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Iraq oil: Less ambition and more realism

With the passage of time scepticism has increased

Gulf News

When Iraq embarked on its oil and gas licensing rounds in 2009 and 2010, the criteria for awards to develop its fields included the plateau production capacity for each field. Therefore it became important for the oil companies to set this rate at the maximum possible irrespective of Iraq’s needs, the expected conditions in the international oil market or the insurmountable logistical problems that must be faced in order to achieve such capacities.

In the euphoria, Iraq was quick and happy to announce that its production would be more than 12 million barrels a day (mbd) by 2017.

The target immediately raised many eyebrows and was described as a kind of “oil rush” and “bonanza” for the oil companies and a “wholesale” where 94 billion barrels of reserves or 66 per cent of Iraq’s are awarded to international oil companies by diminishing the role of the Iraqi operating companies especially South Oil Company. Iraqi experts were among the first to raise concern and suggested the need for revisions.

By the passage of time the scepticism increased even by those who would encourage and welcome Iraq to target such production. The International Energy Agency in its 2010 World Energy Outlook forecasts Iraq’s production at 4.08 mbd in 2017 with lower numbers even given by the American Energy Information Administration.

The sheer volume of work needed (6,000 wells, 6,000 square kilometre of 2D and 3D seismic surveys, huge surface facilities and pipelines) is thought to be extremely difficult with Iraq logistics and manpower.

At the present expectations in the oil market, oil demand which is now 89.5 mbd is not expected to be much higher than 95 mbd in 2017 and most of the target sought by Iraq would have been idle and exerting undue pressure on oil prices, a result that is contrary to Iraq and other oil producer’s interests.

Therefore, it is no surprise that the Ministry of Oil in Iraq belatedly engaged consultants and discussed revisions of production profiles with the oil companies.

In a recent conference in Dubai, Thamir Ghadhban, adviser to the Iraqi prime minister confirmed that Iraq is to reduce its crude oil production target such that production by 2020 could be nine mbd, which is significantly lower than the target celebrated before. He said that “if we go to a very high level, there will be redundant capacity, which is very expensive for Iraq,” and “if you go too low, this is not enough for Iraq because of the need for revenues. That’s why we choose around nine million bpd.”

Surprisingly, he also added that “there could be a possibility that this includes surplus capacity that we can use from time to time” suggesting that even the new target is high and not without problems. Iraq is in the process of enhancing its transportation and export capacity where two of five single point mooring (SPM) systems are already operational with new sea pipelines to feed and an expansion of the land pipelines and storage facilities are underway. Iraq’s oil minister Abdul Kareem Al Luaibi recently said that Iraq’s oil export target for 2016 would be six mbd. But with all good intentions, Iraq may still be short of export capacity in 2020 unless its pipeline to the Red Sea is negotiated with Saudi Arabia, which could give it an additional export capacity of 1.6 mbd. The line is shut since 1990 and not much talk about its fate due to the relations between the two countries. The proposed pipelines to the Mediterranean through Syria are now up in smoke.

Still, the transportation and storage system, which is entirely the responsibility of the Ministry of Oil must be coordinated with the increase in production and at the same time the common water injection system must be expedited if the fields are to meet their targets properly. This project was rightly taken away from ExxonMobil and is now almost two years late and short of new award.

While a revision of the oil production targets is welcome, the Ministry of Oil is silent on how the contracts with oil companies are going to be adjusted. The companies have led Iraq up the garden path with their inflated targets but they can now claim that their economics are worked according to those targets and it will be interesting to see how this works out.

The International Energy Agency will release this week its detailed analysis of Iraq energy sector in its forthcoming World Energy Outlook. It is said in the press that it did consider a slowdown of Iraqi production as a possibility but there was no elaboration as to the base case or the scenarios for such production. Let us wait and see.

— The writer is the former head of the Energy Studies Department in the Opec Secretariat in Vienna.