SYRIA,S GAS SECTOR UNABLE TO COMPENSATE FOR

C O N F I D E N T I A L SECTION 01 OF 03 DAMASCUS 000931 SIPDIS SIPDIS NEA/ELA E.O. 12958: DECL: 09/12/2017 TAGS: ECON EINV ENRG EPET ETRD ETTC PREL SY SUBJECT: SYRIA,S GAS SECTOR UNABLE TO COMPENSATE FOR DWINDLING OIL SUPPLIES REF: A. DAMASCUS 0613 ¶B. DAMASCUS 00762 ¶C. 06 DAMASCUS 4161 ¶D. DAMASCUS 0865 ¶E. DAMASCUS 0866 ¶F. DAMASCUS 0596 Classified By: CDA Michael Corbin for reasons 1.4b/d ¶1. (C) SUMMARY: The SARG routinely expresses confidence that its supply of natural gas -- when fully on-line ) will offset dwindling oil production. In preparation for this switch the SARG has been encouraging the substitution of natural gas for oil in electrical power generation. There is already a gap, however, between Syria's current gas production levels ) approximately 18 million cubic meters a day (cmd) - and growing demand. The SARG asserts that it will increase output to 32 million cmd by 2010, but this is unlikely given the sector's lack of development and delays in constructing new gas plants. Even if the SARG is able to meet its short to mid-term gas production goals, Syria's reserves of natural gas are unlikely to satisfy longer-term demand. Public and private sector contacts agree that the future of the gas sector in Syria lies in collaboration with Iraq, particularly the development of the Iraqi Akkas gas field near Iraq's border with Syria. Moreover, the Arab Gas Pipeline is a critical component of Syria's long-term plans to serve as a regional hub for the transfer of Iraqi gas to Turkey and Europe. End Summary. ¶2. (C) SYRIA'S GAS PRODUCTION TARGETS: The SARG claims that it is meeting its current production capacity of 22 million cubic meters per day (cmd) from fields located in al-Hasakeh in northeastern Syria and in Deir ez Zour and Palmyra in Central Syria. Industry experts, however, estimate that actual production is 18 million cmd. This disparity is attributed to gas processing plants that are not operating at full capacity ) both because the gas fields that currently feed these plants do not provide sufficient yield and because of mismanagement at the Syrian Petroleum Company (SPC). ¶3. (C) GAS PROCESSING PLANTS AND USAGE: Two-thirds of the gas produced in Syria is transferred to the national gas grid, while the remainder is re-injected into the oil fields to increase production. Approximately 75 percent of the gas transported to the national gas grid is used by the Ministry of Electricity for power generation, with the remainder supporting the two Syrian oil refineries, and cement and fertilizer factories. There are four gas processing plants currently in operation, as well as localized infrastructure at some oil fields that captures associated gas and re-injects it into the fields. The largest gas processing plant (13 million cmd) is located in Deir ez Zour and processes associated gas from oil fields operated by SPC and Total. The Omar gas plant (5 million cmd),also located in Deir ez Zour, processes associated gas from oil fields operated by the Al-Furat Petroleum Company (a joint SPC ) Royal Dutch Shell venture). There are also two gas plants, Jebeisseh (3 million cmd) and Sweidiyeh (660,000 cmd) that process both associated and non-associated gas from SPC-operated oil and gas fields in northeastern Syria near al-Hasakeh. ¶4. (C) GROWING DEMAND FOR NATURAL GAS: The SARG is not succeeding in its efforts to slow the decline of oil production and with it, its main revenue source (ref A). One of the SARG's strategies for offsetting this declining revenue has been to seek to develop its natural gas industry and substitute natural gas in power generation to free up as much oil as possible for export (ref B). This strategy, however, is constrained by Syria's current natural gas production levels, with industry contacts reporting that natural gas demand is already outstripping supply. Illustrating this point, contacts in the sector report SARG officials recently required several cement factories that had converted to natural gas to return to using diesel. The gap between supply and demand will only continue to grow as additional power stations are retrofitted to use natural gas in the coming year. ¶5. (C) SARG LIKELY UNABLE TO MEET MID-TERM GOALS: The SARG asserts that it will increase natural gas production to 32 million cmd by 2010 to meet growing demand. Industry experts DAMASCUS 00000931 002 OF 003 estimate this amount is insufficient to offset declining oil revenues, and moreover assert that the SARG is unlikely to meet this goal in the allocated time because of the under-developed state of the Syrian gas sector. The SARG is currently working to construct new gas treatment plants in the Palmyra region of central Syria that could potentially add upwards of 14 cmd to current production levels. Experts assert, however, that a lack of access to technology and skilled workers, an increasing reliance on inexperienced partners, and the need to build extensive infrastructure to bring gas to market will at the very least delay these efforts, if not frustrate them altogether. ¶6. (C) INCREASING RELIANCE ON INEXPERIENCED PARTNERS: Industry contacts report that due to U.S. sanctions and its own bureaucratic hurdles, the SARG has increasingly had to turn to less experienced partners in the gas industry )- resulting in delayed projects. For example, in late 2005 the SARG awarded the Russian company Stroytransgas )- a company which contacts argue has no such prior experience -- a contract to build a three million cmd gas processing plant. Nizar al-Assad, an Alawite businessman with close ties to the regime told Emboff that the Russian company was mismanaging the project. Due to production delays the