Interview: Badr Jafar, Crescent Petroleum

Lionel Mok , April 15th, 2013

Badr Jafar, managing director of the Crescent Group and president of Crescent Petroleum, gives his take on the company’s progress in Iraq and developments in the region’s gas markets

The Middle East is not known for its private, home-grown oil and gas companies. When faced with the National Oil Companies, the super majors and the many other International Oil Companies, the region can be a competitive place for local aspiring entrepreneurs.

But for the companies that are able to make it off the ground here in the Middle East, the rewards can be endless. Local knowledge and simpler corporate structures can go a long way when competing for contracts in the neighbourhood.

Badr Jafar, president of Crescent Petroleum and chairman of Gas Cities, has a number of explanations for why there may be so few like the Sharjah-based, independent company that has been operating in the Middle East since the early 1970’s.

“It seems that there is a general misconception in this region that oil and gas falls exclusively under the mandate of government and government companies,” says Jafar.

“But we have been operating here and across the MENA region for 40 years as an oil and gas upstream company. Within the UAE, all our operations have so far been offshore as well as onshore in Sharjah, but in theory there’s no reason that we as a private company could not go to work in Dubai, Abu Dhabi or RAK as and when the opportunities present themselves.”

Misconceptions aside, the industry itself can be difficult for a new company to navigate. “The industry itself has many barriers to entry; it’s a very risky business to say the least. It’s a business that also requires a first mover advantage in certain geographical locations.” says Jafar.

“You could spend tens of millions of dollars drilling a single exploration well and have nothing to show for it. While onlookers might assume that this is a highly lucrative business and that technology has reduced some of the risks involved, there’s still a lot of luck involved in exploration, and you need a lot of courage and strong nerves to compete in this sector and space.”

For Jafar, Crescent Petroleum’s success in the Kurdistan Region of Iraq is a prime example of the calculations and wherewithal required to grow in the Middle East’s oil and gas industry. “It was the perfect type of project where we felt had an obvious competitive advantage.

To go in at a time where all the majors were unable to because of security considerations and fast track a project that involved investing many hundreds of millions of dollars with uncertain results, is something that very few companies in the world could manage,” he reminisces.

Iraq’s oil industry has certainly continued to make headlines over the last few years, the potential is massive, but so are the challenges. But for Jafar and many of the other operators who are flocking to the country, the challenges themselves are the opportunities.

“If everything was completely smooth sailing in Iraq, then we would be standing at the back of the queue,” he muses.

Even the manner in which Crescent Petroleum entered Iraq is telling of Jafar’s logic of approach to investment in the country and its energy industry.

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In 2006, the Kurdistan region was still severely under-developed following the Saddam Hussein-era, poor infrastructure including power generation and electricity continued to impede development.

“There were very few hours per day of electricity in the region,” explains Jafar.
“So we were asked by officials in the central government at the time to see if we could invest in gas exploration, development and related infrastructure with a view to resolving that power shortage.”

Around that time, the Kurdistan Regional Government had signed contracts with a private contractor to construct two independent power plants (IPPs) with the promise of supplying them gas.

“But as the time came closer to the actual finishing of the two power plants, it was obvious that the gas or alternative feedstock was not going to be supplied by the central government as had been promised, so they had a serious problem, especially considering the usual terms of the IPP where governments usually have to guarantee feed stock,” explains Jafar.

“So they approached us as a gas company working in the region, and asked us if we’d be ready to commit to an extremely fast track development of natural gas in the region for the immediate and urgent requirements to be used in these power plants, and developing further potential which, depending on availability of gas, could be the basis of developing a local gas-based industry and even future exports.”

After an accelerated technical analysis programme, the company decided to take on the challenge along with its partner Dana Gas, listed in Abu Dhabi.

“The only way we can compete in these markets with the majors is by making fast decisions and going into places where others would struggle to go into, and without the huge amounts of bureaucracy they would likely have to go through before making a decision to invest,” says Jafar.

And so the company came to be the largest private investor in Iraq. It was thanks to the company’s nimble and bullish approach to investing in Iraq that within 15 months, it had developed the first phase of the Kor Mor field, installed a brand new LPG plant imported from the USA, and completed construction of a 180km long pipeline through a 30 meter wide corridor in very difficult terrain, which in turn led to 24 hour power for the whole region.

What really put this feat into perspective for Jafar, was the conversations he had with some of the regional majors about the project. “They said that it would have been over a year just to plan that project,” he says.

“The route survey was being completed at the same time that we were laying the pipeline, but of course lack of contractors, lack of service companies and even the lack of insurance companies meant that we had to take on all this responsibility ourselves, but because of the urgency, we were able to implement and plan at virtually the same time.”

“The results speak for themselves, with the first phase of the project completed in under 15 months, and power generation enabled to over 5 million Iraqis in the north of the country. Our over $1billion of investment to-date with our partners has resulted in over $9billion in savings that Iraq would have had to fork out in the past 5 years in diesel fuel bills. That’s an immense achievement.”

Despite its success in Kurdistan, the company is not without controversy, especially regarding the validity of the contracts signed there. The federal government in Baghdad and the regional government in Erbil have yet to decide on a national petroleum law, but Crescent Petroleum has forged ahead to sign contracts with the KRG.

The partners were joined in 2009 by OMV of Austria and MOL of Hungary, each taking 10% of the project in a landmark deal which resulted in the creation of the Pearl Petroleum consortium which Jafar Chairs.

