right direction, the forecast could be good for the government in Buenos Aires.

Click here to buy our revised and extended Argentina Shale Investment Special Report. The new report has brand new chapters on the hydrocarbon law, infrastructure challenges, the growing services industry, lowering drilling costs and enhancing efficiencies. It also has company profiles on Shell and Andes Energia to offer a broad perspective on what operators are experiencing on the ground.

An embarrassment of riches

Iran. Mexico. Distressed assets. Strategic reviews. Even while a mood of austerity grips the exploration and production industry, there seem to be a striking number of opportunities on offer, compounded by falling contractor prices.

“Lifting sanctions on investments in Iran is probably the biggest opportunity for decades, while Mexico is also an opportunity – albeit a little more challenging given the project economics,” Douglas Westwood’s Steve Robertson told NewsBase. “Mexico is more about going into deepwater, which is much higher cost than the onshore Iranian assets. Historically, the big challenge for the IOCs has been that the majority of the world’s reserves are in the hands of NOCs and they’ve been struggling to find new places to find and develop hydrocarbons. That’s why you’ve got the likes of [Royal Dutch] Shell exploring in the Arctic.”

While new opportunities are always being offered to the oil industry, Mexico and Iran are somewhat different because they are political openings, Wood Mackenzie’s Andy Latham said, noting companies were also taking steps to trim their portfolios. “In the second half of the last decade, supermajors went through something of a land grab, which involved signing up acreage in a lot of different areas around the world. Now, they’re cherry-picking the best. In terms of exploration, though, the majors are cutting back rather less than their competitors.”

“Mexico has been moving in this direction for the last two years,” IHS Energy’s senior director, Jamie Webster, told NewsBase. ”While [the oil market] is oversupplied right now, there are still substantial decline rates and low prices, so these countries need to work out how to draw companies in, how to walk this line between attracting investment but not giving away the store. Mexico has tried that – and may need to reconsider its approach. When oil prices are low, countries tend to look more at how to attract investment and throw in sweeteners.”

Rystad Energy’s senior analyst, Espen Erlingsen, struck a cautious note on the opening up of Iran. “We have seen how the majors have been struggling in Iraq, and I think they will be cautious before entering Iran,” he told NewsBase. “Iran is immature and there is a large uncertainty about opportunities there. If it wants to ramp up production, it will need some foreign knowledge and investments. However, the country needs to prove that it will fulfil the new agreements and most likely needs to improve on its fiscal regime.”

Want to read the rest of this piece about the new wave of opportunities? Please get in touch.

Underwhelming start to Mexico’s Round One

Mexico’s historic Round One tender process launched on July 15 without the fireworks many had expected. Instead it was a slow and steady start, as the country welcomed private investment into the oil and gas sector for the first time in eight decades.
Of the 14 blocks that were available, eight received no bids. Another four had bids thrown out because they did not meet the government’s minimum requirement of 40% pre-tax profits, meaning only two were snapped up, both by the same consortium.
The group, which comprises Mexico’s Sierra Oil & Gas (45%), US-based Talos Energy (45%, operator) and UK firm Premier Oil (10%), was awarded the second block in southern rim of the Gulf of Mexico and also the seventh block that was on offer. The consortium offered to pay the government 55.99% of the pre-tax profit from Block 2 and 68.99% from Block 7, in both cases offering to invest 10% above the minimum requirement.
Despite the fact only two blocks were awarded, the bid round was not deemed a total flop, though the lack of activity was clearly disappointing. The government had expected 30% of the blocks on offer to be auctioned off.
Other firms that submitted bids included Norway’s Statoil, Indian firm ONGC Videsh Ltd (OVL), US-based Hunt Oil and Murphy along with Malaysia’s Petronas.
The pedigree was good and it is notable that private equity funds had a major impact. Sierra and Talos are both backed by Riverstone. But the Mexican authorities had hoped that companies such as ExxonMobil, Chevron, Total and BG, who were amongst the 33 companies that qualified to bid, would have made an offer.
Continued low oil prices had an impact on attendance, as most international oil companies (IOCs) continue to slash their exploration and production budgets. But more influential was the fact that the blocks on offer were not great in subsurface terms, with many being too small to attract the really big names. The government’s high take and concerns about the security of contracts were also flagged as possible barriers to bids.
Whilst ostensibly two successful bids out of 14 looks like a poor return for the authorities, an alternative analysis would be that it was not a terrible result for a first stab. It seems that the majors went through the pre-qualification stage in part because they just wanted to be part of the process. They were interested to see how the system worked and be able to lobby the government for the changes they want implemented in future rounds.
The government has shown so far that it is willing to listen and make tweaks and critically this was only the first auction. The National Hydrocarbons Commission (CNH), which ran the tender, clearly would not have wanted to mess up the deepwater auction, which will come later. It was using the blocks on offer this week as a learning curve, as too, it appears, were the majors.
As the post-mortem begins, the big question is whether there will be any major changes to the bidding process. In response, the government says it is too early to say.
What is clear is that the bidding process was impeccable – it was run efficiently and transparently which were key concerns for the authorities – though there was a lack of flexibility for the CNH which meant it could not accept bids that came close to the minimum.
Ultimately, it is obvious the first stage of Round One was not a runaway success. But neither was it an outright failure. The CNH and government will be satisfied that the first step has been taken and will hope for punchier bidding in the forthcoming rounds.
The tender was the first of five included in Round One. Subsequent auctions will be held for onshore, deepwater and unconventional reserves.
State-run Pemex was awarded over four-fifths of Mexico’s proven and probable reserves in the so-called Round Zero phase before private bids were invited in this week’s inaugural auction.
Pemex is free to participate in the bid rounds but opted to sit this one out. The government will hope that it and other major names step up and play in the coming bid rounds.

