POSSIBLE ACTIONS AGAINST THE SYRIAN REGIME'S REVENUES FROM OIL & GAS May 31, 2011 Importance

of Oil Revenues Syria's oil and gas industry is modest by global standards but it provides a considerable amount of the Assad regime's income. According to IMF estimates, oil revenues represented between 21% and 30% of total government income in the years 2006-10, grossing $2.8 billion in 2008 and $2.4 billion in 20091. Syria produces about 390,000 barrels a day but its own rising consumption has meant it exports less than half of that. In 2009, according to the International Energy Agency, it exported about 148,000 barrels of oil a day. Of these almost all went to European OECD countries, notably Germany, France, Italy and the Netherlands which accounted for 143,000 bpd, or 96% of all exports. Syria also produces some 5.8 million cubic metres of natural gas but does not export. A significant proportion is re-injected into oilfields, a small amount is flared and the rest is produced for domestic use in power generation. Broadly speaking, potential actions fall into three categories: 1) Short- and medium-term attempts to deprive the regime of income, such as pressuring oil companies to cease production in Syria, or stop buying and shipping Syrian oil to market. 2) Longer term action to dent business confidence by pressuring companies to stop investing in the sector, particularly in exploration and new infrastructural projects. 3) Demonstrations of solidarity which are psychological pressure to the regime, and support to the peaceful protesters. Income Deprivation Strategies As far as category 1 goes, the obvious campaign would be to try and stop Syrian oil exports by pressuring their trading partners, the international oil companies involved in the country. A list of these is attached in Appendix A. There are three potential risks to this approach: first, that the Syrian government might be able simply to replace current trading partners with new ones, most notably in the Chinese and Asian markets; secondly, that the cumulative impact of reducing or eliminating exports would not be significant enough; third, that such a campaign might simply fail to change the policies' of the companies concerned. As far as the first risk is concerned, there are plenty of cases where sanctions and boycotts have been shown not to work in tight world markets, the most notable recent case in oil being Sudan, where a successful Western divestment campaign over the Darfur issue simply led to the replacement of European and North American oil companies with Asian ones, as Sudan's industry actually expanded constantly2. In the case of Syria, however, it is possible that it would not be so easy for the regime to change customers because of the nature of Syrian crude. The main grade is Soweidie, a heavy and
1 Syrian Arab Republic: 2009 Article IV Consultation, IMF Country Report No. 10/86, pp22 and following 2 Luke Patey, Against the Asia Tide, Sudan Divestment Campaign, Danish Institute for International Studies, 2009
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sour grade which requires special calibration in refineries to maximise utility3. The IEA states that most Syrian crude is sold on 12-month term contracts, which would imply longer term arrangements to deal with the specificities of the grade. On the other hand, these contracts may themselves raise the barrier for companies under pressure to divest. It is one thing not to buy oil available on the spot market. But presumably, they could be at risk of being in breach of contract if they fail to take delivery of crude shipments that have already been agreed. There may also be some logistical and price issues in a change of markets for the Syrian regime regardless of refinery adjustments. It appears that all Syrian oil is currently shipped by tankers n the Aframax class on short trips across the Mediterranean. To ship to Asia is likely to increase shipping costs considerably, a cost the buyer could not be expected to bear, therefore cutting the Syrian regimes revenues per barrel. Soweidie trades at a discount of $10 or more to Brent, and market reports say that discount increased over the last two years. The IMF's Article IV consultation of April 2010 estimated that Syrian oil averaged a sale price of $52 per barrel in 2009. With exports of 148,000 barrels a day, and government revenues of $2.42 billion that year, that works out at $44.71 government revenue per barrel of oil that year. Shipping rates are hard to gauge since they depend a lot on current demand and perceived risk. It is likely, though, that exporting to Asian markets could add some $2 to $5 per barrel of cost compared to Italy, say. If the larger VLCC or ULCC classes of tanker could be used, either the ship would have to avoid the Suez Canal or trans-ship through the Sumed pipeline, either of which will add cost. On the other hand, the smaller grades of vessel are themselves more expensive per barrel, and even they might also avoid the Suez Canal because of perceived vulnerability to piracy on the Straits of Mandab, next to Somalia. The Syrian government take would therefore likely decrease by between 5% and 12% if there were any switch to Asian markets, even assuming full sales and no pass-through of refinery calibration costs. But the figure could be considerably higher. The government take according to these calculations represents some 85% of all revenue generated, raising a question over whether that is the sum before the operating and capital expenditures of Syria's state-run oil companies are taken into account. If those expenses have to come out of the $44 figure, then either the Assad regime must lose a higher proportion of direct revenue it can channel into its security forces and patronage networks, or it must risk starving its oil industry even of basic operating expenses. As far as the third consideration, the degree and pace of impact, Syria seems to have considerable foreign exchange cover. The IMF confirms government figures of some $17 billion in total external reserves, equivalent to nine months import cover. This is important because it means that even if all oil exports were cut off the regime is likely to have resources to survive on for several months at least. Any boycotting or sanctions should therefore be undertaken with this in mind. On the other hand, the importance of oil revenues to the regime is likely to be greater than just its 25% share in the central government budget, since it represents precious foreign currency. This gives it a premium in terms of the Assad regime's patronage networks, particularly because the other major foreign currency earner, tourism, is likely to collapse in 2011 as a result of the uprising and repression, and in any case is harder to channel to security services and other key elements of the regime since, unlike oil, it is distributed across the economy. The government said that 8 million visitors spent $8.5 billion in Syria in 2010, which would represent something like 15% of the country's GDP. Against the likely collapse of this source of foreign exchange, oil income increases in importance. The government announced in May new regulations designed to stop capital flight, estimated in the hundreds of millions of dollars from March to May 2011.
