US embassy cable - 05DAMASCUS5788

C O N F I D E N T I A L SECTION 01 OF 03 DAMASCUS 005788 
 
SIPDIS 
 
NEA/ELA 
NSC FOR ABRAMS/DORAN/POUNDS 
TREASURY FOR GLASER/LEBENSON 
EB/ESC/TFS FOR SALOOM 
 
E.O. 12958: DECL: 11/01/2015 
TAGS: ECON, EINV, ENRG, EPET, ETTC, SY 
SUBJECT: SUBJECT: SYRIA,S ACHILLES, HEEL : ITS OIL SECTOR 
 
 
Classified By: CDA: Stephen Seche for Reasons 1.5 b/d 
 
1.  (C) Summary.  The SARG hopes to attract new investment in 
its oil sector by hosting an international bidders, seminar 
next week.  According to conventional wisdom, the Syrian 
economy is expected to face a potential crisis in three to 
five years when the country crosses over from being a net 
exporter to becoming a net importer of oil, unless the SARG 
takes dramatic action to revitalize the sector and diversify 
its economic base.  Feeding this scenario, the heart of the 
Syrian oil industry ) the Shell/Syrian joint venture ) is 
witnessing a dramatic decline in production.  Likewise, 
nearly all US companies have either divested or are in the 
process of divesting their interests in Syria,s oil sector. 
Despite the forecasts, the sector still holds some promise. 
Though its &easy oil8 has already been exploited, Syria 
retains oil and gas resources that are of interest to 
international companies and an infrastructure with spare 
capacity.  New production from Syria,s last bid round in 
2003 could start coming on-line as early as 2007, in time to 
help moderate any potential crisis, if present plans hold. 
End Summary. 
 
The Economics 
------------- 
2.  (U) The oil sector has been a pillar of the Syrian 
economy since the mid-1980,s.  It currently accounts for 
approximately 20 percent of GDP, 65-70 percent of exports, 
and 50 percent of government revenue.  Oil production reached 
its peak in 1996, producing over 600,000 bpd, and has been in 
steady decline since.  At the same time, Syria is facing 
rising consumption of gas and electricity, seven and nine 
percent respectively, which further decreases the amount of 
oil available for export.  If the current trend holds, Syria 
is expected to switch from being a net exporter to become a 
net importer of oil in the next three to five years.  Local 
economists and proponents of economic reform highlight this 
shift as being the most compelling economic event facing the 
country.  They argue that without comprehensive SARG action 
to open up and diversify the economy, the country will soon 
face a significant economic crisis. 
 
3.  (C) Industry sources are less alarmist.  They comment 
that the SARG may be correct in hoping that rising natural 
gas production will offset diminished oil production to some 
extent.  Secondly, they expect Syria's oil sector to continue 
to benefit from high prices, which continue to draw new 
investment to the sector.  If managed correctly, they opine, 
Syria could witness significant new production coming on-line 
at just the right time ) in three to five years.  They 
comment that the biggest obstacle to realizing this is the 
SARG,s own chronic mismanagement of the sector. 
 
Declining Production 
-------------------- 
4.  (SBU) The backbone of Syria,s oil industry remains the 
al-Furat Petroleum Company (AFPC), a joint venture between 
the state-owned Syrian Petroleum Company (SPC) which owns 50 
percent of AFPC, and Royal Dutch Shell and PetroCanada who 
split the second 50 percent, 62/38 respectively.  AFPC 
produces a high quality, light crude that sells at one to two 
USD below Brent.  AFPC uses the oldest pipeline in the Middle 
East, the Kirkuk-to-Banyas pipeline, to move its product to 
market.  Though the pipeline has a rated capacity of 1.2 
million bpd, Shell executives tell us that there is not a lot 
of spare capacity even with AFPC,s declining production 
levels.  They attribute the limited spare capacity to the 
fact that the state-owned Syrian company responsible for 
running the pipeline has invested very little in maintenance 
in the last ten-plus years. 
 
5.  (C) AFPC,s oil production peaked in 1996, at over 
300,000 bpd, but has been declining ever since.  In recent 
years, AFPC has lost roughly 30,000 bpd of production per 
year.  In 2004, AFPC produced 213,000 bpd.  This year 
production is expected to average 183,000 bpd.  AFPC 
forecasts production to decline further to 153,000 bpd in 
2006.  In an effort to control the rate of decline, AFPC is 
applying technology to increase its rate of recovery, 
currently targeted at 50 percent.  AFPC also has an ambitious 
drilling plan that fully utilizes the available in-country 
rigs.  According to Hisham Yazigi, general manager for 
PetroCanada, AFPC,s strategy is to slow down the rate of 
production decline to the maximum extent possible, but 
further decline is inevitable. 
 
6.  (C) Recent international news stories on Syria,s 
declining oil sector have pointed to PetroCanada,s decision 
this year to explore the possibility of divesting of its 
junior interest in AFPC as proof of the lack of promise the 
sector holds.  Yazigi disputes this, claiming instead that 
Shell and PetroCanada have both profited greatly from their 
interests in AFPC and continue to do so.  For its part, 
PetroCanada is considering selling its share in AFPC because 
of a change in its management philosophy whereby it now seeks 
to be the operator of all of its overseas interests.  Yazigi 
commented that PetroCanada was pleasantly surprised at the 
level of initial interest in its AFPC shares when news of its 
possible sale first leaked out.  Far from leaving Syria, 
Yazigi says PetroCanada is looking for ways to expand its 
presence (see below). 
 
