More Iraqi oil
The federal government will put all output and exports under its control, while boosting capacity
For Iraq's petroleum sector, critical questions for 2018 arise. First, will production increase—and, if so, how much? Furthermore, after Shell's decision to exit Majnoon, will other oil majors pull out of the giant southern projects?
Finally, there's the Kurdish question: what will happen to its energy sector after the mishandled independence referendum, which led to Baghdad reclaiming disputed territory from the Kurds, including Kirkuk's vast oil reserves, and taking control of the Kurdish Region of Iraq's (KRI) main export point at Faysh Khabur on the border with Turkey.
Any deal between Baghdad and Erbil will likely adhere more closely to the Iraqi constitution than in the past; but resolving an increasingly complex situation within the KRI, both financially and politically, will be difficult, amid intra-Kurdish disputes.
With Kirkuk and Faysh Khabur in federal hands, observers will increasingly look at Iraq's petroleum sector as a whole. Although Iraq committed to an Opec deal to cut production, it may not stick with this beyond March 2018 once Kirkuk oil exports resume. Oil minister Jabar Ali al-Luaibi has said Iraq will reach capacity of 5m barrels a day by Q1 2018 (including the KRI's oil). This is difficult but not impossible, knowing that most new production will come from the south, and that 70% of Iraq's northern oil is produced from Kirkuk fields that are now back under federal control.
Before the reassertion of federal control, northern production was about 0.79m b/d in September 2017. The KRI controlled almost all exports, consumption and revenues after June 2014, when Kurdish Peshmerga occupied land during the chaos of the Islamic State offensive, including fields managed by Iraq's North Oil Company. These fields comprised 0.555m b/d from the Kirkuk cluster structures. Kirkuk fields also include Khurmala, the third dome of the Kirkuk field, and part of Makhmur District (in Ninewa province). It was seized by the Kurdish Democratic Party (KDP) in 2008 and produces 115,000 b/d of oil and 300m cubic feet a day of gas.
This makes the KRI's non-Kirkuk oil production around 235,000 b/d. In other words, 30% of Iraq's northern oil is produced by investors inside the four Kurdish provinces. By contrast, before the federal government retook territory, around 0.590m b/d was exported from the KRI, 100,000 b/d went to local refineries and around 100,000 b/d was allocated to disputed territory (now under federal control.)
Oil minister Luaibi has said Iraq will achieve 5m b/d capacity by Q1 2018
Iraq is now reorienting towards federal control of exports. The Ministry of Oil (MoO) will resume efforts to rehabilitate the damaged Iraq-Turkey Pipeline (ITP), the main export route until the Kurds built their own. A resolution between Baghdad and the KRI over access to the border with Turkey and reviving the ITP will be challenging as the pipeline and compressors are believed to be damaged beyond repair.
The MoO is considering a partnership with Turkish companies to completely rebuild the pipeline. Until then, the ministry has no option but to make an arrangement with the KRI to export Kirkuk oil via pipeline that runs through Kurdish territory. This means that for now much of the 440,000 b/d back under federal control is being allocated to refineries in the midland and northern provinces, and potential crude exports via the KRI-operated pipeline. This crude diversion will compensate for the declining exports from the north, while southern exports have increased by 200,000 b/d.
Iraq (including the KRI) maintained production of around 4.6m b/d during 2017. But it plans to increase this to 5m b/d by Q2 2018. How? In the south, around 240,000 b/d is produced from five fields, mostly run by Basra Oil Company (BOC). These include Bin Umar (37,000 b/d), Luhais (70,000 b/d), Tuba (33,000 b/d), Ratawi (23,000 b/d) and Nasiriyah (77,000 b/d). BOC also plans to develop Sindbad. In 2018, BOC will drill 20 wells and refurbish 31 in these fields to add 190,000 b/d of production, fully financed by federal budget allocations. If successful, this will push southern non-IOC output to 430,000 b/d.
