Syria Liberalises its Oil Sector as its State Weakens and Regime Cronies Profit

The increasing difficulties faced by the Syrian government to import and subsidize oil products is leading to a rapid liberalization of this sector and to the end of the state monopoly that dates back to the arrival to power of the Baath Party in the 1960s.

Three and a half years after the beginning of the uprising, the challenges faced by the government in the oil industry include: low budget revenues; the devaluation of the Syrian pound relative to the dollar, which increases the cost of imports and the differential between the buying and selling prices of subsidised oil products; Western sanctions on the transport of petroleum products to Syria; and the end of the Iranian credit line that funded most oil imports in the last year.

As a consequence, since the beginning of October, the government has taken several measures to liberalize the oil sector.

In early October, it allowed the private sector to import and distribute mazout and fuel on the condition that they were sold exclusively to industrialists. Until then, the import of these products was the monopoly of Mahrukat, a company affiliated to the Ministry of Petroleum. The decision was justified by the need to ensure a regular supply of oil products to the industrial sector in order to end production stoppages in many factories.

Then, later that month, the government raised the price of these two products to their levels in world markets, ending, in practice, subsidies for the industrial sector – subsidies for households and other business sectors remained.

With the increase of prices and the authorization granted to the private sector to import, the oil market for the industrial sector is now almost completely liberalized. “Almost” because some restrictions remain. Before importing, traders need to obtain licenses from the Central Bank of Syria, from Mahrukat and from the directorate of industry in the governorate where they are based. These licenses are a means of selecting traders that will be allowed to import and, therefore, to favour regime cronies.

Then, in late November, Al-Watan, a well-connected daily, said that the Government was encouraging private investors to import crude oil, to refine it in one of the country’s two refineries of Banias or Homs and to sell it back in the local market or for export. It is not yet clear how the prices would be set or if the oil could only be sold to industrialists. The government would be paid by these investors either in cash or through the supply of some of the refined products.

Given the cost and the logistics required for this type of operations, only investors close to the regime, who can receive guarantees from the government that they will not face bureaucratic and other obstacles might be interested.

Although the Government retains a very important role in the oil industry, its growing reliance on the private sector is a reflection of the weakening of the Syrian State. For decades, control over the energy sector was perceived as a guarantee of national independence, as a means to encourage the development of a powerful industrial sector, and, through subsidies, as part of a policy to ensure social justice.

All of this is now crumbling, bit by bit, as the State relies more and more on regime cronies to support it.

Note: This article appeared first in December 2014 in The Syrian Observer

Is the Syrian Government Trying to Reduce its Oil Dependency on both Tehran and…ISIS?

In the same week at the beginning of this month, the Syrian government increased the price of gas oil and gasoline, and allowed private traders to import various oil derivatives, ending a decades-old state monopoly on oil trade.

The increases of 33 percent in the price of gas oil and of 17 percent in the price of gasoline were expected given that Syria now imports most of its oil and that the decline of the Syrian Pound relative to the dollar increased significantly the cost of these imports.

However, the timing of the decision was strange because it occurred just a few days before Eid Al-Adha, the most important religious holiday in the country, and a period during which the government usually tries to appease its population, not burden it with a price hike.

The increase will likely have a significant inflationary impact. Last year, when the government also increased the price of heating oil, it announced at the same time a pay rise for public sector employees; not this time. The decision seem therefore to indicate some form of emergency, given also that it comes following the increase in the price of various products and services, such as bread, water and electricity, during the summer.

As to the decision to open the oil import trade to the private sector, it comes with some restrictions; traders can import only gas oil and fuel oil and are allowed to resell only to industrial concerns. Still, the move highlights the difficulties faced by state entities, most of which are under western sanctions, to buy from international markets. The Minister of Economy commented on the decision saying that it would reduce shortages faced by manufacturers.

The government requires that importers obtain various approvals and licenses granted by the Central Bank of Syria, Mahrukat and the Directorate of Industry in each Governorate before they can import. This is normally a good way to select traders in order to favor those most closely associated with security and other regime officials.

It may be a coincidence but the two decisions – to increase the price of oil products and to allow imports from the private sector – were taken only a few days after the US-led international coalition bombed most of the oil refineries handled by ISIS in the eastern region. There have been various reports in the last year that the government was buying some of its oil from ISIS and the fact that these two decisions follow the destruction of the refineries – which likely reduced overall supply in the market – will again raise speculations on this issue.

Another aspect must also be taken into account here. Since August 2013, Syria has been relying largely on Iran to buy its oil, thanks to a USD 3.6 billion credit line granted by Tehran to Damascus to finance its imports. In practice, Iran is not believed to be providing cash but rather to supply crude oil instead. It is not clear how much of this credit line is still available but it is likely that Tehran, which has its own economic difficulties, will not be able to forever support the Syrian government.

While the government’s twin decisions may appear as based on purely economic grounds, they may also be a means to bypass its dependency on both Tehran and…ISIS.

