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Iraq’s reality check for oil production targets

Reality is slowly dawning in Iraq of the implausibility of meeting even half of the 12 million barrels a day (b/d) of oil production the country is targeting by 2017

UNDER two licensing rounds held in 2009, service contracts awarded to international oil companies (IOCs) at existing oilfields were expected to yield a massive output increase.

But speculation is rife in Baghdad that Hussein al-Shahristani – the former oil minister who still maintains executive control of oil and gas policy as deputy prime minister – is ready to slash the official production-capacity target and seek a renegotiation of the 20-year service contracts signed with IOCs.

Shahristani has denied any intention to scrap the contracts altogether and says the amount of oil Iraq produces will depend on market demand. The head-long pursuit of unattainable Iraqi oil-production expansion seems to be yielding to a slower pace of long-term recovery.

The advent of infrastructure bottlenecks at some fields, together with rising costs associated with the development schemes, has given pause for thought. Rather than push hard for rapid output expansion – as the 11 service contracts encouraged companies to do in order to start quickly recovering costs – the emphasis may now shift to a more rational production programme.

Shahristani, the architect of the fast-track expansion programme, is reported to have accepted the view that the massive increase – adding around 9 million b/d to production capacity – may be ill-suited to a reserves base that has been subjected to overwork for over three decades.

So far, so easy. Revising targets down from the unattainable to the realistic is not in itself a problem. But if the target revisions necessitate changes to the service contracts signed with IOCs, the oil ministry may have to face down a tide of corporate anger.

Only yourselves to blame

Critics argue that the oil companies have no-one to blame but themselves. “Because the plateau output targets are not achievable, something has to be done about them. But this requires renegotiation of contracts and once you open these negotiations, other matters must also be renegotiated. It’s not a simple mathematical formula that you reduce the plateau targets from X to a third of X,” said Ahmed Mousa Jiyad, a consultant and former Iraqi oil ministry economist.

But IOCs may have little room for manoeuvre if the government is intent on revisiting production targets and schedules. Under the terms of the service contracts, the companies cannot proceed with final development plans without the approval of the Iraqi authorities.

Jiyad said: “IOCs will say they did their economics on the basis of the plateau targets, but they knew those targets were not achievable. So if they insist on them, they will violate a principle in the contract that states that they must achieve them according to the best practices of the oil industry. They cannot defend a target that they themselves know they cannot achieve.”

Any contract revisions could delay other critical energy-sector projects, amid signs that the oil ministry is already struggling to cope with the sheer volume of work under way. The launch of a fourth licensing round, comprising 12 oil and gas blocks, has been delayed by a couple of months until late January 2012.

The auction of gas-dominated exploration blocks aims to add 29 trillion cf of gas and 10 billion barrels of oil to reserves, although IOCs’ appetite for these offerings may be tempered if existing service contracts are seen to be under review.

Gas potential

The government’s focus is increasingly geared towards realising its untapped natural gas potential. Shahristani has yet to articulate a clear plan for developing Iraq’s estimated 112 trillion cf of natural gas reserves and efforts to encourage foreign companies into gas-prone acreage have so far met with mixed results. Last month, KazMunaiGaz said it was pulling out of a project to develop the Akkas gasfield, after a breakdown in talks.

Iraq’s leaders are due a morale booster and that may come with the imminent drafting of a final contract with Shell and Japan’s Mitsubishi to commercialise around 1 billion cf/d of flared gas. Associated gas produced at the southern Rumaila, Zubair and West Qurna-1 oilfields will be captured and delivered to regional power plants.

The partners were expected draft the final contract for the $12.5 billion project by mid-May, said deputy oil minister Ahmad Shamaa, which would then be sent for approval to the Council of Ministers.

The plan to capture flared gas and use it for much-needed electricity generation has been one of the most argued-over projects in Iraq’s energy sector, with politicians voicing concern that the original heads of agreement, signed in 2008, handed too much control of the country’s gas resource to a supermajor.

If the cabinet does rubber stamp the southern gas deal, the country may have gone a long way to resolving at least one part of its energy conundrum – even if the over-ambitious oil expansion programme remains a bone of contention for the ministry and IOCs alike.

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