The new Sharjah gas exploration joint venture between the local enterprise Crescent Petroleum and Rosneft, the Russian state-controlled oil giant, has been just three months in the making, demonstrating that red tape can be cut quickly when regional priorities are at stake. Talks between the seemingly odd couple began in early March, following a flurry of trade missions between the UAE and Russia, Badr Jafar, the executive director of the privately owned Crescent, said yesterday in an exclusive interview.
They moved quickly. "We were pleasantly surprised," said Mr Jafar. "It was gratifying to discover we shared not only values but also an ability to move forward quickly to achieve specific goals." Beyond pure profit, the partnership's main goal is to increase the natural gas output of a region where demand is running well ahead of supply. Its first project is the venture announced on Saturday to drill gas prospects in Sharjah and develop any discoveries that turn out to be commercially viable.
"There is a huge requirement for gas in the Middle East," Mr Jafar said. "Previously, people thought of the region as a source of gas exports but the Middle East is growing as a huge gas market in itself." A result of this largely unforeseen growth has been power cuts in Sharjah and other Gulf states. Most have been left scrambling for gas to fuel power stations. For many, the only immediate alternative is imported diesel, which is expensive and contributes significantly more than gas to local air pollution.
New projects such as the Crescent-Rosneft joint venture could help matters but only if more private-sector investors become involved. In the past, potential investors have been sceptical of the profit potential due to the regional prevalence of low domestic gas prices that are fixed and heavily subsidised by governments. But Mr Jafar sees signs of change. "There is an increasing trend in the Gulf and Middle East to move towards market pricing," he said. "If you don't do that, you have no investment in developing reserves and you have a huge drain on government finances which greatly impacts economic development."
Nevertheless, even at Sharjah's current gas prices, development of new gas discoveries in the emirate could be profitable, Mr Jafar believes. "We've done our economics based on the prevailing gas prices and they satisfied our hurdles for economic investment," he said. "Based on estimated reserves, the project is economic." The discovery of gas rich in condensate would be a bonus because the ultra-light oil could be stripped from the gas and sold separately at international prices.
But the Sharjah project is not dependent on condensates, Mr Jafar added. For Rosneft, gas development opportunities in the Gulf may be more attractive than in Russia, he suggested. Gazprom, the biggest Russian gas producer, has long depended on exporting Russian gas for profits. That is because Moscow also subsidises domestic gas supplies and the practice may be even more entrenched in the former Soviet country than in the Middle East.
In most Gulf states, the imbalance between gas supply and demand creates more urgency than in Russia to remove subsidies, Mr Jafar said. "Russia is a major net exporter of gas, while most Gulf countries are net importers," he said. "If Russia moved towards market prices there would be an incredible move in investment to develop even more reserves but it's not urgent." Crescent does not publish financial statements or details of its oil and gas reserves and production but with 320 full-time managers at its Sharjah headquarters supervising a fluctuating workforce in the field that typically runs to thousands, it is clearly no minnow.
"We're not a small company but we're not a major yet," Mr Jafar said. Crescent is eyeing major regional oil and gas opportunities that are for the moment the preserve of the world's biggest petroleum companies. They include potential projects in southern Iraq, which is believed to hold the world's biggest concentration of undeveloped conventional oil and gas resources. Iraq is also the ancestral home of Mr Jafar's family.
That is the type of opportunity that Crescent and Rosneft might one day jointly pursue. But first, the partners want to see a stable legal framework in place for Iraqi oil and gas contracts - a pending issue that, according to Mr Jafar, "unfortunately has been heavily politicised to the detriment of the people". "In the interim, we will discuss the potential. There isn't anything immediate, unfortunately," he said.
When the time comes, Crescent and Rosneft would be ready to pounce. In addition to its 40 years of operating experience in the Middle East, Crescent's competitive edge comes from "very fast decision-making", Mr Jafar said. @Email:email@example.com