The Oil and Development in GCC States

Contents Page

Introduction 1

Natural history 1

Early history 1

The Importance of Oil 1

Oil price 2

Oil production in Oman 3

Petroleum Development Oman (PDO) 4

Cooperation between GCC states in the Field of Energy 4

The role of oil in GCC states economy 7

The Organization of the Petroleum Exporting States (OPEC) 8

The Organization of Arab Petroleum Exporting States (OAPEC) 9

Conclusion 10
 The Oil and Development in GCC States

Introduction

Petroleum is vital to many industries, and is of importance to the maintenance of

industrialized civilization itself, and thus is a critical concern for many nations. Oil
accounts for a large percentage of the world’s energy consumption.

Natural history

Petroleum is a naturally occurring liquid found in rock formations, usually beneath

the surface of the earth; it is also called crude oil. It consists of a complex mixture of
hydrocarbons (any organic compound composed solely of the elements hydrogen and
carbon), with traces of various nitrogenous and sulfurous compounds. It is generally
accepted that oil, like other fossil fuels, formed from the fossilized remains of dead
plants and animals by exposure to heat and pressure in the Earth's crust over hundreds
of millions of years. Over time, the decayed residue was covered by layers of mud
and silt, sinking further down into the Earth’s crust and preserved there between hot
and pressured layers, gradually transforming into oil reservoirs.

Early history

Oil in an unrefined state has been utilized by humans for over 5000 years. It is in
general has been used since early human history to keep fires ablaze, and also for
warfare. Ancient Persian language tablets indicate the medicinal and lighting uses of
oil in the upper echelons of their society. Ancient China was also known to burn
skimmed oil for light.

An early petroleum industry was established in the 8th century, when the streets of
Baghdad were paved with tar, derived from petroleum through destructive distillation.
In the 9th century, oil fields were exploited in the area around modern Baku,
Azerbaijan, to produce naphtha. These fields were described by al-Masudi in the 10th
century, and by Marco Polo in the 13th century, who described the output of those oil
wells as hundreds of shiploads. Petroleum also was distilled by al-Razi in the 9th
century, producing chemicals such as kerosene in the alembic, which he used to
invent kerosene lamps for use in the oil lamp industry.

The Importance of Oil

Its importance in the world economy evolved slowly. The Industrial Revolution
generated an increasing need for energy which was fuelled mainly by coal, with other
sources including whale oil. However, it was discovered that kerosene could be
extracted from crude oil and used as a light and heating fuel. Petroleum was in great
demand, and by the twentieth century had become the most valuable commodity
traded on the world market, becouse it became the raw material that makes possible

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the functioning of nearly every component of the economy, directly or indirectly. It
provides most of the nation’s power supply - far more than any other source. Oil
powers the industries, heats the buildings, and provides the raw material for plastics,
paints, textiles, and other materials. But it is in transportation that oil is most essential:

Many people underestimate the significance of oil in modern civilisation, and mainly
associate oil with the petrol or diesel that they put in their cars. However, the value of
oil to our world goes far beyond our personal transportation choices as many of the
everyday items we use are either made from oil or are dependent upon oil for their
production.The fruit and vegetables on supermarket shelves are highly dependent
upon oil - from the fuel oil used to harvest and then transport these goods around the
world, to the petrochemical feedstock used to manufacture the pesticides and
herbicides that maintain high yields. Even fertiliser is dependent upon large amounts
of hydrocarbons for its manufacture. The whole of our modern food chain is
completely dependent on oil, meaning that the future of agricultural production is
vulnerable to depletion of this non-renewable resource.

Many consumer goods are made of plastic, a material utilising petrochemicals in its
manufacture. Many common medical and pharmaceutical products also have oil as a
basic constituent. The aspirin, originally processed from the bark of the willow tree, is
now another of these many oil derivatives.

