Mention the Middle East and the words “persistent instability” may come to mind.

But the region with perhaps the greatest risks has the most to offer—conventional oil and gas assets with budding unconventional opportunities that have some companies loosening grips on clenched wallets.

Pockets of safe places to operate have emerged, as has the realization by some Middle Eastern countries that fiscal changes are needed to hold the attention of oil and gas companies, especially considering there are more E&P opportunities worldwide than available capital. Favorable geological characteristics combined with the supply-altering potential of massive discoveries—such as in the offshore Levant Basin and Persian Gulf—is the region’s cash flow assurance. Barclays predicts spending in the Middle East will outpace others in the firm’s 2014 Global E&P Spending Outlook.

Research revealed E&P spending stood at about $10 billion in 2007, then skyrocketed to about $25 billion in 2008 but began to descend, landing at about $18 billion by 2010. Spending has since steadily climbed, nearly reaching $35 billion in 2013, with the 2014 estimate at about $40 billion. Barclays said the Middle East will again be the fastest-growing oilfield services market at more than 14% in 2014, with Latin America and Russia following closely behind.

“Activity is likely higher than originally forecast, especially in the key markets of Saudi Arabia and Iraq,” James West, oil services and drilling analyst for Barclays, told E&P in June, about six months following the outlook’s release. He believes E&P spending could surpass 2014 levels by 10% to 15% in 2015.

Among the region’s big spenders this year are Saudi Aramco and Kuwait Oil Co., which each plan to increase spending by 20%, as E&P spending by select Middle East companies continues to increase. Qatar Petroleum also recently announced that it will invest about $10.6 billion to redevelop the Bul Hanine offshore oil field with hopes of reversing declining production and doubling oil production by use of IOR and other techniques. In addition to new offshore production and onshore liquids processing facilities, the plan includes a drilling campaign of about 150 new wells through 2028.

Iraq

While Saudi Arabia is on course to be the biggest upstream spending by year-end 2014, according to West, concern remains elsewhere.

“We are concerned about oil development in the southern part of the country due to the instability and the exodus of many of the major oil companies; however, we are increasingly positive about development in Kurdistan (in the north) as many oil companies have moved in and an agreement between Baghdad and Kurdistan may come to fruition.”

Thorsten Ploss, the Middle East and North Africa oil and gas leader for EY, essentially sees two Iraqs when it comes to oil and gas development—the Kurdistan region and the rest of Iraq.

“While as a potential region there is still a lot of activity to be done to get back to the old levels, there is a lot of activity happening now to reduce flaring, so they have to revamp a lot of pipelines,” Ploss said. “Of course, it is impacted by the security situation, which is not really improving. On the other side, if you look at Kurdistan, which is very safe to operate, the industry is facing issues.”

The frenzy of exploration activity in the Kurdistan region—as companies risked breaking ties with the Iraqi government to pursue opportunities in the more stable Kurdistan region—has diminished as the dueling governments continue to clash.

“The companies we talked to are very hesitant because it is unclear how they can get the oil out of the country,” Ploss said. “There is high uncertainty within the industry about how companies can capitalize on the crude if they produce it.”

He specifically mentioned the recently opened pipeline to Turkey, where more than 1 MMbbl of Kurdish oil was sent destined for Europe. The move came amid continued opposition from Baghdad, with the Iraq Ministry of Oil, calling it an “illegally smuggled shipment.” The government in Baghdad said it must approve all energy-related transactions. However, the Kurdistan Regional Government has taken charge of oil and gas resources in that area, claiming Baghdad has not given the region enough money.

The uncertainty has shaken investors’ confidence. While Iraq has the world’s fifth largest crude oil reserves, having surpassed Iran in production in OPEC in 2012 based on U.S. Energy Information Administration (EIA) estimates, the region could fall short of its 4 MMbbl/d by year-end goal due to political disputes and infrastructure constraints.

Iran

In neighboring Iran, where oil exports plummeted due to U.S.- and EU-imposed sanctions following Iran’s illicit nuclear activities, talk of easing sanctions could lead to more crude in the market. Total production dropped from 4.2 MMbbl/d in 2011 to about 3.5 MMbbl/d of total liquids—including about 3 MMbbl/d of crude oil—in 2012 due to the sanctions, according to the EIA.

However, Iran appears to be well-positioned to fulfill oil export wishes. The National Iranian Oil Co. reported that oil production will hit 4 MMbbl/d by March 2015. Iran has more than an estimated 560 Bbbl of in-place oil reserves, with about 140 Bbbl of recoverable oil. In May, Iran announced China renewed its crude purchasing deal that will see the country receive 400,000 bbl/d.

Yet more investment is needed for other major projects, including future phases of the 24-phase, $60+ billion South Pars offshore development. The field is believed to hold about 9.8 Tcm (325 Tcf) of natural gas—more than a quarter of the country’s proven natural gas reserves—along with 7.5 Bbbl of proven oil reserves.
If sanctions are lifted, Ploss is confident companies will return given favorable contract terms on the horizon.

“What is different now from the old times is that the Iranian government understands that the buyback contracts they had in the past were not beneficial for the industry,” Ploss said. “It was only a one-sided benefit—for the government, not for the oil companies. They are now initiating new contracts. It’s not only risk-sharing with oil companies, but also it’s more profit-sharing with the oil companies.

“There is a clear understanding from what I’ve heard so far that the Iranian government will change the contract structure. This makes it far more attractive for oil companies.”

Added West, “If sanctions on Iran are lifted this year, which we do not expect, this would bring more barrels to the market and could force other OPEC member countries to slightly alter their development plans to allow room for Iranian barrels to return to the market, although this would likely only have a marginal impact.”

Saudi Arabia

Meanwhile, the region’s biggest oil producer continues to make strides in production and technology, with Saudi Aramco leading the way. Saudi Arabia, home to the world’s largest oil field—Ghawar with 70 Bbbl of estimated remaining reserves—has set out to boost its gas production. Saudi Aramco has put focus on Persian Gulf fields which include Karan, Arabiyah and Hasbah.

In addition, “There is a strong drive in Saudi Arabia to go into unconventionals because they need natural gas,” Ploss said, noting more gas is needed for power generation.

Saudi Aramco is targeting the northwest, South Ghawar and Rub’ al-Khali areas for unconventional gas and is devising hydraulic fracturing techniques.

“New hydraulic fracturing technologies are being developed to significantly improve cost efficiency, increase recovery rates, reduce environmental impact and enhance well productivity across shale, deep sandstones and carbonate formations in the Kingdom,” Saudi Aramco said in an annual review released in May 2014.

These techniques include pulsed gas fracturing, plasma technology, CO2-based fracturing fluid, staged fracturing, microseismic fracturing and an innovative fracture propping concept.

Saudi Aramco aims to maintain spare output capacity of more than 2 MMbbl/d, CEO Khalid Al-Falih said in a Bloomberg article. In the last decade, the company has grown its capital budget tenfold to about $40 billion.

“What is clear is, if you look at activity, we haven’t reached the peak for capex spending,” Ploss said. “It will significantly increase. But you have to think in scenarios because if Iran opens up, there will be huge capex requirements.”

Add emerging frontier areas such as the Levant Basin and Lebanon, where Ploss said seismic data appear quite promising for gas, to the investment climate of the region’s known producing nations, and predicting future spending in the Middle East is comparable to shooting at a moving target.

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