In the later years of the 1980s, Iraq had a refining industry among the firsts in the region with a well-established contribution to the economic and technological advancement of the country.

But the years of wars and sanctions took their toll not only on the investment in the expansion of the industry but on the wellbeing of the then existing refineries and their ability to produce marketable products matching the evolution of specifications worldwide.

According to the International Energy Agency’s (IEA) “Iraq Energy Outlook”, the refining capacity in Iraq stands at 960 thousand barrels a day (kbd) but operating at 670 kbd in June 2012. In fact since 2003 the refineries were hardly operating beyond 60 to 70 per cent of capacity.

It is understandable that IEA analysis of Iraq’s refining industry is less detailed than that of the upstream industry. After all, the IEA’s main interest is on what volume of oil Iraq is likely to deliver to world markets in the coming years. Yet it is revealing in many ways. The IEA says that “The range of oil products produced by Iraq’s refineries falls well short of its domestic needs and of the possibilities afforded by modern, more complex refineries.” Haven’t many Iraqis been shouting about this since 2003? The average consumption of light products (LPG(liquefied petroleum gas), gasoline, kerosene and diesel) since 2004 until now has been 309 kbd while the imports of these products averaged 86 kbd or about 28 per cent of subdued demand that often suffered many shortages and black market malpractices.

Crude quality

“The possibilities afforded by modern, more complex refineries” could have been achieved long ago by the proper maintenance of the hydrocracking unit in Baiji refinery and the implementation of the conversion units in Baiji and Basra refineries as planned before 2003. This would have increased the production of light products at the expense of surplus fuel oil and reduced the crude oil requirements. Yet for the last nine years only paper work is on the table including the Basra conversion which is supposed to be financed by the Japanese loan. Therefore, surplus fuel oil continues to be mixed with the crude oil export streams at the expense of crude quality. There is nothing wrong with this provided the mixing is controlled to maintain minimum variation of the crude oil quality. This does not seem to be the case as the export crude quality varies widely by the day and the IEA says “in 2011, Iraq blended an average of 150 kbd of heavy fuel oil into the exported stream of crude oil, lowering its quality and price.”

The addition to the refining capacity in recent years has been in the form of small topping units which produce sub-quality products and intensify the problem of surplus fuel oil. Two large distillation units of 70 kbd each were added in Daura refinery without any supporting quality improvement units.

The Ministry of Oil has for the last few years spent close to $220 million (Dh807 million) on the feasibility and design of four refineries with a total capacity of 750 kbd. Yet no award was made for any of them because the Ministry is chasing private investment. There may be some rethinking on one of these refineries as the Ministry may finance it from its own budget but if this happens it will only be after the loss of valuable time. The IEA is less optimistic as it says “in our projections, we assume that this investment does go ahead, but later than currently envisaged by the authorities.” And that “the first of Iraq’s new refineries becomes operational in 2019.” What a fate!!!

Imports

By that time the domestic demand for oil according to the IEA will be 75 million tonnes in 2020 or about 1.5 million barrels a day (mbd) rising from about 520 kbd now. This is in the IEA’s central scenario where crude production may reach 6.1 mbd and would be much higher if the high case of 9 mbd oil production materialises. I hope the IEA is over estimating though some officials have talked about similar numbers recently. The implication of this is that petroleum products imports are likely to multiply.

The estimated investment required in the refining sector is around $27 billion which is modest in comparison with the investment in the upstream or in power generation. This amount is probably close to the cost of imports in the last nine years. With current infrastructure Iraq will find it extremely difficult to import higher volumes of products.

Considering the seriousness of the situation, the Ministry must take the bull by the horns and use its entire jurisdiction to expedite the expansion of the major refineries as planned and at the same time build one or two large scale complex refineries now.

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