Oil has proven to be such a flexible resource that it now underpins many of the items
we take for granted in the modern world, and any interuption of its supply would be
very serious. In light of the dual challenge of Peak Oil and anthropogenic climate
change it is critical that we develop targeted interventions to ensure that we do not
waste important resources.

But Americans continue to act as if there is no problem as they buy more and bigger
cars and commute longer distances from energy-inefficient suburban developments.

America epitomizes the petroleum-dependent lifestyle. It uses a lot of oil. Although, it

constitutes only 5% of the world’s population. It consumes 25% of global oil
production.. Oil provides 97% of the fuel used by America’s enormous fleet of trucks,
trains, planes, ships, buses and cars.

Oil price

In the 1950's and 60's, the production quotas and indeed the control of the oil prices
in the Middle East was set by seven large multinational oil companies. These seven
companies- Exxon, Shell, Texaco, Chevron, Mobil, British Petroleum and Gulf -
were known as the "Seven Sisters" and they kept the price of oil at about
$2.50/barrel. Early in the 1960's the Organization of Petroleum Exporting Countries
(OPEC) was formed to regulate the production of crude oil and to bring about more
realistic prices. In the mid to late 70's the price of oil rose to over $30/barrel. In 2008
the oil price reach the highest peak when was more than 140$/barrel. But today, it
typically swings between $70 and $80 per barrel depending on OPEC quotas and
world events.

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Oil production in Oman

The beginning was in 1963, when the Natih field was discovered, followed closely by
success at Fahud and the investment in a pipeline to the coast and all the other
hardware necessary to transport and export Oman's crude oil. A pipeline was followed
closely by the construction of an industrial complex at Saih al Maleh (later re-named
Mina al Fahal). The first export of Omani oil took place on 27 July 1967. Some
significant discoveries early in the decade contributed also: Ghaba North in 1972,
followed by Saih Nihayda, Saih Rawl, Qarn Alam and Habur. All five fields were on
stream by 1975. The oil price hike in 1973 greatly improved the economics of
producing oil in remote locations like Amal , Amin and Marmul. By the end of 1984
average daily production had risen to 400,000 barrels a day and reserves stood at 3.8
billion barrels. Then, in 1986, the oil price collapsed. Almost was required to cut costs
while increasing production and maintaining reserves. This it did with horizontal
wells , which made their debut in 1986, yielded between two and four times the
production from any one given well.

By the end of 2000 the production was increased. This was due to the increase in
production arisen from the application of the latest technology to increase oil recovery
in existing fields. And some of the production increase over the years was made up of
"new oil" from fields that were not only found but also developed at an ever-
accelerating pace.

The oil production as entered the 1990’s was expected the trend to continue.
Unfortunately, the field-development strategy for the start of the 21st century – based
on incremental infill drilling with horizontal wells and extensive waterflooding – had
its momentum dissipated before the waterflooding projects. The natural production-
rate decline of the major oil fields eventually caught up at the start of the millennium.
And to make matters worse, the new wells were delivering less oil; the costs were
going up. Following a comprehensive review in 2002 that led to a sweeping change
programme, production-recovery plans based not only on waterflooding but also on
enhanced oil recovery (EOR) techniques: the application of heat, chemicals or gas
solvents to alter the way oil or injected water flows in a reservoir. But, in order for
them to be sustainable in the long run . but the fact was that the oil is not sustainable
in the longer term.

Figure Oil production in Oman

Year Barrel
1998 835000
1999 832000
2000 840000
2001 831000
2002 771000
2003 702000

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 2004 661000
2005 631000

Petroleum Development Oman (PDO)

The company name was Petroleum Development (Oman): Shell 85%, Compagnies
Francaise des Petroles 10% and Partex 5%.On 1 January 1974 the Government of
Oman acquired a 25% shareholding in the Petroleum Development (Oman); six
months later the shareholding was increased to 60%, backdated to the beginning of
the year. As a result, the foreign interest in PD(O) was now made up of the Shell
(34%), Compagnie Française des Petroles (4%) and Partex (2%). These shareholdings
have remained unchanged to the present day. (The Company, however, underwent a
change six years later. On 15 May 1980, it was registered by Royal Decree as a
limited liability company under the name Petroleum Development Oman — now
without parentheses in its name.

