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SYRIA - Part 3 - Oil Exports Decline.

Syria's exports of crude oil have fallen to between 157,000-162,000 b/d, down from about 350,000 b/d in the first quarter of 2004 and almost 500,000 b/d in 2000. In 2000 Syria began receiving 150,000-200,000 b/d of crude oil from Iraq by pipeline in defiance of a UN embargo; but that supply was cut off by invading US forces in late March 2003.

The volume of Syrian exports of refined oil products has also fallen as local demand has increased, and imports of higher quality fuels from the spot market have risen sharply since January 2004. Product exports are limited mainly to heavy fuel oil (see background in Vol. 62, No. 11).

Imports of high quality gasoil/diesel and gasoline, as well as LPG, have risen steadily in the past three years, becoming a heavy burden on the state as it subsidises domestic fuel prices (see the Syrian energy base in DT No. 10).

The relatively higher priced Syrian Light, a sweet blend of crudes produced by al-Furat Petroleum Co. (AFPC) and two affiliated JVs, now accounts for less than 50% of the country's total crude oil exports. This is because Syria's oil refining system is configured to process medium-to-light grades. It is more economical for this system to process Syrian Light than heavier grades.

The rest of the country's exports are mostly a blend of heavy/sour crudes produced by the state-owned Syrian Petroleum Co. (see profiles of fields & their operators in Part 2 - OMT & Gas Market Trends No. 11).

Damascus is using euros instead of US dollars in its budgets and trade. The US Treasury Department on March 9 said US banks must close any accounts they had with the state-owned Commercial Bank of Syria (CBS) and its Syrian Lebanese Commercial Bank as part of an effort to crack down on terrorist financing. The government's decision is to cover its trade and services payments and to protect the economy.

The head of CBS Duraid Durgham on March 13 was quoted as saying Syria had switched all the state's foreign transactions to euros from dollars after political confrontations with the US. He said the decision was necessary at a moment when the US was threatening Syria in a way which could complicate banking operations between Syria and the EU - Syria's first trading partner.

The US has headed international pressure on Syria for its alleged role in the assassination of former Lebanese PM Rafiq Hariri and aiding the crisis in Iraq which Syria denies. Syria has been under US sanctions since May 2004, meaning it cannot import US products other than food and medicines.

Finance Minister Muhammad al-Hussein said this action came in the framework of continuing pressures on Syria for political considerations, adding that Syria was not surprised by the US Treasury decision. Hussein added that the Central Bank of Syria, as any government bank, was implementing international laws against money-laundering and support of terrorism. He said all Iraqi government accounts were transferred to Iraq last September according to an Iraqi-Syrian MoU. He said the Central Bank will continue in transactions with its international partners and clients, adding that the bank was supported by the government.

This decision was an attempt "to keep the Syrian economy away from the mercy of the American dollar", as US laws stipulate that any conversion into dollars must go through the American banking system. US threats against Syria would result in complicating the banking transactions and the transfer operations into the country from corresponding international banks in Europe.

Unlike foreign companies elsewhere, the operators in Syria are not allowed to lift or market the crude oils they produce. All the output must be sold to the state-owned Syrian Petroleum Co. (SPC) at prices set on the latter's behalf by a state oil marketing entity called Sytrol. Acting more like a committee than a company, Sytrol is attached to and functions under the control of the prime minister's office, whereas SPC is controlled by the Ministry of Oil and Mineral Resources.

Sytrol is also in charge of pricing and marketing Syrian petroleum products allocated for export, and of importing petroleum products into Syria. Syrian imports, including a growing volume of LPG, are a heavy burden on the state as fuels in the country are retailed at subsidised prices.

Because the volume of crude oils allocated for export has fallen sharply since March 2003, from almost 500,000 b/d to between 157,000-162,000 b/d, the government has been strict in limiting sales to oil refiners and other end-users, rather than traders, contracted on term basis. There is also a destination clause in the term contract, to make sure no crude oil reaches Israel and any other market boycotted by the state. Export sales of petroleum products are less stringent. But the buyers are committed not to re-sell Syrian products to Israel.

Whereas Syrian crude oil prices are set officially every month by Sytrol, oil products sold outside Syria are priced according to spot market quotations. Generally, Sytrol prices of petroleum products are competitive. Private Lebanese trading companies and retailers are among firms often preferring to have term deals with Sytrol for the supply of fuel oil and low quality gasoil.

The Damascus restriction followed a halt in Iraqi crude oil supplies to Syria on March 28, 2003, when US troops marching into north-western Iraq closed the old IPC pipeline at the Haditha pumping station. The pipeline had been carrying to Syria between 150,000-200,000 b/d of Iraqi crude oil since 2000 at a discounted price.

That issue had been controversial since early 2000. The Ba'thist regime of Syria, then headed by President Hafez al-Assad, had responded favourably to a geo-political overture from the Ba'thist dictator Saddam Hussein, who had wanted to end an old dispute with Damascus and boost two-way trade on a full scale in open defiance of a comprehensive UN embargo against Baghdad.

The two Ba'thist leaders agreed on a special oil deal before Assad died in June 2000 and was succeeded by his son Bashar. The latter followed up on that deal and, despite the UN embargo and repeated US/UK opposition, the volume of Iraqi crude oil supplies to Syria increased to reach 200,000 b/d in late 2000/early 2001.

