Guest Post: Forgotten Treasure: Unconventional Oil In The Middle East

Tyler Durden's picture

Submitted by Martin Katusa of Casey Research

Forgotten Treasure: Unconventional Oil in the Middle East

As the conventional and cheap oil and gas start to dry up in the
Middle East… a bigger, even better opportunity seeks to replace it.

For many who aren’t familiar with the region, the Middle East comes
across as an updated version of Lawrence’s Arabia, only with lots of
oil. But this mosaic of cultures isn’t made up of only Arabs or Muslims,
and most Middle East countries are neither awash with heavily armed,
rather excitable citizenry… nor with black gold, which is what we’re
interested in. Twenty-three countries comprise the Arab League, but
only Saudi Arabia, Iraq, Kuwait, the United Arab Emirates (UAE), and
Iran are major oil producers.

No matter; with the exception of Kurdistan in northern Iraq, none of
the oil heavies are currently open to us investors anyway. We’re
digging for other finds, with three basic criteria. We’re looking for
countries in the Middle East that:

  • Have potential for unconventional production, such as oil shales
  • Have incentive to develop it, and
  • Are either net importers of oil or soon will be.

Why? In short, conventional production is in decline, but demand for
oil isn’t. That means the state-owned oil companies and large companies
operating in the region either need to find new fields and basins or
apply new technology to get more out of established ones. Or both, of
course. Nowhere is this reality more critical than in the Middle East,
the world’s most important oil region, where oil production is the
lifeblood of governments.

Our analysis, gleaned from data and on-the-ground experience alike,
points to investment opportunities in new, unconventional technology and
resources. Exploration costs will likely be lower, as companies aren’t
starting from scratch. And in what we see as early days in the
national drives for energy security, it makes sense to look close
around your own turf.

We believe that blue-sky potential lurks in companies operating in the
Middle East with expertise in unconventional production, access to good
source rock, and management that can marry the two.

The Proving Grounds

It’s still early in the game, which can mean both good (high returns)
and bad (high uncertainty) for investors. We believe the potential
upside of unconventional development in the Middle East is just too big
to ignore, however. So what we’ve done, is track down and lay out the
most likely go-to countries for those explorers with the right stuff.

The following chart will narrow further the countries that meet the
three criteria we outlined above. That is, who’s “in the red” when it
comes to oil?


We see here that six countries currently rely on imports for their crude oil: Egypt, Cyprus, Lebanon, Jordan, Israel, Turkey.

In addition, two countries appear on their way to becoming net importers of oil: Syria and Yemen.


Outlook: The oil and gas industry are an essential
sector in Egypt's economy, and the country’s reserves convey its
potential to become a significant producer. In 2009, Egypt produced
678,300 of barrels of oil per day, while consuming 683,000 barrels per
day. Egypt has traditionally been a net producer, but production peaked
in 1993 and has been in decline. Combine that with its increase in
domestic consumption, and Egypt is now a net oil importer.

Consequently, the Egyptian government has reversed its previously much
harsher fiscal regimes and now actively encourages the exploration of
domestic oil, which has resulted in an industry dominated by foreign

Natural gas, on the other hand, has tripled in production in recent
years due to some major discoveries. Thus Egypt is a net producer here,
and more important in the broad picture, a source for European natural
gas. European countries are usually eager to decrease their reliance on
Gazprom, the state-controlled gas giant from Russia.

Egypt has a developed network of pipelines to export its natural gas to
Southern European and eastern Mediterranean countries. It also sends
liquefied natural gas (LNG) to Europe, Asia, and the Americas. 

However, as natural gas represents over 80% of Egypt's source of
electricity, the government has slowed plans for export expansion to
ensure all domestic demands will be met before any further moves.


Outlook: Cyprus has no oil or gas production currently,
and so must import all it needs. However, an oil deposit has been found
recently in the seabed between Cyprus and Egypt. An oil licensing
round took place in 2007, when 11 blocks were offered to potential

This first round took place against a backdrop of opposition from the
Turkish government. As a result of this territorial dispute, companies
chose not to bid, and as of now, only Noble Corporation has a
production-sharing agreement (PSA) with the Cyprian government.

In May 2010, Cyprus announced it was close to commencing a second oil
licensing round for several offshore blocks. It’s again under Turkish
protest. Turkey has even warned Lebanon and Egypt against working out a
deal with Cyprus for oil exploration.


Outlook: Lebanon also has neither oil or gas production
at this time. However, Cyprus has signed lineation agreements with
Lebanon and Egypt to exploit large hydrocarbon reserves that cross
borders offshore, as we mentioned above, and hope to begin exploration
by 2012.

