More at Stake for IOCs as Mideast Risk Profile Evolves

Big Oil will have breathed a big sigh of relief at the apparent end of the 12-day Israel-Iran conflict this week. The industry impacts were temporary and minor, and the potential market apocalypse — a closure of the Strait of Hormuz — was averted. Companies are back to work — but it’s not quite a return to business-as-usual. The geopolitical balance of the oil and gas heartlands of the Mideast has shifted; Israeli power is ascending, while Iranian clout is diminished. The extent of change is debatable, and it’s too early to gauge its impact. But the region’s politics are probably even less predictable than before the conflict started on Jun. 13. Meanwhile, the stakes for Western oil firms are increasing, with net output from the top six Western producers in the region surging some 41% over the last decade. Nevertheless, their appetite for Mideast risk is unlikely to have been shaken. European giants TotalEnergies and Eni demonstrated their commitment to the broader region by securing gas-prone exploration permits in Algeria last week, when the conflict was still raging. US Exxon Mobil and Occidental Petroleum are also studying an Algerian upstream entry. Eni, Shell and Chevron were also awarded blocks offshore Egypt on Wednesday. The conflict forced Chevron to temporarily shut down operations at its 12 billion cubic meter per year Leviathan project, one of two offshore Israeli projects forced off line. But a Chevron spokesperson assured its dedication to the region: “We take a long view of our investments.” Serious Mideast disruptions are rare, and when they occur — such as the 2019 Abqaiq-Khurais attack that took some 5.5 million barrels per day off line — they don’t last long, explains a former international oil executive: “When these conflicts flare up, they are out of your control. You focus on what you can control, keeping your people safe and facilities secure.”

The majors’ recent regional output gains cannot be explained solely by the post-pandemic relaxation in Opec-plus supply restraints. These firms are active in breaking ground on new projects, many spearheaded by non-Opec member Qatar. In short, the Mideast is more important for majors than it was 10 years ago. All but Exxon have lifted output. Eni, insignificant in the region a decade ago, is now a key player and will join the exclusive club of Qatari LNG equity partners when Doha’s three-phase 64 million ton per year LNG mega-expansion starts up in mid-2026. Political risk might be elevated and fiscal terms typically tight, but low-cost barrels and a stable regulatory framework in the Gulf states make for low commercial risk and a useful hedge against downturns elsewhere. And while this month’s conflict threatened to disrupt regional supply, actual impacts were less than in previous flare-ups. Damage to energy infrastructure was limited, confined to a strike on an onshore gas processing facility for South Pars 14, as well as hits on an oil depot and a refinery in Tehran. Israel’s 197,000 b/d Haifa refinery and a power station also suffered damage. Iraq is a traditional victim of spillover tensions involving Iran and saw some personnel evacuated, but no production was disrupted. Neither Lukoil, which leads the 430,000 b/d West Qurna-2 project, nor Chinese firms in Basra evacuated foreign staff. However, around 60% of Total’s secondees and 162 out of 260 Eni staff evacuated, state partner Basrah Oil Co. revealed. Both the Shell-led Basrah Gas Co. and Malaysian state Petronas, which runs the 130,000 b/d Garraf field, opted for “minimal manning but no evacuation,” sources say. In terms of future growth and risk to ongoing development, Piper Sandler analysts say Qatar’s North Field expansion projects and Iraq’s Kirkuk field, where BP is an investor, are the most meaningful to majors in the region over the next two years.

Beyond rising upstream volumes, the nature of majors’ engagement with the Gulf is evolving, and increasingly focused on downstream opportunities. Saudi Aramco is upgrading its Satorp joint venture refinery with Total and looking at expansions at three other joint venture refineries, while Chevron Phillips Chemical has teamed up with state-owned QatarEnergy for major petrochemicals joint ventures in both Texas and Qatar. For Gulf national oil companies, the conflict could accelerate their recent pivot to overseas energy investments to help diversify geographical risk. Already, Aramco and United Arab Emirates firms Abu Dhabi National Oil Co. (Adnoc) and Mubadala have made major LNG investments in the US, with Adnoc also investing in LNG in Mozambique, partnering with Exxon and Eni. Over the past nine years, QatarEnergy has become a major player in global exploration investing, albeit predominantly as a minority partner in over 80 blocks alongside its North Field investors — Shell, Exxon, Total and Eni. There have been a few failures, such as offshore Canada, Mozambique, Mexico and South Africa, but also some major successes, such as Namibia. The Gulf overseas energy investment push is not limited to oil and gas, with both Saudi Arabia and the UAE emerging as significant renewables investors, and both Saudi Arabia and Qatar more recently branching out to build critical minerals supply investments.