3 Cf http://abarrelfull.wikidot.com/souedie-crude-oil Souweidie has an API rating of 23
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Investment and Infrastructure Campaigns Activists might choose instead to target companies involved in exploration and infrastructural development in Syria. The upside of this is that Syria's proven reserves are depleting fast. According to BP's Statistical Review, Syria's proven reserves dropped from 3 billion barrels of oil in 2006 to 2.5 billion barrels in 20094. In theory, that represents 17 years of current levels of production, but international market interest will start to wane long before the last drop is scheduled to be pumped. Not only that, but the remaining fields are small and bitty and prospectivity is relatively low. Syria started producing oil in the 1960s and its geology has been fairly well explored. That means its chances of finding and producing more oil and gas depend more on enhanced exploration and recovery techniques than in the hope of a big, new find. Of intelligent tie-ins across multiple production areas, extensive use of latest exploration techniques such as 4D visualation and in-time bit analysis. That is promising because it is in these areas of expertise that the large International Oil Companies headquartered in Western countries hold competitive advantage, and the agile independent companies likewise listed on OECD stock markets. This means that Syria's future prospectivity could be linked, at least indirectly, to public opinion in OECD countries. Iran and Libya are notable cases where Western-led sanctions, not observed by Chinese or other Asian companies, have succeeded in hampering the development of the industry. The downside is that these are long-term effects. The average oil industry play takes an absolute minimum of five years from exploration to commercial production, so all such actions on investment would threaten is the deprivation of income some considerable period down the line. But for the last two months, the Assad regime has been playing for time day by day and week by week and is unlikely to be focused on anything over such a time-scale. Demonstrations of Solidarity Because of its political positioning, Syria's regime is unlikely to be affected by adverse Western public opinion. There is even a risk that it is encouraged to continue to portray itself as the champion of Arab interests against Western incursions. There are, however, three possible campaigns targeting various aspects of its oil and gas industry which could have significant psychological damage to the regime, and morale boost to the protesters, two of which could also result in some practical problems for the regime. All of them are by Arab constituencies. First, activists in Egypt could campaign for the new government to stop gas sales to Syria through the Arab Gas Pipeline. According to the BP review, these reached 900 million cubic metres in 2009, representing a notional market value of perhaps $120 million (although gas prices are notoriously variable since they lack a spot market). This represented about 10% of Syria's 2008 gas consumption, according to figures from the US Department of Energy. It is conceivable that cutting off Egyptian gas, therefore, could have an effect at the margins on Syria's plans to transfer power generation into natural gas from oil. If the regime decided to divert more crude oil to local power generation, it would lose more foreign exchange. But the overall effect is likely to be more symbolic. It may be that
4 BP Statistical Review 2010 http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622
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contracts are in place which would make the government unable or unwilling to cut off gas supplies to Syria. The new government has after all announced that it is constrained to abide by existing contracts, which are far more controversial, with Israel. But in that case, simply the existence of an Egyptian lobby pressuring the government in this direction will be an important psychological blow to the Syrian regime, and boost to the democracy protesters. Second, Iraq could announce it is suspending work on re-opening the strategic crude oil pipeline to Banias. This pipeline was first opened in the 1950s giving Iraq's oil industry a terminal on the Mediterranean Sea. At its peak it operated at 300,000 barrels a day, though feuding between Iraq and Syria and Iraq;s subsequent wars left it inoperative for many years. Now, though, the two governments have agreed to reactivate the pipeline as part of Iraq's plans to increase exports from 2 million to over 10 million barrels a day in the next few years. Reuters has reported the pipeline, from the northern Iraqi field of Kirkuk, could earn Syria between $1 billion and $1.5 billion throush transit revenues. Full operation of the line is some time away. If Iraqi activists or civil society organisations were to petition their government to freeze development of the pipeline, it would not have any immediate revenue impact on the Syrian regime. But it would signal a loss of future income that will make borrowing on international markets marginally harder. The Iraqi government of Nouri al-Maliki has so far given no indication it is willing to sacrifice its own export plans for the sake of solidarity with Syrian protesters. But it is democratically elected. As with Egypt, even if activists were not able to persuade their governments to act, the issue would provide powerful examples of Arab public opinion turning against the Syrian regime. Lastly, Syria's current crude exports require something like six Aframax tanker shipments a month. It would be possible for Syrians, or other Arab activists, to base themselves in Turkey or Cyprus and sail out in small boats to intercept the tankers on their way to European or Asian refineries, thus providing graphic and widely publicisable footage of more opposition to the Syrian regime. Appendix A: Foreign Companies Involved Exploration: Royal Dutch Shell (UK/Netherlands) Total (France) Tanganyika (Canada) Petrocanada (Canada) ONGC (India) Devon Energy (USA) GulfSands (UK) Production5: Shell (UK/Netherlands, via SSPC) Gulfsands Petroleum (UK) Total (France) CNPC (China, via SSPC) INA (Croatia)