And according to Lebanon’s parliament speaker, Nabih Berri, gas
reserves found off the coast of Israel are located in Lebanon's
territorial waters as well. These fields, however, may run into
developmental difficulties as Israel and Lebanon to this day still
dispute their maritime borders, leaving large fields such as Leviathan
and Tamar in a state of limbo.


Outlook: Large corporations have been eyeing the
unconventional potential in Jordan for quite some time, but were put
off due to both political as well as economic reasons. However, with
advancements in oil shale technology and a gradual shift towards
liberalization by the Jordanian government, which has long been envious
of the hydrocarbon wealth of its neighbors, Jordan’s government has
established plans to liberate the oil market in the next five years. If
that happens, it will be a first for investors since 1958. Under the
National Energy Strategy’s initial phase, four companies will be
offered 25% of the kingdom's reserves. The remaining 75% will remain
under the control of the state-owned Petroleum Refinery Company (JPRC)
until full liberalization.

This development will pave the way to exploit Jordan’s oil shale
resources. Oil shale deposits underlie more than 60% of the Kingdom of
Jordan and have enormous potential. The World Energy Council estimates
Jordan's oil shale reserves at approximately 40 to 60 billion tons,
making it the second richest state after Canada in rock oil reserves.

Furthermore, the oil shale quality is very high compared with the oil
shale in the United States. Jordan has recently signed a deal with
Shell Oil to extract oil shale in the central part of the country. First
commercial quantities are expected by 2020, with an estimated amount
of 50,000 barrels of oil per day.

Modest natural gas reserves were discovered in 1987, and the Risha
field near the Iraq border produces approximately 30 million cubic feet
of gas per day. However, production is pretty flat and looks to stay
that way. That means imports.


Outlook: Israel relies on importing resources to meet
the majority of its energy needs. It boasts no major reserves, and thus
oil production is minimal. However, as we said above, Israel has found
substantial natural gas reserves located in Mediterranean deep water.
This discovery has prompted increased exploration off Israel's
coastline, not to mention increased territorial disputes.

The U.S. Geological Survey reports that Israel's offshore reserves
could hold 122 trillion cubic feet of recoverable gas. That makes it
one of the world's richest deposits.

As a result of this discovery, Lebanon has rushed through approval of a
law that outlines the guidelines of surveying, exploring, and
producing of gas. The legislation also calls for a sovereign wealth fund
to manage the potential revenues.

Nevertheless, Lebanon is still three to four years behind the Israelis,
as it still must secure investors, select bidders, and begin
exploration work. Israel is already well on its way.


Outlook: Although Turkey has both oil and natural gas
reserves, the country is a net importer for both resources. It may
become energy independent as new oil and natural gas reserves have been
discovered off the coast of the Black Sea, Eastern Thrace, the Gulf of
Iskenderun, and in the regions near the borders of Syria and Iraq.

Due to its location, Turkey is vital in energy transportation between
major oil-producing areas, in the Middle East and the Caspian Sea, and
consumer markets in Europe. In 2009, the pipeline network in Turkey
covered over 3,636 kilometers for crude oil and 10,630 kilometers for
natural gas.

One of the pipelines, the Baku-Tbilisi-Ceyhan, is the second largest
oil pipeline in the world. It’s responsible for delivering crude oil
from the Caspian Sea to the port of Ceyhan on Turkey's coast. From
Ceyhan, the crude oil is distributed to oil tankers, which will further
transport it to the world's markets.

Another pipeline, Nabucco, is in the planning stages. It is expected to
provide European markets with natural gas from the Caspian Sea basin.


Outlook: Compared with some of its neighbors, Syria's
oil and gas production is fairly unassuming. On the other hand, Syria
is the only significant producing country in the Eastern Mediterranean
region. Oil production had declined, then flattened out for several
years before new fields were discovered. They’re expected to bump up
future production.

Syria's known oil reserves are located mainly near the Iraq border and
along the Euphrates River, while some smaller fields are located in the
central part of the country. Upstream production is controlled by the
state-owned Syrian Petroleum Company (SPC). The main foreign consortium
which is currently producing is Al-Furate Petroleum, a joint venture
made up of SOC (50%), Shell Oil (32%), and a collection of other

Contracts have been awarded to Shell, in 2008, and TOTAL, earlier this
year, for exploration at greater depths in existing oil fields in the
Euphrates and central areas. Offshore exploration came up dry in 2007,
but recently there’s been renewed interest. The SPC has commenced plans
to issue tenders for the offshore blocks in the future.

Syria is also strategically important as a transit hub and will provide
a larger role with the ongoing plans for pipeline network expansions
in the area.