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“It’s easy for certain politicians to make public statements that it’s allegedly illegal for the Kurdistan Regional Government to sign oil and gas contracts, but what are they basing that statement on?” asks Jafar.

“This is where we as a company, and of course the other twenty or so companies that are active in the Kurdistan region, are fully confident of the legal, technical and moral justifications behind our investment in the region.

We would not, as an international oil company active for over 40 years, go and sign a contract and invests a billion dollars if we feel that there was no legal basis for doing that.”

For Jafar, the ultimatum that companies are faced with has resulted in a northern migration. “You have Exxon, Chevron, Total and Gazprom, all these majors who are now active, and actively pursuing contracts in the North,” he reveals.

Being at the helm of one of the first companies to sail into the region, Jafar looks back and can say confidently that it’s a bit late for most of the competition because the fields have already been awarded, “but nevertheless, they are still awarding some of the remaining blocks, and these companies have realised that they can’t sit and wait in the south where nothing is really happening and so they are moving north.”

In fact, according to Jafar, the entire oil industry is changing and the companies that intend to stay on top are the ones ready to form partnerships and create collaborations.

“What I do not see enough of, which is absolutely crucial if we are to solve our global energy challenges, and this is something that we’re trying to replicate, is true win-win partnerships between IOC and NOCs,” he states.

A few years ago, Crescent Petroleum and Russia’s Rosneft, joined together in Sharjah, to develop a 1,200 square kilometre concession.

The partnership drew on Rosneft’s wealth of resources and experience in large operations, their technological teams in geological and geophysical sciences and was, of course, a boost for political and economic relations between Russia and the UAE.

At the same time, Crescent provided the regional know-how and the ability to implement projects on a fast-track basis, two extremely valuable attributes in the Middle East’s oil and gas industry.

“It was sort of a natural marriage, in which we have formed a strategic agreement alliance to work together in various parts of the region to focus on gas but also oil,” says Jafar. The alliance has also allowed Crescent Petroleum to use seismic technology which had never been used in the Gulf before, with WesternGeco, a point that Jafar is proud to reveal.

Not only does Crescent Petroleum provide partnering IOCs and NOCs with efficiency and local knowledge, the company can also go into the more critical and potentially more dangerous regions with more confidence.

“We have a different perception of risk, being a local company. A foreign company might feel that there’s a potential threat of terrorism, or other security hazards in a particular territory. As a result, their corporate framework will not allow them to place on the ground people there unless they do extensive and lengthy risk analyses,” explains Jafar.

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He believes that because Crescent Petroleum is a local company, it is much more closely in touch with events on the ground.

“Having a different perception of risk doesn’t mean that we are careless, absolutely not. We take just as many precautions, but we don’t necessarily have our hands tied like an international company would. Especially when you look at the Middle East/North Africa region,” he says.

“You’ve seen what can happen when operating in places such as Algeria, Saudi Arabia, Egypt and Iraq. This sends quite strong nervous waves across the industry and so it does put us in a stronger position to potentially become a partner of choice.”

Jafar reveals that the company has actually been approached on a number of occasions by companies who he says, “want to be active but don’t want to lead a consortium because their shareholders won’t allow it. They say that if Crescent leads the consortium as a local company they can join us and get access to the prolific opportunities that our region presents.”

Not only has Jafar changed the game with the partnerships that he is forming throughout the industry, but he is also changing the industry itself.

The development of Gas Cities, a joint venture between Crescent Petroleum and Dana Gas, in partnership with Saudi Arabian Construction Products Company International, a subsidiary of the Bin Laden Group, is working on the creation of gas-based industrial hubs “which uses the molecules of gas, in a multiplier effect to create many multiple molecules of other products, within a country,” says Jafar.

The Joint Venture has started work with a Gas City to be located in Umm Qasar in the Basra province of southern Iraq.

The projects use local natural gas reserves to boost local developments in industry. “We felt that as a local company, we needed to prioritise local energy requirements,” explains Jafar. “You cannot blame international oil companies for coming from outside the region to develop resources with their own markets in mind.”

What differentiates the Gas Cities from any other industrial hub in the region is primarily that these projects are all private sector.

“The private sector would be the master developer, but it would also be buying the gas, and then using the gas in these various industries according to the nature of these industries, so that we would have the flexibility to link the price of gas with the price of the products, thereby sharing risk with our industrial end users” he says.

The other fascinating aspect about the Gas Cities, is the emphasis on clustering, which can provide a huge efficiency gain. “It’s when you place certain industries that can benefit from each other’s waste products next to each other and in a strategic manner. You have one industry, say the steel industry which generates a lot of excess heat, and use that excess heat as an input into an ammonia and urea plant, for example,” he says.

If these industrial clusters are designed properly, Jafar asserts that there will between a 20-30% gain in efficiency, as opposed to the zoning systems that are currently used in many industrial areas.

But the Gas Cities will be more than just industrial hubs; they will be work-live-play environments as well. “One of the key aspects of these types of projects is in-situ training, so creating jobs, creating local skilled labour, and you need to provide housing and recreational activities,” he says.

“When you export a molecule you exchange its value for set compensation at a border, but using the gas locally to generate local industry generates a multiplier effect on its value, and that gas then is ultimately responsible for creating molecules of many other products, as well as generating electricity and even producing water,” says Jafar.

“As a result you bring tens of billions of dollars worth of foreign direct investment into a country, you create jobs, you of course also have training and education, so that’s using the gas to create multiple revenue and value streams.”

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