As for the IOC-operated southern developments, they were producing 3.334m b/d from eight fields in September 2017. Despite the MoO's second review of some technical service contracts with IOCs to bring down plateau targets to 6.98m b/d by 2020 (from 7.15m b/d before and an original target of 11.24m), the ministry will remain committed to financing development and operations in the eight fields. These were the focus of the first and second licensing rounds and will receive funds from the 2018 federal budget. According to sources in the MoO, the IOC-operated fields will increase production by 10% (or 333,400 b/d) in 2018, financed by a budget allocation of $11.76bn.
Presently, with confirmed payments to foreign companies and after the review of production plateaus, no further IOCs will follow Shell out of southern Iraq in 2018—the prospects for growth are now much more enticing. Iraq's total oil production stands at 4.664m b/d. So the plans to add another 0.523m b/d will push capacity to 5.18m b/d. This is an optimistic target, above the oil minister's confident prediction of 5m b/d by Q2 2018. Achieving this growth will depend Iraq's commitment to Opec—last year, it accepted a cut of around 210,000 b/d—and whether it agrees to extend its cuts beyond the deal's expiry at the end of Q1 2018.
It's worth noting that ExxonMobil is heavily involved in negotiating with the MoO to invest in Bin Umar and Ratawi fields. Subject to successful negotiations on a new fiscal arrangement, revenues from both will eventually help finance the much-needed water-injection project for enhanced oil recovery to sustain development of all southern fields. Amid this push, a new single-point mooring facility has been installed at Basra to increase crude-export capacity to 4.5m b/d.
Current natural gas production (excluding the KRI's) is estimated at 2.796bn cf/d, with the southern and midland regions accounting for 2.329m cf/d. This includes 0.8bn cf/d from Basra Gas Company's joint venture with Shell, 216m cf/d from national companies and the rest flared (1.313bn cf/d). The ministry's plan is to reduce flaring and increase gas capture and processing in 2018 by around 20%. But with new oil production coming on stream, as much gas may be flared in 2018 as in 2017. In Kirkuk, the gas situation will remain unchanged in the near term, with 276m cf/d processed and 191m cf/d flared, which brings Iraq's total gas flaring up to 1.504bn cf/d.
KRI-controlled gas production is estimated at 0.62bn cf/d (320m cf/d from Khor Mor and 300m cf/d from Khurmala). After the resolution of its dispute with the KRI, UAE-based Pearl Petroleum plans to further develop Khor Mor to increase production to 0.5bn cf/d by end-2018. The lack of available finance for other gas developments means no further production is expected from other KRI fields.
What happens to all this northern oil and gas is now in the balance. A deal may involve the KRI's budget allocation being restored by Baghdad, but at 12.67% of the national budget in monthly transfers rather than the previous 17%, and this time with funds distributed to provinces in the KRI rather than through Erbil. This would mean KRI production going to the federal State Organisation for the Marketing of Oil (Somo). A federal audit of all KRI accounts, including those managed by the KDP, is needed to assess the critical needs of the region, as Iraq's overall budget is under strain.
The 2018 total budget figure is set at $91.37bn (ID108 trillion), while oil revenue is forecast to be $72.99bn. The oil-price forecast for the year is $43.40 a barrel—well beneath the prevailing price in Q4 2017—and oil exports are estimated at 3.88m b/d (including 300,000 b/d from Kirkuk and 250,000 b/d from the KRI). In the near term, the KRI and the federal government need to work harder at economic diversification. According to the IMF, Iraq's fiscal breakeven price for 2018 is $56/b, a grave situation considering the $4-$7/b Iraqi discount to Brent.
This is the challenge for Baghdad and the KRI, one that will require strong cooperation on energy, as called for in the constitution.
Luay al-Khatteeb is Fellow at the Columbia Center on Global Energy Policy and Founding Director of the Iraq Energy Institute
This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here