SARG reportedly threatened the company with the loss of its 20 million USD performance bond. Nevertheless, Assad and other contacts report that Stroytransgas succeeded in renegotiating this contract as well as signing a new contract worth USD 216 million for an additional three million cmd gas processing plant. Contacts argue that the SARG chose the Russian firm despite its drawbacks because of its interest in closer strategic ties with Russian companies, especially with more experienced partners becoming hesitant to work in Syria. (Note: Conoco-Phillips by contrast completed, in 2005, a USD 200 million project for a 13 million cmd gas plant in Deir ez Zour below cost and earlier than projected. End note.) ¶7. (C) TIME AND ADDITIONAL INVESTMENT NEEDED FOR DEVELOPMENT: The gas treatment plants to be developed by Stroytransgas will gather gas from several SPC-operated fields located in the Palmyra region of central Syria. The SARG has also awarded concessions to Croatia's Naftoplin (INA) and PetroCanada for natural gas exploration in the same area. (Note: As reported in Ref C Marathon Oil was awarded the PetroCanada concession, but subsequently divested due to its assessed risk in Syria. End Note.) INA ) which also received lukewarm reviews from industry contacts in Syria ) is planning to build a 3.5 million cmd gas processing plant and a liquefied petroleum gas unit. PetroCanada is also actively developing its concession in al-Sha'er and al-Sharifah fields in central Syria, with the possibility of yielding more than two million cmd within three years. Nevertheless, Hisham Yazigi, PetroCanada's country manager, estimated that it would take several years for either INA or PetroCanada to construct the needed gas processing plants to bring this gas on-line. Moreover, Yazigi echoed other contacts when he said that gas required more infrastructure than oil, and that the SARG needed to do significant work to develop its infrastructure to bring gas to market. ¶8. (C) ARAB GAS PIPELINE: Even if the SARG increases its natural gas production, local experts do not believe Syria has sufficient reserves to support future demand. The SARG has already appeared interested in bridging this gap, in the near to medium-term through increased imports via the Arab Gas Pipeline(AGP),intended to carry Egyptian natural gas to Europe via Jordan, Syria, and Turkey. In late 2005 the SARG awarded Stroytransgas a contact to build the pipeline from the Jordanian border to central Syria. Industry contacts say this portion of the pipeline is almost complete and believe that Egyptian gas will flow to Syria at a rate of two to three million cmd in the beginning of 2008. (Note: The AGP will also provide Egyptian gas to Lebanon through a connector pipeline from Syria. This connector pipeline was completed in 2005 to provide Syrian gas to Lebanon, but was never utilized due to subsequent political tensions. End Note). The SARG also reportedly awarded Stroytransgas the contract to build the next component of the pipeline from central Syria to the Turkish border. Arab diplomatic and industry contacts note, however, that Egyptian gas alone is not enough to fill Syria's need for natural gas. ¶10. SYRIA IS A STEPPING STONE TO IRAQI GAS: Local experts DAMASCUS 00000931 003 OF 003 believe that the future of the gas sector in Syria lies in collaboration with Iraq ) particularly development of the Iraqi Akkas gas field, near Iraq's border with Syria. They further assert that the Akkas gas field has the potential to exceed all of Syria's natural gas production combined. In June 2007, the SARG contracted Shell to devise a master plan for developing Syria's gas sector and its position as a regional hub linking Arab countries with gas markets in Turkey and Europe. Campbell Keir, Shell's General Manager, told us that Shell's interest in the project is motivated at least in part by the lure of developing the Akkas field. Managers at Shell presented a plan to SARG managers, and subsequently to the Iraqis, to export natural gas from the Akkas field ) which already has capped, drilled wells ) through Syria to either the Arab Gas Pipeline or an LNG facility to be constructed in Syria's oil port of Banyias (ref D). Shell managers believe only minimal investment would be required to bring Iraqi gas to market should the political situation improve. ¶11. (C) Senior managers of both Shell and PetroCanada in Syria have admitted to Emboffs that their presence in Syria is due in part to its strategic location next to Iraq. They view Syria as a platform to move into Iraq - this includes training Syrian staff envisaged as a core of workers willing to work in Iraq once the market opens. During Syria's latest gas and oil bid round earlier this summer, there was significant interest from oil and gas companies, including PetroCanada, INA, and several Indian and Russian companies, in sections adjoining the Iraqi border (ref F). ¶12. (C) COMMENT: The SARG's likely failure to meet gas production targets of 32 million cmd by 2010 will undermine its ability to make up for falling oil revenue and efforts to develop new power stations to ameliorate persistent electricity shortages. Despite public declarations of confidence in its plans to develop the gas industry, the regime recognizes that collaboration offers the only realistic way to boost energy supplies. Moreover, collaboration with Iraq is essential for Syria to act as a conduit for gas, oil, and other commodities transiting from the Gulf and Iraq to Europe. Though economic considerations rarely, if ever, trump political interests in Syria, achieving its stated goals for developing its gas sector will require greater SARG cooperation with both Iraq and the West. CORBIN