The objective of PDO is to engage efficiently, responsibly and safely in the

exploration, production, development, storage and transportation of hydrocarbons in
the Sultanate of Oman. The Company seeks a high standard of performance with the
aim to further the long term benefits of its Shareholders, its Employees and the
society of the Sultanate of Oman at large.

Cooperation between GCC states in the Field of Energy

The Economic Agreement (1981) provided that Member States should harmonize
their policies in the field of oil industry, extraction, refining, marketing, processing,
pricing, exploiting of natural gas and development of the energy resources, and that
Member States should develop common oil policies and take common positions
towards the other world states and at the international and specialized organizations.

Article (9) of the Economic Agreement (2001) also provides as follows:

“For the purpose of achieving integration between Member States in the fields of
petroleum and minerals industry and other natural resources, and for enhancing
competitive positions of Member States,

1. Member States shall adopt integrated policies in all phases of oil, gas and minerals
industry to achieve optimal exploitation of natural resources, while taking into
account environmental considerations and the interests of future generations.

2. Member States shall adopt unified policies for oil and gas and shall take common
positions in this regard towards non-Member States and at the international and
specialized organizations.

3. Member States oil and gas companies working within them shall cooperate in
supporting and developing research in the field of oil, gas and natural resources and
enhance cooperation with universities in these fields.”

Achievements

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To implement those objectives, Member States have taken several steps to enhance
cooperation in the field of energy, such as the following:

(1) The GCC Petroleum Strategy

The Supreme Council (9th session, Manama, 1988) instructed the Oil Cooperation
Committee to develop a long-term petroleum strategy for Member States.

Developing that strategy was based on the common features of the Member States,
and on the pillars on which the GCC was established; those pillars included achieving
coordination, integration and coherence in all fields, and the rules and regulations that
followed, in addition to the resolutions, conferences and common GCC agreements as
well as the negotiating agreements and policies between Member States and the other
international economic groupings and blocs.

It was also taken into account that this objective should be in line with the strategic
objectives of the local development plans at Member States and the GCC long-term
development strategy, which generally focuses on development of human power,
improving living standards, diversification of national economic bases, expanding the
role of the private sector in Member States and reducing the dependence on oil as the
main source of national income.

This strategy was also based on the political and economic importance of the GCC
Member States at the international level and their pilot role in the oil industry and
their oil weight, as Member States possess the biggest confirmed oil reserve and form
the largest area of oil production and exportation. This confirms the importance of
enhancing the political and economic position of the GCC Member States and their
worldwide role through enhancing their role and oil weight.

Therefore, the proposed strategy took into account both the internal and external
dimensions of the GCC oil relations. The adoption of a GCC unified petroleum
strategy is the best method for exploiting the most important natural resources on
which their economies depend on. In this connection, the strategic vision of the GCC
Member States seeks to achieve a number of main objectives through the adoption of
a number of policies and procedures for achieving these objectives and evaluating the
targeted performance according to a crystal-clear implementing mechanism and
approved tools for following up and evaluation.

(2) The Regional Emergency Plan of the Oil Products.

The Supreme Council (9th session, Manama, 1988) adopted “The GCC Regional
Emergency Plan of the Oil Products”. The plan aims at cooperation and solidarity of
Member States when any Member State is exposed to an emergency that causes
discontinuation in the Member State or inability to meet its needs of the consumption
of oil products until it becomes able to restore its potentials and depend on its own
sources.

(3) The Oil Lending System.

