Iraq's crude awakening

By Julian Rogers, Deputy Editor

With perhaps the largest unexploited oil reserves in the world, Iraq is banking on its gargantuan supply of hydrocarbons fuelling a prosperous future for its battle-weary nation. But this vision will never become a reality without the desperately needed technical expertise of the foreign oil giants, Minister of Oil Dr. Hussain al-Shahristani tells O&G.

War-ravaged Iraq is a sleeping giant on the world oil production stage after decades of sanctions, sabotage and chronic mismanagement. But the country with the world’s third largest reserves could finally be waking from its slumber as investment and technical expertise comes pouring in from the international energy giants. Through three wars, more than a decade of isolation and a five-year, US-led invasion the international oil companies (IOCs) have had their noses pressed against the glass looking in like a bunch of kids salivating over a shop full of sugary sweets. They could look but they couldn’t touch – until now.

The security situation, although still a major worry for the IOCs, has improved in recent months and there seems to be no shortage of companies looking for a piece of the action. With rock-bottom extraction costs and 115 billion barrels of proven reserves beneath Iraq’s dusty surface, you can just imagine the dollar signs flashing up in the eyes of Big Oil bosses. But even the 115 billion barrel figure looks wildly short of Iraq’s true potential. This total hasn’t been updated since 2001 and is largely based on 2D seismic surveys from almost three decades ago.

And with huge chunks of the country still unexplored opinions remain divided on how many barrels of proven black gold exist. Indeed, vast swathes of the western desert region have never even seen a drill bit. To add to the conjecture, Iraq’s deputy prime minister, Barham Salih, was quoted in April as claiming that reserves could be as high as 350 billion barrels, tripling previous estimates and putting the country way ahead of Saudi Arabia. Salih said the optimistic forecast came from “reputable sources” after seismic surveying and exploration drilling.

Unsurprisingly, the oil minister has since tried to distance himself from these remarks. It was the same during O&G’s recent unscheduled meeting with the softy-spoken Dr. al-Shahristani inside Baghdad’s imposing Ministry of Oil building. “The statement is not accurate,” he responds firmly in perfect English but with a twinge of frustration etched across his face. You get the impression that he has been fielded this questions more than once of twice in the past few weeks. “It is not industry practice to add probable to proven reserves which is perhaps the source for the figure you mention.” The 68-year-old former nuclear scientist says that through recent studies and the application of new technologies, many of discovered producing and non-producing fields had seen reserves “upgraded measurably.” He adds: “We are conducting an integration study to come up with the new proven reserves figure within the next few months consistent with this exercise of re-evaluation.”

Output projections
Iraq’s oil industry, which has been nationalized since 1972, currently pumps 2.5 million barrels of oil a day (bpd) – two million of which are exported. This is the highest level since the Saddam-era prior to March 2003. Nevertheless, the immediate goal is to raise this to 2.8 million barrels by the end of the year, al-Shahristani explains confidently. “Our plan to increase levels is going to include tying new wells to production facilities and optimizing completions of others, as well as bringing some incremental initial production from some discovered but not yet fully producing fields.” He continues: “However, the main thrust would be to arrest the decline and get the increments from our producing giant and super giant fields in the south and north.” He states that any surplus production will be sent for export.

But output won’t plateau out at 2.8 million bpd; the Ministry of Oil plans to ramp up production to 4.5 million bpd by 2013. In ten years time levels could top six million bpd. “In the short-term up to 2010, we envisage talking production to 3-3.5 million bpd through national effort and technical service contracts (TSCs) with the IOCs,” states al-Shahristani. “Some 500,000 barrels will come from this source.” The oil minister is all too aware that a crippled country like Iraq cannot achieve these targets without the technical expertise and knowledge of the IOCs. One energy expert described Iraq to O&G as being “light years behind on a technological level.” The country also has to fill the gap in the ‘brain drain’ as blue and white-collar oil workers have either fled abroad or been killed since 2003. On top of this, many oil facilities are either dilapidated, looted or war-damaged. A great deal of what is operational dates back to the sixties and seventies. “It seems that Iraq has hit a ceiling as to what it can do with the in-house resources,” says Samuel Ciszuk, Chief Middle East Analyst for Global Insights. “It needs help from technicians and foreign companies, as we as an inflow of foreign cash.”

