Middle East now feeling effects of global climate change
It seems there is as much of a surplus of news stories about global warming being human-caused as there is oil underground. While the debate over the links between human activity and climate changes rages with strong opposing views in meeting halls and chat rooms the world over, there can be no doubt that the oil industry itself is increasingly worried about climate change impact on its activities, from exploration and drilling to transport.
In the past, the Gulf’s oil producers were basking in the assumption that the region is not prone to severe storms and weather phenomena such as the hurricanes that each year pound the Western hemisphere’s crucial oil facilities in the Gulf of Mexico. But that self-assuredness has been thrown into question this summer when cyclone Gonu battered Oman with unprecedented fury. Although there may be no cause and effect between the patterns of global warming and storms like Katrina and Gonu, nevertheless, the impact of such storms has affected the oil industry worldwide and poses new threats that have yet to be assessed.
The Middle East will not be spared from the repercussions of global warming if climate change continues, Lebanon’s Greenpeace campaigner Basma Badran told Executive. “Climate change [in the region] is mostly tackled from the perspective of energy security rather than concern for the global climate. However, the latest cyclone, Gonu, that affected [Oman] and western Iran has shown that climate change will not spare the Arab region.”
Much of the oil and gas exploration in the Gulf is offshore, making the facilities vulnerable to tropical cyclones which build up over warm waters and gather strength as they move across open seas (the US term hurricane describes a tropical cyclone by another name; there is no quality difference in their destructiveness).
Impact in the age of economic interdependence
In Oman, Gonu disrupted oil industry operations, forcing the Sur liquid natural gas terminal southeast of Muscat and the Al-Fahl oil terminal to stop shipments for three days, costing $200 million in lost revenues.
A possible choke point for weather-related trouble in the Gulf is the Strait of Hormuz shipping lane. According to officials, all crude exports from the Arab states in the Gulf except Saudi Arabia — or about a quarter of world supplies — go through the strait, making it the world’s most important oil passage.
As people live in an economically interdependent age, catastrophes that happen across the globe naturally have a serious effect on global markets and business partnerships everywhere. The hurricanes Katrina and Rita, which hit the Gulf of Mexico in 2005, led to $45 billion in insured damages but the overall losses from the two storms were far larger.
The oil industry lost 115 offshore oil platforms, suffered damages to another 52 rigs, and had to write off months of production. US budget office estimates of the two hurricanes’ total damages to the area’s energy infrastructure said repair costs could be as high as $31 billion and insurance industry consultant Aon spoke of $10 billion in insured damages to the offshore oil sector.
From the perspective of the oil producing countries in the Middle East, the impact of weather problems on the international energy market was seen as proof that the consumer experiences from spiraling oil prices were industry more than resources related. Saudi Arabia’s oil minister, Ali Naimi, blamed “high oil prices on a lack of industry infrastructure, including rigs and refineries, rather than oil reserves.”
Ironically, the big five integrated oil companies reported record jumps in their profits for 2005; industry leader ExxonMobil had a whopping 46% increase in profit from 2004 to 2005 and other companies showed similar gains. Those extreme profit margins seem a possible reason why mum’s the word in the oil industry about the amount of money and time it took for production to come back to full swing and how much the industry is committing to improve its preparedness for future storms.
The American Petroleum Institute (API) said in a press release in July that member companies learned “critical lessons” from Katrina and Rita and from Hurricane Ivan in 2004. It mentioned equipment upgrades, revised emergency planning, and contingency plans with suppliers but did not give an estimate on the total cost that climate-related severe weather phenomena create for the industry or how much of their profits oil companies have been allocating to mitigate the impact of climate change on their own operations or the country at large.
In examining the costs of mega oil companies one can take into consideration emission taxation, purchase of other nations’ emission credits, operational costs that include destruction of equipment, delays in shipping, all of which result in depreciation of share value. Oil and gas exploration costs include personnel day-rate fees for drilling contractors of between $45,000 and $80,000, which by multi-billion dollar standards are mere nuisance losses.
Development costs on the rise
Development costs include extracting and refining of petroleum products. New York-based analyst Adam Sieminski of Deutsche Bank “estimates find and development costs have climbed 15% a year in real terms from 2005 to 2007 and expects a minimum 7.5% year-on-year escalation from 2008-2010, a move which would then put worldwide find and development costs at $18-$20 a barrel.”
According to official sources oil rigs can cost between $90 million and $550 million, and take several years to deliver. Adding to the oil processing shortages in the United States is the fact that oil facilities are limited in number and are today much harder to build due to stringent regulations on emissions, which the structures must adhere to in order to ensure minimal emissions. These standards were not in place 30 and 40 years ago when the present rigs, which are falling short of supplying the ever-increasing demand for petroleum products, were constructed.
A World Resource Institute report on emerging environmental risks and shareholder value in the oil and gas industry looks at “the financial implications of prospective climate policies and limited access to reserves [that] were combined to obtain an overall assessment of the impact of these pending environmental pressures for [oil] companies.” The report concludes that “the average financial impact across all companies is a loss of about 4% in shareholder value.”
What all of these Western concerns mean to the outlook for the Arab oil industry looks positive only on the surface. New refinery projects — to a large share joint venture projects between local and multinational players — are mushrooming in the Gulf where there are fewer, if any environmental regulations like taxation on carbon emissions and seemingly no climate dangers.
But if the signs of cyclone Gonu and global climate change indicators — not to mention local pollution assessments in the oil processing centers — ring true, the Arab countries will have to deal with all these issues either now or, with huge additional backlogged cost, in the future. In the latter case, oil producers here could at some not overly distant point encounter conditions that will force them to stop operating.
On a broader scale, the international oil community is taking note of climate change, tacitly or openly, perhaps foreseeing a time in the near future when humanity will not be able to depend solely on petroleum for energy oil companies the world over are taking due precautions to stay ahead of the game.
The consequences of climate change on Arab oil companies starts very generally with its effects on the entire planet. The average surface temperature has warmed one degree Fahrenheit (0.6 degrees Celsius) during the last century, according to studies. In 1975, temperatures began spiking steadily and continue to do so.
This warming will, if not reduced, cause desertification in certain areas and flooding in others from melting ice caps — either way it means a sure end to crops and a natural progression into extreme poverty and disease. In a report on climate change, Greenpeace predicts, “If current trends in emissions of greenhouse gases continue, global temperatures are expected to rise faster over the next century than over any time during the last 10,000 years.” Whether human-caused or not, it’s clear from the global oil industry’s own behavior that it is indeed concerned for itself. The magnitude of the costs that oil producers will suffer as a result of climate change, from operational damage, loss of production, export/import delays, emission taxations and market repercussions, are forcing them to stop and take a look at what it can do to mitigate such risks. This applies to Arab oil companies as much as to all others, and the costs of cyclone Gonu may serve as reminder to the industry that it is in the same boat as