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The Supreme Council (8th session, Riyadh, 1987) approved the Intra-GCC oil lending
system. Lending is based on the solidarity of all Member States at the occurrence of
any injury that causes breakdown of the structures transporting oil exports to the
ports, provided that the injury percentage shall account for 30% of the quantity
expected to be exported by the injured State and the expectation that such injury will
last for at least one month, subject to the bound shares of OPEC Members.

(4) The Common Mining Law.

The Ministers of Petroleum (25th meeting, Doha, 2 November 2003) agreed to

prepare a GCC Common Mining Law. The Law encourages investors to exploit the
available and promising minerals resources in the region. The law specifies the
conditions, obligations and rights of all the parties engaged in the exploitation,
processing and marketing of the various ores in a commercial form in some Member
States. The adoption of such a Law will be in line with the formation of the GCC
Common Market, which requires unification of laws, regulations and legislations,
particularly in the field of investment; where the investor finds similarity among GCC
Member States in respect to his rights and obligations. The Law is currently at the
final preparation stages.

(5) Coordination in the Filed of Marketing.

Enhancing coordination and exchange of information and expertise among the experts
at GCC Member States in respect to the marketing of the refined oil products and
petrochemicals to the different world markets, and the collective work to eliminate all
tax barriers and other barriers that prevent access of the GCC exports of crude oil and
products thereof to such markets.

(6) Correlations between Energy and Environment.

The Supreme Council (9th session, Abu Dhabi, 1998) adopted the following two
recommendations concerning the lead-free gasoline and the reduction of sulfur
content in diesel:

- The GCC Member States stress the importance of Human and Environment
protection through offering the lead-free gasoline by the national petroleum
companies in the local markets of the GCC Member States.To ensure concurrent
implementation of this recommendation among the GCC Member States, due to its
relation to the Intra-GCC transportation and communication movement, the GCC
Member States stress speeding up the production of this product and marketing it
locally by 2002 at the latest with an octane number 90-97.

- The GCC Member States stress that all measures shall be taken to reduce the sulfur
content in the diesel produced by the national refineries to be compatible with the
internationally accepted levels for protection of health and environment from the
adverse health impacts of the sulfuric products.

The Ministries of Petroleum and affiliate corporations have implemented that

resolution by introducing the lead-free gasoline with the designated octane number

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during the specified period. They have also adopted the projects for producing the
low- sulfur content diesel amongst their strategic priorities.

(7) GCC Energy Team.

Enhancement of the role of the Energy Team in its dialogue with the Chinese and
European parties with a view to achieving various gains for the diverse phases of the
GCC petroleum industry and contributing to opening the Chinese and European
markets to the GCC exports of crude oil, refined oil products and petrochemicals.

(8) Collective Action.

Making active the collective action to improve the economies and performance levels
of the oil refineries and gas industry with a view to achieving the highest revenues
and reducing the loss along with making joint efforts to ensure cleanliness of the
environment and safety of plants and manufactures to be always compatible with the
developments of the international specifications

(9) Trade.

Enhancing trade in the petrochemical derivatives (by-products) across the borders of

the GCC Member States, and between them and the Arab and international markets
that would contribute to the growth of the petrochemical sector.

Petroleum Development Companies in GCC states.

S. No Company
1 Petroleum Development (Oman)
2 Saudi Aramco
3 Bahrain National Oil Company
4 Kuwait Petroleum Corporation
5 Abu Dhabi National Oil Company
6 Qatar Petroleum

The role of oil in GCC states economy

As oil prices continue to set new record, GCC states are increasingly shaping trends in
financial markets. The increasing of oil prices since 2002 makes them the largest and
fastest-growing component of a broad shift in global economic markets, a shift that
also includes the private-equity firms, and hedge funds. Exporting of oil with high
prices, generates windfall revenues for GCC counties, which became the world’s
largest source of net global capital flows. A majority of these revenues have been

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recycled into global financial markets, making these states powerful players and help
them to build a good infrastructure to attract the investors.