Although the IOCs are clambering to get in, they are naturally panicky about committing investment and manpower to a country that still doesn’t have a concrete hydrocarbon law in place that will govern the industry. The draft law was agreed by the cabinet in February last year but parliament has failed to rubber stamp the legislation because the government and Kurdish Regional Government (KRG) in the semi-autonomous north have been at loggerheads over who will control reserves and contracts. Even after two years of political squabbling there is still no date as to when this piece of landmark legislation will finally be ratified.

“The oil minister has been promising that it will happen before the end of the month for about 18 months,” argues Ciszuk. “Without it, getting anything underway will be very hard.” Iraq’s old oil law still bans private participation in the country’s oil business. The new one would authorize production sharing agreements (PSAs) which would guarantee a profit for the IOCs. It would also allow provinces freedom from central government to award contracts. Since 2004, around 40 foreign firms have been assisting the Ministry of Oil free of charge through memorandums of understanding.

So how much longer do we have to wait for the new law? Al-Shahristani smiles before divulging his carefully composed response. “We have always advocated the importance and necessity to enact the new oil and gas law as quickly as possible because we are confident that it would properly organize and facilitate the work in the oil sector. However, the delay in promulgation is a political matter to be finally resolved by parliament and the composing political spectrum. If this delay were to last longer things could still be processed under the prevailing oil and gas law in the short-term.” So is there a date? The question falls on deaf ears.

The lack of a new law hasn’t stopped around 20 foreign energy firms from Canada, Norway, US, Turkey and a handful from Asia from setting up operations in the northern Kurdish region, thought to hold as much as 40 percent of the country’s reserves. In fact, Iraqi Kurdistan could have more hydrocarbons than Nigeria. The Kurdish Regional Government in Irbil say the PSAs the companies have signed are legal but the Iraqi government states that the contracts are invalid and the IOCs should leave. Those companies that have shied away from entering have done so out of fear that Baghdad could later annul contracts. The Kurds have accused the Iraqi government of “former regime tactics” but an unrepentant al-Shahristani says the oil is the property of the Iraqi people and should be left alone. There have also been threats to blacklist any companies agreeing to oil concessions with the Kurds.

Elimination process
By February Baghdad has received applications from 120 IOCs to bid for extraction contracts. Al-Shahristani whittled this number down to 35 but then added another six NOCs (national oil companies) to the shortlist. The usual Western protagonists are in the running – the like of ExxonMobil, Shell, BP, Total and Chevron. The oilfields on offer in the bidding round include Kirkuk, Bai Hassan, West Qurna, Zubair, the Maysan fields (Bazargan, Abu Gharab and Fakka) and South Rumaila. Two gas fields – Akkas and Mansuriyah – are also included. One key stipulation of the contracts states that every company in the bidding process has to have an Iraqi partner, with 25 percent of the value of the deal going to Iraqi companies. The deadline for the oil and gas bids is the end of March, and preliminary contracts are due to be signed next June. But this will have to be postponed if the new petroleum law is not passed by this September when technical and legal specifications will be presented by Iraqi oil chiefs. Any delay could have serious consequences on al-Shahristani’s production targets of 1.5 million bpd added to capacity when the foreign majors move in.

However, the Ministry of Oil has also been involved in talks with a handful of IOCs over pilot TSCs to kick-start the oil industry. These no-bid contracts, which would be stop-gap deals worth around $500 million each, have recently hit rocky ground because the majors want more than just a fee for their technical help – they want a share of the spoils. Production Sharing Agreements (PSAs) are the prized asset, not the TSCs. However, they would offer the IOCs a crucial foothold in the country when it comes to bidding for the contracts when the new law is ready. Speaking at a press briefing a few weeks ago al-Shahristani told reporters: “We did not finalise any agreement with them [the IOCs] because they refused to offer consultancy based on fees as they wanted a share of the oil.” He later added: “We think there is no need to share Iraq's oil with anybody.” As O&G went to press reports were circulating that al-Shahristani was seriously considering not signing the TSCs over the continued delays. Indeed, the contracts are already six months behind schedule.

With no oil law in place and the short-term TSCs still up in the air, Iraq’s goals for ramping up production appear to be in serious doubt, says Ciszuk. “ Realistically results are not likely to start trickling in until mid- to late 2010, and thus the real crude output gains seem to have been pushed back to some time between 2011 and 2012.” Indeed, Christophe de Margerie, CEO of Paris-based Total, was reported by Agence France-Presse (AFP) in early July as saying that although his company and Chevron were in talks over short-term TSCs, “2009 is probably too short a time frame to carry out major investments". As you would expect, the KRG is none too please with the arrangements being pit forward. Speaking with World Petroleum Congress News, Ashti Hawrami, the KRG’s Minister of Natural Resources, said Baghdad’s proposed contracts would cost the country “trillions of dollars” in lost revenue and added that the TSCs are “likely to fail.”

