Untapped potential

With Iraq pinning its hopes on its mammoth oil and natural gas reserves to fund the state’s road to recovery and a more prosperous future, we assess the country’s potential and how the IOCs will play their part in unlocking the black gold.

“Reaching half of Iraq’s output target in seven years would be a feat worthy of celebration ”
-Samuel Ciszuk, IHS Global Insight

For a war-ravaged country like Iraq the petro-dollars generated from its enormous hydrocarbon reserves are the key to raising the nation from its knees and the road to a brighter future. Oil accounts for a whopping 85 percent of government revenue but the country is pumping far short of its true potential following decades of sanctions, wars and tyrannous rule. The ramshackle oil sector produces around 2.4 million barrels a day (bpd) in a land that perhaps is the most under-exploited in the world. Iraq's official reserves are around 115 billion barrels but this figure is based on outdated 2D seismic surveying. Ambitious estimates by industry insiders triple the outdated reserve figure, partly because only around a quarter of the 80 known fields have been significantly tapped for oil. Some experts suggest the Western Desert alone could hold as much as 100 billion barrels.

If these estimates turn out to be true, Iraq would spring to the top of the global production league, ahead of neighbour Saudi Arabia. "The reserves are not exaggerated - they are huge, and I am optimistic that this figure will be higher than 115 billion barrels," suggests Manouchehr Takin, Senior Analyst at the Centre for Global Energy Studies. "Some think it could be 200 billion or higher but these amounts are just estimates." With rock-bottom extraction costs, thought to be as low as US$2 per barrel, and more than a third of reserves lying just 600 metres below the earth's surface, it's clear why the oil majors are so desperate for a slice of the pie. It's a tantalising prospect, according to Takin: "Why go to harsh and unhospitable places in the world like the Arctic? It really is entering the unknown and for all the costs that are incurred, you are not guaranteed to find oil. In Iraq the costs are low and the fields are already there."

After much wrangling over how much foreign firms receive for each barrel of oil they extract, the government has signed 10 TSCs, with the 11th in the late stages of ratification, with the likes of BP, CNPC, Shell, Sonangol, LUKOIL, and ExxonMobil. BP and CNPC having landed the technical service contract (TSC) to tap the elephant field Rumaila and its 17 billion barrels of known reserves. Targeted production is eventually 2.85 million bpd but by the end of the year BP and CNPC are aiming for increasing output by between 100,000 and 150,000 bpd. Shell and ExxonMobil have the TSC for the 8.7 billion-barrel West Qurna-1 field which has a target of 2.32 million bpd. All foreign firms have production plateaus that need to be hit as part of their TSCs. For now, the IOCs are ramping up early planning and preparation work for their mega-projects in the south, preparing the ground for worker camps, tendering early work contracts, and consolidating liaison contacts with Iraqi state-owned oil company personnel.

Even hard-line nationalists who accuse foreign firms of plundering Iraq's energy resources are aware that the dilapidated oil industry needs foreign investment, technology, know-how and manpower to get the petro-dollars flowing. Likewise, many of the refineries and pipelines have been sabotaged or damaged since 2003. "I would say the oil industry is on its feet at the moment but the question is what needs to be done to get it to a brisk walk?" says Timothy Mills, former President of the American Chamber of Commerce in Iraq. "Iraq needs to rehabilitate refineries, explore new reservoirs and then extend the pipeline and port capabilities in order to export, so the IOCs will be key because this needs significant investment."

Lofty ambitions

By developing new and existing fields Iraq's oil minister Hussein Al-Shahristani has ambitious plans to eventually boost production to somewhere between 10 and 12 million bpd. In the medium term Iraq pledges to be churning out 4.5 million bpd in three years and six million bpd seven years from now. Some experts question whether much, or any, of these goals are really achievable. "The large number of mega-projects in a limited geographical area is bound to make the contracting industry overheat, and even ," says Samuel Ciszuk, IHS Global Insight Middle East Energy Analyst. "In fact, from a global supply and demand perspective that might well be a much better outcome for all producers, including Iraq." Reaching six million bpd is thought to require upwards of US$50 million of investment in the industry.

Likewise, Thamir Al-Ghadhban, former Iraqi Minister of Oil and Chairman of the Advisory Commission at the Prime Minister's office, told the media recently that he didn't believe his country could hit anything close to the 12 million bpd being touted due to logistics and socio-political factors. His opinion is that possibly eight million bpd could be achieved in seven years. He also suggested domestic consumption could hit one million bpd by then. Despite the doubt that shrouds production targets, oil exports reached 2.069 million bpd recently - their highest level since Saddam Hussein's invasion of Kuwait, oil spokesman Assem Jihad told AFP recently. The target is to achieve 2.15 million bpd this year. Dramatically raising production will generate hundreds of billions of dollars a year, depending on the price of oil. Even at today's production rate of 2.4 million bpd, the government is earning US$170 million every 24 hours.

