8 Oct /13

Arabian Flight

low cost oil production Middle EastThe Middle East was once the promised land of energy. Abundant oil reserves, low production costs, and investor-friendly governments guaranteed energy companies a stable and profitable business environment.

Times have changed. The political destabilization of the region, intensified by the so-called “Arab Spring,” in conjunction with the discovery of vast natural gas and petroleum reserves in North America increasingly leads oil and gas companies to leave the Middle East. Instead, energy producers opt to move their operations to North America and other more politically stable regions. War and unrest across the region now pose a very real and constant danger for installations and employees. As last year’s deadly attack on an LNG plant in Algeria has shown, even areas that were formerly considered low-risk areas have become potential targets.

The logical response of producers is to weigh up the risks and profits and move elsewhere if the dangers begin to outweigh the benefits, and it seems that we might have reached a tipping point in that equation. Occidental recently announced its plans to part with as much as 40% of its North African and Middle Eastern units. Oxy’s stakes in Oman, Qatar, Iraq, and Libya are valued at about $20 billion. In late August, Apache sold 33% of its Egyptian assets for $3.1 billion to Sinopec Group, a subsidiary of China Petrochemical Corporation. Simultaneously, Shell, Exxon, and Chevron are constructing one of the biggest LNG plants on the globe in Australia – a move that underscores the recognizable shift toward production sites in politically stable environments. /-> Read our article on the Australian energy boom. /

There is, however, light at the end of the tunnel for the Middle East as a center of world energy production. After all, the region still harbors enormous oil reserves that are easily accessible and therefore cheap to produce. As long as oil prices are up, high-cost production in North America and comparable settings will be viable. When oil prices are decreasing, low cost oil production in the Middle East and North Africa will, despite the dangers, look much more attractive again. In addition, even though American E&P companies might be reducing their presence in the Middle East, other investors – most notably Chinese energy giants such as China Petrochemical – will be willing to accept the risks and take up their place.

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