As for gas, new fields are expected to ensure that Syria's domestic
demands are met after several years of decline in production. About 35%
of natural gas production is reinjected into oilfields for enhanced oil
recovery techniques, with the remainder going mostly to generate
electricity and for domestic use. By the end of 2010, Syria expects to
double its natural gas production.


Outlook: Like Egypt, Yemen is a strategic hub for oil
shipping. More than 3.7 million barrels of oil pass daily through
shipping lanes off its coast. The alternative is a very costly trip
around the southern tip of Africa, so governments and oil companies are
anxious to avoid any disruptions.

Hydrocarbons currently account for approximately 25% of Yemen's GDP and
over 70% of government revenues. Accordingly, the government is
actively seeking to increase foreign capital in this sector.

Barring significant change, however, its harsh fiscal regime is
strangling exploration. Yemen is currently a net producer of oil, but it
won’t be for much longer at this rate. Production is currently limited
to two major sedimentary basins, but another 10 basins are believed to
hold oil reserves.

A number of companies are interested in the area of Yemen’s border with
Saudi Arabia, though activity has been very limited due to a
combination of limited infrastructure and continued security concerns.
An initial licensing round in 2007 for offshore exploration also
stirred interest, but the rise of Somali pirate activity in the Gulf of
Aden has more or less put the kibosh on that. A fourth round of
bidding was postponed in August 2009 because of the pirates and the
exorbitant insurance rates that companies would need to pay to operate
in the region.

Up until 2009, all natural gas produced was reinjected to provide
enhanced oil recovery. Natural gas export only became viable when a
milestone agreement was signed in 2005 with Korea Gas Corp. Yemen also
signed an agreement Swiss GDF Suez Company and TOTAL. All three
contracts run for 20 years.

Yemen's first liquefied natural gas (LNG) plant, located on the port of
Balhaf on the Gulf of Aden, went online in October 2009. Yemen has the
ability to export over 200 million cubic feet of LNG per year, and much
of the future investment into Yemen is expected to be used in the
natural gas infrastructure.

What It All Means

So the question is, what do we have and, more importantly, how can we make money?

When investing in the Middle East, there’s evaluating infrastructure,
fiscal policies, and, perhaps most important of all, Middle East

Much of the Middle East is well developed, particularly around urban
centers. But many places where a company would be looking for
unconventional oil are a ways off the beaten track, and that means
additional infrastructure. A prominent example is Kurdistan, where
billions of dollars’ worth of infrastructure upgrades are needed to
turn the region into prolific oil-producing center. A junior company
alone could not possibly have the connections to build such
infrastructure. Countries such as Yemen and Oman have similar stumbling
blocks to investment and development. The Catch-22 is that these
places are precisely where the remaining “elephant deposits” could be

Behind the scenes in the Middle East is always politics, much of it
nuanced and layered by generations of history and family ties.

It takes a management team that has been in the arena before and knows
the intricacies of the particular area of interest. A good security
detail may be a must in some places as well.

Lastly, the fiscal systems in the Middle East are relatively tough
compared with the rest of the world, and in some countries, such as
Saudi Arabia, there are very few, if any, opportunities for foreign
companies to even come in and share the wealth.

Countries with the highest petroleum shortfalls tend to have the lowest
government take. But that’s relative. Any company that operates in the
area needs to remember the Middle East holds the dubious record of the
highest number of “two-stars” (80-90% government take) and “one-stars”
(90%+ government take) in the world, leaving contractors with very
little with which to recuperate their costs and justify their
investments. Southern Iraq and Kuwait can even reach 95%+.

Who’s Got It

Nevertheless, opportunities are definitely available for those looking
for them. Some are conventional, but the big upside that we see in the
Middle East is in its unconventional potential. Reconnaissance and
seismic data for the region are readily available due to decades of
exploration in the area, saving companies millions, if not billions of
dollars that would have been needed to do the same work. There are also
a good number of pipelines here that, where geography and geology
meet, can convey a premium to any unconventional oil production. As
several countries begin to look for the oil shale opportunities, the
unconventional story has the potential to be the biggest boom in the
energy market in decades.

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Pants McPants's picture

Lengthy Peak Oil debate in 3...2...1.....

hedgeless_horseman's picture

Those fools in Egypt must not be digging deep enough.  Right, Ivan?

flavian's picture

Now that the oil is running out, they want to put us on LPG.

They'll do anything to postpone the HHO / MEG coming to mainstream... :)

tewkatz's picture

Probiotics!  All our oil comes from Jamie Lee Curtis's bowels...