Cheap for those that can afford it

One benefit of the oil industry’s reduced circumstances is that service costs have fallen. Independents, such as Ophir Energy, are keen to stress such reductions as one way in which there are opportunities – even when times are tough.

The main beneficiaries of this counter-cyclical trend, though, have been the cash- and hydrocarbon-rich economies of the Middle East, at the heart of OPEC. Saudi Arabia and its neighbours have seized the opportunity, triggered by the price fall in 2014, of putting pressure on their service providers to secure better deals for work. This will provide the group at the heart of OPEC with future productive capacity but also sets the stage for a degree of price volatility from which no one benefits.

The number of rigs working in the Middle East has proved remarkably robust this year, averaging 409, little changed from 2014 and up from the 372 working in 2013. Other regions, meanwhile, have seen rig numbers fall as a mood of conservatism sweeps the industry.

BH ME rigs rising

Under the cosh

A particularly striking instance of the squeeze on service providers can be seen at Hercules Offshore, a US-listed provider of jack-ups liftboats around the world.

On June 1, Hercules said the dayrates it was receiving from Saudi Aramco for three rigs had been reduced to US$67,000 per day. The dayrate reduction, it said, would apply from the beginning of this year and run until the end of 2016. As a result, Hercules took a US$13 million reduction on expected revenues for the first quarter.

A note from UBS said the downgrade took the jack-ups to near cash breakeven levels and that previously Aramco had been paying US$115,000-137,000.

Pressure on the jack-up market is likely to persist for the next two years, UBS continued, given that more than 100 newbuilds are coming to market, even while existing kit rolls off contract. The analysts reported Rowan was also under pressure in the Middle East, with nine of its jack-ups working for Aramco and the company agreeing to 16% price reductions.

On June 17, Hercules announced a major “restructuring” of its business, under which a majority of its noteholders had agreed to swap around US$1.2 billion of outstanding debt for 97% of the company’s common stock.

The impact on existing equity holders: dilution leaving them with just 3% of the company.

It is important to note that this serious dilution is justifiable: leaving equity holders with some stake is better than nothing. It is equally important to note that Aramco cannot be blamed for flexing its muscles in this situation. It saw an opportunity and took it.

Another area of opportunity for Middle Eastern NOCs is that of contracting seismic coverage. This area is the “most volatile and cyclical” of the oilfield services industry, Moody’s said. IOCs have cut back spending particularly from the offshore, given its higher risk and cost, leaving seismic companies in a particularly difficult position – and sparking discussion of which may not survive this downturn. Seismic prices will “likely fall more sharply in 2015” than in 2014, the ratings agency said, while next year also appears challenging.

Future swing

Curbing spending while expanding activity has provided the Middle Eastern NOCs with some shelter from the current industry storm. What Saudi, Kuwait, Qatar and the UAE are losing through lower prices they make up for, to an extent, by securing additional future production.

Just as the much-discussed “fracklog” in the US has risen, driving talk of it as a potential swing producer – although one triggered by incremental price gains rather than policy – so the Middle Eastern states’ current moves are increasing their future ability to determine prices. Acquiring seismic, drilling wells, securing contractor services are all best achieved at a time of low prices and provide additional future swing capacity, while providing a hedge against future cost inflation.

Not all are in as privileged a position as the Middle Eastern companies, with NOCs from other parts of the world facing a tougher time and abandoning work. For instance, Brazil’s Petrobras and Mexico’s Pemex cancelled a number of rigs in February, while Statoil took a penalty rather than carry on drilling in Angola’s Kwanza Basin.