But with world supplies approaching the dreaded Peak Oil (some would say we have passed it already) the overseas firms need’s Iraq’s oil. Likewise, Iraq needs the overseas firms. “We see their [the IOCs] complementary role as important for the future,” al-Shahristani explains in between a quick sip of still water. “The participation of the international oil industry will complement our national effort to reaching our new production objectives through providing new investment and new technology. Starting in 2010 we foresee the implementation of Investment Service Contracts through licensing rounds with the IOCs to redevelop, improve and enhance oil recovery mainly from the same giant and super giant fields (those fields with over five billion barrels of reserves), and perhaps the development of a limited number of discovered but not yet developed fields.”

Those companies in the running for contracts will be mindful of the fact that Russian oil giant LUKOIL signed a deal with Saddam Hussein back in the nineties that went sour. The contract, to develop the super giant field West Qurna, was subsequently cancelled and left in legal limbo before finally being torn up last year. Cuszak says the IOCs will need confidence in the contracts that they sign. “There needs to be some kind of political stability so that companies can trust that the law that is there will remain for the foreseeable future. If it remains a politicised environment like Iran where parliament can go in and pick a single contract to pieces then it will be extremely difficult.”

Petroleum consultant Tariq Shafiq was co-author of the draft petroleum law two years ago along with two other ‘technocrats’. Together the trio have 120 years experience in the energy industry of Iraq and the Middle East. During a recent meeting with O&G over lunch in London, Shafiq expressed his disappointment at the current situation. “It is a stalemate,” he exclaims. “Without improvement in the state of the ‘failed state’ of Iraq, there is little hope of a solution in the future.” Shafiq, who is a former executive director of the Iraqi National Oil Company, says his first draft put an emphasis on revitalizing the ageing and damaged oinfrasture in order to boost production levels, not new E&P efforts. “The proven reserves can raise today’s production of 2.5 million bpd to 10 million bpd and maintain it for decades at high levels without the need for one barrel of new oil.” He adds: “Investment and discovery by the regions or provinces, besides being unjustified investment, would lead to unhealthy consequences among the haves and have nots and on account of lack of infrastructures.”

Protection
As well as the wrangling over the legislative framework, the government is all too aware of the need to continue to focus on security in order to protect oil workers, plants and pipelines. For the past five years Iraq has been synonymous with sectarian violence and killings and although the situation is improving, it’s still an extremely dangerous place to do business. The government has been protecting oil workers and energy facilities with gun-toting guards and lofty walls, while the coalition forces have played their part too. It is expected that those after contracts will be required to have a manned office in the Iraqi capital during the bidding process and negotiations, which will present a scary prospect for some.

Iraqi oil officials say the security situation is being kept under control. “With improved security conditions in Iraq, the Ministry of Oil has already been able to protect installations and pipelines which has allowed increased production and export,” al-Shahristani asserts. “Therefore, the IOCs can evaluate the matter more objectively now and start getting involved, on the ground, with us. We are co-operating extensively with the army and police forces to provide the secure conditions needed for their work in the field under acceptable conditions.” The minister also reports that none of the bidding foreign firms see the security or the stalled oil law as serious deterrent to going into Iraq.

Another major headache for that the authorities have to address is smuggling, with a conservative estimate of 105,000 barrels worth of oil stolen from pipelines every day and sold on the black market. MPs may not be able agree on the petroleum law but they have given the green light to an oil anti-smuggling bill. The crackdown will mean those caught facing punishments ranging from fines to imprisonment.

So is security and smuggling the key issues that the Ministy of Oil faces today? Al-Shahristani leans forward in his chair to emphasize his point. “The main challenges for the Ministry of Oil now are the security threats, which have been reduced measurably in recent weeks, as well as the need to optimize reservoir management, surface installations and de-bottlenecking.” The oil chief is also quick to point out that repairing an industry brought to its knees by the old regime will take time. “We have inherited a situation that was subject to 10 years of international embargo and gross internal mismanagement, not to mention several wars that affected the oil centers directly. Since April 2003, we have relied almost entirely on our own efforts to bring back production now to 2.5 million bpd and exports to two million.”

