Turning around Iraq's oil sector

Years of conflict have left Iraq's oil infrastructure crippled. However, as Iraq's approved $37 billion (Dh135.9 billion) programme to upgrade the country's infrastructure and security requirements starts rolling out, Iraq will become one of the biggest investment opportunities for companies in the energy sector.

Iraq sits on the third largest oil reserves in the world and pumps 2.75 million barrels per day (bpd) of crude. This figure is projected to reach 7 million bpd by 2017. However, because of its damaged infrastructure and security concerns, foreign companies find it difficult to set up shop and invest in the country. As a result, despite its huge oil reserves, Iraq imports about 10 million litres of petrol each day to meet domestic demand. According to US Energy Information Administration data, Iraq generates the majority of its revenue by exporting oil and importing about 30 per cent of the petrol it uses.

Iraq is now actively seeking foreign investment to build refineries and develop its oil and gas fields to avoid importing petrol and diesel.

"Projects would raise Iraq's capacity to transform crude into fuels by 900,000 barrels a day," said Abdul Kareem Luaibi, Iraq's deputy oil minister.

An issue hindering the development of the industry is the lack of a federal oil and gas law. Efforts to draw up a draft have been one of the most disputed political issues in the country, particularly between the central government and the Kurdistan Regional Government (KRG). Due to several disagreements concerning amendments to a new law, the old oil and gas law, enacted by the Baathist regime, is still in force and oil deals signed with international oil companies therefore lack a legal framework.

Kurdistan Region's Parliament prepared and legislated its regional oil and gas law in 2007 and while the Federal Ministry of Oil has claimed the KRG's oil deals are illegal, KRG authorities argue that they passed their regional law in accordance with the Iraqi Permanent Constitution. Oil companies that have contracts with the KRG include the Norway's DNO and Austria's OMV.

"The most important thing for the oil sector is restructuring, part of which includes reinstituting the Iraq National Oil Company and having a federal oil and gas law in place. For the country as a whole, the constitutional requirement is to implement Article 106 — the Revenue Sharing Law — and this cannot be completed without restructuring the oil sector," said Adnan Al Janabi, chairman of the Oil and Energy Committee of the Iraq Parliament in a recent interview in The Energy Exchange on Iraq 2011: Future Energy.

"Once the federal oil and gas law is in place, the Federal Oil and Gas Council (FOGC) should be formed to set the framework for bidding rounds and other things."

Electricity shortages

Iraq is also in desperate need of electricity. Currently, only 7,000 megawatts (MW) is being generated while demand is twice as much.

"An average of six hours of electricity is received daily, causing significant problems, especially during summer. The Ministry of Electricity needs to raise $29 billion between 2015 and 2030 to meet [its] strategic plans," said Sidharth Mehta, senior project manager at The Energy Exchange.

In an effort to attract international investment, the Iraqi Oil Ministry recently announced it will hold its fourth bidding round on January 25 or 26 next year. It has scheduled a roadshow with foreign oil companies for September 11, 2012. However, these plans have met with resistance from the Parliament's Oil and Energy Committee, which has proposed a law that would suspend all new oil and gas deals until the long-delayed hydrocarbon legislation is finally passed.

"Kuwait Energy is very positive about the concept of expanding its Iraqi operations further and has recently completed its roadshow activity for the fourth bidding round. The company is now forming its opinion on the specific blocks offered," said Mohammad Aboush, Kuwait Energy Company's senior vice-president for Iraq.

Companies already present in the country include Iraq Shell International, which has plans for future production at the Majnoon oilfield, and Total, which is jointly developing the Halfaya oilfield. DNO, the operator and 40-55 per cent licence partner in the Tawke, Erbil and Dohuk oilfields in the Kurdistan Region, is looking at boosting production at the Tawke oilfield. In addition, Kuwait Energy signed development contracts for the Siba and Mansuriya gas fields in Iraq last June.

A major environmental concern in the region is gas flaring. According to the Organisation of Petroleum Exporting Countries (Opec), as of the end of 2010, Iraq had proven gas reserves of 3.1 trillion cubic metres. However, the country produced only 1.3 billion cubic metres of marketable output and 8.09 billion cubic metres was flared.

"The volumes that are currently being flared could indeed double the power generation in the country and help solve the present power crisis. Then, in the future, when more oil and gas production comes on stream, the additional gas produced will be able to fuel most of the power generation needed for the development of the country," Fabrice Mosneron Dupin, Global Gas Flaring Reduction (GGFR) Adviser to the World Bank's Oil Gas and Mining Unit, told Gulf News.

During the oil extraction process the associated gas is burnt, creating carbon dioxide. "The main challenge we face in the region is not technical, but regulatory. Technically, you need to collect, process and transport the gas toward the markets. This requires very large investments, for which you need to attract investors. But you also need to have a market, meaning users who will buy the gas to either generate power or produce petrochemical products," Dupin said.

"To tie these pieces together you also need to have a clear regulatory framework that establishes the rights and obligations of each party, and the pricing mechanisms that will make the gas gathering projects economically feasible."

"Gas selling prices are too low to justify the investments necessary to collect, treat and transport the gas to markets. In order to find investors for flare reduction projects, you need to value the gas at a price that allows the project to be economically viable," Dupin said.

The GGFR public-private partnership is an initiative to combat this issue. It acts as a facilitator between governments and oil producers to help devise gas utilisation projects that are beneficial for the country and economical for investors. It promotes effective regulatory frameworks and tackles the technical and commercial constraints on gas utilisation. The GGFR partnership comprises more than 30 members, including all major international oil companies, many national oil companies and various government agencies from oil-producing countries. Shell recently signed a $17 billion gas production deal in Iraq.

Complex and challenging project

"We understand that Iraqi authorities and oil operators are taking the gas flaring issue very seriously and looking at various options. One of them is a major project for gathering, treating and transporting associated gas, led by Shell, the government and others. This is a huge project to collect, treat and transport the gas associated with major oil-producing fields. The magnitude of the investment proposed by Shell reflects the complexity and challenges of this type of project," Dupin said.

"If Shell and the Iraqi government indeed finalise their agreement it would have a major impact on gas flaring reduction, and would allow for the utilisation of this value resource for the benefit of all Iraqis."

These issues will come under discussion at the second annual Iraq 2011: Future Energy conference in Istanbul, from today to Thursday.