Persian Gulf Producers Delay Oil Projects

Persian Gulf oil producers are delaying oil projects and squeezing contractors for hundreds of millions of dollars in savings, as the pain from low crude prices spreads to state-owned energy companies struggling to pump at full tilt.

Saudi Arabian Oil Co.—known as Saudi Aramco, the world’s largest crude producer—has pushed back by a year the startup of a $3 billion expansion project in an important field and delayed a liquefied natural gas export plan, according to Saudi industry officials.

A $3 billion United Arab Emirates project that would boost the country’s production by 100,000 barrels a day is on hold until contractors offer cheaper terms, a UAE oil official said. And in Oman, the government has delayed $1.4 billion in contracts for special electric pumping, a critical technique for the sultanate’s low-pressure oil reserves, according to people familiar with the matter.

The delays demonstrate how a protracted period of sharply lower oil prices could have long-term effects on the production capacity of big Middle Eastern producers and reflect decisions being made across the oil industry as big projects are shelved to cut costs. According to Scotland-based energy consultancy Wood Mackenzie, oil companies have put over $200 billion spending on hold as crude oil prices hover around $50 a barrel, down from $114 a barrel in mid-2014.

National oil companies in the Gulf “will try to take advantage of the oil slump by reducing costs on their supply chain,” said Tony Hayward, the former chief executive of U.K. oil giant BP PLC, who now leads independent oil company Genel Energy PLC.

But the delays also raise questions about the sustainability of the Organization of the Petroleum Exporting Countries’ strategy of pumping as much crude as possible during this period of low oil prices to maintain its share of the export market. In the past, OPEC often orchestrated production cuts that made oil scarcer and drove prices up.

This time, Saudi Arabia and Iraq are producing record levels, and Kuwait and the United Arab Emirates have oil output near historic highs. The glut of production comes as investment banks and energy companies predict oil prices of around $60 a barrel or less through 2016, which could eventually force changes at big state-owned oil firms that once seemed immune to price fluctuations.

Saudi Arabia and other Gulf producers “are likely to cut spending across the board,” said Jim Krane, an energy studies fellow with the Baker Institute for Public Policy at Houston’s Rice University. That “could have an impact on future production,” he said.

The UAE oil ministry, Abu Dhabi National Oil Co. and the Omani oil ministry didn’t respond to requests for comment. Saudi Aramco declined to comment.

For now, Middle East production shows no sign of abating. Kuwait’s oil minister said recently the country was on track to produce 4 million barrels a day in 2020, up from about 3 million a day currently. Saudi Arabia’s oil minister Ali al-Naimi said earlier this month the kingdom will maintain its planned oil investments.

And Iran is ramping up oil production and preparing for new investment if western sanctions are lifted next year as expected.

Several important projects in the Middle East are still under way. For example, in May, Abu Dhabi awarded a $334 million contract to a unit of China National Petroleum Corp, to help develop the 20,000 barrels-a-day Mender onshore oil field.

The places where Persian Gulf companies are delaying are potentially important drivers of future production growth.

The Khurais oil field in northeast Saudi Arabia is a $3 billion project for Aramco that would add about 1 million barrels a day to the kingdom’s export capacity.

The other Aramco project facing delays, a liquefied natural gas project to ship product out of the desert region known as the Empty Quarter, has also been challenged by technical issues, but low oil prices are adding to the problems. With gas production already taking place in its Persian Gulf platforms, this project would be the kingdom’s first opportunity to become a natural-gas exporter.

In the UAE, the delayed Bab oil field is a $3 billion development that would boost the country’s production by 100,000 barrels a day.

In Oman, the sultanate’s reservoirs are characterized by low pressure, which requires special electric pumping equipment to sustain output. But it has delayed awarding most electric-pump contracts to oil-field service firms by at least six months. That could potentially jeopardize Oman’s ability to sustain its current output of 1 million barrels a day.

In one case where Oman did award electric-pump contracts, the government managed to negotiate $200 million in savings from the eventual winner, a consortium that included Schlumberger Ltd.

The Omani government is also trying to cancel oil-field services contracts it sees as nonessential, such as purchases of gear to measure oil production, a person familiar with the matter said.

Even when contracts are awarded, the winners have to make huge sacrifices.

In response to questions by The Wall Street Journal about the contracts’ delays, negotiations and cancelation, Omani oil minister Mohammad bin Hamad al-Rumhy said in an emailed statement that “it is not true.”

Saudi Aramco and Abu Dhabi National Oil Co. are seeking up to 20% discounts from contractors on bills for engineering, well testing and seismic exploration, according to a Dubai-based manager at a large European oil-services firm.

WSJ