5 Taken from the IKV Pax Christi report: Investments of European Companies in Syria, May 2011
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Stage 1 Exploration

Action Publicity campaign against international companies involved in exploring in Egypt: Shell (UK), Tanghanyika, PetroCanada (Canada), ONGC (India), GulfSands (UK) N/A

Goal Slow or stop exploration activity for new resources

Impact Create pressure as falling production from existing fields not to be replaced by new finds

Risks Could fail to induce companies to abide by boycott; or they could be replaced by others, such as CNPC

Next Step Take detailed advice from industry experts as to prospectivity & nature of agreements in Syria

Production 2 Export

Syrian and other Arab Capture publicity activists blockade tankers on pan-Arab leaving Syrian ports channels

Demoralise regime and give support to protesters

Physical injury; if perceived to be Western-led would have adverse publicity effects

Consult with Syrian & Egyptian activists

Campaign in Europe against European companies taking Syrian crude to refine

Deprive regime of Cut gov't Gov't could redirect oil sales revenues by $7 sales to other million a day markets (e.g. Asia)

Consult industry on calibrations required for new refineries to take on Syrian crude & how to identify which refineries take Syrian crude; also on what shipping costs would be to Asia cf the Med Consult with Syrian activists on readiness of population; Egyptian activists on modalities of protest

4 Import & Consumption

Egypt could refuse gas sales through the Arab Gas Pipeline

Cause loss of revenues by forced use of export oil for power generation, or gov't weakness by power cuts

Psychological blow to regime to be boycotted by Arab democracy

Loss might be too small to have major practical effect; harm to Syrian population from power cuts might be counterproductive Iraqi govt refuses, and even cracks down on Iraqi activists involved in such a campaign; retribution against Iraqi refugees in Syria

Iraq could stall pipeline re- Deteriorate activation plans. relations between Assad regime and Iraq

Blow to business confidence from loss of future income]

Consult with Iraqi civil society organisations interested in oil transparency issues

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