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