Middle East oil and gas recovery faces months-long process despite ceasefire

The 11 million b/d of upstream production currently shut-in across the Middle East can only be restored when export logistics normalise, according to Wood Mackenzie.

Initial stages of oil supply recovery

"A 'workable system' of transit and shipowner confidence in the security of the transiting vessels is essential," said Alan Gelder, SVP Refining, Chemicals and Oil Markets at Wood Mackenzie. "This includes availability of insurance for transiting vessels, facilitating commercial trade financing, sustained outbound vessel transits through the Strait of Hormuz making current oil on water available to the global refining market, and sustained inbound vessel transits through the Strait making ballasting vessels available to load crude at Gulf load ports. There also needs to be confidence in viability of transit during and beyond the current two-week ceasefire."

Laden vessels have every incentive to transit the Strait of Hormuz as quickly as insurance and security assurances allow, but it is unclear what rate of transits can be achieved safely.

"Ballasting vessels are unlikely to enter via the Strait of Hormuz any sooner than a 'just in time' logistics basis, at risk of becoming trapped if hostilities resume," Gelder added. "Onshore storage drawdown remains constrained by over-the-jetty load rates, onshore inventories cannot be instantaneously transferred to ballasting vessels."

Secondary stages of oil recovery

As export volumes ramp up, storage ullage will allow upstream production and refining operations to resume. The level of storage varies from around a month for Saudi Arabia and the UAE, to less than two weeks for Iraq and Kuwait.

"The initial recovery from major fields will be more than sufficient to meet the ramp-up of export volumes. Shipping logistics will remain the constraint on upstream recovery for several weeks," said Fraser McKay, Head of Upstream Analysis at Wood Mackenzie. "Thereafter, as those constraints begin to ease, the constraints on supply will shift to the upstream production, and this will expose the different challenges each country faces. More than half of most field's previous supply levels could be restored before shipping constraints ease. Thereafter, different recovery profiles will emerge."

McKay noted that even unconstrained, it will take countries like Iraq a long time to reach prior production levels—as long as between 6 and 9 months—given the complexities involved, due to both reservoir management and resource constraints.

In other countries, while there is little damage to upstream infrastructure, local demand centres (i.e. refining capacity) could require repair. So even though exports will ramp-up, previous production highs will take much longer to reach.

"There are a couple of silver linings of these shut-ins," McKay said. "The first is, this is the largest and longest build-up test—though not how they would typically be undertaken—in history, so reservoir engineers will have more data to incorporate into optimisation plans. The second is reservoir pressures tend to rebalance with time, and so pressure around producing wells will have increased, helping the deliverability of these wells during their recovery."

Most or all of these operators will have had a contingency plan in place before war broke out. This will have been adapted as events unfolded, so if and when the uncertainty around exports is resolved, these could be initiated quickly. And ultimately, most—but not all—production will be restored to prior levels.

But some things will break as they are brought back onstream, from downhole damage sustained during the shut-down or other unplanned operational complexities. Fortunately, for both the region's big oil producers, Saudi Arabia and UAE, they hold spare capacity. So, they should be able to arbitrage most of these ill effects and are more likely to be limited by offloading logistics than upstream potential.

"But all this comes with a health warning," McKay added. "Operators hastened by regulators and governments to restore production too rapidly, will risk doing more long-term damage to foundational assets.”

Gas recovery

A two-week ceasefire in the Middle East is bearish for global gas prices, but as of noon London time on Wednesday, little has fundamentally changed with regards to LNG supply.

"The ceasefire means it may be possible for the 14 trapped laden LNG cargoes in the Gulf to exit the Strait of Hormuz and provide some relief to the global gas market," said Tom Marzec-Manser, Europe Gas and LNG Wood Mackenzie. "But for there to be a real structural change in supply the Ras Laffan site in Qatar would need to restart its 12 operable trains. It is unclear if QatarEnergy would consider doing this during a ceasefire, however."

Satellite imagery shows that two mega-trains at the Ras Laffan's North site still have heat signatures, so may be able to fully restart relatively quickly.

As with oil, it remains to be seen how quickly any ships leave the Strait, as visual checks by Iranian authorities may still need to take place between Larak island and the Iranian mainland.

"If ballast LNG vessels were able to enter the Gulf, loading would also be possible immediately for 10+ vessels, even if LNG production at Ras Laffan has not yet resumed," said Marzec-Manser. "There have been a number of loadings for delivery to Kuwait while the conflict has been on-going."

Wood Mackenzie assumes that if QatarEnergy began restarting Ras Laffan at the start of May, it would take all the way to the end of August for the 12 trains to return to full service. A restart of just the 41mtpa North site would take just over a month. It would be the South site which takes through to the end of the summer to restart.

It is the South site which originally had a 36mtpa capacity that have sustained damage. These two additional trains will not return to service for a number of years and reduce the site's capacity to 24 mtpa.

Wood Mackenzie assumes the ADNOC's 5 mtpa Das Island LNG plant in the UAE will be able to return to service fairly quickly.

"Outside LNG, domestic gas infrastructure in the UAE has been harder hit than oil, and that recovery process could require longer-term repair work," Marzec-Manser added. "Sustained disruption at Habshan would have wide-ranging implications for domestic gas availability, compelling the UAE to reduce reinjection volumes or increase piped imports via the Dolphin pipeline."