7.  (U) SPC is the other major oil producer in Syria.  The 
company has produced oil in Syria,s northeast for decades. 
Its current production level is estimated to be around 
180,000 bpd.  It is expected that SPC's production may soon 
overtake AFPC, but the oil it produces is a heavy-grade, high 
sulfur oil that sells at 20 to 30 USD below Brent, depending 
on the time of year.  A 30-inch, 200,000 bpd pipeline carries 
the SPC oil from the northeast to the refinery at Homs.  What 
isn,t used in the refinery is added to the Kirkuk-Banyas 
pipeline for export from the port at Banyas.  SPC does have 
one field that produces a high-grade oil, similar to AFPC,s, 
but its production is only around 5000 bpd. 
 
8.  (U) Total,s joint venture with SPC is the only other 
current oil producer of significance in Syria.  Similar to 
AFPC, Total,s production has recently been in decline, from 
66,000 bpd some years ago to an estimated 33,000 bpd today. 
Total also uses the Kirkuk-to-Banyas pipeline to move its 
oil.  Total is, likewise, using technology and an ambitious 
drilling plan to slow its production,s rate of decline.  At 
least one sector contact told us that he expects Total,s 
production to actually start to increase modestly as a result 
of the company's efforts. 
 
New Exploration 
--------------- 
9.  (C) The SARG last offered blocks for international 
bidding in 2003.  A number of production sharing contracts 
(PSC) were subsequently signed with firms ranging from 
Croatia to the US.  The US companies all subsequently left, 
but activity in their blocks continues.  The most promising 
oil developments are Gulfsands' in the extreme northeast of 
the country, and PetroCanada,s, which borders it. 
Gulfsands, a London based company, started shooting its 
seismic this month, with plans to start drilling in early 
April 2006.  Gulfsands managers told us they estimate the oil 
holding formations in their block are capable of having up to 
10 times more oil than the formations common in SPC,s areas. 
 Unless the political situation deteriorates further, 
Gulfsands managers believe their company could be producing 
between 50 to 100,000 bpd of high grade oil within three 
years. 
 
10.  (C) PetroCanada has finished shooting seismic in the new 
block it was awarded in 2003 and had planned to drill one or 
two wells before the end of the year.  A lack of in-country 
drilling rigs has compelled PetroCanada managers to change 
their plans.  Since Total and AFPC have all available rigs 
in-country fully booked, PetroCanada now plans to begin 
drilling its first well in July 2006.  In spite of the delay, 
PetroCanada managers still believe they could bring new 
production on line as early as 2007.  Because of the existing 
infrastructure and the spare capacity in the Kirkuk-Banyas 
pipeline, PetroCanada engineers estimate the company must 
only construct a 65-kilometer spur for PetroCanada to be able 
to move its oil to market. 
 
New Bidding Round 
----------------- 
11. (C) On November 7 and 8, Syria will hold a bidders' 
conference on seven new blocks for oil and gas exploration. 
Bids will be due on December 21, with the SARG expected to 
award the new blocks early in 2006.  In addition to 
soliciting bids, the conference is designed to highlight 
opportunities countrywide in both the oil and gas sectors. 
Dubai based, IBC Gulf Conferences is organizing the event on 
behalf of the Syrian Ministry of Petroleum and Mineral 
Resources.  Local industry representatives who have attended 
other IBC conferences have been critical of the quality of 
the company,s services.  Shell,s general manager Campbell 
Keir was equally critical of the SARG,s own ability to 
promote its oil sector.  Keir commented that in the last 
bidding round in 2003, the SARG,s efforts at promotion were 
so hopeless that Shell finally had to step in.  Keir said 
Shell ended up even having to pay for an ad in the Economist 
as the SARG couldn,t manage to make the payment on its own. 
According to Keir, the SARG has done equally little to 
promote this round, leaving everything to IBC, which he and 
others judge to not be up to the task. 
 
12.  (C) Still, with oil over 60USD per barrel, there is 
considerable interest in Syria,s oil sector in spite of the 
SARG,s poor marketing.  The general manager for Conoco 
Phillips, William Duey, describes the interest in Syria as 
&frothing8 and a side effect of how over-heated the sector 
is worldwide.  According to Duey, in the present market Syria 
is attractive to medium and small companies that are unable 
to get their foot in the door in other markets.  Duey 
commented further that because of its lax environmental and 
regulatory policies, Syria is viewed as a good place for 
companies that aspire to becoming operators, like Gulfsands, 
to start.  Duey said the same is true for the Chinese, who 
have been frustrated in their efforts to break into other 
markets in the Middle East.  For them, Syria offers the 
opportunity to establish a presence in the region. 
 
13.  (C) Shell's Keir is more dismissive of the type of 
companies Syria is attracting.  According to him, the 
companies interested in Syria are not to be taken seriously. 
He believes their goal to be nothing more than getting a hold 
of a block with some promise, shooting &a little seismic,8 
maybe drilling one or two wells, hyping its worth, and then 
selling out for as much as possible, as quickly as possible. 
Keir opined that no other major, besides Shell, would 
participate in the present bidding round so very little real 
development of the sector could be expected.  Keir added that 
even Shell was undecided whether it would actually submit a 
bid or not given the unstable political situation, though he 
felt there were blocks that were of significant potential. 
 
14.  (C) Comment.  The oil sector will undoubtedly remain 
important to Syria,s economy for the foreseeable future. 
With oil at 60USD per barrel, the conditions are favorable 
for the SARG to reverse the sector's current downward slide. 
Still, those most likely to turn the sector around - Shell, 
PetroCanada, and Gulfsands ) are all watching with great 
concern developments affecting Syria's political stability. 
The SARG, however, seems to be counting on companies from 
eastern Europe, Russia, India, and China to be able to 
replace any lost investment from the West, but these 
companies have yet to produce any oil of significance in 
Syria.  In any case, the SARG has increasingly less time to 
ensure its continuing membership in the select club of 
oil-exporting countries. 
SECHE