The Iraqi cabinet has given the green light to fourth state-run oil business 200 miles south east of Baghdad in the province of Maysan. The new company will be created by reorganizing the Maysan Oil and Gas Commission after splitting it from the Basra-based Southern Oil Company. Al-Shahristani has also pledged that each Iraqi province producing at least 100,000 bpd would get its own state-run oil company to focus on developing oilfields there. Increased capacity and rebuilt infrastructure cannot come soon enough for the minister. “We recognize the need to reconstruct and renovate all aspects of our industry to ramp up production and rehabilitate and renew plants, installations and management practice, as well as make a quantum leap forward in the training and development of Iraqi oil personnel. These we are hoping to achieve in co-operation with in the international oil industry in a measured and balanced manner to avoid implosion and chaotic expansion.”

Bright outlook
Once the foreign firms finally arrive, full-scale production won’t begin overnight as extensive seismic surveying and analysis will have to take place. For instance, even thought the country has 80 discovered oilfields, there are around 400 structural anomalies waiting to be explored. As for natural gas, no one seems to have a clue how much exists, although conservative estimates put the total at 112 trillion cubic feet of reserves; cue dollar signs in the eyes again. Talking on money, Iraq has been heating the ‘ching ching’ sound too recently thanks to the rocketing price of oil recently. If crude remains at the giddy heights of US$145 a barrel al-Shahristani predicts that revenues for 2008 could hit US$70 billion. Industry experts are predicting that if the country fulfils its true potential earnings could swell to somewhere between $200 and $300 billion a year.

When you consider than that hydrocarbon revenues account for 90 percent of the government’s budget it is easy to see why the hopes for regeneration are being pinned on black gold. For consumers, increasing Iraq’s oil would ease global supply fears and would probably bring crude prices down. For the time being, the country is an uncut diamond – enormous potential but much work needs lies ahead. “Iraq has a huge potential but it cannot be seen as anything but the region’s wildcard right now,” suggests Cuszak. “When looking at future production there are so many question marks over the political situation and the levels of violence. Iraq should be able to double its production in the long run if everything goes well. He continues: “The country could overtake Iran as the world’s second largest producer but it will take a time because of the sheer size of the projects and the time it will take for the country to heal properly.” That healing process is slowly underway which cannot come soon enough for Iraq’s citizens. “The Iraqi nation’s deep routed culture remains the only safeguard for the country’s return to normality,” Shafiq concludes.

Critics tell Big Oil to stay away
Unsurprisingly, vehemently against the oil giants plundering Iraq’s resources, accusing the IOCs as being nothing more than a pack of vultures circling a stricken animal. The American majors being involved in the no-bid TSCs has only added fuel to fire with anti-war critics arguing that oil was the main reason the US invaded Iraq. Last year Alan Greenspan, the former chairman of the Federal Reserve said the war was “largely about oil.” Back in 2003 Defence Secretary Donald Rumsfeld famously dismissed similar accusations as “utter nonsense” but this did little to dispel concerns. Oil workers’ unions and nationalist parliamentarians feel that Iraq should pay for the re-development of the industry, not the IOCs through PSAs. They want the foreigners to be employed as contractors and paid a fee for their services and expertise. Hassan Juma’a, President of the Iraqi Federation of Oil Unions, has stated that if contracts last 30 or 40 years IOCs could make more money than the government. Al-Shahristani rebuffs these fears and says the deals will be on terms beneficial to Iraq. For ordinary Iraqis the main priority is getting essential services back up and running, not lining the pockets of the energy giants. You only have to look around Baghdad on any given day to see queues of vehicles snaking around the streets from the gas stations. For all its tremendous oil wealth, the country still can’t supply enough to its people. With this situation it is little wonder that hostility exists over the IOCs’ involvement.

Prisoner turns minister  
Shiite Hussain Ibrahim Saleh al-Shahristani is a former nuclear scientist who was imprisoned for in Baghdad’s notorious Abu Ghraib jail during the Saddam Hussein regime. He was tortured for using his powerful government position to make and distribute pamphlets urging Iraq's Shiite soldiers to abandon the army and fight against their fellow soldiers and officers. Whilst he was locked up, al-Sharistani refused to help build a nuclear weapon for the regime. Al-Shahristani, who was appointed Minister of Oil in May 2006, has a BSc in Chemical Engineering from Imperial College, London, and a MSc and PhD in Nuclear Science from University of Toronto. He also has a PhD in Chemical Engineering.

Factoids…

• US$70 billion­– the predicted Iraq oil revenue for 2008
• 90% of the Iraqi government’s budget comes from oil
• 80% of production comes from fields in the Kurdish north and Shia south