Makes as much sense to me as cooling mantel material disgorging sweet crude like Moses had struck a rock.

anonnn's picture

...23 countries comprise the Arab League, but only Saudi Arabia, Iraq, Kuwait, the United Arab Emirates (UAE), and Iran are major oil producers...

Iran is not in the Arab League, AFAIK

[sorry to jump the line]

Mr Lennon Hendrix's picture

Lengthy debate without a swing producer?

trav7777's picture

oil can't peak...that's just a myth.  The declines were caused by Saudi environuts

outamyeffinway's picture

Too funny, I was just thinking what to say! lol

tmosley's picture

Let the peak oil flamefest begin!

goldmiddelfinger's picture

wtf is a flamefest? your life at home?

tewkatz's picture

"flaming" someone is an archaic term, pre-Internet, from back in the dial-up bulletin board days...

hambone's picture

We've already discussed peak oil, perhaps instead "Peak God"???

We've been seeing less and less of him since the time of Christ except for that one sighting  in Utah couple hundred years ago!!!

Seems his powers of omnipotence are on the wane???  Looking for a big turnaround and crescendo in 2012?  Is the ticker GOD a buy or sell?

cbclarkson's picture

That was actually Palmyra, New York hambone!  Joseph Smith was killed before the Mormons even made it to Utah.  Just saying . . .

hambone's picture

So is that a buy GOD, buy NY, sell Utah, and strong sell of Hambone?

I'm neutral on CbClarkson...just saying

mynhair's picture

but...but...oil is God, T-Bone told me so!

tmosley's picture

So you're saying Saudi Arabia is God's septic tank?

tmosley's picture

I lol at the random, extremely weak insults.

Gold will get CRUSHED.  I just don't know when.  Next millennium, maybe?

outamyeffinway's picture

Brilliant analysis. Oh you meant literally right?

Eric The Red's picture

Pretty long article for saying basically nothing at all.

mynhair's picture

Whew!  Thought it was just me!

mynhair's picture

Picture Obama, right profile, chin and nose up in the air, with a goatee and 'Rules for Radicals' tucked under his right arm, and white skin......Lenin....

He sure as CIT posed that way often enough last nite.

CrashisOptimistic's picture


Pretty long article for saying basically nothing at all.


I'll rephrase it for you:

We, my partners and I, want to make money.  We think the best way to do that is to get you to send us money to pursue . . . whatever.  That's not really important.  Just send us the money and we'll make . . . us rich. Thank you for your attention.

Why does this bullshit see the light of day?  At all?

goldmiddelfinger's picture

Dinosaurs make oil. It's Abiotic my pimps.

mynhair's picture

uurrppp.   There goes two barrels.....

Next up for Algore - no beer for you.  Him is ok, cuz he's 'special'.

freedmon's picture

I think it's a good article. It's a good survey of likely geopolitics in the region. I also think the author is right: there will be a "boom" in unconventional oil exploration the Middle East. So for a while it will look positive, but this time the boom will not be as big as the last one. The companies involved will be doing well, but one or two will be having trouble and will gradually go broke and get bought up. But still the majority won't clue in.

In the mean time, people will be digging in Yemen and Kurdistan, both of which are dangerous places. A few incidents, and they'll either send in troops, or maybe use mercenaries for security. And that will just deepen the quagmire.

Money Squid's picture

I am guessing Martin did not read Twilight In The Desert, The Coming Saudi Oil Shock and The World Economy by the dead Matt Simmons? There will always be oil, just less, less quality, more difficult to produce and process and more expensive. Peak oil, peak credit, peak economic productivity. What I do not undrstand about the Global Warmers is that with peak oil you do not need carbon cap and trade, we have likely already reached peak oil consumption and therefore peak carbon emissions.

Peak everything bitchez.

Coming soon - peak lead delivery.

Madcow's picture

There are a number of companies working on technology to economically harvest the unconventionals - the deep, thick cold tars and other "heavy oils" and bitumens.  Once they figure out how to get that out, the game changes.  considering that unconventionals are 10x the size of conventional oil reserves, there's huge potential supply on the horizon - the lion's share in Canada, the USA, and Venezuela.  here are just a few companies working on this problem. i suspect they're much closer to overcoming technology barriers than the futures markets believe is possible. with the right technology, peak oil is bs.



Hulk's picture

Eroei, its a bitch, bitchez...

trav7777's picture

sigh..production RATE motherfuckerz

DaveyJones's picture

"Once they figure out how to get that out, the game changes"

yeah I feel the same way about cold fusion. Peak oil is as much bs as math 

Freddie's picture

Not true.  They can do most of that stuff with shale oil, coal diesel, tar sands, etc. but the cost is about $30 a barrel.  Regular oil probably sill avgs about $10 to get out of the ground.  The US in the past 5 years has become the largest nat gas producer and there is probably 200 years supply at the minimum.  There are also nuke reactors that will run on other fuel that is cheaper and mire plentiful than uranium.  