OPEC’s core Middle Eastern group is exercising its bargaining strength over service providers now, in order to continue its longer-term price – or market-share – setting position. While the group may benefit from such a position of strength, if it is too successful it will also have to take on a larger share of responsibility for meeting future demand.

The heart of OPEC’s dilemma remains the same, it must attempt to find a balance that provides sufficient incentive for non-OPEC members to pick up the slack and, at present, this is not the case, with IOCs scrapping or delaying megaprojects.

Hot rock rolling

Iran is talking up plans to generate power from alternative resources, such as geothermal energy, with Azerbaijan. The country, which has substantial oil and gas reserves, has talked of adding 5 GW of grid-connected wind and solar capacity by 2018, supported by a standard feed-in tariff (FiT). According to the Economic Council, this is set at a base rate of 4,628 rials (US$0.15) per kWh, for a maximum of five years.

Hot rocks, though, represent a bold step out for the government. In mid-May, AzerNews reported that Iran’s energy ministry had signed a memorandum of understanding (MoU) with the Azerbaijani State Agency to co-operate on two renewable energy projects.

In addition to building wind farms in Khorosan Province, near the city of Khaf, the two are to build joint geothermal power plants in Iran’s East Azerbaijan Province, near the city of Tabriz.

The Azeri State Agency’s deputy head, Jamil Melikov, said there were “quite significant geothermal resources” in the region, and that the agency was negotiating with the Iranian Energy Ministry on the future of the projects.

Warming to the idea

Although geothermal energy has a long history in Iran’s energy landscape, it has remained relatively underdeveloped in terms of its use for electricity generation and direct heating. Early efforts to develop more commercial prospects with Italy’s Enel in the mid-1970s were truncated by the war with Iraq.

Azerbaijan’s industry is at a similarly early stage, though surveys have displayed promising potential in the Lyankaran, Gandja, Yalma-Khudat and Jaarly regions.

Both countries lack any installed capacity, though Iran has for years been developing a small plant at Meshkin Shahr. In January, a US$6 million loan from the International Renewable Energy Agency (IRENA) was issued to support a 5-MW pilot scheme in Ardebil – likely Meshkin Shahr.

Recent news suggests an undisclosed Italian firm has now been chosen to supply turbines, but delays have plagued the scheme for almost a decade, suggesting the 2017 online date may yet be a pipe dream.

Help thy neighbour

Co-operation between the two countries seems prudent, given their pressing need for power, and the fact that the great majority of viable geothermal potential is located along their shared border.

Yet the Azeris’ stated aims are much larger and far more ambitious than Iran’s modest 5-MW Meshkin Shahr project. The Azerbaijan State Agency has its eyes on a 50-MW co-operative project, which would eventually be scaled up to an eye-watering and wildly unlikely 250 MW, according to Melikov.

Moreover, he also suggested an unusual power-sharing arrangement. “By selling electricity on the domestic market, it is possible to acquire its equivalent of gas at competitive prices, which then can be exported to Nakhchivan [an Azeri exclave surrounded by Iran and Armenia], other regions of Azerbaijan, or even global markets. In any case, it is important that electricity has a gas equivalent and that the Iranian side gives assurances that we will be able to either sell electricity at special rates or purchase gas and petroleum products within two years,” Melikov told AzerNews.

Gas for peace

Iran and Armenia swap gas for electricity via the 140-km Iran-Armenia pipeline and transmission system, which transports 2.3 billion cubic metres per year of Iranian gas to the Hrazdan power station. In exchange Iran receives much of the power produced by the facility. The trade between the two works out at around 3 kWh per cubic metre of gas.

Armenian hydropower projects have been developed, with further expansions being discussed over exporting more electricity to Iran for greater volumes of gas.

On June 4, it was announced that the 40-km Meghri-Kajaran section of the gas pipeline would be sold to Gazprom Armenia. This section is the only part of the Armenian gas network not owned by the Moscow-backed firm.

The successful investment in and construction of a 250-MW plant is highly unlikely – but less remote than one might suspect, especially given the potential easing of sanctions by the P5+1. A flood of firms eager for hydrocarbons would also bring in their equipment and transferable expertise – and Iranian geothermal power could be a welcome beneficiary.

Chasing Karachaganak

Kazakhstan’s government has already had to revise its economic forecasts in light of difficulties and delays at the country’s two largest hydrocarbon deposits, but there may be some relief in sight. The Central Asian state’s oil sector is under significant pressure.

