Syria: Disintegration and little sign of recovery
The brutal civil war is dragging on. It is a disaster for Syria's people, economy and oil sector
Bashar al-Assad's chances of survival have been growing of late, helped by the routing of opposition forces in the strategic town of Qusayr in May. His regime seemed destined to fall a year ago. Now the president and his forces are gaining momentum.
The recent ratcheting up of international pressure on Damascus, with the White House announcing that the US would provide direct assistance to the Syrian rebels, reflects a growing sense that the Baathist regime - cushioned by Russian and Iranian support and now the direct intervention of Hezbollah, the Lebanese militia - is now able to consolidate territory under its hold. In June, state forces were said to be preparing to take on rebels in the northern bastion of Aleppo. Assad looks sufficiently confident to retake larger prizes in the mainly rebel-held north.
These hard-fought territorial gains have reinforced the Syrian regime's survival instincts. Though a recapturing of the vast chunks of territory lost to the opposition over the past two years looks beyond Assad's capability, the victory at Qusayr and success in dislodging anti-regime strongholds in the outer ring surrounding Damascus, will embolden the president ahead of proposed peace talks in Geneva.
The likelihood of protracted conflict portends further gloom for the already hollowed-out Syrian economy, whose major export earner, oil production - export receipts from which furnished about a quarter of state revenues before the conflict - has dwindled to a trickle.
Pre-uprising, average oil production was 380,000 barrels a day (b/d), with light crude accounting for almost 41% of this output. According to Syrian oil minister Suleiman Abbas, output by the end of May was down to just to 20,000 b/d, a decline of about 95% on March 2011. Natural gas output has fallen, too. In May, it was about 15 million cubic metres a day, half the level of production before the unrest began in 2011.
The declines have been steady since Western governments imposed sanctions on the state-owned oil firm, Syrian Petroleum Corporation (SPC), in December 2011. The embargo precipitated declarations of force majeure by major foreign producers including Shell - a joint-venture (JV) partner with SPC on the largest producing field at Al Furat, in Deir Ezzour. Eight joint venture firms involving foreign operators accounted for half of Syria's oil production before the uprising.
Extracting oil has become an onerous task in Syria. For the rebels that have seized control of much of the east's productive capacity - whether Jihadists or secular-nationalist like the Syrian Kurdish Democratic Union Party (PYD) - pumping more than a few thousand barrels represents the extent of their capabilities.
Some of the rebel control over the oilfields has gone to Al-Qaeda affiliated Jabhat al-Nusra, which overtook Sunni tribes in the competition for producing fields in the provinces of Deir Ezzour, Raqqa and Hassakah. This raised the spectre - in the view of Western newspapers, at least - of an oil-funded fundamentalist mini-state in Syria's east.
Critics identified the EU's 22 April decision to lift its embargo on rebel oil sales as a trigger for the Nusra rebels' advance. But while these groups have indeed established tea-pot refineries to produce heating oil and gasoline across the east, these are only tangentially linked to the EU's lifting of sanctions. The rebels needed their own ready supply of fuel. In any case, the east's productive capacity is too minimal to provide much funding source for an Al-Qaeda rump state. "There's nothing there to compare to the Kurdistan Regional Government, for example," says Christopher Phillips, a Syria expert at the University of London's Queen Mary College, of eastern Syria's resource base.
There is little clarity on which fields are responsible for the estimated 20,000 b/d of domestic crude production, though many will be SPC-controlled ones in the north. Mostly consisting of 'scraps and dog-eared bones' in the words of Chatham House Mideast associate David Butter, one of the more productive areas is the Jafra field, where Total had operated.
Among the opposition, inter-factional squabbling over oiflields look set to continue, doubtless to the relief of the Assad regime, which has been shrewd enough to try to cut deals with rebels over oil sales.
While this chaotic situation characterises Syria's oil sector during the war, the longer-term outlook depends on the how the conflict pans out. If the regime is unable to re-establish its hold over the whole of the country, the cantonisation of Syria's declining oil industry will accelerate. The PYD - affiliated to the Kurdistan Workers' Party in Turkey - is already asserting Kurdish rights over SPC-operated resources around Hassakah, in the ethnically Kurdish northeast.
The more immediate question is whether the Assad regime will imminently run out of oil, undermining its recent territorial gains and even hastening its demise. That seems a distant prospect, despite the state firm's paltry production figures.
Before the conflict, Syria was a net exporter of crude, selling about 109,000 b/d in 2010. Those days have gone. Yet, thanks to several friendlier countries, the regime is surviving - just about - on a diet of imports: deliveries of Russian gasoil, for example, along with sporadic supplies from suppliers like Venezuela and Iran. Iraq signed a deal in mid-2012 to send up to 720,000 tons of fuel oil to Syria as part of a one-year supply contract.
More encouragingly, the government's decision at the start of this year to allow new private firms to buy fuel imports has deftly skirted EU sanctions imposed on sales to the state sector, leading to a boom in trade, much of it covered by Italian and Greek shipping firms. Lebanon is also a fruitful source of fuel imports. Hezbollah does a tidy trade selling on supplies to Syria.
Damascus has also attempted to sweeten deals with its fuel suppliers, for example offering Iranian fuel providers exemptions on taxes and customs duties.
But the impact of sanctions and conflict on the economy continues to be severe. The currency's recent depreciation may suggest that Assad is in danger of running out of dollars, too. In mid-June 2013, the Syrian pound for the first time traded above SYR200 to the dollar, compared with under SYR50 in March 2011. With an oil-import bill estimated by the government at $500 million a month, the lack of money, rather than oil, represents the most noxious threat to the regime's survival.
Economic prognoses remain uniformly gloomy. The Washington-based International Institute of Finance estimates that Syria's GDP will decline by 15% in 2013, and that government debt will reach a punishing 57% of GDP this year. Meanwhile, the gas sector, running at half-steam, is managing to keep the lights flickering, though much depends on how the situation will look during the peak winter demand season. "On the engineering side I don't think the Syrians have problems," says one former consultant active on Syria's natural gas sector. High-quality engineers, many of them trained in the Soviet Union, continue to work in the country, he says.
The biggest problem for the gas sector is that the pipeline network is vulnerable to sabotage. "If the central points around Homs are damaged, that could effectively cut off a lot of power plants," says the consultant.
Gulfsands Petroleum, Shell, Total and others can only watch and wait, hoping for an eventual resolution of the conflict. A speedy recovery in oil output, as occurred in Libya after its civil war ended, is unlikely, believe analysts. Nor are firms going to rush back. The big international oil companies (IOCs) have larger assets to worry about elsewhere; Syria's assets remain marginal to them. Chinese and Russian companies are maintaining a low profile. Given their governments' support for Assad, only a regime victory will give them opportunities in Syria.
So even if Syria manages to restore a semblance of stability, it will struggle to regain its status as a significant oil producer. The country's hydrocarbon offerings are too fragmentary to make an Iraq-style, IOC-led field development programme realistic.
From the presidential palace in Damascus, such concerns must appear insignificant. This time last year, it looked as if the 40-year rule of the Assads was coming to an end. With the rebels no longer on the front foot, Bashar can see his survival so far as a victory, of sorts.