Under pressue

If Iraq is to have any chance of achieving its aggressive ambition to increase its oil output fivefold within the next decade, it must first overcome the many infrastructure, logistics and security challenges that stand in its way.

Nearly four decades after the nationalisation of Iraq's oil industry, International Oil Companies (IOCs) have finally been granted access to develop Iraq's dream oil fields on an unprecedented scale. As Iraq struggles to get back on its feet after years of conflict and UN sanctions following Saddam Hussein's invasion of Kuwait in 1990, Big Oil has been eager to get back into the country and capitalise on Iraq's plentiful reserves.

With proven oil reserves totalling 115 billion barrels and proven gas reserves of 112 trillion cubic feet, Iraq is up there alongside the major producing nations of Saudi Arabia and Russia when it comes to hydrocarbon resources. However, unlike its main rivals, Iraq's turbulent history means that the country is severely lacking the money and technical resources to further develop its fields and increase output. Furthermore, for the companies already operating in Iraq or hoping to enter the country in the future, one of the most pressing concerns is the severe shortage of skilled and experienced oil personnel and project managers capable of leading the planned expansion.

Gavin Jones is a founding partner at Upper Quartile, a business specialising in post conflict economic reconstruction, and he believes that the skills shortage is currently

being largely ignored and that opportunities need to be made available to Iraqis in order to get them involved in the industry. "There needs to be some form of skills development put in place, probably with Basra University or certainly one of the state-owned universities, and that should include things like English language training and technical skills," says Jones. "But the university hasn't really been engaged and there are no training schools. It's quite clear that you're going to need a very large amount of people who can work drilling rigs in the very short-term, and nobody has got that sorted out.  This frustrating lack of local engagement needs to be unpicked quickly," he urges.

Unproven resources

This is even more of a concern if the predictions regarding Iraq's unproven resources are to be believed. The country is in fact relatively under explored and the last time that it estimated its reserves was several decades ago, back before the days of seismic 3D surveying and other technologies that are available to us today. There is a very strong chance that if Iraq were to be surveyed today, we would see a marked increase in its reserves, particularly when carefully applying today's modern technologies to improve recovery efficiency and explore undeveloped fields. Whilst estimates vary, it is conceivable that Iraq could be in possession of anywhere between 45 and 215 billion barrels of unproven oil resources and between 275 and 300 trillion cubic feet of probable gas reserves.   

In order to benefit in the short term from its extensive oilfield rehabilitation plans, Iraq had little option but to open the country up to foreign investment and enlist the help of IOCs, which can provide the necessary expertise, technology and training that Iraq's oil sector so desperately needs. Last year therefore represented a landmark event for Western oil majors as Iraq offered up 16 oil fields containing reserves that have been estimated at nearly 85 billion barrels.

The auctions took place in two rounds - the first in June 2009 and the second in December 2009 - with six fields being offered in round one and 10 in round two. With the auction of Iraq's supergiant Rumaila field won by a BP-led partnership with the China National Petroleum Company (CNPC) in round one, two other deals negotiated over the following months and a further seven deals closed in round two, Iraq has a commitment from the IOCs to add new production capacity totalling approximately nine million barrels per day. 

In a recent IHS CERA report entitled Field of dreams: The great Iraq oil rush -its potential, challenges and limits, author Bhushan Bahree wrote: "The relative success of the second auction of oil fields in December emboldened Hussain al-Shahristani, the Iraqi oil minister, to assert that the Technical Service Contracts agreed so far (as a result of both bidding rounds last year) would help raise Iraq's oil output capacity to some 12 mbd within six or seven years".

This statement by al-Shahristani is bold indeed and would represent a significant increase over the 2.4 mbd that Iraq produced in 2009. It also far exceeds the 2018 target production figure of 6 million barrels per day that the Republic of Iraq National Investment Commission cites on its website. The figures have indeed caused some controversy with experts unable to agree on whether either of these targets are actually achievable. 

According to the liquids output capacity outlook for Iraq, which is produced by IHS CERA, it is more likely that output will be somewhere closer to 4.3 mbd by 2015 and 6.5 mbd by 2020. IHS CERA also predicts that investment needs will be in excess of $50 billion to reach the 2020 capacity level. This estimate includes critical investment needed to refurbish and expand Iraq's oil export capacity but excludes domestic infrastructure renewal and expansion.

Unparalleled achievement

Whether the target is achievable or not, one thing is for sure; if Iraq were to increase its output on a scale anywhere near the upper echelons of these estimates, this would be an unparalleled achievement. "Such a massive capacity increase in so short a time would be unprecedented," says Bahree. " The most rapid build up in recent decades has been in Russia, where output rose by about 3.7 mbd over 10 years to 2008. A Saudi programme in the past decade to rapidly increase capacity by some two mbd took about five years to complete."

With no other country having been able to expand its oil industry by so much in such a short period of time, Bahree says that if successfully implemented in full, the three agreements from the first auction alone - Rumaila, West Qurna 1 and Zubair - would catapult Iraq into the first rank of world oil producers in the latter half of the next decade, adding new capacity of 4.8 mbd. "The second round, if fully implemented, would add another 4.7 mbd ­- for a total increase of 9.5mbd - propelling Iraq into the company of super producers Saudi Arabia and Russia, with respective capacities of 12.5 mbd and about 10 mbd," says Bahree.

