As Damascus struggles to repress widespread protests across the country, now in their seventh month, it will also have to contend with a comprehensive sanctions package from the United States and the European Union on Syria’s oil sector.
The sanctions prohibit purchases of what until now has been Syria’s 145,000 barrels per day (bpd) export regime, with the International Monetary Fund valuing these oil receipts at $4 billion annually, amounting to some 25 percent of total government revenue. Sanctions also ban all new investment into the country’s hydrocarbon sector.
The EU represents 96 percent of the export market for Syria, with Germany, Italy and France alone accounting for more than 70 percent. But the sanctions will not be enforced immediately, as the EU vote on September 2 stipulated an implementation date of November 15 — a compromise deal with a coalition of members, chief among them Italy, under domestic pressure from refiners that had been affected by the disruption in oil supply from Libya this year.
While Europeans have been outspoken in their criticism of President Bashar al-Assad’s brazen repression of dissent, for many the sanctions come as a surprise. Because of a tight supply market, especially in the Mediterranean, as well as longstanding European involvement in the Syrian energy sector by super-majors Shell and Total (and a litany of newcomers), the official line in Brussels was that US-style sanctions would hurt the people, rather than the regime. However, persistent lobbying by representatives of the Syrian opposition in exile, who made a simple yet compelling case advocating a ban on imports, may have had the desired effect. Anti-regime lobbyists noted that the Assad regime may be in too precarious a position to maneuver the levers of power and bureaucracy required in finding new markets for its relatively unattractive oil, much less respond to a multitude of disruptions across the entire supply chain.
A minnow in the ocean
Syria does not have a significant oil industry to wield as a political tool with the West. Historically, relations with the West have been fraught with tension over Syria’s antagonism toward Israel, its involvement in Lebanese politics and its alleged support for the insurgency in Iraq. But while the country may punch above its weight ideologically, it is considered a minnow in the global oil arena and has few resources from either a technical or market perspective to weather a sustained and serious embargo from the West.
Syria’s oil output in 2010 was estimated to be 385,000 barrels per day, which represented a victory for the sector as the first time in a decade that the country was able to buck a year-on-year decline (often at rates as high as 5 percent) that had many analysts writing Syria off as an exporter by 2020. Syria benefitted, however, from the flurry of global exploration and production activity that was spurred by the dramatic rise in the price of oil from $35 in 2000 to $147 in the summer of 2008. The newfound incentives saw companies aggressively pursuing opportunities using technologies that had until then been deemed uneconomical.
President Assad and former deputy prime minister for economic affairs Abdullah Dardari responded to the changes in the market by embracing western firms and instituting a series of laws that made the Syrian play (the country’s market and resource opportunities) “the best of any country in the Middle East”, according to Ken Judge, an official with Gulfsands Petroleum, whose main production assets are in Syria.
Super-majors Shell and Total, producers of the country’s premium Syrian Light grade, declined to expand operations in the country, focusing instead on marketing refined products to the rapidly growing Syrian demand and using the country as a platform for entry into the post-Saddam Iraq. A litany of independents, however, entered the trade and began an aggressive drilling campaign, particularly in the heart of the country, but also in the northeast Deir ez Zor region. Companies such as Dove Energy, Loon, Stratic and France’s Maurel & Prom invested millions of dollars in the play, encouraged by a global market that was rewarding risk and a Syrian market that had already paid off for at least one independent, United Kingdom-based Gulfsands. The company discovered oil in 2007 and by 2009 was posting impressive production gains, with profits jumping some 160 percent from $18 million in 2008 to $48 million in 2009.
