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Growth pause in Iraq

Iraq’s output soared in recent years. But the price slump and politics mean further rises are getting harder

THE GOVERNMENT is mired in dysfunction, with Iraqi prime minister Haider al-Abadi struggling to placate a popular challenge. Management of oil and gas is negligible – the oil ministry has been rudderless since minister Adel Abdul-Mahdi resigned on 24 March. A deputy minister, Fayad Al-Nema, is ostensibly in charge.

None of this helps lift a sense of gloom now surrounding Iraq’s oil sector, especially after last year’s stellar performance. In 2015, production rose by 0.7m barrels a day, to 4.1m b/d. Including Kurdish oil, it hit 4.43m b/d at the beginning of 2016. But in March, it was 4.19m b/d, well down from January’s highs, on account of sabotage that shut the Iraq-Turkey Pipeline in the north.

Further wellhead gains are now unlikely, as capacity constraints are hit. Iraq is now trying to eke out more upstream work at a time when global energy investment is slumping. The country’s finances have been hit hard by the drop in oil prices, crimping the value-added that would ordinarily be accrued from record oil production levels. So up to $7bn worth of energy-related contracts have been put on hold, notes Apicorp, a Middle East bank, and a further $2bn cancelled since 2014.

Its budget depleted, the government has struggled to pay international oil companies (IOCs) operating the south’s megaprojects and has demanded that they scale back expenses – a reflection that the fixed per-barrel cost structure of the technical-service contracts (TSCs), once seen as favouring the government, is now a problem for the Iraqi authorities.

The IOCs’ revised development plans for 2016 are supposed to take account of the decline in oil income. In essence, if the companies want to be reimbursed for their expenses, they need to spend less. But that means slower development and probably no output growth. Repayments have already been delayed, too, although Nema says the $2bn owed to the developers will be repaid. As of early May, there is no confirmation of these payments having been made.

An agreement to revise contracts with firms including BP, Shell, ExxonMobil, Eni and Lukoil is, the government hopes, possible by the middle of the year. Instead of continuing to pay fixed per-barrel dollar fees for more volume, Iraq wants remuneration linked to the oil price. The companies won’t like this. Nema expects any production growth this year to be “very modest”.

Shifting plans

One idea is to direct the IOCs towards smaller developments, like the Integrated South Project. This consists of building oil pipelines, storage facilities and a seawater-supply project to inject water from the Gulf to maintain pressure and enhance oil recovery. But the project – which would help debottleneck developments in the south – has moved glacially.

PetroChina and ExxonMobil – developing West Qurna-1, which needs water injection to halt production declines – have been approached about investing to help raise production from the Artawi and Nahr Bin Umar oilfields and build energy infrastructure. Revenue from the two oilfields’ production would then be used to repay investors. The Luhais, Nassiriya, Tuba, Nahr Bin Umar and Artawi oilfields are producing around 240,000 b/d but the plan would lift output to 350,000 b/d by end-2016.

While production is likely to remain well above 4m b/d in 2016 and 2017, future expansion will require a transformation in Iraq’s financial position

BP is also looking to upgrade an old water-injection facility in Garmat Ali for use in the Rumaila and Zubair fields. That plan would treble water production, to 3m b/d but plans beyond that are sketchy.

One improvement of the past year was the addition of three single-point moorings (SPMs) near the Basra and Khor al-Amaya ports in the Gulf. Another SPM, the country’s fifth, is to be installed in 2016. Each is capable of moving 0.9m b/d, leaving nameplate export capacity of 4.5m b/d. The addition of those SPMs played a big role in the sharp ramp-up in southern exports, which hit 3.3m b/d in April.

While production is likely to remain well above 4m b/d in 2016 and 2017, future expansion will require a transformation in Iraq’s financial position. When the TSCs were signed in 2008-09 period, Iraq entertained more ambitious production plateau targets for the dozen oil fields, eyeing 12m b/d by 2017. Reality has intervened: the target is now 6m b/d target by 2020. That’s more plausible, but politics could yet drive that target lower too.

This article is part of an in-depth series on upstream in the Gulf. Next article: Iranian oil gushing forth.

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