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Iraq's output surges, but many problems remain

Oil output is rising quickly, but many problems still afflict Iraq’s energy sector

For now, Iraq is defying the doubters. Rising oil production from the megaprojects near Basra has taken the country’s output to 3.62 million barrels a day (b/d), its highest level in 35 years, with exports now at 2.8m b/d. Between January and February, 530,000 b/d were added to production, says the International Energy Agency (IEA). Government data put the figure at 570,000 b/d.

This is important for global oil markets, which remain tight thanks to Libya’s struggles - production there was just 360,000 b/d in February, or more than 1 million b/d beneath capacity - and the loss of oil from Iran and smaller producers like Syria, South Sudan and Yemen. Global oil demand is expected to rise by 1.4m b/d this year, according to the IEA, so consumers need the cushion offered by more Iraqi oil. 

Iraq’s government thinks this is just the start of bigger output gains to come. Thamir Ghadban, a former oil minister and chairman of the prime minister’s advisor’s commission, said in Dubai at the end of February that exports would reach 3.4m b/d by the end of this year, meaning another 600,000 b/d of output in the next eight months.

This wouldn’t come cheap for the central government. Ghadban said payments to the companies developing the large projects in the south of Iraq would rise from $7 billion last year to $12.5bn by the end of 2014. Building new export infrastructure to get the oil to market will also be pricey. A major new pipeline from Basra to Aqaba - construction bids for which are due this summer – could cost another $18bn, though the Iraqi government will only pay for the 680 km section in its territory.

Keeping up the pace of output growth and managing further development will be tricky. Not all of the south’s developers are happy. In the north, Kurdistan’s stand-off with the central government is still restraining the autonomous region’s oil plans. Saboteurs continue to undermine the northern export route. Parliamentary elections in April, meanwhile, hang over the country’s fraught political scene. Iraq’s leaders insist the longer-term oil target of 9m b/d by 2020 remains on track, but analysts are less convinced.

The jump in oil exports in February was probably anomalous, reflecting simply the start up of long-planned export infrastructure to handle pent-up supply. Crucial to this was the start of dual-loading at two single-point moorings (SPMs), said the IEA. Other factors may have been played more of a role in making February a bumper month. Bill Farren-Price, head of Petroleum Policy Intelligence (PPI), a consultancy, attributed the “significant jump” to “unusually calm weather”, which allowed deferred loadings from January to be made up in February. But the risk of equipment outages shouldn’t be ignored as loading operations scale up in the next few months, he added.

Further rises in exports from the south - the government’s ambitious target sees export capacity at 6.8m b/d by the end of the year, far more than will be needed by then - will also depend on progress in adding new bits of kit before the summer. Another SPM could be online by the middle of the year. But a host of other smaller pieces must all fit together, and work, before the Basra becomes the Gulf oil powerhouse the Iraqi government wants. Hayan Abdulzahra, an executive at South Oil Company, which is responsible for the expansion of Basra’s export capacity, told Petroleum Economist that work was going well, saying much work would be “ready in a few weeks”.

But some things are still frustrating capacity growth. Abdulzahra said, for example, that while the two SPMs were working, they couldn’t work at the same time. While one SPM loads a tanker, the other undergoes six-hour long safety inspections. Construction of storage tanks and pumping stations at Fao, south of Basra, has also been slow. Only four tanks are operating. Another four could be online later this year. Another eight will be needed after that, first to handle the extra output foreseen from the megaprojects this year and, by 2017, when Iraq begins selling two different grades of crude out of Basra.

But that’s just on the loading side. Further upstream, bureaucracy remains a major beef for foreign operators and a possible threat to the projects. BP, leading the consortium hired to increase Rumaila’s output from 1.4m b/d now to 2.85m b/d by 2017, was forced to cancel scores of contracts with sub-contractors recently after the central government took too long to approve them and also stalled on visas for some foreign workers. Crucial contracts for construction and work on wells were among those cancelled.

Eni, leading development of the b/d Zubair field, has complained of similar delays, saying approvals from Baghdad can take up to a year to come through. It did get permission to install two de-gassing stations recently, and Ghadban said another contract would soon be approved, but Eni still faces problems getting access to water for injection. A recent report in the Financial Times said the company would now spend $3bn on its project, compared with $7bn planned. Its chief executive, Paolo Scaroni, told the government: “Either you remove the obstacles or we remove ourselves from the country.” Zubair’s output this year will probably average closer to 320,000 b/d than the official target of 390,000 b/d, said PPI. (The lowered plateau target calls for eventual output of 850,000 b/d.) One of the criticisms of the way Iraq licensed some of its fields was that the per-barrel fee would see the companies race ahead with little care for the reservoirs they were developing. At least the red tape has killed some of those fears.