Note: This article appeared first in October 2014 in The Syrian Observer

Russia looks for economic gain in Syria

The Syrian government has confirmed a preliminary agreement with Soyuzneftegaz, a Russian oil and gas company, for the exploration of the country’s offshore waters, highlighting Moscow’s desire to capitalise economically on its sustained political and military support for the Assad regime.

No details have emerged on the specifics of the agreement between Soyuzneftegaz and the Syrian government but its timing is significant. For Damascus the deal represents a much needed attempt to secure energy supplies and revenue flows.The November announcement capped more than five months of negotiations between the government and Soyuzneftegaz and a formal agreement is expected to be signed between the two parties in the next few weeks.

Recent gas finds in the offshore areas of Israel and Cyprus have raised the energy prospects of the eastern shore of the Mediterranean. However, Syria has been slow in exploring its offshore potential, partly because of the 30-month old conflict gripping the country.

In 2007, the Syrian government did launch a bidding process for the exploration and development of four offshore blocks over a total area of 5,000 square kilometres. However, because of the poor terms offered and the high risks and costs associated with offshore exploration the process was largely unsuccessful – only one small independent oil company submitted a bid. Another licensing round with improved terms was initiated in March 2011, only days after the beginning of the first protests. Unsurprisingly that round also failed to attract much interest.

In the last two years all international oil companies have withdrawn from the country. European and Canadian companies quickly left because of sanctions imposed by their home countries. Russian and Chinese companies left at a later stage due to the widening violence, particularly in the north-east where almost all oil and gas reserves are located. Some 14 foreign companies were involved in oil exploration in Syria in early 2011, of which eight were western and only two were Russian.

Soyuzneftegaz, which was exploring an area located on the border with Iraq, was among these – the company had drilled two wells in its block but has not yet made any finds. Unlike European firms, it is not now bound by any sanctions. It would also face fewer security problems in offshore exploration given that the coastal area is among the safest in the country.

Since the beginning of the uprising two and a half years ago, Moscow has been a key ally of the Assad regime, supporting it against most of the international community. Russia’s support has principally come through the use of its political weight and its veto power in the UN Security Council, but also through financial and military backing. The governor of the Syrian Central Bank has, for instance, acknowledged on several occasions that his institution is using Russian banks to escape European and American sanctions.

For Moscow, which has a controlling stake in Soyuzneftegaz through the Central Bank of Russia, the deal with the Syrian government holds several potential benefits. Firstly it enables it to capitalize economically on its support for the regime; secondly it could help it secure a foothold in the eastern Mediterranean’s potentially promising gas reserves; and thirdly it would gain an advantage over rivals, including Qatar and Iran, in any future competition to control energy supply routes from the Levant to Europe.

Despite analysis to the contrary, Russia’s direct interests in Syria over recent years were very limited. Its naval base in Tartous was more akin to a resupply station; its economic presence was restricted to a handful of companies; cultural relations were negligible; and political ties were unimpressive.

Russia’s support to Damascus since the beginning of the conflict was first and foremost a means for Moscow to reassert itself on the international stage and to rehabilitate the Security Council as the source of legitimacy for intervention in international affairs. But with the lengthening of the conflict and Damascus’ continuing dependency on it, Moscow is now trying to secure some material reward.

Note: This article appeared first in December 2013 in the blog of the European Council on Foreign Relations

The EU’s pointless oil gesture

On April 22, the European Union lifted its embargo on Syria’s oil exports to enable the purchase of crude oil from the opposition. The diplomatic move also permitted the sale of oil equipment to the opposition and allow the investment in oil fields located in rebel-held areas.

Sanctions imposed by the EU in September 2011 banned the purchase of all crude oil produced in Syria as well as its transport and the insurance of the tankers that transported it. While other Western countries have imposed their own set of sanctions, the EU’s has a more significant impact. Prior to the uprising, the bloc purchased more than 90 percent of all exported Syrian crude.

The rationale behind the decision to partially lift the sanctions appears to be that it will give more financial clout to the opposition, enabling it to finance the purchase of weapons and to spend and invest in the areas under its control.

However, the actual impact on the ground is less clear. Indeed, while most oil fields are now out of the direct control of the central authorities in Damascus, the groups that actually control them are varied and have sometimes competing agendas.

Syria’s oil fields are spread in two broad areas: the first around the city of Deir ez-Zor, in the east, which produced around 100,000 barrels of per day (bpd) prior to the uprising; and the second in the province of Hassakeh, in the north and north-east, which produced some 250,000 bpd.

The former is under the control of disparate groups of fighters, including local tribesmen or fighters affiliated to radical Islamist groups such as Jabhat al-Nusra. The continued fighting in the region and the fighters’ lack of experience in the oil industry has reportedly led to the eruption of many well fires. In early April, the minister of oil announced that three wells with a cumulative daily output of more than 2,000 barrels of oil had burned. The cumulative loss from all the well fires is estimated by the ministry at the equivalent of around 750,000 barrels of crude. At current global prices, this is some $75 million.