The US-led TengizChevroil (TCO) venture recently announced that it intended to delay the expansion of output at Tengiz, an onshore site that is already in production. Meanwhile, North Caspian Operating Co. (NCOC) is still working to fix a specific target date for the re-launch of production at the offshore Kashagan oilfield, which could eventually yield more than 1 million barrels per day.

Work has also been running behind schedule at Karachaganak, Kazakhstan’s third largest hydrocarbon deposit. This field, with reserves of around 1.35 trillion cubic metres of natural gas and 1.2 billion tonnes of crude oil and gas condensate, accounts for nearly half of the country’s gas production and about 18% of liquids output. It was due to begin Phase 3 development in 2012, but the project was put on hold after the Kazakh government questioned the higher budget estimates put forward by Karachaganak Petroleum Operating (KPO), the consortium that is operating the field.

KPO decided last year to postpone a final investment decision (FID) on Phase 3 until 2017. If it meets this deadline, this phase of development, which will push production levels up to 16 billion cubic metres per year of gas and 335,000 barrels per day of condensate and crude, will begin in 2022.

In the meantime, KPO has continued with Phase 2. Earlier this year, it revealed that its production had risen to a record high of 142.5 million barrels of oil equivalent in 2014, up by 4.8% on the previous year.

KPO is not likely to repeat this feat in 2015, as it is heading for a shareholder reshuffle. One of its shareholders – BG Group, which is also one of the operators of the project – is being taken over by Royal Dutch Shell. Karachaganak may not be part of the deal, BG said in its most recent annual report. According to the report, the change in ownership may lead Kazakhstan’s national oil and gas company KazMunaiGaz (KMG) to assert its right to buy out BG’s stake.

KMG already owns 10% of KPO. Buying BG’s 29.25% holding would make it the largest shareholder in the consortium, ahead of Italy’s Eni, which operates Karachaganak jointly with BG.

KMG has not said whether it intends to exercise its pre-emptive rights – or, if it does so, whether it will assume BG’s operatorship as well as its equity. It is likely, though, that KMG will do both.

Kazakhstan’s government said last year that it wanted to increase production at existing oilfields to compensate for the delays at Kashagan. It now has more reasons to do so, as the postponement of the Tengiz expansion, together with lower oil prices and a fall in the tenge, is not good news for the economy.

Under such conditions, KPO is an attractive asset. Even though it extracts more gas than liquids, it is still a major producer of oil and condensate. The venture reportedly accounts for about 18% of the country’s liquids output.

As such, Astana will probably instruct KMG to increase yields at Karachaganak in the hope of generating more budget revenue. But it may also seek to bring Phase 3 on stream more quickly. It is unlikely to achieve this aim, since major projects tend to run behind schedule rather than ahead of it. But it will devote more attention to the project than it had previously intended.

Five reasons to invest in post-sanctions Iran’s oil and gas sector

  1. Iran is home to the world’s fourth and second largest proven reserves of oil and gas respectively. Sanctions have kept the country’s 158 billion barrels of oil and 33.8 trillion cubic metres of natural gas largely off limits for foreign investors for much of the last decade. The lifting of sanctions, though, will open up unprecedented opportunities to collaborate on their development.
  2. The Iranian energy sector is expected to require US$150 billion of investment to optimise the development of existing oil and gas fields by 2019, and attractive terms are being offered.
  3. A new petroleum contract is being introduced in order to satisfy the requirements of both international oil companies and the Iranian constitution.
  4. With convenient shipping routes via the Gulf as well as sharing borders (both land and sea) with 15 countries, Iran’s location is ideal for export-focused industries.
  5. Several of Iran’s oil and gas fields are among the largest in the world, and with development in most cases having been carried out without the latest technology, there is a wealth of opportunity for production optimisation and enhanced recovery projects.

In preparation for the likely (gradual) lifting of sanctions this summer, NewsBase has launched its Iran Investment Special Report, which, in addition to the usual quality analysis and insight, includes maps, specific field coverage, a comprehensive breakdown of the Integrated Petroleum Contract (IPC), project information and contact details, enabling your company to prepare for future investments in the country’s hydrocarbon sector.

Senior Editor Ian Simm and his team of reporters, analysts and experts have worked at great length with senior industry executives to prepare this comprehensive handbook for oil and gas investment in Iran.

Over the past six months or so, NewsBase has been almost alone in the industry in reporting the likelihood of a breakthrough in the prolonged nuclear discussions between the P5+1 and Iran. The April announcement has led to a sea-change in the relationship between Iran and the international community.