But Iraq can’t afford to do without the well-travelled operators in the south, especially given the struggles facing companies with less experience operating in difficult foreign environments. Angola’s state company Sonangol, for example, has already said it will pull out of its project, won in 2009, to operate the Qayara and Najmah fields in Nineveh, in northwest Iraq. The deteriorating security situation may have been the main reason for its exit - but Iraqi oil-sector observers say the company had been out of its depth in the country anyway. Kuwait Energy, a private firm, is struggling with costs at its Mansuriya field, in Diyala province, northeast of Baghdad. Security risks meant wells drilled in the play could cost twice as much as deeper ones in Iraq’s more secure south.  

Meanwhile, progress on two delayed projects - the Lukoil-led West Qurna-2 development and GazpromNeft’s Badra field - is also uncertain. In his presentation to investors in Dubai, Ghadban didn’t even include output from them in forecasts for end-2014 output in the south (see table). That surprised some observers. Lukoil said in January that it sees production coming on stream this spring, with production of 120,000 b/d rising to 400,000 b/d in the autumn. (The IEA expects 300,000 b/d from West Qurna-2 by the end of 2014.) Initial output from Badra, now connected to Iraq’s pipeline network, will be more modest, at 15,000 b/d.

Another problem for the government’s export plans this year remains Kurdistan. Iraq’s 2014 budget, which forecasts oil exports of 3.4m b/d, calls for output from the autonomous region to reach of 400,000 b/d. That was a figure proposed by the Kurdistan Regional Government’s (KRG) bullish oil minister, Ashti Hawrami. But Kurdistan’s output remains well short of that, averaging only around 240,000 b/d in February. Hawrami may have intended his aggressive output figure as a show of strength, but it has weakened the KRG’s hand in various payment and contractual disputes with Baghdad, which has cut state funding for the region because it has failed to live up to its half of the bargain. The central government insists that all Iraqi exports, including the KRG’s, be handled by the State Oil Marketing Organisation (Somo), and says it won’t restore funding until the region accepts that - and gets its output up to Hawrami’s 400,000 b/d. It’s an impasse that probably won’t end until after the parliamentary elections in April. By that point, says one Kurdistan-based analyst, the deal will be along the lines of the KRG asking Baghdad kindly to take the boot off its throat.

Turkey, for its part, has hardly rallied on Kurdistan’s behalf - dismaying some Kurds who last year thought a broad energy deal with Ankara would solve its Baghdad problem. Kurdistan is eking out some exports - the IEA estimates up to 100,000 b/d is making its way by truck to the border, where it sells at a sharp discount to international prices. Some is also passing through a new Kurdish spur line that ties into the Ceyhan route at Fishkabur. But even these small export volumes are causing problems, because any Kurdish oil fed into the Iraq-Turkey Pipeline (ITP) has to be kept separate in storage tanks in Ceyhan, lest it be mixed with oil from federal Iraq. Iraq’s central government hasn’t approved those exports either, and most signals suggest that Ankara is still deferring to Baghdad, possibly fearing a legal challenge if it enables Kurdish oil sales without the Iraqi government’s blessing. For now, Turkey’s energy minister says Kurdish oil that reaches Ceyhan is being held on Iraq’s behalf.

In any case, repeated sabotage to the ITP in northern Iraq - attacked 54 times last year, according to the government – are also causing problems in Ceyhan, where storage tanks that would have held federal Iraqi oil have periodically run empty, leaving tankers awaiting shipments, according to reports. (Though interruptions in supply from Iraq may be enabling the batching of Kurdish oil through the line.) The twinned-line once had capacity of 1.6m b/d, but throughput in February, while an improvement on January’s figures, was just 293,000 b/d. It’s also a problem for output at Kirkuk, where output has fallen to around 200,000 b/d partly because it lacks adequate storage facilities to hold oil when it can’t be shipped north. A plan to build a link through Anbar to solve this problem seems some way off, because of the violence in that province.

The lack of security in the north, where the government is still fighting insurgents and Al Qaeda has a strong presence, makes the export route to Jordan more important. Ghadban said last month that both governments had approved the pipeline, which will be 42-inches in diameter and eventually ship 2.25m b/d from the south to the Jordanian port, where Somo will sell the oil. SNC-Lavelin is managing the project. Onshore and offshore terminals will be part of the development, while a spur line to Jordan’s refinery is also to be built. Ghadban said 10 companies had met with the ministry of oil to discuss the project. It could be on stream by 2017-18.

How any of that progresses in the next months will, like everything else in Iraq this year, hinge on the outcome of the coming elections. Prime minister Nuri al-Maliki seems the likeliest victor, but beyond that outcome few political analysts of the country are willing to speculate. Kurdistan’s future remains cloudy. Rising oil exports in the south have bred some confidence in the oil industry that Iraq could realise its potential as a producer. But the efforts of insurgents to sew sectarian chaos in the north leaves many doubts about Iraq’s future as a prosperous and united country.

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