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10/10/2011 - Issue 55
Syria’s oil sector feels the pain
by Obaida Hamad
Syria's oil industry, a critical mainstay of the economy and a vital source of government income, is now being targeted by sanctions from both the United States and the European Union. It takes will, might, and plenty of patience, to outlive the crisis, experts say.
Washington and Brussels hope that squeezing Syria's small but lucrative oil sector will have a serious impact on government financing and, as a result, help them meet their openly expressed aim of toppling President Bashar al-Assad.
Industry experts, analysts and political commentators are, however, divided on how effective these sanctions can be, and what impact they will end up having on Syria's ability to remain financially afloat in the face of an unprecedented domestic crisis and international pressures.
"The sanctions against oil will be a big blow to the country, they will hit the Syrian economy hard," said Hussein Amach, a Damascus-based economist who previously worked at the International Monetary Fund in Washington.
"Oil is more important now than is typically the case. Because tax receipts are down, oil now finances 30 to 40 per cent of government spending. Anything that affects that will have a serious impact on the budget."
Amach, a founder of al Jazeera University and a member of a pro-reform Democratic National Initiative platform, said the Syrian government would be running a "serious deficit" and, with oil incomes cut, would be eating into dwindling hard currency reserves in order to meet the day-to-day costs of running a country.
"The sanctions will push Syria closer to major economic problems," he said. "In the short term, the government will be able to meet its costs but over the medium to long term, it will be very hard on the economy, we will see pressure building to devalue the Syrian pound."
Mazen Ganamah, a shareholder in Ganamah Oil Group which provides well-related, equipment and engineering services to Syria’s oil sector, disagreed, saying the impact of expanded sanctions would be limited.
“The European embargo on the Syrian oil experts will have no direct affects on the working oil companies in the country or the signed contracts for exploration and production,” he said.
However, he said there would be a psychological effect created by the term ‘embargo’ being applied to Syria’s oil industry, with its negative implications and stigma.
“The word of ‘embargo’ has affects on the Syrian oil sector’s reputation,” he said. “Trade deals including the oil deals depend on reliability and reputation. Although the EU only sanctioned importing of the Syrian crude oil it is hard to anticipate the consequences ‘embargo’ will have on bringing new companies to the Syrian oil sector.”
Another Syrian working in the oil business said the delayed implementation of sanctions would help Syria react and come up with alternative buyers. Although passed in September, the EU oil import ban will not come into effect until mid-November, as requested by the Italian government. Italy has a number of contracts with Syrian oil firms and did not want those deals to be hit, according to news reports from Brussels.
“The sanctions will implement at the mid of November and this period of time will help the Syrian government to find the alternatives,” the businessman said, on condition of anonymity.
“The Syrian Oil Ministry has already put in place a plan to deal with these sanctions. The US sanctions are very hard but have not had a big affect because Syria has been under American sanctions since the 1980’s.
However he did warn that bolstered US oil sanctions would likely have some effects, with smaller intermediary firms pulling out of the Syrian market.
“Some American companies were working in the country by way of intermediary agent companies in Europe and Asia, these companies will stop completely any future project in Syria,” he said.
At the time of writing, there are no European sanctions on investment in the exploration and production inside Syria, although the EU is actively considering taking those steps, according to news reports.
Europe’s Royal Dutch Shell and France’s Total are both big players on the production side. Yet, if these both companies are obliged to stop work in Syria, it will not stop the oil production process in the country.
“The state-owned Syrian Oil Company relies one hundred percent Syrian investment and experience, produces 200.000 barrels per day – more than half of the country’s total output,” said the oil businessman.
Syria’s total oil output is 384,000 barrels per day (bpd), according to official statistics.
That leaves 184,000 bpd being produced by local Syrian companies in cooperation with Shell, Total, Chinese, Indian and forms of other nationalities.
“There will be some effect but it will be light in nature,” the businessman said.
According to oil experts, Syria uses two third of its oil production for local needs and exports 120.000 to 150.000 bpd of “Souedie” crude oil. The vast majority of exported crude - 95 per cent – has been going to Europe where is refined to be refined by companies in Germany (31%), Italy (31%), France (11%), the Netherlands (9%) and other EU states.
Those trades will, as of November, have to stop. But without United Nations sanctions , Syria can sell its crude oil to any of the world’s numbers oil thirsty countries, particularly those in Asia - India and China – with which Damascus enjoys strong political relations. However those sales will be a reduced price compared to the banned EU trade.
“Syria has a choice to sell its crude oil to any China, India or Russia but with lower prices, perhaps 10 to 15 % of the real price in the international market,” said a Syrian economist affiliated to the domestic political opposition.
“In addition, Syria will have to buy refined oil products to cover the local increasing needs with higher prices. These deals will push the government to lose more money, sell with low price, buy with higher price for the state- subsidized oil products,” he said, also on condition of anonymity.
Some economists have analysts have also cast doubt on the ease and practicality of finding other buyers for Syrian oil, certainly in the short term.
“Most of our exports went to Europe and I don't think it will be easy to find another market,” said one Syrian economist who asked not to be named. “Oil is 20 per cent of so of Syria's GDP and more than 40 per cent of the government's budget. It will be a hard punishment for the regime, and they are expecting more sanctions.”
He said the implementation of oil sanctions meant this current economic embargo would be much harder to overcome than that put in place in 2005 following the assassination of former Lebanese Prime Minister Rafiq al Hariri.
“Syria faced sanctions in 2005 and got out of that easily,” said the economist. “The main problem is that Syria believes it is now in the same situation as it was back then, so it thinks it will, in the end, get out of it. But this situation is different. These sanctions will be so hard; the entire economy will in the end be affected by this. It's difficult.”
The possibility of an oil embargo hitting the national economy hard - and impacting ordinary Syrians, rather than leadership figures, has led some opposition members to criticise the measure.
Louay Hussein, a Syrian opposition leader said the sanctions came in response to calls from exiled opposition figures, rather than from dissidents inside the country.
"The sanctions will hurt, and they will hurt the ordinary people. It's a mistake to have the oil sanctions,” he said. “The money will not stop going to the security services, the regime will still find the money it needs for that, even if it means stopping spending on education and hospitals. The security services will be the last to stop getting money.”
Mr. Hussein said the oil sanctions, in conjunction with other measures would, eventually take their toll on the country.
"It will eventually lead Syria closer to economic collapse,” he said.