Apparently, the government continues to control some smaller fields and manages to procure additional amounts through purchase agreements it has entered into with some of the groups that control the other fields — unconfirmed reports include even Jabhat al-Nusra among these groups.

Meanwhile, many locals are using their control of oil wells to generate new sources of income and wealth, leading many of them to abandon the fight against the regime.

The fields located further to the north, around the city of Hassakeh, are to some extent under the control of the armed wing of the Democratic Union Party (DUP). The DUP is the best armed Kurdish party and has remained at an equal distance from both the regime and the opposition. Kurdish rebels are relatively well organized and disciplined, and the fields are located in a region that has avoided much of the chaos witnessed near Deir ez-Zor.

The situation of the Suwaydiyah field, the largest Syrian oil field, which is located around Qamishli, is not clear but even if it were technically still under the control of the government, in practice the whole surrounding area is held by the Kurds.

Here, too, the Syrian government continues apparently to access some of the oil produced, either thanks to its relatively good ties with the DUP or because it also purchases oil from the groups in charge in the region.

This picture of the current state of Syria’s oil sector is further complicated by the disrupted distribution networks across the country. Not only are the fields under the control of groups that fall outside the scope of the political wing of the opposition; even if the opposition managed to put some order in its ranks and ensure that all oil produced in rebel-held areas fell under its control, it would still have the task of managing the logistics behind the transport and export of the crude.

The partial lifting of the embargo will do no harm to the opposition. But given current facts of the ground, it will struggle to make any significant impact.

Note: This article appeared first in the May 2013 edition of Executive Magazine

Syria can’t afford to break apart

As violence expands across Syria, fears over the future of the country are increasing. They range from the potential use of chemical weapons in the conflict to the unleashing of a full-fledged sectarian war and to the potential disintegration and partition of the country along sectarian and ethnic lines.

Regarding the latter risk, it is likely that economic factors will play an important role in terms of its impact on the centralization/decentralization debate and on how any future partition of the country could affect economic policies.

The issue that comes first to the mind is obviously the north-eastern part of Syria, inhabited to a large extent by a Kurdish population. While prior to the conflict the demands of the Kurds were mainly limited to linguistic and cultural rights, there are now increasing calls for the creation of an autonomous region. The issue is particularly sensitive because Syria’s northeastern region is home to the country’s largest reserves of crude oil.

Indeed, while fields located near Deir Ez Zor, where the population is overwhelmingly Arab, generated most of Syria’s crude output in the 1990s, their production has now fallen from more than 400,000 barrels per day (b/d) in 1996 to around 100,000 b/d in early 2011. The fields around Hassakeh, near the Kurdish region, now extract more than 250,000 b/d of crude and hold most of the country’s reserves; these fields are now to a large extent under the control of the Kurdish Democratic Union Party.

Besides oil, however, the northeast is also host to most of Syria’s wheat and cotton crops. Because bread is Syria’s main staple food and cotton is key to the development of the large textile industry, keeping control of the region will be of utmost importance for any future Syrian central government.

The fears over a Kurdish region with wide autonomous powers may be exaggerated in view of the relatively small size of the population, the lack of a major urban centre — Qamishli, the largest city in the Kurdish region, is home to only around 200,000 people — and the fact that Kurds are actually spread across the country; the largest concentration of Kurds is in Aleppo, which has a majority Arab population. Still, the debate on how to share the resources of the state between the central government and the various provinces making up the country will be of particular importance when it comes to the Kurdish-dominated parts of Syria.

Another region of Syria that matters in the debate over decentralization or partition is the coastal area, where a large portion of the population is Alawite. While the issue of a potential independent Alawite state was raised during the French mandate, it has largely died out since and was reignited only in the last few months with the growing sectarian tones of the conflict gripping the country. Besides the fact that Sunnis and Christians probably represent up to 50 percent of the population of that region, the economic challenges that such a region would face would be numerous.

Syria’s coastal region has very limited manufacturing and agricultural basis. Except for a refinery in Banias, a single power plant and an old cement plant, manufacturing is limited to light industries and agriculture to tobacco and citrus fruits.

Some argue that Lebanon has managed to remain independent with as little resources. However, Syria’s coastal region has none of Lebanon’s large expatriate community, significant human resource wealth and excellent know-how in the financial, touristic, education and health sectors.

The debate over the sharing of the resources of the central government goes, however, beyond the sectarian/ethnic issue. Syria’s small cities, spread across most of the country, such as Rastan, Talbisah and Tel Kalakh, have paid an extremely heavy price in the uprising and are likely to demand a much larger share of the government’s money and investment programs than other less affected regions — including parts of the country inhabited by minority groups, such as Suweida or the Christian city of Mhardeh.

What will the policy of any future government be on these issues and what impact will it have on issues such as development programs or political representation? With more time passing, the challenges for future Syrian governments are increasing. It is time the opposition starts thinking about them.

Note: This article appeared first in the April 2013 edition of Executive Magazine