Should a deal be agreed by June 30, the barriers to entry into Iran will be lifted, and a large number of companies will look to establish possible investment opportunities. The Iran Investment Special Report seeks to do exactly that, presenting information on a variety of available projects, while assessing some of the country’s main oil and gas fields and midstream ventures.

Click here to find out more information.

New oil, old problems

Discussion of Africa’s resource boom tends to oscillate between extremes. Companies and governments tend to overhype the potential in the run-up to production, followed by seemingly inevitable disappointment – and corruption. One leading example often cited is that of Chad, which seized control of revenues from its oil production, overriding safeguards imposed by the World Bank.

This binary – of resource redemption to resource curse – is entirely too simplistic, the BBC’s former Chad correspondent, Celeste Hicks, demonstrates in her book, “Africa’s new oil: power, pipelines and future fortunes”.

Hicks examines the example of Chad and then teases out some of the strands to draw some predictions and suggestions for new – and aspiring – African oil producers, such as Ghana, Niger, Kenya and Uganda. Furthermore, as is now customary when talking about Africa and resources, she comments on the role that China plays in such states.

The pipeline pitfall

Exploration of Chad’s oil began in the late 1980s and the Kome field was inaugurated in 2003. The country’s resources had been known for some time but how to move this crude to market was the challenge. The solution was through the assurances of the World Bank that made the construction of a 1,070-km pipeline to the Cameroon coast possible.

The project’s construction was a major success, coming in ahead of schedule and demonstrating how governments, companies and international agencies could work together. As part of the World Bank’s commitments to construction, it baked-in safeguards to how oil revenues would be distributed.

Chad’s Law 001 required all direct revenues from oil to be deposited in an escrow account, in London, with 10% going to a Future Generations Fund. Of the remaining 90%, 80% was to go into five priority sectors, 5% into a fund for the producing Doba region and 15% to recurrent government expenditures. It also created the CCSRP, a joint government-civil society group to monitor and authorise government spending from the escrow account. The law also set out requirements for environmental monitoring.

The law was flawed and, according to various tellings, did not regulate as much as 75% of Chad’s oil earnings, but it attempted to balance the needs of the government with a desire to create longer-term prosperity.

Unfortunately, by 2005, the political situation had deteriorated and rebels were within a “few hundred metres” of the presidential palace, Hicks said. In such circumstances it seems like little wonder that Chadian President Idriss Deby opted to rewrite the agreement in order to shore up his armed forces.

The World Bank loan was repaid, and an end to the deal was announced in September 2008. The institution’s support for the pipeline, which had been seen as establishing a new mode of transparency and safeguards, came to be seen as emblematic of much that was wrong with international lending for fossil fuel projects in Africa.


The reality, though, as Hicks demonstrates, was more complicated. The World Bank’s regulations were overly prescriptive and allowed little leeway for military crises. It would be hard to imagine any government allowing itself to be forcibly removed by rebels for want of additional funds that were available and flowing into the country.

Furthermore, there are notable benefits that have stemmed from the World Bank’s involvement. Chad has benefited from the strong involvement of civil society groups – even if they could be better supported – Hicks shows, while the country has also taken a strong hand with foreign investors, most notably the Chinese, on environmental issues.

The book goes on to look at what can happen to small economies that benefit from a surge of revenues as oil production starts up. Chad and Ghana, for instance, scaled up output, rapidly securing inflows of cash but these appear not to have provided much protection for the governments against the recent price decline.

Chad, for instance, is reported to be facing difficulties in servicing its debt to Glencore, while Ghana ran into problems recently and has been forced to go cap in hand to the IMF for assistance.

This sums up the problems linked to revenues from oil production. While additional funds for a government are always welcome, the fluctuations linked to such cash flows – with oil prices ranging from about US$115 per barrel in the summer of 2014 to US$45 in January – make planning harder, particularly when following a period of stability.

The new producers of East Africa, with Uganda and Kenya likely to start operations within the next five years, must consider the potentially destabilising swings of oil revenues when planning budgets. Even those countries that have been in the game for longer can be caught out. Angola, for instance, has slashed its budget by one third this year on reduced revenues, while looking for financing support from abroad.

The challenge, then, is how to find the balance between saving sufficient cash from oil flows to smooth out future potential swings against the needs of countries where extreme poverty must be tackled. The Chadian example sets out some important precedents and demonstrates some pitfalls, but the limits of such examples must also be acknowledged – oil makes up much more of Chad’s GDP than it will Kenya’s.

Ahead of the next upswing in oil prices, which will drive another round of interest in Africa’s exploration frontiers, citizens and companies would be well advised to consider Hicks’ lessons – and warnings.