At the same time, a regional shift towards utilizing associated gas production, by either bringing it to market or by re-injecting it into aging oil fields, allowed the state-owned Syrian Petroleum Company — which controls the sector through independent production and joint ventures with foreign producers — to gradually arrest declining output. Through its marketing arm Sytrol, the method allowed for a 15-year export plan that would offset the gradual decline of its premium Syrian Light blend with substantial growth of its primary export blend, Soueideh (also known as Syrian Heavy), which would allow the country to maintain current export levels until 2025. Syrian Heavy is a low quality and technically challenging oil to process, sold at a discount to benchmark Dated Brent. It can only be processed by a minority of refineries in the world, which are generally concentrated in Europe and the US, as well as in Syria. As has been a pattern in the region, the government invested its inflated revenues from increased crude output into manufacturing and heavy industry. This boosted domestic demand for refined oil to the point where, by the mid-2000s, it outstripped domestic supply. Syria was left increasingly reliant on imports of refined oil it purchased with precious foreign currency when, had the country instead prioritized expenditure on its own refining capacity in the last decade, it could theoretically be supplying to its own market. Syria’s refining capacity had long stood at 240,000 barrels per day which, outstripped by domestic energy consumption, forced Damascus to begin an import regime that now stands at approximately two to three cargos a month to meet its gasoil and liquefied petroleum gas (LPG) needs. It buys these cargos at market value, which it then sells domestically at deeply subsidized prices. According to the US Energy Information Administration, the practice cost the government $3 billion in 2010, but will likely remain in place as the government seeks to retain popular support.
Both ends of the sanctions
Syria’s proven reserves have generally remained around 2.5 billion barrels, the lowest of any Middle Eastern oil exporter, and accounting for just 0.2 percent of the world total.
In 2010, BP estimated the country’s reserve-to-production (R/P) ratio — the amount of time it would take to exhaust oil at current production levels — to be 18 years. It is indicative of the diminutive size of Syria’s export stream, in global terms, that their top buyer, Italy, has imported an average of 41,500 barrels per day this year, which is less than 3 percent of their total import mix. Its major buyer, Eni, is confident that they can source supply elsewhere.
Similarly, although major US investment had been halted in 2004, the latest sanctions formally and entirely cut the cord with Syria’s oil sector. Though the vast majority of Syria’s domestically refined crude is consumed in-country, the US had been taking in 9,300 barrels per day of refined Syrian petroleum products, contributing to the $400 million in payments to Damascus in 2010, according to US trade data. The US was Syria’s largest single purchaser of refined petroleum products, yet accounted for less than 0.004 percent of America’s 2.6 million barrels per day of total imports of petroleum products. By contrast, Libyan oil reserves of light sweet crude, highly sought after by European refiners, stood at 46 billion barrels with a R/P ratio of 78 years at 2010 production levels. The loss of Libya’s 1.4 million barrels per day on the market compelled Saudi Arabia to increase output and US President Barack Obama to authorize a rare 30 million barrel sale from America’s strategic reserves. The loss of Syrian supply would be unlikely to engender such moves.
Although Assad did get somewhat of a reprieve with the November 15 implementation date, the regime is expected to have difficulty finding new markets to keep up its export schedule. Kate Dourian, Platt’s Middle East bureau chief, believes that “countries will voluntarily stop working with Syria.” Indeed, both Danish Maersk Oil and French giant Total voluntarily cancelled scheduled deals in September, with Maersk spokesman Michael Christian Storgaard attributing the stoppage to “US sanctions”. Traders Vitol and Trafigura, on the other hand, continued with planned sales of one cargo of gasoline each, to Syria’s state-owned Sytrol in August.
Though Vitol and Trafigura, both based in non-EU Switzerland, would not be required to comply by the EU standards, an email from Vitol’s press office to Executive stated that the company “has been and will remain in full compliance with all local and international sanctions legislation relating to Syria.” Dourian believes that the “reputational risk” involved with the Syrian market is not worth it for Western traders — who have no infrastructure or long-term deals at stake with the country — to continue their dealings with Damascus even ahead of the November 15 deadline. Heavies such as Shell, who are still dealing with Damascus, are under pressure from grassroots campaigns by Syrian activists and non-governmental organizations.