However, whilst this all sounds very promising for the future of Iraq, most experts are convinced that these ambitious plans are a little out of reach given the multitude of obstacles that the country must first overcome. For Jones is it quite evident that this is was never going to be easy. "What you've got in Iraq is basically 30 years worth of sanctions followed by six years worth of war. And in any environment like that it's going to be difficult, especially when you've got a huge array of very big, very sophisticated, very slick international companies piling over the parapet, trying to work with a government that has been isolated for 30 years."

This is one of the first challenges that Jones believes will need to be overcome. "There needs to be a significant amount of work in getting the Ministry of Oil up to a level where it can more effectively engage with the international oil companies. Some significant levels of support need to be given to the Ministry of Oil to build its capacity to manage what are in effect the worlds 3^rd largest reserves. Having a building where the lifts do not work and senior staff are reached on a Yahoo email address is not in Iraq or the IOC's best interests," he explains.

Battling bureaucracy

The capability of the Ministry of Oil is not the only challenge that IOCs are having to navigate. Many are yet to establish local offices due to the sheer complexity of dealing with the Ministries of Trade and Interior and all the bureaucracy that comes with doing business in Iraq. One persistent complaint has been the difficulty of obtaining the necessary visas to get executives into the country, a problem that if not resolved will only become more acute when development really takes off and hundreds of foreign workers are required to enter the country.

The visa issue has been somewhat tackled with the co-operation of the Ministry of Interior, which agreed to issue visas for those foreign employees working on contracts to develop the oil fields directly at the Iraqi airports. However, there is a long queue of other challenges waiting in line to be solved before operations can continue smoothly and uninhibited.

After decades of war and sanctions Iraq is lacking in practically everything. Much of the infrastructure has been totally destroyed or is in a state of disrepair and even basic services like electricity and water are severely disrupted and completely inadequate. The country is also in desperate need of having its roads, bridges and railways rebuilt. Without decent transportation infrastructure foreign investors will struggle to conduct their business at optimum levels.

However, as far as IOCs are concerned, most of Iraq's oil exports come from the fields around Basra in the south and here the transport network is not too bad according to Jones. "In the south, in Basra, there is actually quite a broad network of transport infrastructure, both for the sea and the road. A lot of it hasn't really been repaired, but most of it works reasonably well. So for transporting in and around the place you can move around reasonably well," he explains. 

"The logistics though, getting stuff in and out, is an absolute disaster. And again, you've got to go back to the issue of sanctions. For 30 years they haven't needed anything, and suddenly there are drilling rigs being brought in and containers of this and that and people flying in. So the logistics is a big problem," says Jones explaining that whilst most people knew that oil was going to be the main driver of the economic recovery in Iraq, very few of the aid organisations that were there during the war spent any time sorting out the logistics and infrastructure that would be needed to rebuild the economy. "Now we are paying the price," he says.

Ports under pressure

The ports in particular have begun to buckle under the demand of the arriving oil majors, their service companies and the vast amounts of equipment that they are bringing with them. Umm Qasr, the country's main port near the oil hub of Basra, handles 80 percent of Iraq's imports, bit it is suffering from years of neglect and under-investment and is therefore ill-equipped to deal with the demand that the oil majors are placing on it.

"Now what they're talking about is having astonishing amounts of equipment piling in there," says Jones. "The cranes aren't big enough, the gate out of the port isn't big enough to take the volume of lorries, there's nowhere to leave the stuff when you get it outside of the port, the free zone on the other side has been talked about for years, but there's just no infrastructure."

Captain Fadhil Abd Ali, Assistant Director General of Iraq's state ports operator told Reuters: "At the present time, the port can handle the commercial trade, but for the needs of the oil companies we will need more dock space." In addition to this many shippers complain of exorbitant port fees, up to eight times that in others ports around the world.

In an attempt to rectify the debilitating situation with Iraq's main port, the authorities are pursuing a number of rehabilitation projects designed to modernise and upgrade the country's port facilities, including plans for a new $6 billion port at Fao, the southernmost tip of Iraq. The main road that links Umm Qasr port with Basra city and that is the main route for goods and cargo arriving into the port from abroad will also benefit from rehabilitation projects, which will be financed by the World Bank.

Furthermore, the Director of Iraqi Ports, Salah Kadaier, recently told AKnews that 120 companies, including the likes of Mazda, Siemens, Volkswagen and Audi, are expected to invest in the development of Iraqi ports. You've various people coming in and investing and taking berths and quays there to do up," says Jones, "so it's happening, but it's too slow."

On the export side, there is also the issue of pipelines. Once the IOCs have managed to extract the oil the next challenge is clearly getting it out of the country. Iraq's aging pipeline network will need major upgrades, particularly the southern export pipelines, which send 80 percent of Iraq's total oil exports to the global market by way. Experts have said that these pipelines can handle no more than 1.6 million bpd without risk of rupturing. "The pipelines need to be refurbished to a level where they can transport the anticipated short-term increase, and that's about 10 to 15 percent. And there certainly needs to be a metering system put in pretty damn quick," says Jones.

