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Iraq: The year of transfer?


Iraqi oil minister Hussein al-Shahristani said April 23 that the recent government crackdown in the southern oil hub of Basra had been a success and had created a safer environment for the oil industry.


Shahristani, speaking to reporters on the sidelines of the International Energy Forum in Rome, said that Iraq was making progress in raising production from northern and southern oil fields and hoped to be producing 2.9 million b/d, up 400,000 b/d over current levels, by the end of the year.


The reality is that a safe operating environment in Iraq remains a distant prospect.


"That is why we are confident that we can increase our production, both in Basra and in Kirkuk beyond our current production of 2.5 million b/d. Our aim actually by the end of the year is about 2.9 million b/d..."


The Iraqi oil ministry has been negotiating with foreign oil companies on short-term technical service agreements, which accordingly to Shahristani were meant to provide a short-term fix to increase production capacity until Iraq was ready to sign longer term development contracts.


The fact that Iraq had succeeded in the interim in raising production by nearly 400,000 b/d in the last six months meant any further delay would render the Technical Support Contracts (TSCs) irrelevant.


"We are planning to increase by another 500,000 b/d by the end of the year or early next year and this is giving us what we are planing to get through the technical service agreement," he said.


"If there are going to be delays, and the delays are not due to the Iraqi side, then the relevancy of these technical support agreements will be in question," he said, explaining that the technical services agreements were meant to help Iraq raise production by 500,000 b/d in the immediate future.


"That is why we have told the IOCs, those who are interested to go ahead, that they are losing time. June itself is a bit late and whoever is not ready by then, we might not really require technical service agreements," Shahristani said, adding later that they might be dropped altogether. "We may drop them if they are not signed soon, yes," he said.


Companies negotiating technical service agreements include: Shell, Total, BHP Billiton of Australia, ExxonMobil, Total, Vitol, Anadarko and Dome Energy.


Shahristani said the oil ministry hoped to launch an international licensing round for brownfield oil fields and a few gas fields, including the giant Akas gas field, in the summer.


"The first licensing round is going to go ahead as quickly as we can get it through the procedures and we are planning to announce a call for bids by this summer," he said.


Despite this significant advance in turning around the fortunes of Iraq's oil industry, the reality is that a totally safe operating environment in Iraq remains a distant prospect.


The US military 'surge' launched in February 2007 has met with some success, improving the security situation and facilitating a rise in Iraqi crude production (see chart on Iraqi monthly oil production), which has in turn bolstered the government's finances.


Iraq's crude exports reach post-war high


Iraq exported more than 2 million b/d of crude oil during May, passing the 2 million b/d level for the first time since the 2003 US-led invasion of Iraq, according to Iraqi Oil Ministry figures.


According to the figures obtained by Platts, Iraq's crude exports in May averaged 2.011 million b/d, the highest level since the 2003 invasion and 109,000 b/d higher than in April.


Exports from Iraq's northern fields were 444,000 b/d in May, compared with 442,000 b/d in April, while exports from the country's southern oil fields rose to 1.567 million b/d compared to 1.46 million b/d in April.


Total Iraqi production in May was 2.528 million b/d, 62,000 b/d higher than in April and the highest rate since September 2004.


Exports from the Turkish Mediterranean terminal of Ceyhan, which moves Iraqi crude from the northern fields, totaled 13.757 million barrels in May, as 13 crude tankers were loaded with 11.542 million barrels from the port and 2.215 million barrels were supplied by pipeline to the Turkish refinery at Karikala, according to the Iraqi data.


Crude loadings from Iraq's Basrah terminal in the Persian Gulf totaled 48.563 million barrels, lifted by 29 tankers.


Production from Iraq's northern fields in May was 633,000 b/d, a level slightly lower than the April rate of 641,000 b/d, which was the post-invasion record.


Output from Iraq's northern fields has been rising since September 2007, the result of measures taken to protect pipelines, including the export lines to Turkey, by the establishment of pipeline exclusion zones along the routes as well as engaging local Sunni tribes to protect the conduits as part of the so-called "tribal awakening" scheme.


That effort has generally resulted in improved security in the central and northern areas of Iraq.


The official ministry figures also showed production from Iraq's southern fields has risen to 1.895 million b/d, up 70,000 b/d from April. The boost was due to the recommissioning of the pipeline that transports Meessan field crude to Basrah storage.


The line was damaged by an insurgent attack March 25 during the fighting in Basrah between Iraqi government forces and the Mahdi Army.


Crude supply to domestic refineries and power stations in May was 226,000 b/d from the northern fields compared with 205,000 b/d in April, and 258,000 b/d from the southern fields compared with 276,000 b/d in the prior month.


The higher supply occured despite the continued shutdown of a 70,000 b/d processing line in the Basrah refinery due to a major fire that occurred in early January.


The volume of unaccounted for oil production in the south during May, which is obtained by subtracting the total of exports and domestic supplies from the total production figure and adjusting for the increase in the local stocks level, appeared to be 61,000 b/d, down from 86,000 b/d in April.


The presence of the unaccounted for oil in the ministry's figures has fueled allegations of widespread corruption and smuggling within the Iraqi oil industry.


Iraq's potential too big to ignore


Investing in a factionally, ethnically and regionally riven country in which institutions and the rule of law are weak and which depends on an outside force for its stability is never going to look like a great proposition, but IOCs know that Iraq's potential is simply too big to ignore.


Iraq offers world class hydrocarbon resources that make it perhaps the last bastion of 'easy oil' on earth open to foreign investment. Proven reserves are estimated at 115 billion barrels of oil with low extraction costs.


Tariq Shafiq, director of Petrolog and Associates, and a member of the team charged with drafting Iraq's subsequently amended petroleum law, estimates the finding and development cost of Iraqi oil at just $0.5-$1.0/barrel and the operating costs at $1-$2/barrel, although costs may be inflated by security requirements and rising oil field equipment prices.


As a result, it is not surprising that a large number of companies contested to be qualified in the first post-war licensing round. Iraq represents such a big opportunity that IOCs cannot afford not to be involved.


Technical service contracts (TSCs) represent a foot in the door, with the possibility of much more lucrative exploration and production ventures in the longer term.


According to the Centre for Global Energy Studies' (CGES) recent study, Hydrocarbon exploration and field development in Iraq, new known fields in Iraq could support a plateau of 3.8 million b/d in addition to current output of about 2 million b/d, but this will not be realized soon.


Iraq's current production export facilities can handle up to 3.5 million b/d. This implies that a rise in existing output could be accommodated, but realizing the long-term potential of Iraq's reserves - output between 6-9 million b/d - would require major investment in new export infrastructure.


CGES forecasts Iraqi output of 2.146 million b/d in 2008, rising to 2.385 million b/d in 2009 and 2.692 million b/d in 2010 (see table on Oil production and export forecasts).


An important caveat is the contribution of the northern oil fields, where security issues have reduced capacity to 30-40%.


An improved security situation could result in an increase in production of 500,000 b/d, says CGES. An additional factor will be the success of service contracts negotiated with the majors.


In the north, capacity is not a problem so long as the security of the Iraq-Turkish crude pipeline can be maintained. In the south, the current export system and the Gulf terminals are barely sufficient to export at current levels.


Raising export capacity here from it's present level of around 1.7 million b/d to 3.0 million b/d would require the development contracts to include the rehabilitation of Sea Lines and the Khor Al-Amaya export terminal, the installation of extra storage tanks and pumping units, as well as pipeline system development, including the upgrading and completion of the second internal strategic pipeline (see map of Iraqi oil infrastructure).


Next page: Security environment the key element


Updated: June 9, 2008


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