This level of income is vital for a battle-scarred Iraq and its new government elected after the country staged the second full parliamentary election since the US-led invasion in 2003 to topple Saddam. For starters, most of the oil and gas infrastructure is in a decrepit condition, which will need to be addressed urgently according to Ciszuk. "The Oil Ministry will have to tender repairs and upgrades, particularly to its pipeline network, very soon as its current spare capacity in the south hardly even matches this year's gain. As oil production continues to rise during the coming year, the expansion of Iraq's southern oil export terminals will also become urgent, stretching the state industry's already extremely depleted project management capabilities." Then there is the widespread corruption that infects the country. Indeed, since Saddam's regime fell Iraq has gained the dubious honour of becoming one of the world's most corrupt countries, alongside the likes of Somalia and Myanmar. On top of this, there is still no concrete hydrocarbon law - a bone of contention between political factions for years. 

A tale of two cities

But while Baghdad has struggled to get its house in order and rubber stamp deals with the IOCs during protracted bidding rounds, semi-autonomous Kurdistan in the north has been quite happily working with overseas oil companies to extract hydrocarbons, much to the anger of Al-Shahristani, who has branded these deals as "illegal". Iraq's government and the Kurdistan Regional Government (KRG) continue to be at loggerheads over who controls the vast reserves the region holds. The row has been running throughout the past government's tenure, keeping oil exports from the region's two developed oilfields - Sinopec and Genel Enerji's Taq Taq and DNO's Tawke - shut in since they were initially brought onstream almost three years ago. "The KRG for its part cannot back down, as it has been highly successful in attracting IOCs to its acreage," suggests Ciszuk. "Indeed, as exploration has begun the acreage has proved to be more prolific than many initially thought. While exploration investment for the programmes to which the IOCs have committed still seems solid, companies could soon start to baulk at investing in the development of their finds, unless there is a sign of some form of compromise opening the way for them to export and monetise the crude from their oilfields."

The city of Kirkuk is the country's northern oil hub with current production from its giant oilfield producing 450,000 bpd. Production could eventually hit one million bpd, while this region is also Iraq's sole oil pipeline route into Turkey. As well as the dispute over the contacts signed between Kurdistan and foreign energy firms, Ciszuk says the manner in which Iraq and Kurdistan have gone about attracting IOCs have been very different: Kurdistan has opted for production-sharing agreements (PSAs) while Iraq has offered TSCs. The PSAs Kurdistan has with IOCs have come in for a fair amount of criticism, however. Al-Ghadhban told reporters in March that the agreements were "inferior in terms of preserving the interests of Iraq" compared to the contracts signed pre-regime change.

Taking precautions

With the oil supermajors poised to flood into Iraq, lingering security concerns continue to dog this fragile country. As was expected, the March elections sparked a surge in suicide attacks and car bombings. Although the level of violence is a far cry from a few years ago, protecting employees from attack, and even kidnappings, will be of paramount concern for IOC bosses. Toby Chinn, Associate Director in Iraq for security consultants Control Risks, told O&G that the risks differ considerably depending on where you are in the country. "The risks vary hugely - the situation in Basra is very different to Baghdad, while the risks at the Ramaila oilfield is very different to West Qurna." This impacts how the IOCs allocate their funds, says Chinn. "So while it may be appropriate to use armoured vehicles and armed guards in one location, there may be a more effective way in another, such as journey management, communications and community relations programmes." This sentiment is echoed by Mills: "You have to analyse it on a case-by-case basis and you structure your business plan accordingly with respect to your security precautions and security costs,"

Chinn and his team have years of experience and local knowledge on the ground in Iraq; they are the eyes and ears for the IOCs. And it's not just security risks that he has to advise companies on - there are political risks, contractural risks, risk to reputation and physical dangers to consider. However, he says many foreign energy firms can draw on past experience from operating in some of the world's danger zones. "The principles and spectrum of risks are the same irrespective of the environment but a lot of oil companies already have experience of working in places like Nigeria or Yemen." Control Risks has also received requests for long-term risk assessments on neighbouring Iran and its frosty relationship with the US. "Iran has the capacity to interfere in Iraq so if the relationship changes and there is a hostile confrontation this could jeopardise or present more political risk to oil contracts awarded in Iraq."

Despite all these fears and logistical headaches, the rewards in Iraq are too juicy to pass up for foreign companies. Iraq's problems won't be solved overnight but the new government is all too aware of the need to plough on with addressing massive logistical, infrastructural, financial and management challenges, according to Ciszuk. He adds: "The promise of huge oil company investments in its main fields has swayed many resource-nationalist sceptics, tentatively setting the scene for more cooperative political relationships in the energy sphere." But it won't be all plain sailing, he suggests. "With the ambitious schedule looking likely to slip, a host of new tensions and challenges should be expected as early as the end of 2010."