"I think the oil companies and the Iraqi government haven't got the rollout of the assets that they need in place in the right order. So for example, there's been oil licenses given out and there's been drilling contracts let, but the pipelines don't work, the port can't cope with the volume of equipment, there's no metering system in place.  So one end of the process works exceptionally well but you don't have all the other bits of critical infrastructure in place. Maybe it would have been better to have two or three oil licenses and two or three contracts sorting out the oil-related infrastructure," suggests Jones. 

Business villages

However, the issue of security remains something that companies will need to address before establishing a presence in certain areas of Iraq. Security is far more of a problem in the South, particularly around Basra. However, in order to appease the many firms worried about the violence and bloodshed that has plagued Iraq in the past few years, one Iraqi firm is planning to build a "village of businesses" next to Baghdad airport. The mini-city will provide a secure environment in which businessmen can conduct their business and relax after hours. The US$250 million project is due for completion in three to five years and will be home to apartments, hotels, offices, restaurants, cafes, 119 shops, a petrol station, a car rental agency and parks.

France has decided to follow suit and is building a heavily fortified business centre and boutique hotel near its embassy in Baghdad's Abu Nawas neighbourhood. Many companies are already relocating to the new centre including oil contractor Technip SA, engineering firm Alstom and oil major Total, which is moving from Baghdad's Green Zone to the new business enclave.

So whilst there is no shortage of infrastructure and logistics problems that need to be solved in order for Iraq to come anywhere close to its aggressive production targets, it would seem that progress is being made. The much needed investments in infrastructure are being made, but as Jones pointed out, progress will inevitably be slow as a result of this Bahree believes that the development of Iraqi oil resources will be sequential and capacity build up will be gradual, with limits defined by the infrastructure expansion that Iraq can achieve.

But Jones is sure that no matter what the challenges that the IOCs have to face in Iraq, they will overcome them. "The oil companies will do it, because they've done it before, in Nigeria, in Pakistan, they've done it everywhere else, and they'll complain about it and they'll try and leverage stuff out, and the contracts will be changed and adapted and manipulated. But the pipelines are sort of there. The port is going to be a shambles for a number of years to come, but people will manage to get stuff through. Not at the right times, but it'll sort of work," he says.

A portly investment

As part of Iraq's port refurbishment projects, UAE-based port operator Gulftainer was awarded, early in 2010, the concessions to operate Berth 8 in South Port Umm Qasr, and, to complete construction of and develop and operate Berths 10 and 11 'The Iraq Container Terminal' (ICT). Peter Richards, Managing Director of the Gulftainer Group of Companies tells us about his company's ambitious plans for expansion into Iraq.

What is the potential for investment in the port infrastructure of Iraq and how is Gulftainer hoping to capitalise on this?
 
Certainly everyone, including the Iraqi Government, is acutely aware that Umm Qasr needs to be in a position to cope with the rapidly increasing volumes - and this is why we have been awarded the concession to operate the already existing all-purpose berth 8, where we will be installing container handling equipment and gradually ramping up operations over the coming months. Moreover, we have been awarded the long-term concession to build and operate berths 10 and 11, which will be named the Iraq Container Terminal (ICT) - this will be a dedicated container terminal, able to handle larger ships in a more efficient way than the all-purpose berths. It is the largest concession awarded by the Iraq Ports Authority and the Iraq Ministry of Transport - and the fact that we beat much larger competitors like DP World and APM Terminals speaks to the importance of local knowledge and the recognition that the Iraq Ports Authority gives us.

Can you please tell us about Gulftainer's development of three logistics hubs and port facilities across Iraq and how this will cater to the oil and gas industry?
 
In addition to the terminal facilities in Umm Qasr, we are investing in logistics cities/ ICDs throughout Iraq, both in South near Basrah and in North Iraq (Kurdistan), providing storage and distribution facilities linked with transport opportunities to allow all customers - particularly those in oil and gas ­­- to service their activities.

Can you please give us some details about Gulftainer's planned development and operation of a Cargo Village at Sulaimaniyah airport?

Work has now begun on the Sulaimaniyah Cargo Village Project at Sulaimaniyah International Airport and the project, awarded to GulfMar Ltd (a collaboration between Gulftainer and Sulaimaniyah based Azmar Air), will provide a dedicated cargo facility for carriers flying into Kurdistan to support the huge growth in the region, including the expanding oil and gas industries and major investment projects.

The site covers 250,000 sq m and will eventually contain an aircraft apron capable of supporting every type of cargo aircraft, a domestic and international cargo warehouse, freight forwarding units, truck parks and office space for rent by aviation support companies and freight carriers.

Work started on the site on May 19, 2010. We hope to complete the tender process in a very short space of time so that work can begin on the apron and taxiway construction.

Construction is planned over several phases with phase 1 providing an aircraft apron capable of parking three B747 freighter variants, a cargo warehouse with integrated office space, a single block of freight forwarding units and a truck park.