The Iraqi crude, for which Syria paid at market prices less a discount of about $15/barrel, was most suited for the country's two oil refineries. Built in the 1940s, the Syrian refining system had been configured to process Iraqi crude then supplied by Iraq's international concessionaire - the BP-led Iraq Petroleum Co. (IPC) - by pipeline.

(From the Haditha pumping station, IPC had built two crude oil pipelines in the 1940s for export to the Mediterranean, one to Syria's terminal of Banias where a refinery had been built, and one to north Lebanon's terminal of Tripoli where IPC had built a refinery as well.

(In 1972 Iraq nationalised IPC. The move at the time was made by Saddam Hussein, then vice chairman of the Ba'thist regime's Revolutionary Command Council. A few years later Syria nationalised IPC's assets within its territory.

(The Lebanese government took over IPC's assets in Tripoli under a somewhat different arrangement. But the pipeline to Lebanon was closed eventually as a result of a serous conflict between the rival Ba'thist regimes of Syria and Iraq.

(To compensate for the loss of Iraqi supplies to Syria, Saudi Arabia and Kuwait provided the Damascus government with crude oils to be processed at the refineries of Banias and Homs. In 1981, as Damascus sided with Tehran in the Iran-Iraq war that had begun in late September 1980, Iran replaced Saudi Arabia and Kuwait as a supplier crude oil to the Syrian refineries. The Iranian crude oil shipments were supplied partly at a discount and partly as a gift. But these supplies stopped shortly before Iran and Iraq reached a ceasefire arrangement in August 1988.

(By then al-Furat Petroleum Co. had increased its production of light crude oil and allowed Syria to begin exporting larger volumes - see Part 2 in Oil & Gas Market Trends 11).

Saddam Hussein's resumption of Iraqi crude oil supplies to Syria in 2000 came as a major boost to Damascus. On the one hand it allowed Syria to maximise the export of Syrian Light, with the Iraqi crude processed locally for the domestic market, and thus earn considerable income. On the other hand, the Assad regime perceived a geo-political advantage in defying the UN embargo as it was thus giving the US a hint that Damascus would close the pipeline if Washington worked more seriously in peace negotiations between Syria and Israel.

Before he died, Hafez al-Assad used to attach geo-political importance to the latter card. The subject figured fairly prominently in the Geneva summit meeting held in late March 2000 between then US President Bill Clinton and each of Assad and then Israeli Labour Prime Minister Ehud Barak. That summit ended abruptly as Assad refused an offer from Barak for Israel to return to Syria the Golan Heights, in exchange for peace, but retain a narrow strip on the coast of the Sea of Galilee. Bashar has since upheld the position of his late father.

Despite the big price discount to Damascus, the amount of oil money Syria was paying to Saddam's regime was considerable and was outside the UN framework of control. In addition, Saddam's Iraq used to smuggle a fairly large volume of Iraqi gasoil and fuel oil to Syria, which were sold partly to Lebanon and partly to other markets. The money from that went to Saddam's regime directly as well.

So while Syria was having a windfall as a result, a great deal of money going to Baghdad allowed Saddam's regime further to tighten its grip on the Iraqis as well as gain more allies in the Arab world and abroad. Because there was link - from the Arabs' standpoint - between the US confrontation with Saddam and the Israeli-Palestinian violence, the Syrian regime perceived a stronger Iraq under Saddam to be in its favour.

It was mainly since 2000 that Saddam's regime had been able to gain more allies outside Iraq through oil-related bribes. Since the US-led invasion of Iraq in and the downfall of Baghdad's Ba'thist regime in April 2003, this has become the subject of big post-Saddam scandals, with the Iraqi Oil Ministry having uncovered a long list of non-Iraqi leaders and politicians - both Arab and foreign - who allegedly received such bribes.

Soon after the Republican administration of President George W. Bush came to office in early 2001, then Secretary of State Colin Powell visited Damascus as part of a Middle East tour. His main objective there was to persuade the young Assad president to close the Iraqi pipeline. But he failed as Assad was following in his father's geo-political footsteps.

Even when US troops were marching on Baghdad on March 27, 2003, Syrian then Deputy Premier and Foreign Minister Farouq al-Shara' stated publicly that the Damascus wish was for the Americans to lose the war in Iraq. On the following day, the pipeline to Syria was closed by the US troops and Defence Secretary Donald Rumsfeld and other American officials began warning Damascus of serious consequences if it continued to facilitate the flow of Arab volunteers to Iraq through Syrian territory. (Shara' was recently made vice president of the republic.

Although Damascus has since made numerous efforts to stop the flow of Arab volunteers to Iraq, the border between the two countries has remained porous. Assad's Ba'thist regime is no longer as effective in controlling the border as it was in the past three years. Among other problems being faced by Damascus, Assad's regime has been implicated in the Feb. 14, 2005, murder of former Lebanese Prime Minister Rafiq Hariri. Syria has been blamed for the murder of other Lebanese figures since then.

The Syrian opposition to Assad's regime has gained much strength, with the US openly backing democratisation in Damascus as well as in the rest of the Greater Middle East (GME). Long-serving Vice President Abdul-Halim Khaddam, who defected from the Ba'thist regime in 2005, is a leading figure in the opposition. At the end of a meeting in Brussels on March 18, Khaddam and several opposition groups announced a strategy to take over power in Syria (see who's who in next week's Review No. 13).
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Publication:APS Review Downstream Trends
Date:Mar 20, 2006
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Previous Article:SYRIA - LPG Production.
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