Moreover, the influence of oil revenue is likely to continue, but not for long future
because of depletion of oil as it is non-renewable resource. Therefore, the exact size
of future petrodollar foreign investments will depend on oil prices, which are subject
to considerable uncertainty.

As shown in the graph bellow Saudi Arabia is the biggest producer of oil in OPIC.
Also, the GCC states region posse the most of the oil proven reserves in the word. For
example, according to Oil & Gas Journal, as of January 1, 2009, Qatar has 15.2 billion
barrels of proven oil reserves. Qatar was the fifteenth largest crude oil exporter in the
world in 2008, and of the 12 Organization for Petroleum Exporting States (OPEC)
members, ranked eleventh in crude oil exports in 2008. Year-to-date 2009 production
averages indicate Qatar produced an estimated 1.2 million barrels per day (bbl/d) of
total liquids (830,000 bbl/d of crude and 370,000 bbl/d of non-crude). The country’s
crude oil production capacity from 2008 to 2009 increased from 960,000 bbl/d to an
estimated 1 million bbl/d. As an OPEC member, Qatar is allocated a specific
production target by the Organization. In mid-2009, Qatar’s implied crude production
target was estimated to be 730,000 bbl/d. At current production levels, Qatar carries
about 270,000 bbl/d of spare crude capacity.

The Organization of the Petroleum Exporting States (OPEC)

The Organization of the Petroleum Exporting States (OPEC) is a permanent,

intergovernmental Organization, created at the Baghdad Conference on September

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10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding
Members were later joined by nine other Members: Qatar (1961); Indonesia (1962) –
suspended its membership from January 2009; Socialist Peoples Libyan Arab
Jamahiriya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971);
Ecuador (1973) – suspended its membership from December 1992-October 2007;
Angola (2007) and Gabon (1975–1994). OPEC had its headquarters in Geneva,
Switzerland, in the first five years of its existence. This was moved to Vienna,
Austria, on September 1, 1965.

OPEC's objective is to co-ordinate and unify petroleum policies among Member

States, in order to secure fair and stable prices for petroleum producers; an efficient,
economic and regular supply of petroleum to consuming nations; and a fair return on
capital to those investing in the industry.

The Organization of Arab Petroleum Exporting States (OAPEC)

Established by an agreement amongst Arab states which rely on the export of

petroleum, the Organization of Arab Petroleum Exporting States (OAPEC) is a

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regional inter-governmental organization concerned with the development of the
petroleum industry by fostering cooperation among its members. OAPEC contributes
to the effective use of the resources of member states through sponsoring joint
ventures. The Organization is guided by the belief in the importance of building an
integrated petroleum industry as a cornerstone for future economic integration
amongst Arab states.

On January 9, 1968, Kuwait, Libya and Saudi Arabia signed in Beirut an agreement
establishing OAPEC. The three founding members agreed that the Organization
would be located in the State of Kuwait.

By 1982 the membership of the Organization has risen to eleven Arab oil exporting
states: Algeria (1970), Bahrain (1970), Egypt (1973), Iraq (1972), Kuwait (1968),
Libya (1968), Qatar (1970), Saudi Arabia (1968), Syria (1972), Tunisia (1982) and
United Arab Emirates (1970). In 1986, Tunisia submitted a request for withdrawal.
The Ministerial Council deliberated the request and it was agreed to suspend
Tunisia’s rights and obligations in OAPEC, until such a time that Tunisia chooses to
reactivate its membership.

Conclusion

We have staked our entire way of life on a non-renewable resource that may be
largely exhausted within the next 30 years. All of the current and projected alternative
energy sources will not be able to replace oil in the near future.

It doesn’t take much imagination to realize that when (not if) we run out of oil, our
accustomed way of life will change radically. But even before that day, our oil-
guzzling lifestyle erodes our national security, destroys the environment, and makes
us very vulnerable to fluctuating oil prices.

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