As far as oil - more is being made each day by the earth's core.

RichardP's picture

What's it being made from?

A Texan's picture

There are also nuke reactors that will run on other fuel that is cheaper and mire plentiful than uranium.  


Thorium, bitchez! 


Seriously, thorium is far, far more abundant than uranium, costs less to mine, is more effiecient as a fuel, has less duration (tens of years vs. thousands for uranium) for the half-life of its radioactive by-products, CANNOT be refined in any way into nuclear weapons, and is cheaper and less environmentally damaging to mine than uranium.  The US has thousands of years worth of thorium, vs. needing to import uranium.  Apparently, the reason why we use uranium to power our reactors instead of thorium is precisely because only uranium produces bomb-grade U-235 and Plutonium as by-products, and we needed them to face the Soviets.  If we were (are) interested in a safer, cheaper and longer-lasting source of electrical power, thorium is the only answer.  By the way, the thorium in coal has more energy than the coal itself.  Why we burn coal to make electricity and don't use thorium is beyond me (except when considering that the coal lobby has a LOT more pull than the almost non-existent thorium lobby). 

Madcow's picture

There are a number of companies working on technology to economically harvest the unconventionals - the deep, thick cold tars and other "heavy oils" and bitumens.  Once they figure out how to get that out, the game changes.  considering that unconventionals are 10x the size of conventional oil reserves, there's huge potential supply on the horizon - the lion's share in Canada, the USA, and Venezuela.  here are just a few companies working on this problem. i suspect they're much closer to overcoming technology barriers than the futures markets believe is possible. with the right technology, peak oil is bs.




hambone's picture

Once they're done with that, we need to get these smart guys working on abiotic microbes or something that can break up and unclog the nearly debt blocked economic arteries. 

Oh, and then they should finally get the recipe right on the alchemy thing...if the Fed can "print" gold, now that's a game changer!!!

Freddie's picture

Sasol Ltd. = Coal diesel. Also nat gas to liquid.

Problem Is's picture

Oil Sands = Net Energy Loser
It takes more energy to mine tar sands out of the ground and process it into usable fuel than the energy you get from the processed tar sands... Ask the Canadians...

Post Rating: 0.

Tyler: Scratch Katusa from the stable of Johnny Carson Monday night replacement hosts...

trav7777's picture

no, tarsands aren't negative EROI.  They are 6-10:1

What the tarsands are good for illustrating is the disparate production rates from different reserves quality.  Tarsands in Canada are 250GBbl or more.  Yet production from this gigantic reserve is far lower than an equivalent surface field.  All of Canada's tarsands may peak out at 4-5Mbpd.  Ghawar is one field that produces more than that, and it's roughly 1/3 the size of the tarsands reserves.  THAT is a concrete example of EROI and its impact on real production rates.

DaveyJones's picture

good post. tarsand EROI is one thing, ER on water invested is another. Some production methods take up to 7 units to one oil. We do not have enough fresh water nor can we continue to contaminate this amount of fresh water to come anywhere close to meeting energy needs  

cclaeys's picture

yeah, but if BP can catch half of Canada on fire in the process and make a shitload cleaning it up...

alter ego's picture

What this guy is talking is on unconventional Oil.

For the crowd over here, unconventional oil needs a lot of energy input in order to be extracted. For example the Canadian Oil Tar Sands needs tons of Natural Gas and fresh water in order to be converted into an API gravity levels that can be cracked into gasoline, diesel, etc, etc. In addition if we compare with the Venezuelan Orinoco Oil, it comes with tones of sulphur that need to be separated from this heavy crude. It is not hard to say that this process is "energy Intensive" , therefore you need to burn a lot of natural gas in order to get the stuff.


For everybody that thinks that oil prices are high due to especulation, go and do your research, learn what it is the Net Energy Gain.


Net Energy Gain (NEG) is a concept used in energy economics that refers to the difference between the energy expended to harvest an energy source and the amount of energy gained from that harvest.[1] The net energy gain, which can be expressed in joules, differs from the net financial gain that may result from the energy harvesting process, in that various sources of energy (e.g. natural gas, coal, etc.) can be priced differently for the same amount of energy.


Conclusion: In order to get unconventional oil you need to invest a lot of energy, this energy is translated in economics in $$$, therefore we can still have oil running for years, however the price that we have to pay to get the sweet stuff that makes our world run is going to be the same triple digits prices that creates economic recessions. this is a "catch 22" issue.