At the same time, an expected price collapse of Syrian oil after the sanctions take effect may make Syria’s crude attractive to buyers in the east, who tend to be less influenced by Western politics in the oil industry. A number of logistical obstacles, however, would have to be overcome. Syria’s shipping capacity is designed for Mediterranean markets and short trips. Loading ports in Baniyas and Tartous are limited to Aframax class tankers, with a capacity around 600,000 barrels. They can technically make the journey to Asian and Indian markets but would do so at a higher cost per mile than larger tankers, which would offset the discounted prices. China and Russia my be tilted towards buying from Syria by political considerations but India, the closest east-of-Suez destination that would potentially accept Syrian Heavy, traditionally favors political neutrality in its oil dealings in the Middle East.
Additionally, the premiums paid for the financial instruments necessary to secure these deals and guarantee tanker costs, have also been rising. According to the UK-based Worldscale guide for tanker rates, Syria pays around $18,000 per day to ship a full Aframax load to the EU, but a Reuters report in March of this year noted that rates had gone up by 26.5 percent, concurrent with the first round of EU sanctions. The price hike is due to the risks perceived by traders in handling the cargo and is likely to rise further as sanctions drag on.
China, with recent acquisitions through its state-owned China National Petroleum Corporation, does have a 35 percent interest in Syria Shell Petroleum Development, but this represents less than 10,000 barrels per day of the company’s 2.8 million daily production.
Russia, however, has long standing plans to build a major naval facility in Tartous. Ambitions of a blue water base in the Mediterranean are , according to IHS Jane’s analyst David Hardwell, “as old as the hills”. This isn’t necessarily dependent on Assad; an opposition visit to Moscow late last month no doubt included assurances as to the viability of the project in a post-Assad Syria.
The extent of Russia’s, China’s, and perhaps India’s willingness to step up and support the regime in the face of increasingly unified and diverse pressure on the country is unclear.
Although indications from Moscow and Beijing are that they will not stand for another Libyan style intervention, both countries would need to go out of their way to serve as substitute markets for Syrian oil in the medium term. Russia, for example, is invariably the largest, or second largest (running neck and neck with Saudi Arabia) net oil exporter, and imported just 1,000 barrels per day in 2010, according to BP. Though a price collapse of Syrian Heavy after the November 15 moratorium on EU imports is certain, China’s heavy refineries are already enjoying a decidedly buyer’s market, which has seen sharp discounts in heavy oil for east-of-Suez deliveries.
Structurally, it is potentially much easier to thwart Syrian efforts to sidestep the embargo than augment them. Organization of Petroleum Exporters (OPEC) powerhouse Saudi Arabia, who in August withdrew its ambassador to Damascus to protest the regime’s crackdown, demonstrated its willingness to dip into its spare production capacity, in response to supply disruptions from Libya, by increasing output by 300,000 barrels per day in June.
This was accompanied by a statement from its Oil Minister at the time Ali Naimi indicating that any disruption to global oil production from the unrest in Libya, or any other producing country, would be met by swift action from Riyadh. Furthermore, although less likely in the short term, Barack Obama reserves the right to penalize any company with US interests that does business within the Syrian oil sector. Washington has successfully wielded a similar threat in discouraging many international oil companies from doing business with Iran.
Even if the Syrian government does get its oil to market, the earnings derived may be diverted into ensuring that the imports of LPG and Gasoils remain on track to keep the country functioning.
A September 23 report from Reuters quoted unnamed traders as saying that Damascus was making overtures on the international market to swap crude oil in return for refined product that the country needs to meet consumption.
The same report went on to detail the difficulties that Syria was facing in concluding contracts, even ahead of the November 15 deadline, primarily because the financial instruments necessary to facilitate such deals — such as insuring shipments and payments — have also been impacted by the sanctions. The report concluded that Damascus would likely eventually find a willing partner to finance the operations, but that its premiums to underwrite the risk would be extraordinarily high.
Even if Assad can keep some of the oil revenue flowing to prop up his embattle regime, this lifeline will be thin.
“It is potentially much easier to thwart Syrian efforts to sidestep the embargo than augment them”
